Dear Senator:
On behalf of the 362,000-member National Taxpayers Union, I urge you to vote "NO" on S. 2636, the so-called Foreclosure Prevention Act of 2008. This bill would hurt taxpayers as well as the chances for a long-term recovery in the mortgage debt market.
Section 201 of the legislation would appropriate $4 billion in "emergency funds" states and localities could use to enter the redevelopment business. If this provision becomes law, other, even more expansive schemes, such as federal buyouts of bad mortgage debt totaling tens of billions of dollars, will become likelier. Other parts of the bill would allow courts to alter the terms of mortgage agreements in bankruptcy cases. While proponents of this approach argue that it would merely equalize treatment of mortgage debt with other forms of indebtedness, the Congressional Budget Office has noted that the result "could be higher mortgage interest rates, although the magnitude of the increase is difficult to predict and could depend on the exact change in policy." Opinions vary somewhat on the latitude courts would have under this bill and the attendant effect, but should the Senate be taking any chance on seriously jeopardizing the goals of increased homeownership and more stable borrowing costs? We think not.
Policymakers have already taken numerous steps aimed at aiding the housing debt crunch, and should be wary of creating the "moral hazard" that results from socializing risks while encouraging private reward- seeking. Throughout NTU's 40-year history we have seen instances of how small changes in policy (or lack thereof) can eventually translate into huge bills for taxpayers and consumers. As the National Commission on Financial Institution Reform, Recovery, and Enforcement noted in its report on the causes of the S&L crisis, federal deposit insurance "was at the heart of it" because the government created an environment in which "depositors could benefit with no meaningful risk of financial loss." With enactment of S. 2636, the Senate could very well be launching America on another fiscally tortuous path that could end in a wholesale bailout debacle.
Congress cannot "prevent foreclosures" by tinkering with the housing market, spending federal tax dollars, or allowing courts to make mischief over mortgage contracts. Foreclosures result not only from the consequences of lending and borrowing decisions, but also poor economic conditions. To get homeowners back on their feet, Congress should enact long-term tax and regulatory relief that will help to get the whole economy back on its feet. Roll call votes on S. 2636 and its amendments will be significantly weighted in our annual Rating of Congress.
Sincerely,
Pete Sepp
Vice President for Policy and Communications