White House Silence Paved Way for ‘Cramdown’ Crash
Reluctance to Spend Political Capital Doomed Bankruptcy Reforms
Though mortgage bankruptcy reform has been a central component of
the Obama administration's foreclosure prevention strategy, the White
House all but abandoned the proposal in the days leading up to last
week's Senate vote, providing some Democrats with the political cover
to kill the bill and leaving supporters scratching their heads in
wonder why the administration didn't push harder for passage.
The proposal, sponsored by Sen. Richard Durbin (D-Ill.), would have
empowered bankruptcy judges to reduce, or "cramdown," the terms of
primary mortgages, allowing some struggling homeowners to avoid
foreclosure. Obama supported the measure on the campaign trail last
year, and endorsed it again in February as he unveiled his
Yet in the days before Thursday's Senate vote, the silence emanating from the White House was palpable. Unlike Obama's high-profile support for legislation to reform
the credit card industry, the president made no public statements on
cramdown, nor did he pressure Democratic lawmakers to support the bill.
"When the time came to stand up to the banking lobbies and cajole
yes votes from reluctant senators - the White House didn't," The New
York Times wrote in a biting editorial Monday.
The administrative hush led some lawmakers to believe that issue was
no longer a priority for the White House. Indeed, a spokesperson for
Sen. Michael Bennet (D-Colo.) - who opposed the proposal, saying it was
too broad and would have raised interest rates - told The Denver Post that a "no" vote was not inconsistent with Obama's position.
That sentiment allowed on-the-fence Democrats to oppose the measure
without being perceived as defying the White House. Indeed, the measure
failed 45 to 51 - 15 votes shy of defeating the GOP filibuster - with
12 Democrats joining every Republican to kill the bill.
The vote arrived at a time when foreclosure rates are skyrocketing
and more and more homeowners find themselves "underwater" - owing more
on their mortgages than their homes are worth.
In another curious move, the White House issued a statement last
week reiterating its support for "appropriately tailored bankruptcy
language" as part of its anti-foreclosure strategy. But the statement
wasn't released until a day after the Durbin's cramdown amendment had already failed on the Senate floor.
Administration officials deny that Obama's support for cramdown ever
waned. "The President continues to support balanced bankruptcy reform
to permit judicial modifications of mortgages for borrowers who have
run out of options and is working with the Congress to get a bill
enacted," White House spokesman Nick Shapiro wrote in an email this
week. But asked why Obama chose not to twist arms on the Senate vote,
the White House didn't respond.
Some observers say the administration's silence simply represents a
recognition that the proposal was doomed from the start. "They
definitely left it hanging out there," said a representative of the
finance industry, who would only speak anonymously due to the delicate
politics surrounding the issue. "But why would you expend political
capital on something so many Democrats oppose, and it's going to lose
anyway? That just creates an ugly dinner table mess."
Observers on all sides of the debate say that the administration
made a political calculation, deciding that credit card reform would
yield more mileage than cramdown.
"Bankruptcy reform, important as it was, was sort of esoteric," Sen. Charles Schumer (D-N.Y.), who sponsored Durbin's bill, told Politico this week.
"If you went into O'Halloran's Pub, the fellas aren't saying to you,
‘What's going on with bankruptcy reform?' But they might say, ‘What are
you doing about my credit cards?'"
Yet many experts are quick to point out that it was the housing
crisis - not credit card abuses - that led to the global economic
meltdown. Unless the housing market stabilizes, they say, the federal
spending on bailouts and stimulus measures will be largely undermined.
"They can't solve [housing] in isolation from the rest of the
economy," said Desmond Lachman, economist at the conservative American
Enterprise Institute, "and they can't solve the rest of the economy
without fixing housing."
Recent figures indicate that "fixing housing" remains a ways away.
Foreclosure filings topped 341,000 in March alone - up 17 percent from
the month before, according to RealtyTrac, an online foreclosure database. More recently, the realty Website Zillow.com released a study
revealing that roughly 20.4 million homeowners - representing 20
percent of all homes - were underwater at the end of March, up from
16.3 million three months earlier.
On Tuesday, Federal Reserve Chairman Ben Bernanke delivered more bad
news for the housing market, telling a congressional panel that
unemployment would likely continue to rise through the remainder of the
"There's no doubt in our minds," said David Berenbaum, executive
vice president of the National Community Reinvestment, "that the number
of foreclosures will go up as unemployment goes up."
Former chairman and CEO of Honeywell and CNBC financial analyst
Larry Bossidy this week predicted 3 million foreclosures this year.
"Housing's still in the dumps," he said.
Cramdown supporters argue that bankruptcy reforms would provide a
last resort that could cut into those numbers. Under current law,
consumers may file for bankruptcy to save second homes, boats, cars and
almost any other material possession. Primary mortgages, however, are
exempted. The Durbin bill would have empowered judges to reduce the
principal and the interest rate while increasing the duration of the
loan to prevent foreclosure. A similar proposal passed the House in March.
Last month, Mark Zandi, economist at Moody's Economy.com, along with
the Center for Responsible Lending, issued a report finding that the
Durbin amendment would prevent nearly 1.7 million foreclosures - not
because 1.7 million homeowners would file for bankruptcy, but because
lenders and servicers would be more likely to reduce the terms of
mortgage loans voluntarily if threatened with the possibility that a
judge might do it instead.
Part of the problem facing cramdown stems from the moral hazard
associated with saving homeowners who bought over their heads. "It's
easy to send out a $600 check," said Campbell Harvey, a finance expert
at Duke University, referring to Congress' first stimulus strategy in
early 2008. "To figure out who was a prudent borrower and who was an
irresponsible borrower, that's much tougher to do."
The finance industry remains adamantly opposed to cramdown, arguing
that the uncertainty associated with allowing judges to change mortgage
terms would force lenders to pass the risk along to more responsible
borrowers in the form of higher rates.
Durbin spokesman Max Gleischman said this week that the issue isn't
dead, but he couldn't say how or when it might resurface. Although
cramdown remains a part of the House housing bill - and could
theoretically be included in the conference bill pieced together by
House and Senate leaders - House Speaker Nancy Pelosi (D-Calif.) has
said she won't push to do so.
Not that Washington policymakers haven't taken steps to address the
housing crisis this year. On Wednesday, the Senate approved legislation
that aims to improve the unpopular Hope for Homeowners program, while
also providing a permanent bump in deposit insurance, from $100,000 to
And in February, Obama unveiled
a $75 billion anti-foreclosure plan, which provides financial
incentives to mortgage servicers to modify loans to keep homeowners in
their homes. Already, 13 servicers, representing almost 80 percent of
the market, have signed up to participate in the voluntary program,
according to Melanie Roussell, spokeswoman for the Department of
Housing and Urban Development.
Yet neither the Obama plan nor the Senate bill provide significant help "underwater" homeowners.
The Obama plan, for example, encourages refinancing for homeowners
with loans taken out through Fannie Mae and Freddie Mac, but only in
cases when they owe less than 105 percent of the home's value. Lending advocates are urging the administration to increase that number to include more underwater homeowners.
Meanwhile, cramdown supporters are hoping the Democrats will return
to the proposal sooner than later. A delay, they argue, will only allow
more and more struggling homeowners to slip through the cracks of the
anti-foreclosure plans already in place.
"There are a lot of modifications that can be offered that, in the
end, won't be enough to keep homeowners in their homes," said David
Abromowitz, a housing expert at the Center for American Progress, a
liberal policy group. "The bankruptcy courts exist to help people who
have experienced a set back."