Wednesday, April 22, 2009

Cramdown: clinging to a bad idea

Sometimes when politicians get their teeth into a bad idea they just hang onto it no matter how plausible the arguments against it, no matter if it starts to taste bad. An example is the idea of giving bankruptcy judges the power to reduce the principal and/or interest on mortgage contracts. For starters, this would be yet one more contract/agreement that someone from the government can simply abrogate at will -- making it more difficult to make agreements, to make plans, to be able to trust people to do what they say they will do, thus breaking down a little further what is perhaps the most essential element of a society that has any hope of being reasonably free, the ability to trust somebody who is not a direct relative or a member of your clan or tribe.

As this Register editorial explains, it would also quite predictably raise the cost of mortgages by introducing one more element of risk for the lender. Lenders deal with risk by raising the price -- either requiring a larger down payment or charging a higher interest rate or both. This is a terrible idea, but the Obama administration is committed to it, it has passed the House, and though it's running into resistance it is likely to pass the Senate.

To make it worse, it just wouldn't help that many people. But the people who would be hurt the most would be low- to moderate-income people or first-time homebuyers who don't have any equity to draw on when looking at a required down payment in the $40-50,000 range. How it ever came to be a part of our culture that people thinking that giving more power to people in government can be equated with com[passion is one of the great mysteries of our time.


R. Grace Rodriguez, Esq. said...

But the whole thing it will do is have mortgage companies better assess their risk so they don't just hand out loans like candy to anyone who wants them. So forcing the cram down benefits everyone!

Alan Bock said...

It would be nice to think so. I suspect the crisis to date has already had that effect, cramdown or no.