John Conyers' Stupid Mortgage "Reform" Ideas

Liberal House member John Conyers (D-MI) is, to judge from his editorial in last Friday's Wall Street Journal, not a very bright man. Not at all.

His piece, entitled "Loan Modification Can Stop the Foreclosure Crisis," pretty much distills his small-minded, near-term obsession with home foreclosures, rather than the longer term health of the mortgage industry.

Conyers wrote,

"I introduced the Helping Families Save Their Homes In Bankruptcy Act of 2009 to give courts the power to modify mortgages to bring them in line with underlying home values. For families in distress, this is a much-needed reform. And considering the realistic alternatives, it is fair to all concerned.

For more than three decades, the bankruptcy code has permitted the very kind of court modification we are considering today, for every other form of secured debt, including loans secured by second homes, investment properties, luxury yachts, and jets. For over 20 years, this very kind of modification has been available for home mortgages already -- if the home is a family farm. There is no indication that this has in any way increased the cost of credit for any of these kinds of loans.

As for my legislation, we have narrowed it to apply only to existing mortgages. So it will have no effect on new mortgages and cannot impact their cost. This is one reason why Citigroup is now among the many business and consumer groups that support this proposal. It's also one reason why the Obama administration supports my bill.

Finally, to those who argue that this legislation constitutes some form of "moral hazard," which will encourage reckless borrowing in the future, I would simply ask them to come to Detroit, my home town."

There are quite a few things wrong with Conyers' assertions.

First, any reasonable, educated adult voter knows that once you give a small exception to a standing rule to either the courts or Congress, it will be enlarged and distorted as time passes. So this is a classic 'camel's nose under the tent' approach that Conyers advocates. And he knows it.

Conyers focuses, in the second quoted paragraph, on the cost of credit. He gives no evidence, so we really can't believe his contention. It simply has no evidentiary basis in the column. But that's not the whole picture. Often, it's not the price of credit, but its very unavailability that is a problem. The asset classes which Conyers cites are much smaller asset-backed markets than home mortgages. And are generally viewed as riskier loans to buy.

Home mortgages are different because it is presumed that while someone might just let their boat, jet or investment real estate be repossessed, they will want to remain in their home. And home mortgages are just about the most securitized asset on the planet. So allowing some local municipal or district court judge to begin capriciously doling out mortgage relief will chill the market for securitized debt backed by home loans.

Conyers states that Citicorp supports his bill, but fails to mention that the US government effectively owns that bank. And it is generally accepted that Citicorp's management caved on this issue in exchange for continued access to Federal funding in the future.

Nobody with a brain who is not a libeal really believes the current restriction of this bill to existing mortgages will last through the next few years. It will only be a matter of time before the legislation is 'modified' so that more homeowner loans are included, and, in time, will simply become a part of the mortgage market.

This is precisely why limited government is to be preferred in an economic democracy like ours. Once Congress begins to encroach a little bit on some aspect of business, it gradually takes more and more power unto itself.

Make no mistake. If this measure passes, the future of mortgage finance will be far different than the past, and not in a good way. Excepting the past sixteen years of ill-advised Federal pressure on commercial banks to make and securitize risky, low-downpayment mortgages to unqualified borrowers, the US mortgage finance markets have functioned well for decades. This legislation will end that, as investors shy away from assets, the value of which can be arbitrarily reduced by some unknown local court judge.

Conyers' insistence that we all 'come to Detroit' to see the shape its in dodges the question of how it got that way. Probably by poor- read liberal- city management and risky borrowing by its defaulting homeowners.

By the way, didn't the Detroit mayor get bounced out of his job? Yes, surely Detroit is a model case for efficient government in the first place. More to the point, it is not the place you would look to for an example of normal operation of the mortgage markets.

Conyers' then plays on class prejudices with this choice passage near the end of his editorial,

"If we can spend $700 billion to bail out the brokers on Wall Street, the very least we can do is allow working Americans who are willing to repay their debts as best they can, under court supervision, the dignity of staying in their homes. With one in 10 homeowners behind on their mortgages, and 10 million foreclosures expected over the next several years, the time for meaningful action is now."

It's clear Conyers barely understands the financial services sector. The firms which were "bailed out" were investment and commercial banks. His reference to "brokers" is off the mark and refers to a rather small, increasingly unrepresentative and unprofitable part of the financial services business mix. His verbiage is designed to incite class warfare and hatred of one economic class by another.

John Conyers' liberal diatribe about mortgage loan modification by local courts is an example of why Americans rightly worry about Congressional encroachment into their economic lives.