As Congress debates legislation to empower the Treasury to purchase troubled mortgage-related assets, some are trying to weigh the bill down with ancillary, unnecessary provisions. The one which concerns us the most is a provision that would allow bankruptcy judges to unilaterally change the terms of many mortgage loans, including the loan balance, as part of Chapter 13 bankruptcy proceedings. By granting judges this power, this bill would throw into question the value of the collateral that backs every mortgage made in this country -- the home.
We oppose the inclusion of bankruptcy reform in this bill for several reasons. First and foremost, it is a polarizing issue that threatens to bring down a crucial measure this country needs in order to avoid a serious economic downturn. Congress must pass this bill to establish the Treasury program in order to safeguard the American economy. Congress has already debated the bankruptcy issue and the proposal was defeated. This is not the place to have this debate again. We welcome another debate on this issue on its own merits, not in the context of the current issue.
The fact remains that the lending community remains united against this idea. It is our position that if this proposal were to become law, mortgage rates would increase in cost by 150 basis points. In addition, lenders will be forced to require higher down payments and charge higher costs at closing. All these increased costs would be necessary to account for the new risks that lenders will face when judges decide to change how much borrowers owe on their mortgages.
For each state, we show below the average loan amount and the increase in the monthly payment as a result of the higher interest rates that MBA estimates will occur if bankruptcy cramdown is allowed to become law.