Contemporary Issues
As a potential solution to the subprime mortgage crisis, legislators and consumer advocates have advanced a proposal to allow cram downs on these loans, and legislation to that effect was introduced for potential inclusion in the Emergency Economic Stabilization Act of 2008.
However, the financial industry strongly voiced opposition to such a measure, claiming that it would create additional uncertainty as to the value of mortgage loans (and by extension, the collateralized debt obligations into which they are bundled). In addition, like in the late 1970s, the financial industry had powerful political leverage on its side: the risk that revoking the cramdown restriction would result in higher interest rates on home loans. It was impossible to simultaneously enact a law preventing the industry from jacking up interest rates on all home loans; that would have raised the horrifying possibility of bank runs, because no rational investor will keep their money at an institution that is actually prohibited by law from setting interest rates on its loans to accurately reflect the underlying credit risk. To prevent bank runs, Congress could have simultaneously imposed capital transfer restrictions, but that would have paralyzed the global economy. As few politicians wanted to be blamed by Wall Street for making homes unaffordable or causing even more bank failures or a second Great Depression, the proposals for revoking the prevention of cramdowns on loans secured by primary residences never found much traction in Congress.
Read more about this topic: Cram Down, Home Mortgage Loans
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