Cramdown update

According to Tapped (a lefty blog), negotiators on the foreclosure bill have agreed that the cramdown provision will apply only to mortgages that exist when the bill is passed, not new mortgages going forward. If true, this has to be taken as tacit acknowledgement that mortgage cramdowns are generally bad policy, that would cause mortgage rates to rise on good credit risks in order to subsidize bad ones.

By limiting cramdowns to existing mortgages, the bill would avoid the effect on interest rates going forward.  Except, that is, to the extent that lenders are not fools.  Lenders will learn not to trust the government; what it does now, it will do again.  Any loan they make will ultimately be subject to cramdown the next time there’s a foreclosure bill.

But the primary effect of the bill is still on existing mortgages, and that’s still where it is truly dangerous.  The banking system is still reeling from the impact of a drop in the value of its loans.  Cramdown would be yet another blow to those assets and to the banking system. To do it right now is the apotheosis of stupidity.

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