Yesterday, Congress passed H.R. 1106, the Helping Families Save Their Homes Act.  Supporters hope this legislation will restore liquidity in the housing market and assist those homeowners who are in foreclosure.  While this is a lofty goal, the bill just passed may not achieve it.

There are certain aspects of the bill that I can support.  For example, permanently raising the FDIC insurance limit from $100,000 to $250,000 will provide additional assurances that our banks are safe, which will encourage investment.

On first blush, it may appear that giving judges this power will be helpful, however the long-term results are unsettling.  The most troublesome provision grants bankruptcy judges the power to write down the principle on a mortgage while lowering the interest rate and extending the terms.  Known as “cramdown,” this provision would cause mortgage interest rates for the average American consumer to skyrocket, making homeownership harder for all Americans.  Compounding this problem, cramdowns will be costly to investors who have invested in mortgage-backed securities and will cause them to demand a higher interest rate on all further mortgages.  The result is grim: in a time when we need to restore confidence and liquidity to the housing market, this bill will actually discourage investment and decrease lending, perpetuating the current freeze on credit. 

I am sympathetic to those Americans who are struggling with their mortgage payments.  However, approximately 90 percent of homeowners are paying their mortgages on time.  The federal government cannot continue to bailout the irresponsible choices of a few at the cost of many.  Americans are suffering from bailout fatigue.  It is time for Congress to come up with serious solutions to the serious problems we are facing instead of continuing to throw money we don’t have at every problem that presents itself.