There were lots of very smart experts (and Democratic members of congress) pushing for "cramdown" reform, which would have prevented lots of foreclosures by allowing judges to renegotiate the terms of these loans. How did the geniuses on Obama's economic team respond?
To force those servicers to modify mortgages, advocates pushed for a change to bankruptcy law giving judges the power not just to change interest rates but to reduce the overall amount owed on the loan, something servicers are loath to do [3].The Stimulus and cramdown were probably the two best tools the Administration had to improve the economy. Larry Summers made the stimulus too small, shutting out voices from within the administration saying it needed to be bigger, and both he and Geithner opposed cramdown.
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.
“That was always the thought,” said Rep. Brad Miller (D-NC), “that judicial modifications would make voluntary modifications work. There would be the consequence that if the lenders didn’t [modify the loan], it might be done to them.”
When Obama unveiled his proposal to stem foreclosures a month after taking office, cramdown was a part of the package [4]. But proponents say he’d already damaged cramdown’s chances of becoming law.
In the fall of 2008, Democrats saw a good opportunity to pass cramdown. The $700 billion TARP legislation was being considered, and lawmakers thought that with banks getting bailed out, the bill would be an ideal vehicle for also helping homeowners. But Obama, weeks away from his coming election, opposed that approach and instead pushed for a delay. He promised congressional Democrats that down the line he would “push hard to get cramdown into the law,” recalled Rep. Miller.
Four months later, the stimulus bill presented another potential vehicle for cramdown. But lawmakers say the White House again asked them to hold off, promising to push it later.
An attempt to include cramdown in a continuing resolution got the same response from the president.
“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 [5] 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.”
Obama picked these people to fix the economy, and it had very real consequences.
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