Way back in September, I wrote the narrative of how the banks successfully staved off cramdown, with big assist from the Barack Obama, who even as a candidate for President told the political leadership to keep it out of TARP, when the banks were at their most vulnerable. Now Paul Kiel and Olga Pierce tell the same narrative in Pro Publica, with a couple blanks filled in.
Basically, it’s the same story. The President and his team promised to fight for the reform to allow bankruptcy judges to modify the terms of primary residence loans, the way they can for vacation homes or yachts or virtually any other asset. We have primary source material from the transition team, from public statements from both candidate Obama and President Obama, proving this. Then, they failed to use the big bills moving through Congress – TARP and the stimulus – to attach this cramdown measure. In fact, they actively intervened and told lawmakers to take cramdown out of those measures, saying they would push for it in a separate bill. And when it came up for a vote of its own in a housing bill, the White House stood idly by as the provision failed in the Senate.
What Kiel and Pierce add is the genuine antipathy from key economic advisers to the cramdown plan.
Congressional Democrats had long been pushing a bill to enact cramdown and were encouraged by the fact that Obama had supported it, both in the Senate and on the campaign trail.
They thought cramdowns would serve as a stick, pushing banks to make modifications on their own [...]
“We would propose that this stuff be included and they kept punting,” said former Rep. Jim Marshall, a moderate Democrat from Georgia who had worked to sway other members of the moderate Blue Dog caucus on the issue.
“We got the impression this was an issue [the White House] would not go to the mat for as they did with health care reform,” said Bill Hampel, chief economist for the Credit Union National Association, which opposed cramdown and participated in Senate negotiations on the issue.
Privately, administration officials were ambivalent about the idea. At a Democratic caucus meeting weeks before the House voted on a bill that included cramdown, Treasury Secretary Tim Geithner “was really dismissive as to the utility of it,” said Rep. Lofgren.
Larry Summers, then the president’s chief economic adviser, also expressed doubts in private meetings, she said. “He was not supportive of this.”
In essence, the Administration pushed for cramdown to be held out of bills where it had a chance of passing, and when it did get a vote, they opposed it through their silence.
Keep in mind that we have a letter signed by Larry Summers, during the transition, saying that the Administration will undertake “reforming our bankruptcy laws” to help keep homeowners in their homes. And we have assurances delivered in writing to lawmakers like Donna Edwards and Jeff Merkley that they would take this up. All of this has gone down the memory hole now, but this was a fundamental promise, and they broke it. As a result, we have a program to help homeowners that it entirely voluntary on the part of the servicer, with predictable results.
The Treasury Department, according to the Pro Publica article, was much more focused on the fear of helping homeowners who didn’t “deserve” the help (spooked by Rick Santelli’s proto-tea party rant, which was pretty much about exactly that), and that homeowners would game the bankruptcy system, than actually providing aid to homeowners, and by extension the economy. More important to Treasury, “The banks’ books could take a beating if too many consumers lured into bankruptcy by cramdown also had their home equity loans and credit card debt written down.” It was more about protecting the banks’ bottom lines with respect to second liens and credit card debt.
This is nonsense, because as the Cleveland Federal Reserve Bank has shown, the consequence of cramdown is not a rush of borrowers to the bankruptcy courts. It’s a rush of loan modifications and workouts. The threat of cramdown brings the banks to the bargaining table, and gets modifications in place that stabilize the housing market, provide better returns for the investors who own the loans, improves the economy and keeps people in their homes.
This is a neat detail on the origins of HAMP, by the way:
At the time that the new administration was frustrating proponents of cramdown, the administration was putting its energies into creating a voluntary program, turning to a plan already endorsed by the banking industry. Crafted in late 2008, the industry plan gave banks almost complete freedom in deciding which mortgages to modify and how.
The proposal was drafted by the Hope Now Alliance, a group billed as a broad coalition of the players affected by the mortgage crisis, including consumer groups, housing counselors, and banks. In fact, the Hope Now Alliance was headquartered in the offices of the Financial Services Roundtable, a powerful banking industry trade group. Hope Now’s lobbying disclosures were filed jointly with the Roundtable, and they show efforts to defeat cramdown and other mortgage bills supported by consumer groups.
Hope Now eventually became HAMP, but the same problems were inherent in the structure.
I’m glad Pro Publica took this up, though the narrative has been obvious for months. It deserves more attention. The Obama Administration directly worked against the one tool that homeowners could have used to get relief, at great cost to the economy overall.