[Congressional Record Volume 155, Number 42 (Tuesday, March 10, 2009)]
[Extensions of Remarks]
[Page E610]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             HELPING FAMILIES SAVE THEIR HOMES ACT OF 2009

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                               speech of

                          HON. FRANK D. LUCAS

                              of oklahoma

                    in the house of representatives

                        Thursday, March 5, 2009

       The House in Committee of the Whole House on the State of 
     the Union had under consideration the bill (H.R. 1106) to 
     prevent mortgage foreclosures and enhance mortgage credit 
     availability:

  Mr. LUCAS. Mr. Chair, I rise today in strong opposition to this 
legislation.
  Many of my colleagues today have made excellent points about the real 
effect of this legislation. This legislation will most certainly not 
help those who it is designed to help. It will drive up the cost of 
loans, limit the number of loans that can be made, raise interest 
rates, and increase opportunities for abuse in the bankruptcy system.
  I want to focus the House today on another important problem that has 
not been discussed: how the bankruptcy laws and the accounting rules 
and treatments combine to do potentially substantial and lasting damage 
to the financial system.
  Under existing accounting rules, any bankruptcy loss may be 
considered an indication of impairment. The term that is used by 
accountants is ``other than temporarily impaired'', or ``OTTI''. I want 
to make sure that the House understands the consequences of this 
problem in the real world. Even if a company took a small bankruptcy 
loss on one of the residential mortgage-backed securities (RMBS) that 
it owns, the amount of loss that would be recognized in that company's 
income statement is a full writedown to deeply depressed market values, 
not just the amount deemed to be a bankruptcy. Any loss of principal, 
current or future, requires this treatment no matter what term is used 
to describe the loss. If a judge can adjust principal, then a 
significant detrimental impact to the company will automatically 
follow.
  The House must clearly understand that the losses which would be 
recognized by financial institutions in this situation are far greater 
than the amount of the bankruptcy losses. Any RMBS holder will have to 
record these losses in the same manner, and so the threat of bankruptcy 
``cramdowns'' casts a huge shadow across the entire financial services 
industry. For example, if a company owns five million dollars 
($5,000,000) in RMBS with a current market value of $2,500,000, and 
there is a bankruptcy loss per the judge of fifty thousand dollars 
($50,000 economic loss) to the preferred RMBS tranche, the required 
financial statement loss under existing accounting rules would be two 
million five hundred thousand dollars ($2,500,000). In this example, 
accounting rules require booking the financial statement loss at fifty 
times the actual economic loss.
  This is a stark, but true, statement of the horrific impact that 
existing accounting rules are likely to have on the financial services 
industry in the event this legislation becomes law. It would only take 
a few of these kinds of losses to destroy the current year operating 
positions of any company and greatly impact its overall capital 
position.
  This means that the cramdown legislation the House considers today 
carries with it a virus that threatens to consume significant parts of 
the financial services industry, particularly any company that is a 
significant holder of RMBS. The Majority either does not understand, or 
has chosen not to deal with, this significant and looming problem. 
Likewise, there is a lack of understanding about the major role that 
accounting rules and treatments play in it. I earnestly hope that our 
colleagues in the other body will address this issue squarely, and 
understand that cramdown without accounting reform and strict 
limitations on the discretion of bankruptcy judges has the potential to 
create significant and unanticipated collateral damage to our financial 
system, as well as loss of credibility with financial services industry 
customers and widespread negative ratings from all rating agencies.

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