New Direction for Energy Independence, National Security, and Consumer Protection Act and the Renewable Energy and Energy Conservation Tax Act of 2007
Floor Speech
NEW DIRECTION FOR ENERGY INDEPENDENCE, NATIONAL SECURITY, AND CONSUMER PROTECTION ACT AND THE RENEWABLE ENERGY AND ENERGY CONSERVATION TAX ACT OF 2007 -- (Senate - April 03, 2008)
BREAK IN TRANSCRIPT
Mr. CORNYN. Mr. President, I want to address the Durbin amendment because I am concerned that the Durbin amendment would hurt low and middle-income families by making home mortgage interest payments higher, make them more expensive, by discouraging credit counseling and mortgage renegotiations and inadvertently steering more American homeowners into bankruptcy.
Let me try to quantify what I mean in terms of the expense. It is estimated that the so-called cramdown provision would raise interest rates on average by about 1 1/2 percent. In Texas the average home loan is $122,000 a year. The monthly payment for a 30-year fixed home mortgage at 6 percent is $734. If you add a percentage point and a half to that, it goes up by $122 a month. So if these estimates are correct--and I think they are the best information we have available to us now--the average increase to Texas homeowners would be almost $1,500 a year. It would be $1,465 a year. For that reason, among others, I oppose the Durbin amendment.
The bill actually risks increasing the cost of owning a home for every American, and not just for people in my State, in Texas. There has been a little history to this provision as well.
The Democratic Congress and President Jimmy Carter back in 1978 had a reason for excluding from cramdown the ability for a bankruptcy judge to actually go in and rewrite the interest rate so people could afford their home. As a matter of fact, the cramdown exception, which this amendment would eliminate, actually helps people buy homes. It is pretty clear--Senator Specter from Pennsylvania quoted a U.S. Supreme Court opinion relative to this, but it is pretty clear that the congressional intent to exclude home mortgages from cramdown was intended. Some have disputed that Congress was pursuing a policy of making home mortgages more available when we created the cramdown exception.
Senator Durbin, I believe, has said that the cramdown exception for home mortgages makes no sense whatsoever. The record from the 1978 act clearly shows that Congress viewed exceptions to cramdown as a means of making mortgages more available. The Senate Judiciary Committee report explained that the purpose of the real estate exception was to: ``afford greater protection'' to real estate financing ``by creating a safe harbor that would facilitate, rather than discourage, this type of financing.''
As I alluded, the courts have recognized this policy in interpreting the act, most notable in Justice Stevens' concurrence in Nobleman v. American Savings Bank. So I would say that the Democratic Congress of 1978, President Carter, and Justice Stevens all have acknowledged that this policy of excepting home mortgages from cramdown makes sense and helps keep mortgage rates low, which I think ought to be our policy.
Inadvertently, I think this amendment would also encourage more people to seek bankruptcy as a way to deal with their financial difficulties. It has been argued that this provision would actually encourage borrowers to negotiate with their lender. The one problem with that is, as we all know, most mortgages these days are actually sold by the lender; they are packaged and then purchased as securities and sold on the open market. It is, in fact, what has happened in the subprime mortgage market, which has created this crisis. The people who actually bought those securities now find that they are worth dramatically less than they thought because of the problems these mortgage holders are having. So it is certainly not a given that they will be in a position to negotiate with the lender, who no longer even holds that mortgage.
I am concerned, though, that the amendment goes too far in those rare cases where negotiations are still possible to remove the homeowner's incentive to negotiate and, instead, steer them into bankruptcy. The Durbin amendment would, in fact, create a siren's song that would lure struggling families onto the rocks of bankruptcy. For most Americans, our homes are our largest and most-cherished investment. The chance to have their mortgage decreased by a bankruptcy court, basically to renegotiate what a negotiated interest rate is, would encourage struggling families to seek bankruptcy protection instead of trying to negotiate and get their finances back in order in a way that will preserve their credit and will not lure them into bankruptcy.
I think it is worth noting that bankruptcy itself has lasting and serious consequences to the credit rating of the people who seek it. Bankruptcy is not in the long-term interest of every family who falls behind on their mortgage. We should encourage negotiation where possible. In fact, we know that is what happens anyway. Very few mortgage holders refuse to negotiate with the borrower when they get behind in their payments because, frankly, they don't want the property back. They want to continue the loan in effect, if possible.
So I think the Durbin amendment actually discourages negotiation and creates an effective magnet, attracting people into bankruptcy. I have already talked about why I think that is a bad idea.
Of course, this amendment also waives the bankruptcy law's counseling requirement when a home is in foreclosure, which is inconsistent with the underlying Shelby-Dodd compromise that provides $100 million to encourage credit counseling.
The goal of the bill should be to help struggling families get back on their feet, not encourage bankruptcy filings that would raise mortgage rates for everybody, ruin the credit of the borrower, and ultimately not solve the problem it is intended to solve. For that reason, I oppose the Durbin amendment and encourage my colleagues to do likewise.
Mr. DURBIN. Will the Senator yield for a question?
Mr. CORNYN. Yes.
Mr. DURBIN. Mr. President, I acknowledge that the Senator is correct that this modification of a mortgage on a primary residence would be a change in bankruptcy law. I ask the Senator from Texas, is he aware that in the 1980s we created chapter 12 bankruptcy for farms and created the opportunity for the bankruptcy court to modify mortgages on family homes and farms, and at the time the banking industry said the same thing about that change as they have about my amendment--that it would raise interest rates? Is the Senator aware of the fact that there was no significant increase in interest rates on farms as a result of the creation of chapter 12 bankruptcies?
Mr. CORNYN. I accept what the Senator says. I have no reason to dispute it. I, frankly, have no knowledge of it. I know that currently we have roughly 2 percent of the mortgages in America that are in foreclosure proceedings. While there is undoubtedly a serious problem, I don't think this is the right solution to it. I said that some estimates are that it would increase interest rates by 1.5 percent on mortgages. On a $122,000 mortgage in Texas, it would increase annual costs about $1,500. So I must oppose it.
Mr. DURBIN. Will the Senator yield for a further question?
Mr. CORNYN. I will.
Mr. DURBIN. Is the Senator aware that my amendment limits the modification of mortgages in bankruptcy to those on primary residences, existing as of the date of the enactment of this law, and that it would not apply to any future mortgages and would not have an impact on future mortgages, those that are going to be issued. So the credit industry is saying: We are afraid this is going to apply to everybody. There is a limited application of a narrow class of people who would be eligible.
Mr. CORNYN. Mr. President, I appreciate the clarification. I also note that the tendency in Washington and in Congress, and the Federal Government generally, is for things to get bigger rather than to contract. So while I appreciate the clarification, I am not consoled by the current limitation.
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