Lindsay Robbins Blog

Many industry professionals are calling for more aggressive loan modifications that reduce borrowers’ loan balances, principal write-downs can’t be mandated by policymakers, Rep. Barney Frank said on CNBC on Tuesday, January 5th.

Rep. Frank, Chair of the House Financial Services Committee, reiterated his support for giving bankruptcy judges the power to modify mortgages in so-called cramdowns. Legislation for bankruptcy-overhaul would be the fairest way to reduce loan balances because it would require borrowers must pay some price—in this case, by going through bankruptcy, he said. The House approved bankruptcy legislation last year, but couldn’t secure enough votes in the Senate.

There’s no easy or fair way to mandate principal write-downs without otherwise requiring borrowers to suffer some hardship, said Rep. Frank.  “What do you then say to the individual who says, ‘Wait a minute, we’re equally circumstanced. I’ve got the same mortgage she’s got. I’ve been more prudent. I’m not in distress; she is. Why does she get the reduction?’” he said.

While it would be “OK” to encourage principal reductions “on a voluntary basis with even some pressure” from policymakers, Rep. Frank said there’s just no way to create a loan modification program that mandates write-downs. “One, I don’t know what criteria you would put in to mandate it. What would we say in the law? What level of distress qualifies you? How would we prevent you from sort of getting yourself into distress?” he said.

He also stated his support for a measure that would lend money from the Troubled Asset Relief Program, or TARP, to borrowers who have fallen behind on their mortgages due to unemployment. Rep. Frank said it was important to distinguish between people who had mortgages that they should never had taken out and that probably weren’t ever going to be repaid and those who had fallen behind simply because they had lost their jobs.

“There’s a new category of foreclosures that are threatening us now and that’s people who got a perfectly reasonable mortgage that was appropriate to their circumstance, but they have been unemployed for longer than expected because of the depths of this recession,” he said.

Rep. Frank also defended the decision that the Obama administration made last month to stand behind unlimited losses that mortgage-finance giants Fannie Mae and Freddie Mac might run up over the next three years. The government had previously pledged to back up to $200 billion in losses at each company.

“They have become the public utility that finances housing in America to a great extent and particularly multifamily housing,” said Rep. Frank. “People who believe that multifamily housing has an important role both economically and socially should understand that Fannie Mae and Freddie Mac have been the major sources for that. So part of the loss is a public policy decision that it would be worse not to have some support for the housing market.”

Exerts taken from WSJ.