The Wall Street Reform and Consumer Protection Act of 2009 is a broad financial reform aimed at creating new regulations to protect consumers and investors. Gone fairly unnoticed is an amendment to the Act designed to stabilize homeownership that was voted down around mid-December.

The American-dream amendment that never was

House Amendment 534 was killed only nine days after the introduction of the Wall Street Reform and Consumer Protect Act. The proposed amendment was designed to empower bankruptcy courts with the authority they had prior to 2005 to prevent homeowner foreclosure. The amendment would have allowed bankruptcy courts to extend repayment periods, reduce excessive interest rates or fees and reduce the principal balance on a mortgage to keep the owner in his home, just as the courts can for all other types of real estate.

In essence, this was the cramdown amendment the single family residence (SFR) market desperately needs to eliminate negative equity so homeowners can become solvent and stay in their homes long-term with the freedom to sell and relocate in order for families to remain economically viable and competitive by being able to move in this changing job market.

The lobby

Thanks to a letter made available by the Politico news organization, a clearer picture of the benefactors in the battle against cramdowns has emerged. The letter is an appeal to all members of the House of Representatives from lobbies with a vested interest in seeing the death of the cramdown amendment.

These lobbies include:

  • American Bankers Association;
  • American Financial Services Association;
  • Consumer Bankers Association;
  • Consumer Mortgage Coalition;
  • Financial Services Roundtable;
  • Housing Policy Council;
  • Independent Community Bankers Association;
  • Mortgage Bankers Association;
  • Securities Industry and Financial Markets Association; and
  • U.S. Chamber of Commerce.

The lobbies argue that allowing cramdowns in the current unstable market will topple the fragile stability the financial market has attained in the recent months.  Their argument also claims lenders losses will be transferred onto taxpayers as the government absorbs the losses on federally-guaranteed mortgages, and the stability of the lending and banking infrastructure would be put into question. [To read the full letter, see the pdf made available by Politico]

These arguments imply that saving homeownership will destroy bankers and the financial markets (Wall Street) on the tax payer’s dime. We must step back and examine these bombastic and ultimately unimpressive assertions.

First, the ability of bankers to survive is not in question: they are the cash conduits for our society and our industries. To suggest that the cramdown will destroy bankers is to deny that most are already known to be insolvent when examining current market values of SFRs. Reducing loans to market values, which bank management has convinced Congress that they cannot do, would only bring to light the reality of bank insolvency. On a cramdown, the lender must report their worthless paper, and not delay that report until foreclosure and resale of their real estate owned (REO) properties. However, lenders and the federal government will be forced to acknowledge bad paper eventually.

Second, the tax payers already pay for the nation’s housing and have been paying for 80 years. The federal government’s housing policy since before World War II has been to subsidize a high rate of homeownership at a cost of around one billion dollars per year. No other developed country does anything of the sort. Recently the percentage of U.S. families owning homes rose artificially to 69% (59% in California) on the back of nontraditional loans made primarily though Wall Street Bankers to hopeful homebuyers. Now homeownership is falling fast and will be below the steady long-term national rate of 64% (California’s is 55%) by mid 2011.

The cramdown makes homeowners with negative equities suddenly solvent (94% loan-to-value on exiting bankruptcy) and, most importantly for the multiple listing service (MLS) market, keeps them in long-term homeownership. On the other hand, negative equity and worthless payment modifications will turn once-homeowners into mostly permanent tenants on completion of the inevitable foreclosure.

Brokers must be aware of a homeowner’s reaction to foreclosure. Most homeowners put through the traumatic experience of foreclosure never return to homeownership. Once burned, homeowners who lose their homes to foreclosure will gladly become permanent tenants, forever avoiding the risks associated with homeownership. Burning homeownership is not good for future real estate sales and broker fees.

Thus, without a cramdown for SFRs the destabilized California homeownership ratios will drop below the 55% long-term homeownership in 2011 down to somewhere around 48% by 2016. Home sales business will be permanently lost for brokers and agents, and total brokerage fees will be permanently reduced.

We must clear the bad loans from the market in order to move forward. If the market is soon allowed to start fresh from the bottom, it will be able to kick off into a vibrant recovery. Strong recoveries always happen that way. As it is, we are needlessly floundering. Without the SFR cramdown authority for bankruptcy judges, America is going to go the way of Japan and Mexico following their financial crises around 20 years ago — years of economic stagnation (which still exist) due to a failure to purge bad paper from the books of their nations’ lenders.

[For the first tuesday take on everything cramdown, see the January 2010 article, Cramdowns, cramdowns, cramdowns!]

The California cramdown opponents

Be aware of the stance of your representative and how well (or poorly) he represents homeownership interests. The following California representatives took part in the killing of the cramdown amendment:

  • Brian P. Bilbray (R), 50th District
  • Buck McKeon (R), 25th District
  • Dana Rohrabacher (R), 46th District
  • Darrell Issa (R), 49th District
  • David Dreier (R), 26th District
  • Devin Nunes (R), 21st District
  • Duncan Hunter (R), 52nd District
  • Ed Royce (R), 40th District
  • Elton Gallegly (R), 24th District
  • Gary Miller (R), 42nd District
  • George Radanovich (R), 19th District
  • Jane Harman (D), 36th District
  • Jerry Lewis (R), 41st District
  • Jim Costa (D), 20th District
  • John Campbell (R), 48th District
  • Ken Calvert (R), 44th District
  • Kevin McCarthy (R), 22th District
  • Tom McClintock (R), 4th District
  • Wally Herger (R), 2nd District