Monday, August 20, 2012

Mortgage Cramdowns: A Missed Opportunity

by Calculated Risk on 8/20/2012 11:20:00 AM

Binyamin Appelbaum at the NY Times reviews some of the Obama administration's missed opportunities: Cautious Moves on Foreclosures Haunting Obama Here is an excerpt on mortgage cramdowns:

Former Representative Jim Marshall, a centrist Georgia Democrat who lost his House seat in 2010, was a staunch advocate of the administration’s economic policies. He supported the banking bailout. He opposed a similar bailout for homeowners.

The administration made just one mistake, he said in a recent interview: it failed to rewrite the bankruptcy code.

Congressional Democrats wanted to change the law to permit “cramdown” — a term that meant letting bankruptcy courts cut mortgage debts — to put pressure on mortgage companies to modify loans and to provide a backup plan for borrowers who could not get the help they needed.

“There was another way to deal with this, and that is what I supported: forcing the banks to deal with this,” Mr. Marshall said. “It would have been better for the economy and lots of different neighborhoods and people owning houses in those neighborhoods.”

Mr. Obama sponsored cramdown legislation as a senator, endorsed it as a presidential candidate and called on Congress to pass it in the Arizona speech.

But he also repeatedly pressed the pause button. When proponents sought to add a cramdown to the Emergency Economic Stabilization Act in September 2008, Mr. Obama, who had flown back to Washington from the campaign trail, persuaded them to postpone the “partisan” effort as an example to Republicans, who said the measure would violate existing contracts.

In February 2009, after Mr. Obama became president, the White House asked Democrats not to attach the measure to the American Recovery and Reinvestment Act, fearing it would cost votes. In March, a watered-down version finally passed the House, but the mortgage industry rallied opposition to block it in the Senate.

Some officials said the White House had tried and failed. But other officials and participants, including Mr. Marshall, said it simply was not a priority.

“There wasn’t enough political capital, time or energy,” said Mr. Barr, the former Treasury deputy.
Both Tanta and I urged changing the bankruptcy laws to allow mortgage cramdowns. Here was a piece from Tanta in 2007 (yes, 2007) explaining mortgage cramdowns and why they were the appropriate policy: Just Say Yes To Cram Downs (For new readers, Tanta was my former co-blogger and mortgage banker. You can read about her here).

Cramdowns in bankruptcy are still an appropriate policy, and hopefully the candidates will be asked in the debates about what policies they will pursue to help the unemployed and to address foreclosures - and be asked specifically about cramdowns.