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A Victory Against Cramdowns in the Senate

Anthony Randazzo
May 1, 2009, 4:30pm

Yesterday, the Senate rejected the "cramdown" bill that would have let bankruptcy judges cut down mortgage terms to help borrowers avoid foreclosure. Republican Senators Jon Kyl and Mitch McConnell led the charge to reject the bill that would have destabilized the mortgage market and caused interest rates to spike. The rejection is also a defeat for the Obama administration which has said cramdown legalization is a key part of its plan to fight the housing crisis.

The Senate’s rejection represented a victory for the mortgage industry and a defeat for the Obama administration, which made the cramdown measure a part of the White House’s broader plan for combating the housing crisis. They believe that cramdowns are the best way to slow foreclosures, and thus get the housing market back on track. Many believe the financial crisis will not end until the housing market recovers.

However, cramdowns would not have helped the housing market. From the lender’s point of view, their contracts would have become worthless pieces of paper if the government could have simply swept in at any time and changed them to protect the homeowner from defaulting. This might have led to lenders charging higher initial rates, hurting the prospects of recovery.

Consider those who are paying on time, why should their rates go up? How about those who are renting, but could buy a home priced low in this market? Why should they have to pay higher rates getting into the market? Why should a bank not be able to sell them a foreclosed home and get greater value? In regards to this, Senator McConnell said yesterday that the vote "ensures that homeowners who pay their bills and follow the rules won't see an interest-rate hike at the whim of a bankruptcy judge."


Anthony Randazzo is Director of Economic Research


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