Cramdown is unwise

Our representatives in Washington, D.C. are feeling pressure to "prevent home foreclosures".  One recent idea being "intensely debated" in the U.S. Senate right now is appropriately called "Cramdown".   A recent news article here.

The idea is that homeowners unwilling or unable to pay their mortgages should have some sort of "help", and the public pressure on Congress to "do something" is intense.

There are only two ways to "help".

The first way is to give the borrower (tax) money so he can pay the loan.  This is not so popular, because it is so hard to determine which borrowers are "worthy" of getting a taxpayer subsidy. How long should the borrower be subsidized? Was the borrower flipping houses?  Was there fraud involved?  Many taxpayers are offended that those of us who have worked hard to make prudent choices should have our money spent to support those who made poor choices and took too many risks.

The second way is to allow the government to modify the terms of the loans.  This is more popular, because it does not spend taxpayer dollars directly.  The trouble with this is that it is basically theft from the lender. Recent news can be seen here.

As you might guess, the lenders, who are facing this idea as upcoming legislation, are not happy about it.  Only a fool would lend money to a borrower knowing that the borrower can ask Uncle Sam to change the loan terms if he has "trouble" paying it back.

The current "cramdown" legislation is theft from the lenders. It is a seizure of some portion of the loan value, to be given to the borrower for political gain.  It is corruption.

The U.S. Constitution recognizes and protects the sanctity of our right to contract. Article I, Section 10 states: "No state shall pass any law impairing the obligation of contracts." Moreover, in the famous case Hale v. Henkel, the U.S. Supreme Court says: "The individual may stand upon his constitutional rights as a citizen. He is entitled to carry on his private business in his own way. His power to contract is unlimited."

Free, responsible citizens pay their debts and keep their word on contracts.

The idea that the federal government has the power to reach out and modify private contracts should frighten us.  This sort of power begs to be abused.  Most of us are borrowers, so this power benefits "us" today, but once power is granted, it is seldom used as intended.  Next time around, we may be the victims.