Why Are Republicans Against Mortgage Cramdowns?

Why Are Republicans Against Mortgage Cramdowns?


Looks like the cramdown provisions will be taken out of the stimulus bill, but this is frankly puzzling to me. Because Americans need to have mechanisms to renegotiate the values of their homes, and thus their mortgages. And every single person I’ve read on this subject has said that this will result in fewer foreclosures which means fewer toxic mortgages and banks will be able to stabilize their balance sheets.

Why would Republicans be against that?

Greg Sargent reports…

As I noted below, anonymous House Dem staffers told Politico that Nancy Pelosi and the House Dem leadership were dropping from the bill the so-called “cram downs,” which give judges the power to renegotiate mortgages on terms that are better suited to homeowners who are in trouble. House liberals wanted this, and it was unclear why the leadership had done this.

I’ve just confirmed from a senior House Dem aide that the House leadership did this at the behest of Obama aides, who asked the leadership to chuck the provision. This is the second such move: It comes after the news this morning that Obama had personally appealed to Pelosi to drop family planning funds for low-income people from stim package — also to placate Republicans.

Do know that the speculators who bought multiple homes with internest only loans hoping to flip them for profit can do currently do cram downs on their multiple properties.

Again, a curious request by Republicans, but another move by the Obama administration to build consensus for the bill.

More as it develops…

  • shane

    One of the long reaching problems of a cram down policy is that the lending institutions will have to price it in the loan. The possibility that that loan will be “crammed down” to a new interest rate or new loan value means that lenders will have to price that risk into either fees or loan values. One of the reasons we are in the mess we are in is because risk was inappropriately priced to begin with and once that was realized, banks weren’t willing to loan. If the government implements policy that changes the current loan structures significantly, lending institutions will have to take it into account. Such a policy would hurt future lending and refinance.

    Now as for the question of what the republicans thinking – I haven’t a clue anymore.

  • http://www.iconicmidwest.blogspot.com Rich Horton

    Hmmm…a provision that basically allows the government to institute price controls on real estate.

    Is it really that much of a mystery?

  • Snarkless J. Harden

    Shane – that is one of the most astute comments I’ve read on this blog in months. Here are some additional concerns on the cram-down: 1) If one wants credit to start flowing again, I wouldn’t encourage more lender write-downs by allowing a judge to lower the underlining value of the collateral. 2) It is nothing short of an incentive to declare bankruptcy if you’ve lost equity in your house (moral hazard). 3) There is nothing to guarantee they’d stay in the house anyway — you can cram-down the loan balance, recast the loan, lower the rate and there will still be a cheaper house down the street. 4) As Shane points out, you’d see a 150 basis-point increase in mortgage rates.

  • http://www.artformfunction.com Michael

    Is the idea to let everyone renegotiate the terms of their mortgage? I hope so.

    I am going to be pissed if someone down the street gets to cut thousands off their mortgage because they got a bigger house than they could afford and I don’t because I chose to be realistic about my finances.

  • nosympathy

    if you bought at the peak you deserve to get hit with your high mortgage payment. smart investors wait until the prices are low to buy. just because you want an overpriced house doesn’t mean you need one. do the smart thing and rent for awhile — save your money and buy when the market is low. now is the perfect time for first time buyers who have been fiscally responsible. if you’re underwater you have no one to blame but yourself.

  • Nikolai

    This is not technically a cramdown, but if you are in trouble the mortgager bank will negotiate with you to lower your rate, but first you have to be THREE payments behind. In other words, the banks are willing to help only when THEY are standing to lose.

    My mortgager is offering great rates right now for NEW mortgages, but when I called them they wasted my time (and theirs) by going over all the figures and questions, then proceeded to tell me how my present rate of interest is better than the new one they would
    give me.

    I suppose I understand their reasoning for wanting to keep my interest rate higher($$$) but don’t they reason that I am now going to another bank to see if I can refi to a lower rate?

  • Nikolai

    I was speaking with a retired loan officer about a year ago (before the financial crisis) and I was wondering aloud how most of the twenty-somethings in my neighborhood could afford two luxury cars, 2500 sq foot homes, Carribean cruises, diamond tennis bracelets, private schools for their kids, weekly gardeners, poolmen and maids, etc, on salaries for example of a married couple where the hubby was an autoglass manager and wifey was a part time newpaper marketer(real-world scenario), and she told me, “Simple, they’re maxed out, about 90% of them.” I pressed her for more details and she SWORE that most of them were maxed out on their credit cards, their mortgages were only 3 or 4 or NO % down mortgages, and the ones who could also took out second mortgages. She told me she was retired and “didn’t have to worry about what I say anymore, so there ya have it.”

    Between these kinds of borrowers and the banks who made bad mortgage loans, and the idiot investors who bought the bundled mortgages/bonds, and the idiot insurance companies that insured them (AIG) and those who took out these loans who could not afford them, plus these same folks (and others) having massive credit card debt, we now have an unprecedented economic disaster on our hands. IDIOTS! (BUT, the biggest idiots like AIG, and the big banks that received the bailout $$$, are perhaps not idiots, but merely clever, scheming thieves).

    So much for saving your money for the American Dream, especially if you invested your savings in stocks, mutual funds, or real estate!

  • http://www.hsh.com/ Paul Havemann

    I’m not sure who “every single person” is who can claim that cramdowns “will result in fewer foreclosures.” That might be true in the short run, but as has been pointed out, there’s a danger that the lure of a cramdown will mean more bankruptcy filings in the longer term. One reason: cramdowns would wipe out those inconvenient home equity loan balances.

    There’s also the inconvenient fact that 2/3 of Chapter 13 bankruptcies fail within five years, and that 55% of the loans modified in the first quarter of 2008 were more than 30 days late six months later (source: OCC, OTS).

    Other possible side effects could include higher borrowing costs for everyone, as well as reduced borrowing opportunities for some homebuyers (especially home equity lines; see above), as lenders are forced to price higher risk into mortgage loans.

    Loan mods/cramdowns are not a cure-all. What’s needed is a hard look at both sides of the coin.

  • Tony P

    It seems to me that a focused “cramdown” provision would be a win-win for most. First, limit the cramdown to subprimes that are delinquent and where loans were made between 2006 and 2009. Second, have a sunset provision that retires this option after an appropriate amount of time. Banks already got bail out money (tax money) and instead of helping people, they bought other banks. A temporary Chapter 13 provision would not require additional tax money, would put a portion of the burden / responsibility on banks that made speculative and questionable loans, would reduce foreclosures and subsequent market depreciations, would virtually eliminate the need for another government run program (HAMP), and would help stabilize housing markets by forcing banks to declare their assets at market value rather than the inflated and underwater mortgage notes they currently post. We need to deflate this artificial pricing and allow the markets to rebound.

  • WHQ

    Tony P, are you familiar with the town of Rethymnon?

  • Tony P

    Yes WHQ…and it’s history; including German occupation, its resistance movement, etc. However, your reference seems non sequitur.

    Yes I’m a conservative, but also a pragmatist. I have had the displeasure of dealing briefly with lobbyists and laywers of the MBA. In comparison, the wilds of the Savanna don’t know the meaning of the word predator. The mother’s milk for those of the political office ilk. I also note the recent “rubber stamped” forclosures courtesy of B of A which recently made the news as an ongoing theme of “bad faith” which continues to stream from this industry. Even investors suffer because the banks (account management) get theirs first…regardless of what the investor’s loss is. Banks, especially investment banks are important institutions, but they have lost the trust of many Americans; and they (with a few exceptions) are doing little to regain that trust. And there’s a reason they don’t bother to do so…

    The fact of the matter is that the subprime mortgage issue has not been dealt with effectively; simply postponed. It will continue to remain a drag on the economy until such time as Congress and the White House butch up and do what’s necessary. Moral objections to those few who might benefit from principal forgiveness does not outweigh the collateral damage being done to the rest of us, our neighborhoods, and our economy.

    Tell me WHQ, are you familiar with the corporate culture of Goldman Sachs? Only an insider knows for sure.

  • WHQ

    I know a Tony P from another blog where I use a different login. I honeymooned in Rethymnon, where he, by chance, has some family history, as we, also by chance, happened to discover during a blog conversation. Just wondering if you were the same guy.

  • WHQ

    Here’s non sequitur, done right:

    Popular interest in the typing monkeys is sustained by numerous appearances in literature, television, radio, music, and the Internet. In 2003, an experiment was performed with six Celebes Crested Macaques. Their literary contribution was five pages consisting largely of the letter ‘S’.