Cram down

The short-term memory problem that afflicts most members of Congress is acting up again. Barely a couple of years removed from the housing collapse brought about by federal meddling in the lending industry, lawmakers are preparing to introduce another round of destructive intervention before a recovery has a chance to take root.

House Democrats are determined to jam into bankruptcy law "cram-down" provisions which would allow bankruptcy judges to rewrite mortgages, either by extending loan terms, cutting interest rates, reducing the principal owed or combining these forms of relief. Granting judges such power would severely weaken American contract law and make already scarce home loans even more unavailable -- and more expensive.

"We couldn't get it done on its own" earlier this year, said House Financial Services Chairman Barney Frank, D-Mass. "If there's enough pressure ... it could be that the eagerness to get the bigger picture, gets that one done."

The bigger picture, from Rep. Frank's perspective, is an overhaul of banking regulations that allows the majority to appear tough on "greedy capitalists" while holding lawmakers themselves totally unaccountable for growing the twin black holes of Fannie Mae and Freddie Mac and for wrongly coercing lenders into handing out credit like candy.

Rep. Frank believes banks haven't been properly, ahem, "encouraged" to modify the mortgages of people who lack the income to make mortgage payments in the first place. So he's planning to push the issue with a stick instead of a carrot. And this time, apparently, he has Senate Democrats in his corner.

Banks must take into consideration the risk of default with every loan they offer. That drives up the cost of borrowing for even the most credit-worthy customers.

If Rep. Frank has his way, banks also will have to calculate the likely costs of having bankruptcy judges rewrite loans and declare that vast amounts of principal don't have to be repaid -- only the lenders won't be able to evict the occupants and sell the property to recover some of their losses.

Moreover, The Washington Post reported this week that the federal government provides or guarantees about 90 percent of all new home loans. Taxpayers are also on the hook for future losses incurred by Fannie and Freddie. With mortgage delinquencies rising, it makes no sense to limit the debt-plagued government's ability to recoup taxpayer losses.

The cram-down "reform" would cause more long-term damage to a weakened economy. Senate Majority Leader Harry Reid of Nevada shouldn't entertain Rep. Frank's pet cause. If it gets to his chamber, he must let it die.