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Thursday, September 25, 2008

Durbin's using financial crisis to extort redistribution of wealth from responsible homeowners to the profligate

Some people, including me, are worried that the proposed financial bailout will eventually cost taxpayers a big net chunk of money, either through higher taxes or increases in the national debt, if the bailout structure doesn't repay the Treasury. But did you realize that Dick Durbin, Barack Obama's senior partner in the Senate from the Great State of Illinois, is trying to use the current crisis to extort a ginormous transfer of wealth, via across-the-board home mortgage rates, directly from the responsible homebuyers to benefit the irresponsible ones? So shows, I'm confident, my latest guest post at HughHewitt.com.

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[Copied here for archival purposes on November 5, 2008, from the post linked above at HughHewitt.com.]

(Guest Post by Bill Dyer a/k/a Beldar)

Taking ruthless advantage of a national crisis, Democratic presidential nominee Barack Obama's fellow and senior senator from Illinois, Dick Durbin, is still insisting that — as a condition for his agreement to legislation which would stabilize illiquid and panicked financial markets — federal bankruptcy judges be given the unprecedented power to re-write bankrupt consumers' home mortgage contracts (h/t Althouse):

Current bankruptcy law allows judges to approve the modifications of the terms of certain debts, namely auto and student loans and second-home mortgages. Under the Democrats’ proposal, judges could approve individuals’ reorganization plans that would allow debtors to pay a lower interest rate for their primary-residence mortgages. Furthermore, if the value of the property falls below the loan amount, debtors potentially could reduce the balance of the loan to equal the current value of the property — a process commonly known as a “cram down” or “strip down.”

Durbin would like to paint this as a modest change that would broadly benefit all classes of consumers. In fact, it would be a revolutionary one, effectively obliterating at a single stroke both (a) your freedom to make binding contracts on the soundest and most traditional of economic terms and (b) the very fundamental difference between "secured debt" and "unsecured debt."

And if Durbin gets his way, in the end it will be the responsible consumers — the ones who actually make their mortgage payments regularly, and who didn't use subprime mortgages to move into McMansions which they objectively can't afford — who will suffer. To bail out the profligate (both past and future), the responsible homebuyers will be forced to pay. And that payment will not just be speculative and indirect, through possibly higher taxes or increased national debt if the bailout mechanism doesn't ultimately pay the Treasury back as planned. Instead, the cost of Durbin's provision will be direct and certain, paid through higher mortage interest rates extracted from all new homebuyers over the entire length of their mortgages.

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The distinction between "secured debt" and "unsecured debt" sounds at first like a difficult and arcane subject, but it's really not. It's all about common sense and collateral.

Let's say my neighbor Al, who's lived next door for 10 years and I trust like a brother, knocks on my door and wants to borrow $50 because he's a bit short before payday and he really wants to take his son out for dinner this weekend to celebrate his high school graduation. I pull out my wallet, hand Al a $50 bill, and we shake hands. I've just made an "unsecured loan," and Al has just incurred an "unsecured debt" — one with no collateral to back up Al's word that he'll ever pay me back.

But let's say the request instead comes from my new neighbor, Bob. Maybe I'm not so confident that Bob will pay me back in full and on time. I could simply tell him no, I'm not willing to trust just his word, but that would be kind of rude, and there's another option: If, instead, I say, "Sure, Bob, I can loan you $50 for a week, but just to make sure you don't forget to pay me back, how about you park your lawnmower in my garage. Then next week after you cash your paycheck, you can come back and pick it up when you pay back my loan."

Bingo. Now Bob's got a loan which he otherwise couldn't get, but by insisting that he put up some collateral to secure his debt, I've hedged my risk that he won't pay me back.

Suppose it turns out that Bob doesn't pay me back. It turns out he was kind of a shady character anyway, and he just up and moved to Belize without either paying me my $50 or trying to retrieve his lawnmower. A new neighbor, Chip, moves into Bob's old house. And fortunately for me, he needs a lawnmower! "Hey Beldar," sez Chip, "I'll pay you $48 for that extra lawnmower you have parked in your garage. But hey, can you spot me $40 of that? I don't get paid until next week."

"Okay, Chip," sez I, "I'll gladly sell you my extra lawnmower for $48, and I'll take your $8 downpayment. But here's the deal: Until you pay me the remaining $40, we're going to keep this lawnmower parked in my garage except when you're using it. And if things don't work out and you can't pay me the full $40 on time, I'll just keep the lawnmower."

"Great!" sez Chip. Now we've got a debt transaction that is collateralized by the very same property that's being bought. It makes a lot of sense for both sides, and hey, I don't have to live next to a house with a nasty yard.

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In their daily lives, tens of millions of American consumers enter into unsecured debt transactions on a daily basis. The most typical among them are credit-card transactions. Generally speaking, credit card companies have extended a line of credit to these consumers just on the basis of a signature, without any collateral being held as security by the credit card companies that they can look to if the consumer ends up breaking his agreement to pay off his credit card charges.

And because the credit card company is taking the risk of being an unsecured creditor, guess what? It insists on a much higher interest rate.

Consumers also enter into secured debt transactions frequently, although not on a daily basis, and the two conspicuous examples of that are buying cars and buying houses. "Sure, I'll loan you money at a lower rate than those credit card companies charge," says the auto finance company, "But our name goes on the car title along with yours until you finish paying us off. (And we're going to require you to maintain collision insurance. Oh, and if you default in making your payments, we'll send Guido and his boys to pick the car up out of your driveway.)" But even with those conditions, the lower interest rate can make the difference between your having a car and your taking the bus.

House purchases are on the same principle: The mortgage company says, "Oh yes, we'll offer you a lower rate than even your auto finance company charged! We'll agree to a longer payment term, too! But while you'll become the 'beneficial owner' of the house right away, and you'll move in and enjoy it, we're actually going to put the formal, legal title in the name of a 'trustee' under a 'deed of trust.' When you pay off your mortgage in 30 years, he'll transfer full title to you then. But if you default, well, he'll be obliged to transfer title to your house to whoever makes the high bid at a public foreclosure auction, and the proceeds from that will go to us."

Again, most consumers are thrilled to agree to these terms. They're typical, they're standard, they're traditional, and they make common sense. Most importantly, they make home ownership possible for literally millions of people who couldn't remotely qualify for a similar-sized unsecured loan. And the whole key to that affordability is the lender's knowledge that based on the tight language of the mortgage contract, it can rely on having first dibs on the collateral (the home itself) if the mortgage borrower defaults.

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Besides just being able to exercise control over the collateral — either through language on your car title or through a deed of trust on your house — these lenders are also counting on the existing law regarding what will happen if their creditors not only default, but declare bankruptcy. And currently, and traditionally, there is and has always been a huge difference between the way secured debts and unsecured debts are treated in bankruptcy proceedings:

There are some exceptions, but in general, within the first few weeks or months of all consumer bankruptcies, most secured creditors — that is, the ones like your mortgage company or auto finance company who've insisted on getting collateral posted by their borrowers — are going to get permission from the bankruptcy courts to go ahead and foreclose on their collateral. Most likely, even the proceeds from foreclosure (the auction proceeds) won't cover the whole debt, but they'll go directly to the secured creditors. And meanwhile, the unsecured creditors — typically the credit card companies — are the ones who are going to take the big financial hit, whether the consumer bankruptcy ends up in a payment plan for the future or a total liquidation.

Now, I shed no tears for the credit card companies in bankruptcy proceedings. Especially after the "reform" of the bankruptcy laws championed by Slow Joe Biden a few years ago, they're doing okay, with many fewer consumers being eligible for bankruptcy discharges based on total liquidation than was once typical. And more importantly, the risk of being stuck in that position was something the credit card companies anticipated, and they made up for that in the higher interest rates (and penalties and fees) they charged.

But Sen. Durbin wants bankruptcy judges to have the power — meaning, of course, that they'll use the power — to treat the most sacred of secured debt transactions most people ever enter into, their home mortgages, just like they're easy-breazy credit card transactions. "You only thought you had collateral you could foreclose on even in the event of bankruptcy," those judges will tell the mortgage companies. "But guess what — you don't! Either agree to re-write your whole mortgage in the way that I, the bankruptcy judge, think is fair and equitable, or you have to get in line with all the unsecured creditors, bub!"

Friends and neighbors, if Sen. Durbin gets his way, every mortgage company will have to completely recalculate their risks for every future consumer mortgage they underwrite. Reponsible people will lose their chance to qualify for a lower interest rate that can only be offered if the mortgage company is fully protected by its collateral, because homes will no longer be a safe form of collateral. Your good credit rating, your demonstrable income history that amply covers your future payments, and even your big down-payment, won't be able to get you as good terms. Durbin's change in the bankruptcy laws will force you to pay the price for mortgage companies' increased risks, even though you've never done anything to generate those increased risks.

This is naked, blatant income redistribution from the responsible to the irresponsible. Dick Durbin and his Democratic allies are extortionists who want to take from the worthy and responsible, and give to the profligate and irresponsible (who, by the way, also tend to vote Democratic). Even if no one who knows Sen. Durbin can be particularly surprised by it, this is worthy of your outrage, and it should be a deal-breaker on the bailout bill if Durbin & Co. don't drop it. If so, and if the entire economy tanks as a result, the blame will be squarely on the head of Barack Obama's slippery fellow senator from Illinois, and on Obama's head, too, for not using the full leverage he has as the Democratic nominee to back Durbin off this extortion.

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UPDATE (Fri Sep 26 @ 5:25 p.m. CST): Larry Kudlow reports that even Sen. Obama has come out against Durbin's plan. That's an indication not of moderation on Sen. Obama's part, but of just how insane Durbin's plan is, and how quickly it would have become obvious that it had destroyed the home mortgage market if it had been enacted.

— Beldar

Posted by Beldar at 07:18 PM in Congress, Current Affairs, Politics (2008) | Permalink

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Comments

(1) Gregory Koster made the following comment | Sep 25, 2008 8:03:42 PM | Permalink

Dear Mr. Dyer: I'm not so bothered by this. It's Dick Durbin, and we expect him to rob the rest of us to the limits of our endurance. What I am interested in is McC's response to Durbin. I think it would be fair to say that Durbin's idea would not find favor with him, but would it find disfavor? Would he be willing to swallow such poisonous hokum just to "get this deal done nownownownownow"? That I find all-too-plausible. I've not been able to find any response to Durbin on McC's website or anywhere else. I hope there's one soon, and along the lines of Hell, no!

Another reason to oppose Durbin: imagine what this will do to the confirmation of bankruptcy judges. Every quack in the Ivy League will be crowding the Senate, screeching for a nomination, lusting for the new bullwhip Dick & Co. are thrusting into the bankruptcy judges's claws. Imagine William Ayers taking the oath in the Oval Office as Michelle looks on, smirking as she clutches the M-16, ready to hand it to Bill in his new role of making the bourgeois disgorge, while The One preens and adjusts the halo.

You never pay any attention to the advice I give you, but that isn't going to stop me: give up this attorney business in favor of writing. At least a sideline. And I mean books.

Sincerely yours,
Gregory Koster

(2) Howard made the following comment | Oct 23, 2008 10:00:51 AM | Permalink

Obama's first, second, and third priority is to get elected. If that means pandering to large numbers of unemployed, under employed, those on welfare, illegal aliens, and malcontents, he'll be happy to throw them a few crumbs as a way to get their votes. He will also turn democracy and capitalism on it's head, and villainize the affluent and successful in our society, in order to rally the masses behind him. With evangelical zeal Obama will convince his followers to replace reason with hope and belief ... to blindly follow him ... never challenge him ... and embrace his words as gospel. In the real, and unforgiving world of economics however, when you immediately gratify everyone by feasting on the goose that lays the golden eggs, the economy looses it's ability to continue generating growth and wealth. Obama is promising everyone a piece of the pie, whether they helped bake it, or not ... but, only in a socialistic, or communist state do the non-contributors demand to share equally in the property that belongs to others. Immediate gratification is like a drug to the malcontents, but in the big picture, every farmer knows that you never eat your seed crop. If Obama gets elected, America will turn into a third world country, with massive government welfare programs, unable to generate jobs for it's citizens, and unable to compete in the global markets. Keep America safe, free and strong ... elect McCain/Palin on November 4th.

(3) Howard made the following comment | Oct 23, 2008 10:02:14 AM | Permalink

Obama's first, second, and third priority is to get elected. If that means pandering to large numbers of unemployed, under employed, those on welfare, illegal aliens, and malcontents, he'll be happy to throw them a few crumbs as a way to get their votes. He will also turn democracy and capitalism on it's head, and villainize the affluent and successful in our society, in order to rally the masses behind him. With evangelical zeal Obama will convince his followers to replace reason with hope and belief ... to blindly follow him ... never challenge him ... and embrace his words as gospel. In the real, and unforgiving world of economics however, when you immediately gratify everyone by feasting on the goose that lays the golden eggs, the economy looses it's ability to continue generating growth and wealth. Obama is promising everyone a piece of the pie, whether they helped bake it, or not ... but, only in a socialistic, or communist state do the non-contributors demand to share equally in the property that belongs to others. Immediate gratification is like a drug to the malcontents, but in the big picture, every farmer knows that you never eat your seed crop. If Obama gets elected, America will turn into a third world country, with massive government welfare programs, unable to generate jobs for it's citizens, and unable to compete in the global markets. Keep America safe, free and strong ... elect McCain/Palin on November 4th.

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