Cramdowns Increase Costs for Homeowners.(Viewpoint)

Byline: David Kittle

Mr. Kittle is the chairman of the Mortgage Bankers Association and executive vice president of Vision Mortgage Capital in Louisville, Ky. He testified recently before the Senate Judiciary Committee at a hearing titled, "Helping Families Save Their Homes: The Role of Bankruptcy Law." This viewpoint is an excerpt from his testimony regarding a proposal that would allow bankruptcy judges to unilaterally modify mortgage loans on primary residences.

Mr. Chairman, we all agree on the same goals. We all want to help consumers by stabilizing the market. We want to help families stay in their homes and we want to make sure that the market excesses we saw earlier in this decade do not return. We all agree on that.

We disagree on the notion that bankruptcy would help our nation's consumers. We should be working on efforts to keep people out of the bankruptcy courts, rather than pushing people toward them. Let me give you three reasons why bankruptcy is harmful to consumers.

First, no one should make filing for bankruptcy appear attractive. There are real and severe consequences for consumers who declare bankruptcy. Bankruptcy stays on a credit report for seven to 10 years. It makes it very difficult to acquire future credit for a new home or car. It can stand in the way of getting insurance. It can make it harder to get a new job or even to rent a home or an apartment.

Two-thirds of those people who file for bankruptcy are unable to fulfill the terms of their repayments plans. Two-thirds. In other words, two-thirds of those who file will still lose their home, and still have the bankruptcy on their record.

Second, changing the law will force lenders to impose tougher standards on people trying to get a mortgage. "Cramdown" legislation would add new risks to the calculation lenders make in setting prices. For the first time, lenders will have to pay more attention to markets with the most volatility and those with higher risks, such as rural areas, inner cities and new subdivisions, where history shows the greatest fluctuation of home values. This could even lead to a new era of redlining.