Lamar S. SmithU.S. Representative
[R] Texas, United States

Length: 5 minutes, 45 seconds

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Mr. SMITH of Texas. Mr. Chairman, I yield myself such time as I may consume.

Mr. Chairman, our country has fallen into a serious economic recession, a recession that is worsened by the foreclosure crisis. Until we address the rising number of foreclosures, it will be difficult for the economy to recover.

But some of what is in this bill we consider today will be helpful. Providing loan servicers a safe harbor from the threat of litigation if they offer borrowers meaningful loan modification will, in fact, help blunt the crisis.

But the bill also includes many counterproductive components, especially the bankruptcy provision. This bankruptcy provision not only will fail to solve the foreclosure crisis, but also will make the crisis deeper, longer and wider.

Allowing bankruptcy judges to rewrite mortgages will increase the overall cost of lending. Lenders and investors will hesitate to put up capital in the future if they fear that judges will rewrite the terms of their mortgage contracts. Less available capital and increased risk means that borrowers will pay higher interest rates in the future.

Allowing bankruptcy judges to rewrite mortgages will also encourage borrowers to file for bankruptcy. Under this bill, a borrower will be able to reduce, for example, a $500,000 mortgage to $400,000. When housing prices rise in the future, that borrower has no obligation to pay back the $100,000 amount they crammed down. Thus, the borrower receives a $100,000 windfall. And experts predict that receiving this windfall will provide an incentive for borrowers to file for bankruptcy.

If bankruptcy filings increase as a result of this legislation, which is predicted, it is unlikely that the country's only 368 bankruptcy judges could handle the additional caseload in an effective manner. This will prolong the crisis as borrowers wait for their bankruptcy plan to be court-approved.

In fact, even Senator Durbin, the primary sponsor of this legislation in the Senate, has stated that he is ``willing to restrict'' this legislation to subprime mortgages in an effort to make this proposal ``reasonable.'' So, the legislation we are considering today, and the ``Housing Affordability and Stability Plan'' announced by the President last Tuesday, really amount to another entitlement program, a program that comes at the expense of the 92 percent of the homeowners who are making their payments on time.

And it is a program that benefits lenders who wrote irresponsible loans and borrowers who borrowed more than they could afford. In other words, this legislation will punish the successful, tax the responsible, and hold no one accountable.

If we pass this legislation, what message does it send to responsible borrowers who are making their payments on time? How can we ask them to foot the bill for their neighbors' mortgages? What are homeowners to think if they pay back the full amount of principal they owe, while others receive a government-granted reduction in principal? We need to do everything we can to help solve the foreclosure crisis, but we need to do so in a manner that doesn't bankrupt the taxpayers or our financial system and that is, in fact, fair to all.

And as we work to solve the foreclosure crisis, we need to remember how we got here. As the President said in his address to Congress on Tuesday, ``It is only by understanding how we arrived at this moment that we'll be able to lift ourselves out of this predicament.'' This foreclosure crisis was brought on largely by irresponsible mortgage policies. Those policies were implemented by lenders and supported by government-sponsored entities like Fannie Mae, who were all too willing to put profits ahead of prudence. Their irresponsible behavior was encouraged by Members of Congress and the Clinton administration. Too often borrowers, spurred on by cheap credit and little or nothing as a down payment, borrowed more than they could afford.

The mortgage bankruptcy provisions in this bill are not the answer. Allowing bankruptcy modification of home [Page: H2849] mortgages will be costly, generate unintended consequences, and likely delay the resolution of the foreclosure crisis itself.

If we're going to enact this bankruptcy provision, despite all of its flaws, we should at least limit relief to subprime and non-traditional mortgages. We should provide bankruptcy judges with clear guidance on the procedure to follow in modifying the terms of home mortgages, guidance that would make lowering payments to an affordable level the paramount goal of bankruptcy modification. And we should provide much stricter provisions for allowing a lender to recapture any principal that is reduced in bankruptcy if the home is later sold at a profit.

Mr. Chairman, this bill, and the amendments we are going to consider today, provide none of these safeguards.

I urge my colleagues to vote against this bill.

I reserve the balance of my time.