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Zoe Lofgren and Olga Pierce: Obama Broke Pledge to Force Banks to Help Homeowners - ProPublica

ZL&OP:

Dems: Obama Broke Pledge to Force Banks to Help Homeowners - ProPublica: 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 the scenes. “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....

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....

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.... After narrowly passing the House, cramdown was defeated when 12 [Senate] Democrats joined Republicans to vote against it....

“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 complicated place.”

The program was further limited by the administration’s concerns about using taxpayer dollars to help the wrong homeowners....

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...

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