Kyl on Cram down: “Congress should not incentivize bankruptcy by making it the only means to save one’s home"

WASHINGTON, D.C. – U.S. Senate Republican Whip Jon Kyl delivered remarks on the Senate floor Thursday regarding the Durbin cram down amendment to S. 896, the housing bill. The following are excerpts from his remarks:

“Senators Durbin’s amendment would allow bankruptcy judges to modify home mortgages in bankruptcy court by lowering the principal and interest rate on the loan, or extending the term of the loan. This concept, known as ‘cram down,’ would apply to all borrowers who are 60 days or more delinquent on payments for loans originated before January 1, 2009, and would set the maximum value of loans that qualify at $729,000. It is broader than the bill that was tabled in the Senate a few months ago.

“Senator Durbin believes his amendment will help save homeowners who are at risk of losing their homes in foreclosure, and I respect that. But many experts believe that the cram-down provision would have pernicious unintended consequences on the mortgage market.

“First, it would result in higher interest rates for all home mortgages, exactly what we don’t want while we are trying to entice people back into the market. Interest rates on home loans are substantially lower than other types of consumer loans because of the guarantees that current law provide to lenders. If all else fails, the lender always has the right to take back the house for which it lent the money. If we eliminate this security for lenders, and increase the risk inherent in making a home loan, then lenders will have to charge higher interest rates for home loans to cover the risk. The net result of the amendment will be higher interest rates for home loans, and fewer Americans who will be able to afford to buy a house – not what we need to end the housing crisis.

“So while attempting to solve a specific problem for a particular group of people, we could end up exacerbating the situation for all the people that want to refinance or take out loans in the future.

“As I said, experts agree, and studies show, that cram down will result in higher interest rates:

“The Congressional Budget Office warned in January 2008 that cram down could result in ‘higher mortgage interest rates’ for homeowners because lenders are forced to compensate for potential losses that will be levied upon them in bankruptcy court.

“In a 1999 confirmation hearing before the Senate Finance Committee, Senator Grassley asked Lawrence Summers, who now serves as President Obama’s head of the National Economic Council, if ‘…debt discharged in bankruptcy results in higher prices for goods and services as businesses have to offset losses?’ Mr. Summers responded that ‘the answer is – it's a complicated question, but certainly there's a strong tendency in that direction and also towards higher interest rates for other borrowers who are going to pay back their debts.’

“In November 1986, Congress implemented a mortgage cram-down provision for family farmers under Chapter 12 of the Bankruptcy Act. According to a 1997 study, farmers faced a 25-basis point to 100-basis point increase in the cost of farm real estate loans, as well as increased difficulty for farmers to obtain financing as a result of the cram down application. The current median value of a new home in the United States is $206,000. A 25-basis point to 100-basis point increase for a $206,000 would increase the cost of the mortgage by over $47,000.

“So we’re talking about substantial impacts as the result of this well meaning provision.

“Proponents of the bill argue that a cram down should be allowed on primary homes because bankruptcy law already allows it for vacation homes. What proponents fail to mention is, that to qualify for cram down on a vacation home mortgage, the debtor is required to pay off the entire amount of the secured claim within the five-year length of the Chapter 13 plan. The Durbin amendment does not include the requirement that the debtor must pay off the secured claim within five years. Senator Durbin does not purport to treat cram down on primary homes the same way the Bankruptcy Code treats cram down on second homes.

“The Durbin-Schumer bill is not the “narrow,” targeted approach to the problems in the mortgage market that proponents claim. Unlike prior proposals, this bill is not limited to high-risk ‘subprime’ loans or other non-traditional loans, but would allow cram downs for all loans. This will allow millions of borrowers to enter into bankruptcy and simply walk away from the debt owed on their homes.”

“Cram down will not fix the recent downturn in the housing market but will only prolong the housing recovery by increasing interest rates. Instead of encouraging homeowners who are at risk of foreclosure to file for bankruptcy, the federal government should continue to encourage lenders to work with owners to modify loans where it is economically viable for homeowners to remain in their homes. While it is regrettable that not all homeowners are eligible for a loan modification, Congress should not incentivize bankruptcy by making it the only means to save one’s home.”