CNBC "CNBC Reports" Interview - Transcript
Interview
CNBC "CNBC Reports" Interview - Transcript
CNBC "CNBC REPORTS" INTERVIEW WITH REP. BRAD SHERMAN (D-CA); REP. AARON SCHOCK (R-IL)
INTERVIEWERS: SCOTT WAPNER, DAN COLARUSSO AND MELISSA FRANCIS
SUBJECT: BANKRUPTCY CRAMDOWN PROVISION
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MS. FRANCIS: Well, next week, the House will consider allowing judges to reduce the principal owed on mortgages. It is known as the cramdown provision, part of the new housing bill. Supporters say it will stave off foreclosures, but critics think it will reward scofflaws. Representative Brad Sherman is a Democrat from California, Representative Aaron Schock is a Republican from Illinois.
Gentlemen, it is great to have you with us.
REP. SHERMAN: Good to be with you.
REP. SCHOCK: Thanks for having us on.
MS. FRANCIS: Congressman Sherman, let's start off with you. It seems like this sort of kicks the can down the road, so to speak. We're allowing the judges to reduce principals. But ultimately, doesn't this hurt the holders of those mortgage-backed securities?
REP. SHERMAN: Well, I think that it may hurt them a bit, but it will help neighborhoods, and it will help home prices. And it ought to be a narrow piece of legislation. I think it will be more narrowly tailored as it goes through the process. The legislation really doesn't allow for a writedown of the principal unless writing down the interest and the payments is insufficient. And in almost every case, writing down the interest in what's going to happen.
MS. FRANCIS: So essentially, Congressman, this is a choice between who will win the most and who will lose the most.
REP. SHERMAN: Well, my hope is that you don't win with foreclosures, you don't win with bankruptcies. What you want to do is get the lenders and the servicers to talk to the homeowners and take advantage of the HOPE for Homeowners bill that we passed earlier that allows, with the proper changes, the loan to become federally insured. We want to keep people in their homes. We don't want bankruptcies. We don't want foreclosures.
MR. WAPNER: But Congressman, your own party can't even agree on what the finality of this bill should end up being. That's the reason for the delay here. Should it just be for subprime, for example? Should it be for all mortgages in general? How do you make that determination? And how are you guys going to get your act together and come to one solid voice for what you think the party should be going forward?
REP. SHERMAN: Well, you know, you don't expect hundreds of congressmen to all agree. I expect that the bill will leave the House, dealing with regular as well as subprime lending. But I expect that will be the opening bargaining position of the House of Representatives, dealing with the Senate, and ultimately the bill will deal with subprime lending almost exclusively.
MR. WAPNER: Representative Schock, where do you stand on this issue? Should it be just for subprime? Should it be for all mortgages? And then you have the slippery slope in general of people who are not necessarily in bankruptcy but maybe borrowed more than they really can afford now. Maybe their job situation has changed, and they're looking for something as well.
REP. SCHOCK: Well, and what about the 90 percent of Americans who have been responsible? Let's first establish the fact that there's no free money. And this cramdown provision is outrageous, so much so that not just Republicans disagree with it but keep in mind that the Democrats have a 70-seat majority in the House, and there's a reason why this bill didn't pass this week, despite the speaker's efforts. There's no free money. A cramdown provision that allows banks and bankruptcy judges to go in and rewrite a mortgage is going to be paid for by lenders as well as taxpayers who pay for it in higher interest rates, higher fees and less access to capital.
One thing I'm hearing around the country is small-business owners and entrepreneurs are having difficulty with access to capital, and this will only make the problem worse.
MR. COLARUSSO: Well, it strikes me that with 70 percent of our nation's GDP being consumer spending, a house being the psychologically biggest factor in someone's feeling of wealth, don't we have to do something to shore up this part of the market to make sure that Americans still go to Target, still go to Wal-Mart, still go to Home Depot and keep the economy humming? It's not like we have an industrial economy to fall back on anymore. I mean, how do you suggest we skin that cat?
REP. SCHOCK: Absolutely, you're spot on. And much of this bill is good. There are many healthy provisions in it. For example, increasing the FDIC insurance rates so people feel comfortable and safe with their investments. Allowing lenders to be able to go in and voluntarily restructure it so that the rates can come down and the payments can come down to something manageable for the individual to be able to meet. There are many healthy provision in this that I think the bill will get bipartisan support on. But these amendments that were added, like the cramdown provision, is really what got this bill stuck in the mud.
MS. FRANCIS: Congressman Sherman, do you acknowledge Congressman Schock's argument that perhaps interest rates for everybody else will end up rising? And are you again making the decision that staving off foreclosure for the select few that go through cramdown is better than them suffering the other consequences?
REP. SHERMAN: Well, first, I don't think foreclosure is in the interest of the banks. It's certainly not in the interests of neighborhoods. And what I think this bill will lead to is not more bankruptcies but more negotiations between the homeowners and the banks. As for higher interest rates, I don't think that has been shown to occur at all. Keep in mind, however, we allow these very types of transactions -- reducing interest rates and principal -- on your second home. So why do we allow people to do something with regard to their second home while we're foreclosing them out of their first home? That's a rather extreme aspect of our current law.
MS. FRANCIS: Congressman Sherman, I wanted to back up to a statement that you say. You said that you ultimately believe that this will cause more homeowners who are facing foreclosure to open negotiations with their banks. Do you think that ultimately the number of cramdowns, the number of cases where we see it decided in the courts will actually not materialize, and that that prospect of having to go to court will trigger negotiations and it will be solved in the free market ultimately?
REP. SHERMAN: I think it will be, but I still think there will be lots of foreclosures this year. This is going to be a terrible year no matter what we do. But I think the number of foreclosures that result this year will be substantially less if we pass this bill.
MR. COLARUSSO: And it might not be terrible having a judge decide either, because at least they're not interested financially, you know. It was too easy to refinance, you know, during the boom. And it's going to be tough to get out of it. So it's not bad having somebody in the middle.
MR. WAPNER: I agree with you.
MS. FRANCIS: I don't know. When you bring the courts in and you let someone decide? I mean, that --
MR. COLARUSSO: Well, how good were the mortgage bankers? Look who they gave mortgages to. How good were the borrowers? Look what they did. So why not?
MR. WAPNER: Congressman Sherman, let me just ask you a quick question before you go here. What about the stress that this could cause some of the banks? I mean, one of the members of your own party, Representative Conyers of Michigan, saying that this could be too difficult and too hard on the banks to follow through with?
REP. SHERMAN: I think that the banks may actually benefit from this because while on an individual mortgage maybe they want to foreclose, but they tend to have mortgages elsewhere in the same neighborhood, and the property values in that whole neighborhood will go down if you have a foreclosure. And one bank may foreclose, another bank may be helped by not having that foreclosure take place.
MS. FRANCIS: Okay, we're going to leave it there. Thanks so much, Congressmen Sherman and Schock.
END.
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