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The Great Cramdown Debate

April 27, 2009 - by Donny Shaw

It’s hard to believe that the insolvent banks, after all the taxpayer money they have been given by the government, could still have enough political clout to kill legislation in Congress. This week’s vote on cramdown will be a major test of that power.

Last week, Ryan Grim at the Huffington Post reported that Sen. Richard Durbin [D, IL] has spent several weeks trying to negotiate a deal with Bank of America, JP Morgan, Wells Fargo and others over a proposal to help homeowners avoid foreclosures by empowering bankruptcy judges to “cram down” the principles on troubled mortgages and reduce interest rates. Citigroup dropped its opposition to the plan in January and is “still feeling the wrath of GOP leadership” for their decision, according to CongressDaily ($).

The banks, of course, don’t want to be forced to take a loss on their mortgages, partly because the losses would show up on their already dismal balance sheets. They prefer the carrot approach put forward by President Obama as a supplement to the cramdown, which would give them cash bonuses from the government for every mortgage they rework voluntarily through interest rate reductions. Adjusting interest rates would not be reflected in their basic accounting.

The proposal could come to a vote in the Senate this week, and it’s uncertain whether or not it will have the 60 votes needed to pass. Yet, instead of working on a compromise with the key senators whose votes will ultimately decide its fate, Durbin has been working with the big TARP banks. The strategy, according to Grim, is to “come to a compromise with the banks first and then use the bank support to win the votes of conservative Democrats and a few Republicans to get the 60 needed to overcome a promised Republican filibuster.”

Bank of America, for example, is headquartred in North Carolina, which is represented in the Senate by Kay Hagan [D, NC]. According to a spokesperson, Hagan has “reservations about the bill.” North Carolina ranks eighthteenth in foreclosures per capita, according to data from RealtyTrac. Sen. Evan Bayh [D, IN], another Senate Democrat working against the cramdown proposal, represents the state with the tenth highest foreclosure rate. Regardless, they are both likely to vote against cramdown this week, taking away consumers’ only possibility for a leverage point when negotiating a deal with the banks to save their home.

The explosion of bad mortgages is a root cause of the financial crisis and experts generally agree that stabilizing the housing market is an essential step for getting out of it. Yet, the banks are pushing the whole debate over how to do so in the direction of protecting their balance sheets rather producing policy that will be effective at reducing foreclosures. That the banks still hold that kind of power seems like a pretty serious problem to me, for this issue and for the broader economic recovery in general.

The cramdown proposal will be considered in the Senate as part of the Helping Families Save Their Homes Act of 2009. More details on the current state of the compromise can be found here.

UPDATE: Grim’s sequel: Bankruptcy Bill Watered Down, Still Fiercely Opposed By Banks.

It is “hard to imagine that today the mortgage bankers would have clout in this chamber but they do,” said Durbin. “They have a lot of friends still here. They’re still big players on the American political scene and they have said to their friends, stay away from this legislation.”
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Comments

  • Erwi31 02/07/2010 8:14am

    Well, Durbin does not have to worry, Those that voted against the cram down will be voted out; the senators know this for sure.

    The banking institutions may have bought them off, but only for awhile.

    Senators, remember your place, you work for us, the common taxpayer/serf as we so often called by all of you and your lobbyists.

    If you want your bailout, you will bring the bankruptcy provisions back to the floor and vote accordingly. and most favorable for the commoners who pay your salary.

    Yours Truly, “Serf”

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