Sometimes bad ideas are like grease fires—they can be hard to extinguish for good. In fact, one bad idea that ICBA has repeatedly doused with common sense has flared up yet again.
The state attorneys general have reportedly proposed a settlement with large mortgage servicers that would open a backdoor to mortgage “cramdowns.” Meanwhile, the Senate Judiciary Committee passed legislation that would allow individual bankruptcy courts to effectively place a moratorium on foreclosures until lenders agree to reduce principal balances.
While the public is justifiably upset with the “robo-signing” foreclosure controversy at the large institutions, there is no justification for continuing efforts to impose mortgage cramdown. Haven’t we had enough bad policies that hurt community banks when we should be focused on the misdeeds of those who created the financial crisis? As ICBA has repeatedly told policymakers, arbitrarily requiring lenders to reduce principal and modify terms on mortgage loans would set a terrible precedent, increase interest rates and actually make the foreclosure problem and housing recovery worse.
And we’re not alone in our opposition. In a recent report, economists from the Federal Reserve banks of Atlanta and Boston wrote that principal-reduction schemes would incentivize all borrowers to seek loan forgiveness, even those who don’t need it. Amen!