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Home Publications Blogs Beat the Press Correcting Vox on Cramdown

Correcting Vox on Cramdown

Tuesday, 10 June 2014 08:14

Matt Yglesias has a piece in Vox explaining the politics of cramdown in which it tells readers that there was no way the Obama administration could have gotten cramdown through Congress. While Yglesias correctly points out that the Obama administration never really tried, he misrepresented the nature of the problem.

One of the great things about cramdown was that the proposal could have been sliced and diced in almost an infinite number of ways. While Yglesias is undoubtedly correct in saying that a wholesale revision to the bankruptcy code, that would have allowed all mortgages to be rewritten in bankruptcy, never would have gotten through Congress, that doesn't mean Obama could not have gotten a more limited version passed.

For example, the dates at which mortgages were issued could have been narrowly restricted (e.g. 2004-2008). The size of the mortgages could have also been restricted. Does Yglesias know that Evan Bayh never would have agreed to cramdown for mortgages of less than $300,000 issued in a narrow time window, coupled with some huge government contract for a firm he could subsequently work for as a lobbyist in his post-Senate career? 

That is the way presidents get bills passed that they actually want passed. (Look at what Obama will do to get fast-track authority when he wants to get the Trans-Pacific Partnership approved by Congress.) Anyhow, cramdown was almost certainly passable in some form if President Obama wanted to go that route. He didn't, end of story.


Comments (18)Add Comment
Weak, Low-rated comment [Show]
NEVER a priority
written by Jennifer, June 10, 2014 9:21
Anybody paying the least bit of attention will tell you the Obama administration NEVER took housing seriously-either from the perspective of prosecuting the banks/servicer companies who engaged in outright, documented fraud, or from helping homeowners. This, even though at least a few Democrats are on record as claiming to have only voted for the bailouts as a trade-off for homeowner relief. In fact, according to the recent "House of Debt" by Atif Mian and Amir Sufi the lack of cramdowns is unique to the recent financial crisis, they document it was common in other previous ones. No question the Obama administration could have got something, it was choice not to.
When did President Obama get to appoint head of Housing Agencies?
written by root_e, June 10, 2014 9:45
Filibustered until December 2013 - leaving FHA in hands of Bush appointee.
Bankruptcy Code Already Authorizes Cramdown
written by Paul Mathis, June 10, 2014 10:12
Cramdown is exactly what occurs right now in Bankruptcy Court to mortgage holders. The BC discharges (voids) the debt of the homeowner and transfers title to the lender who then sells the home for whatever the market will bear, i.e., de facto cramdown.

So allowing cramdown without bankruptcy would just expedite the process and clear the market faster. But lenders would be forced to recognize their loss sooner so not gonna happen because banks would be hurt.
moral hazzard up the wazooo..
written by pete, June 10, 2014 10:17
Heads I win tails you lose. Suppose I bought a house for $300,000 with 100% financing in 2004 and intended to flip it in a few years, as prices continued to rise at astronomical rates. Now in 2009 I can sell it for $200,000. You want to make me whole, give me the $100,000, tax free, I have lost on that speculation. Why, exactly? I see no way to segregate the greedy folks and deliberate income liars from the "innocents." Genearlly a forgiveness of the $100,000 would at least be a taxable event, giving the feds&states about $30,000 on the deal.
risk sharing
written by Squeezed Turnip, June 10, 2014 10:29
Here is a link to the book by Atif Mian and Amir Sufi (mentioned by Jennifer above). In particular, they make a compelling argument that risk sharing would give the banks incentive to maintain due diligence.
cramdowns and second homes
written by David Cay Johnston, June 10, 2014 11:14
Our Congress has decide that second homes can be protected in bankruptcy, but not primary residences.

One way to minimize future harm is to in all states have the rule that some states have which makes the mortgaged property the only collateral. The virtue of such a rule is that lenders are unlikely to lend more than actual values because they must bear the burden of losses from inflated appraisals -- oh, I forgot, some 11,000 appraisers (one in three) petitioned the government a decade ago that their integrity was costing them business as mortgage issuers favored inflated appraisals because it inflated their fee income at no risk. The petition got round filed instead of being Page One news.

If your residence is not protected then neither should your second home, if you have one.
"Moral Hazard" is a Joke
written by Paul Mathis, June 10, 2014 11:26
Pete's scenario is meaningless because if I form an LLC to hold title to my $300K speculative house, then file bankruptcy for the LLC when my bet goes bad, the lender takes the entire loss and I walk away free of any debt and with no hit to my credit.
Larry Summers
written by Peter K., June 10, 2014 12:03
Dean received an overdue shout-out from Summers in the FT:


Long overdue given the amount of nice (and true!) things Baker has written about Summers over the years.
quote is
written by Peter K., June 10, 2014 12:07
"There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olson, have emphasised."
Thank you, Dean
written by ifthethunderdontgetya™³²®©, June 10, 2014 1:07
I've made this point over and over.

The big banks didn't want it in any form. So Obama, who made it a campaign promise, didn't want it as President.

End of story.
P.S. For root e
written by ifthethunderdontgetya™³²®©, June 10, 2014 1:41
Ed DeMarco has been a convenient scapegoat for the Administration.

But it's all bogus. Obama and his appointees are the ones who have slavishly protected Wall Street's interests.

One more link - Before March 2009
written by ifthethunderdontgetya™³²®©, June 10, 2014 2:46
Yglesias: "All the reporting from March of 2009 — before the outbreak of the wars over the administration record — points to this conclusion and specifically fingers then-Senators Evan Bayh and Arlen Specter as the key actors."


Barney Frank: I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it. This is now December (2008), so we tried to get the Obama people to ask him and they wouldn’t do it.
Game, set, and match. The banks didn't want it. So Obama didn't want it. So it didn't happen. All this nonsense about Congress is just a big smokescreen.
written by Tray Bein', June 10, 2014 3:09
Thunder, B Frank says explicitly that the message never got to Obama. The inner circle controls what goes into the president's ear. That's how Cheney got to be president in deed if not fact. Geithner squashed those bugs. Now he works for a big bank. Grima Wormtongue must admire his work.

The deal was cut before Obama got into office and there was not much you can do about it, just look at the difference between his face the day before he arrived in Washington as PotUS and the day after.

Plus, this
written by liberal, June 10, 2014 3:59
...coupled with some huge government contract for a firm he could subsequently work for as a lobbyist in his post-Senate career

LOL. Sad but true.
written by liberal, June 10, 2014 4:04
root_e wrote,
None of which was politically feasible.

Someday someone will come up with a complete taxonomy of Obot excuses...
written by Ryan, June 11, 2014 8:08
I have to say, I think you're probably wrong regarding Evan Bayh. This is a man who really was in the wrong party, though that's probably giving him too much credit. This is a man who believes whatever his funders want him to believe. He had no moral core that I could see, he certainly did not care about his constituents.
Tray Bein', we're supposed to blame Obama's people instead?
written by ifthethunderdontgetya™³²®©, June 11, 2014 9:23
As I mentioned the last time (aka the other day), how come Obama's appointments keep ending up with WPITW (worst person in the world) awards, when he means so well.

That was sarcasm, by the way.

I don't know if Obama's current Treasury Secretary, Jacob Lew, has gotten a WPITW yet, but he will.


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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.