Before he took office, President Obama
repeatedly promised voters and Democrats in Congress that he'd fight for
changes to bankruptcy laws to help homeowners-a tough approach that
would force banks to modify mortgages.
"I will change our bankruptcy laws to make it easier for families to
stay in their homes," Obama told supporters at a Colorado rally on
September 16, 2008, the same day as the bailout of AIG.
Bankruptcy judges have long been barred from lowering
mortgage payments on primary residences, though they could do it with
nearly all other types of debt, even mortgages on vacation homes. Obama
promised to change that, describing it as exactly "the kind of
out-of-touch Washington loophole that makes no sense."
But when it came time to fight for the measure, he didn't show up.
Some Democrats now say his administration actually undermined it behind
"Their behavior did not well serve the country," said Rep. Zoe
Lofgren (D-CA), who led House negotiations to enact the change, known as
"cramdown." It was "extremely disappointing."
Instead, the administration has relied on a voluntary program with
few sticks, that simply offers banks incentives to modify mortgages.
Known as Home Affordable Modification Program, or HAMP, the program was
modeled after an industry plan. The administration also wrote it
carefully to exclude millions of homeowners seen as undeserving.
The administration launched the program with a promise that it would
help 3 million to 4 million homeowners avoid foreclosure, but it's
likely to fall far short of that goal. The Congressional Oversight Panel
now estimates  fewer than 800,000 homeowners will ultimately get lasting mortgage modifications.
Over the past year, ProPublica has been exploring why the program has helped so few homeowners. Last week, we reported how the Treasury Department has allowed banks to break the program's rules with few ramifications .
The series is based on newly released data, lobbying disclosures, and
dozens of interviews with insiders, members of Congress and others.
As the foreclosure crisis grew through 2008, the large banks that
handle most mortgages were slow to offer modifications to struggling
homeowners. Homeowners were left to navigate an onerous process that
usually did not actually lower their mortgage payment. More than half of
modifications kept the homeowner's payment the same or actually
Many in Congress and elsewhere thought that mortgage servicers, the
largest of which are the four largest banks, would make modifications
only if they were pressured to do so.
Servicers work as intermediaries, handling homeowners' mortgage
payments on behalf of investors who own the loans. Since servicers don't
own the vast majority of the loans they service, they don't take the
loss if a home goes to foreclosure, making them reluctant to make the
investments necessary to fulfill their obligations to help homeowners.
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 .
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 . 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  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
The White House and Summers did not respond to requests for comment.
Treasury staffers began conversations with congressional aides by
saying the administration supported cramdown and would then "follow up
with a whole bunch of reasons" why it wasn't a good idea, said an aide
to a senior Democratic senator.
Homeowners, Treasury staffers argued, would take advantage of
bankruptcy to get help they didn't need. Treasury also stressed the
effects of cramdown on the nation's biggest banks, which were still
fragile. 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.
While the Obama administration was silent, the banking industry had long been mobilizing massive opposition to the measure.
"Every now and again an issue comes along that we believe would so
fundamentally undermine the nature of the financial system that we have
to take major efforts to oppose, and this is one of them," Floyd Stoner,
the head lobbyist for the American Bankers Association, told an
With big banks hugely unpopular, the key opponents of cramdown were
the nation's community bankers, who argued that the law would force them
to raise mortgage rates to cover the potential losses. Democratic
leaders offered to exempt the politically popular smaller banks from the
cramdown law, but no deal was reached.
"When you're dealing with something like the bankruptcy issue, where
all lenders stand pretty much in the same shoes, it shouldn't be a
surprise when the smaller and larger banks find common cause," said
Steve Verdier, a lobbyist for the Independent Community Bankers
The lobbying by the community banks and credit unions proved fatal to
the measure, lawmakers say. "The community banks went bonkers on this
issue," said former Sen. Chris Dodd (D-CT). With their opposition, he
said, "you don't win much."
"It was a pitched battle to get it out of the House," said Rep.
Miller, with "all the effort coming from the Democratic leadership, not
the Obama administration."
The measure faced stark conservative opposition. It was opposed by
Republicans in Congress and earlier by the Bush administration, who
argued that government interference to change mortgage contracts would
reduce the security of all kinds of future contracts.
"It undermines the foundation of the capitalist economy," said
Phillip Swagel, a Bush Treasury official. "What separates us from
[Russian Prime Minister Vladimir] Putin is not retroactively changing
After narrowly passing the House, cramdown was defeated when 12 Democrats joined Republicans  to vote against it.
Many Democrats in Congress said they saw this as the death knell for
the modification program, which would now have to rely on the
cooperation of banks and other mortgage servicers to help homeowners.
"I never thought that it would work on a voluntary basis," said Rep. Lofgren.
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
The Hope Now plan aimed to boost the number of modifications by
streamlining the process for calculating the new homeowner payments. In
practice, because it was voluntary, it permitted servicers to continue
offering few or unaffordable modifications.
The plan was replaced by the administration's program after just a
few months, but it proved influential. "The groundwork was already
laid," said Christine Eldarrat, an executive adviser at the Federal
Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.
"Servicers were onboard, and we knew their feelings about certain
As an official Treasury Department account of its housing programs
later put it, "The Obama Administration recognized the momentum in the
private sector reflected in Hope Now's efforts and sought to build upon
it." It makes no mention of cramdown as being needed to compel
Ultimately, HAMP kept the streamlined evaluation process of the Hope
Now plan but made changes that would, in theory, push servicers to make
more affordable modifications. If servicers chose to participate, they
would receive incentive payments, up to $4,000, for each modification,
and the private investors and lenders who owned the loans would also
receive subsidies. In exchange, servicers would agree to follow rules
for handling homeowner applications and make deeper cuts in mortgage
payments. Servicers who chose not to participate could handle delinquent
homeowners however they chose.
The program had to be voluntary, Treasury officials say, because the
bailout bill did not contain the authority to compel banks to modify
loans or follow any rules. A mandatory program requires congressional
approval. The prospects for that were, and remain, dim, said Dodd. "Not
"The ideal would have been both [cramdown and HAMP]," said Rep.
Barney Frank (D-MA), then the chairman of the House Financial Services
Committee. But given the political constraints, HAMP on its own was
"better than nothing."
"We designed elegant programs that seemed to get all the incentives
right to solve the problem," said Karen Dynan, a former senior economist
at the Federal Reserve. "What we learned is that the world is a really
The program was further limited by the administration's concerns about using taxpayer dollars to help the wrong homeowners. The now-famous "rant" by a CNBC reporter ,
which fueled the creation of the Tea Party movement, was prompted by
the idea that homeowners who had borrowed too much money might get help.
Candidate Obama had portrayed homeowners in a sympathetic light. But the president struck a cautious note when he unveiled the plan in February 2009 .
The program will "not rescue the unscrupulous or irresponsible by
throwing good taxpayer money after bad loans," said Obama. "It will not
reward folks who bought homes they knew from the beginning they would
never be able to afford."
While the government had been relatively undiscriminating in its bank bailout ,
it would carefully vet homeowners seeking help. HAMP was written to
exclude homeowners seen as undeserving, limiting the program's reach to
between 3 million and 4 million homes.
In order to prove their income was neither too high nor too low for
the program, homeowners were asked to send in more documents than
servicers had required previously, further taxing servicers' limited
capacity. As a result, some servicers say eligible homeowners have been
kept out. According to one industry estimate , as many as 30 percent more homeowners would have received modifications without the additional demands for documentation.
A lot of the program is focused on "weeding out bad apples," said
Steven Horne, former Director of Servicing Risk Strategy at Fannie Mae.
"Ninety percent is not focused on keeping more borrowers in their