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Here it comes:

WASHINGTON (Reuters) – The leader of the U.S. House of Representatives said on Monday lawmakers expect to begin debating legislation this week that would let judges erase some mortgage debt for borrowers who file for bankruptcy.

U.S. House Speaker Nancy Pelosi said Democratic leaders hope to bring mortgage bankruptcy legislation known as the “cramdown” bill to the House floor on Thursday.

“Hopefully Thursday,” the speaker said to a reporter who asked when the bill would come to the floor, adding that the legislation should be introduced later on Monday.

The legislation would permit bankruptcy judges to erase some principal from troubled home loans just as they are able to adjust other consumer debt.

Broadly speaking, this would mean higher interest rates on home loans for everyone from here on out. If bankruptcy judges can write down the principal on home loans, banks will adjust interest rates upward to account for the increased risk. Even economists who favor the cramdown are frank about this — they just think that the negative effects of foreclosures are worse than the the price we will all have to pay for this sweeping legislative change. As Jerry pointed out earlier, that conclusion is probably mistaken. (And in case you forgot what kind of behavior this law would reward, re-read Jonah’s post on what being “underwater” means.)

Now, maybe higher interest rates on home loans would be a good thing. Home ownership is heavily subsidized in this country, and the reason bankruptcy law currently protects banks from losses on principal is so that they can keep mortgage-interest rates low. But is Congress really going to let mortgage-interest rates rise as a result of this new law? Liberal interest groups already think credit-card interest rates are a crime against humanity. Can you imagine the hue and cry whenever mortgage-interest rates start to tick up?

The more likely scenario is that Congress passes some new law that keeps mortgage-interest rates suppressed, even though the new bankruptcy law has exposed banks to greater risk. If your goal is to re-inflate the housing bubble and create another credit catastrophe, well, there you go.


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