Remember Cramdown?

Remember cramdown? It was a proposed change to bankruptcy law that would have allowed judges to modify the mortgages on primary homes for people entering bankruptcy. Supporters of the change argued that cramdown would provide an important stick to force lenders into modifying loans–and in so doing help millions of people stay in their homes. Here’s how DDay described the thinking behind the House cramdown legislation that passed in March 2009.

Under the proposal, the banks would be allowed to work out their terms with borrowers first, before resorting to a bankruptcy judge. This is how it worked in the House version of cramdown, which passed in March 2009; the homeowner had to negotiate a voluntary loan mod with the lender before going to the bankruptcy judge. And this may have worked, but only because, for the servicers, cramdown would have loomed in the background as a big stick, forcing a negotiation with a level playing field for the borrower.

In other words, cramdown was meant to give homeowners and the government leverage over servicers and lenders to voluntarily modify mortgages.

I ask whether you remember cramdown, because it doesn’t show up in this WaPo story at all. The WaPo allows some anonymous administration officials to claim they couldn’t do anything about the abuses now being exposed in the foreclosure process because they wanted servicers’ voluntary help on modification programs (basically, the famously unsuccessful HAMP).

In an interview this week, a senior administration official confirmed that the White House and Treasury Department had received warnings that the mortgage industry employed inexperienced staffers to oversee foreclosures, had problems handling documents and communicating with borrowers, and often failed to comply with regulations.

But the government had struggled to address shortcomings in the industry, the official said, because the administration was also seeking the servicers’ help with modifying the home loans of millions of borrowers to help them avoid foreclosure.

In addition, a Treasury official said the federal government’s power to tackle problems in the servicer industry is limited because foreclosure law is largely the domain of states.

Both officials, who were not authorized to speak on the record but were providing the administration’s views on the matter, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

The massive foreclosure fraud that is about to seize up the economy again wasn’t the Administration’s fault, these anonymous sources want you to know, because they couldn’t do anything about it when they first got warning of it. Oh, and the servicers aren’t engaged in fraud, these anonymous sources want you to know, they’re just overwhelmed (never mind that if they’re overwhelmed, it’s partly because they refuse to hire enough people to do foreclosures right, presumably because that would hurt profitability).

Key to this story of the Administration’s helplessness is the claim that the only tool they had to get servicers to modify loans was the servicers’ good will. Basically, they’re saying that they had to let the servicers (who are also some of the biggest banks) engage in what amounts to fraud, because it was the only way they had to get servicers to participate in HAMP.

Setting aside the fact that a relative handful of people have actually gotten modifications under HAMP (which suggests the Administration was willing to overlook the problems they knew existed in the foreclosure process in exchange for helping just a few people), the claim that allowing those problems to remain was the only way to get banks to participate in HAMP is simply not true.

Or it didn’t have to be.

Back in July 2009, when the Administration was sitting on its hands as cramdown failed in the Senate and as Dick Durbin was observing that the banks own the Senate, the Treasury Department’s Assistant Secretary for Financial Stability, Herb Allison, testified to Congress that the Administration had all the tools it needed to slow the flood of foreclosures.

As housing foreclosures top the 1.5-million mark this year, the Obama administration has openly abandoned cramdown as a strategy for tackling the crisis.

That approach — which would empower homeowners to avoid foreclosure through bankruptcy — was once a central element of the administration’s plans to stabilize the volatile housing market. Some financial analysts say the strategy would prevent 20 percent of all foreclosures. But, appearing before a Senate panel Thursday, two White House officials said that current policies are enough to address the problem.

“We have enough tools,” Herbert Allison, the Treasury Department’s assistant secretary for financial stability, told members of the Senate Banking Committee. “The challenge is to roll them out.” The tools Allison invoked are several federal programs that offer financial incentives to mortgage lenders and servicers — the companies that buy the rights to manage loans — to modify the terms of mortgages in efforts to help homeowners escape foreclosure.

Fifteen months ago, according to the Assistant Treasury Secretary, the Administration had all the tools it needed. Now, as the problem of foreclosure fraud is about to explode, a Treasury official and a senior Administration official claim they didn’t have the right tools, they were helpless.

Now, you can argue whether the Administration would have ever been able to get Bad Nelson and Mary Landrieu to vote for cramdown (me, I sort of think comments like Allison’s and Obama’s silence gave the Senators cover to screw homeowners).

But you can’t argue one point: after fifteen months of trusting banksters to do the right thing for homeowners hasn’t worked out so well, the Administration is changing its story about whether it needed more tools to motivate those banksters.

  1. Sara says:

    Yes the Cramdown idea was very similar to the program brought in, spring 1933, by the Roosevelt Administration. In fact, if you can translate a few names of agencies, and you know that banking systems were different in the Depression Era, it is a near duplicate.

    FDR’s agency was called HOLC. Home Owner’s Loan Corporation.

    The funding for HOLC came out of RFC, or Reconstruction Finance Corporation. In many respects, TARP is a great deal like RFC. RFC was passed during the Hoover Administration to provide liquidity for failing banks. But it was not limited to that purpose, so FDR used the RFC window to back mortgages under his HOLC.

    In 1933 there were lots of orphan mortgages about, the result of failed banks, or banks that were being re-organized. HOLC mortgages were largely these — though not necessarily limited, and the Farm Bill had a parallel program.

    Essentially, HOLC wrote 20 year fixed rate mortgages, sat on them for a time, and then as banks and S&L’s reorganized, they were sold to the restored banks, and serviced mostly locally. HOLC lasted less than two years, and then many provisions converted into the new FHA programs, but when the program wound down in the 1950’s, the default rate was way less than 1%, and banks, borrowers, and even the Government, made a profit on the program.

    As I say, you have to do a little translating between systems from the 30’s to current linguistics, but the shame is what we did back in the 30’s got short changed when we needed to talk about it again.

  2. 1der says:

    Obama needs to appoint a bipartisan committee to study it, with an 18 month window, you know getting the car out of the ditch, filling the gas tank with diesel fuel or whatever such auto/truck metaphor du jour Ax and the Audacious Plouffe can think up. That’ll get the economy back on track, putting money in the peoples hands, buying refrigerators and shit. And Oliver Stone should make a movie about this mess and the cover up. Joaquin Phoenix. We are led by idiots.

  3. wavpeac says:

    Yes, and the whole story is still not completely out. The rest of this story and you have heard me tell it over and again on this site and many others is that once a homeowner was late on a payment…at 30 days late…these banks would engage in a system of behavior designed to “make” the homeowner fail. These “systems” were just repackaged under HAMP. All the same behaviors and fees were present in the HAMPS refinancing, which is why so many people who got them failed. What the banks would do is force people to refinance inaccurate balances with bogus fees. This system of behavior included TILA and RESPA violations. This was rampant. It would be impossible to know how many of these folks could have survived these loans had the “systemic” fraud behavior not been present.

    These are the behaviors the banks would engage in, knowing that once a creditor was late, they would not be believed:

    1) refusal to communicate with people while in foreclosure. This is why the “foreclosure specialist” companies were begun. There were thousands and maybe even millions of people trying to communicate and negotiate with their banks but the banks were not communicating at all. This is a violation of RESPA.

    2) Refusing to give people their pay off amounts until the last few weeks before the foreclosure sale. So you had no idea about how much the fees would be. You could put your house payment in savings while they racked up the fees but they would not tell you the fees until the last minute. THis is also a RESPA violation, not responding to requests for pay off amount or accurate pay off statements.

    3) foreclosure mills would not exist if the banks were communicating and negotiating with people. In my case, I would get a letter ever month urging me to contact homecomings financial. I would call, write, fax to try to communicate and the bank would not respond to any of my attempts. My calls were not returned AND I was forced to enter my number, security number or account number in order to get a human being. I am no dummy and worked to get around this computerized system with letters and fax as well as presenting myself as a real estate professional. None of this got me to be able to talk to a human being who could resolve my problem.

    4) Servicers were down right “mean”. They would call you names and say really abusive things to you once you were 30 days late. This was incredibly unnerving.

    5) inaccurate pay off amounts, bogus fees and escrow manipulations, that included forced insurance on countless people who were proving as best they could that they had insurance. These are documented by literally thousands of complaints found on the internet.

    This was a systematic way to force foreclosure. Now we understand that clearly these companies had motive to do this. Back when this first started all I ever heard when I said that fraud was afoot was “they have no reason to do that to you, it doesn’t make sense”. Well it does now.

    If they were believed Bush had the A.G’s in many states wrapped up and told not to prosecute mortgage fraud. For many of the lawyers that did fight it, they found very unfriendly court systems where it was a crap shoot as to whether or not they would win. Enough of a crap shoot that it wasn’t worth the time and effort for most lawyers to pursue a class action lawsuit. Some were won, but few told the whole story and the banks were raking in enough dough to just pay off the lawsuits. Homecomings went bankrupt just as a HUGE class action was about to tell this story.

    I would also like to add one other thing. There exists quite a bit of research correlating physical health problems with having these kinds of mortgages. My cousin is a researcher at University of Pennsylvania and has published a book documenting the high correlation. I thought it didn’t apply to me, until I really started being honest with myself about it. The stress from this has been something like being constantly victimized over my most prized and necessary possession. Then invalidated horribly in respond to the behaviors of these banks. I contracted a hospital acquired infection in 200l. The year I bought my house. This last year, I have been hospitalized 3 times and had 5 surgeries trying to get rid of the infection which peaked in a bout of septicemia this year. The toll on this country for these banks behaviors is more than just economic. Perhaps the psychological toll is something to contend with as well.

    • Synoia says:

      Ok wavpeac, I’ll bit on your tale of woe.

      While sympathetic, I also have a question:

      When did you file the lawsuit for the RESPA violations, and demand the note under the discovery riles of this lawsuit?

      If the lender looses a RESPA lawsuit can result in the rescission of the loan. As you must know.

      The lender or loan servicer cannot evade their responsibilities in discovery.

      Did you consult an attorney? Why no lawsuit?

      • wavpeac says:

        I am really not trying to make this about me…personally. I think this story is shared by many. I have to tell you lawyers have not been lining up to take my case. I have interviewed as many as 12 in my state. Back in 2005, it was almost impossible to get anyone to go up against them and we didn’t know about asking for the note back then. I have been in protection from the bankruptcy since 2005 and just getting out this month. We are suing but my lawyer wanted to wait.

        • cbl2 says:

          as one who ha been reading your posts on this subject for some time now, it is clear you aren’t making it about you – peace to you and yours

        • bobschacht says:

          It is definitely not just about you. My wife lost through foreclosure the house that she had wanted to leave to her daughter. There has been too much worrying about homeowners abusing the system, and not enough worrying about bankers abusing the system.

          Bob in AZ

    • marymccurnin says:

      As you probably know, when someone is in the federal modification trial period those three payments are n.o.t. counted as payments toward the mortgage. When you get out of that trial period you are now three (more) payments behind. Our neighbors decided to not accept the trial period they were approved for. They told the bank they were not going to pay the bank to foreclose on them. Now their house has been on the market for six months and the asking price is only $99,000. That is about 75% of the lowest price I have seen in the entire neighborhood.

      • wavpeac says:

        yes, I have not applied under hamps and will not do so. I am going to try to get refinanced through the HOPE program instead. It’s a ton of work and stress to have to do all this, however…as you may know.I just wrote a diary on The seminal about the link between being in foreclosure and health problems. The research suggests that as people struggle with their mortgages and spend money paying these fees, and as the health care industry has made health insurance less effective, the result has been an increase in serious health problems linked to people in foreclosure. This is costing the country in many ways and there really is a confluence of destruction to the middle class in a way that I think, is similar to the depression.

  4. ScrewBush says:

    Short and Sweet, this story like many these days just makes me sick to my stomach. We are in a state of emergency, You can hear the sirens everywhere, yet the powers that be just want to continue to gorge themselves at the table as if nothing has changed. This is going to get ugly.

  5. cbl2 says:

    good morning Emptywheel –

    although it will barely rate sideshow status as the full tsunami hits, I’d like to see someone take a closer look at Senator Leahy’s’explanation’ for the sudden passage of HR 3808 – per the linked HuffPo piece, Calvin Coolidge ate his homework


  6. liberalarts says:

    Helplessness on the one hand doesn’t go with death by fiat on the other hand. I’m really, really sick of the poor me, little boy lost routine.

  7. zeabow says:

    And the poor mortgage servicers were innocently “overwhelmed” … I almost threw up when I read that one last night. What utter bullshit! It gives us some insight into the obama administration’s story on the whole matter and it’s just like every other story they have concerning the precious banks: there was some bad judgment by the bankers, but it wasn’t nothing illegal or purposeful so let’s move right along; besides we need these motus’ cooperation or else they’ll blow the economy to smithereens.

    allison was out babbling this week on huffpo on what a “success” tarp was. The title of his ministry of truth-approved essay had something to do with the public not knowing the full story about tarp. He then went ahead and didn’t tell the full story about tarp, just the parts they want the public to believe.


  8. tremoluxman says:

    Cramdown would be a fine tool, but why should a mortgage holder have to file for bankruptcy before it can be used? There should be a process whereby an arbitrator or some such can invoke it after the mortgage holder and lender come to an impasse in trying to work out a mutually agreeable modification. They could then appeal to the arbitrator to settle the issue. It would prevent either side from making unreasonable demands.

  9. myshadow says:

    This scandal/atrocity is on the present watch. Between this and the governments collusion with bp, how have we gotten anythin different from bushco?

    This administration has earned our rage and outrage for fostering a metastacized climate of greed that allowed financial institutions to appropriate the property of the middle class.

    Is there a functioning department of justice? AIG? Nothing to see here, move along, they DROPPED that case, the least they could have done is try and loose.

    I know that bush has done alot, and I actually think the republicans threw the election so they wouldn’t have to preside over all of this, but obama has thrown more gas on the fire that will consume his administration.

    What has been welling has been obvious in real time, the pathetic explanation of the once respectable patrick leahey that calvin coolidge made him vote for jeff sessions get out of jail card makes me sick. It is almost criminal.

    I have a dear friend tho is 62 and fighting to save his home from a swindle from country wide. He’s a case in point, middle class, over 55, he and wife put out to pasture, unable to secure employment, but able to put payments in escrow, fighting a fradulent mortgage deal.

    Fuck those that say it is people who bought above their pay grade, this is happening to Americans who, were playing by the ‘rules’.

    I was thinking about the ‘Shock Doctrine’ as well as I read this.

    I am disgusted that it is occurring on the watch of this president, and for this I hold HIM responsible.

  10. clemenza says:

    I sure remember cramdown. I remember Dorgan, of all people, voting no on cramdown. He said he didn’t want people who bought their house say ten years ago who were going into foreclosure to abuse the system.
    He seemed to be saying he wanted to limit it to people who got screwed through a sub prime loan. To hell with the man who can’t afford his mortgage payment because his job is in China.

    I also recall how Obama did jack shit to get it through. In fact, Rahm was behind the scenes putting the kaibosh on it, hence it failed just shy of the votes required. Nothing new there. It’s the modus operandi for the Dems in the last four years.

      • clemenza says:

        Ha. Didn’t know that, but no surprise there.
        Funny how all of their spouses sit on the board of banks, insurance companies, drug companies, etc.
        Who knew we had such a qualified bunch behind our elected officials.

        It’s no wonder we’re in this freaking mess.
        They’re all taking care of themselves first, last, and always.
        They should be run out of town.
        Let ’em take a walk down the block to “K” Street.

        I’d love to see droves of former incumbents looking for payback
        get turned away because there isn’t room for them all.

  11. wavpeac says:

    Yes, we are suing them to prove the balance of the loan because we do not agree with the pay off. However, I will tell you this, my lawyer was not willing to sue until he saw that they would be saying I owed this extra amount because then I would current on my loan and not in foreclosure. I have made all payments since my bankruptcy and according to the bankruptcy judge am current. But yes, we are suing because we have twice requested a payment history and they have not given it to us. It’s been very hard to get lawyers involved in this stuff. They don’t get paid unless they win a suit. My lawyer wants me to fill in an itemized sheet showing each payment and when it went through my bank since 2001 when I took out the loan. This is a hell of a lot of work. Certainly I am doing this, but he says he got burned on another lawsuit. I can tell you though that the problem is that many of these lawyers especially in my state are not up to date on this stuff. I just sent my lawyer all the links from the latest foreclosure stuff and he said he hadn’t heard any of it until I sent the links. In fact he seemed a bit miffed. I don’t know what this is, but there are a lot of ignorant lawyers who are just not willing to put the work into pursuing it.

  12. allan says:

    So little time, so many bubbles to burst.
    If the mortgage-backed securities market is going to disintegrate due to Fraud-gate,
    it may need to take a number and go to the back of the line:

    Dollar slump drives emerging markets, gold ETFs
    Hot money chases precious metals, commodities, other currency hedges

    Hot money? Unpossible. Surely the rational expectations of anyone who had a pulse during the last five years would lead them to realize that the music is going to stop eventually.

  13. grayslady says:

    Let’s take a look at Mr. we-don’t-need-cramdown Allison’s history: He spent 30 years at Merrill Lynch, moving up to become COO. He left Merrill in 1999 to become John McCain’s presidential campaign chief financial officer. (Worked for John McCain and now working for Obama?!!! At least we know where he’s coming from.) He then spent several years working at various jobs, including the Alliance for Lifelong Learning and then as President of TIAA-CREF, a teachers’ pension fund management group. He is not an economist. He has an undergraduate degree in Philosophy from Yale and and MBA from Stanford.

    Recently (October 3, 2010), Mr. Allison wrote an article for Huffington Post proclaiming how wonderful and necessary TARP was. In that article, Mr. Allison stated:

    Additionally, more than 3.3 million struggling homeowners have had an opportunity to stay in their homes or find more affordable alternatives because of foreclosure prevention programs either financed by TARP or created as a result of TARP in the private sector.

    Of course, he doesn’t use specifics to back up any of his claims, because–let’s be honest–they can’t be backed up by specifics. Bottom line: if we want to eliminate mortgage sleaze, we’ll probably have to start at the state level and work our way up the food chain, because with guys like Herb Allison in charge, there’s no way D.C. is going to be any help.

  14. FormerOkie says:

    I know Sen. Michael Bennett (CO), who may get beat by a tea party nut, voted against the cramdown. I sent him an email to vote for it, then sent him one to express my displeasure when he voted against it. He replied but his logic was total bullshit.

    While I don’t want his tea party opponent (Ken Buck) to win, I really don’t want Bennett for another 6 years either.

    And that’s the decision facing a lot of democratic voters this year. Vote for a sitting corporate democrat or just sit this out.

  15. posaune says:

    Shock Doctrine indeed.
    This issue needs a timeline (an EW timeline* g*).

    I truly believe via my front row seat to all this as a regulatory reviewer, the housing bubble was planned with the 2000 election, from the get go, to pay for Bush’s war. Thanks to Greenspan. Looking at the whole from a structural standpoint, there was the rising housing bubble, which commenced as housing bubbles do. The next step involved the exponential increase in the SCALE of development in terms of size of subdivisions, amount of land, numbers of units, enabled by the nationalization of the home builders and their stock listings on the exchange. This was the shift from local industry to national industry with nationalized financing (located in the most favorable states to the banks for legal and regulatory limitations.)

    What’s interesting is that this actually goes back to the Reagan era and the restructuing of the S&L’s via the abolishment of Regulation Q (that set the limits on interest rates) and the ensuing Depository Institutions Deregulation & Monetary Control Act and Garn-St. Germain Depository Institutions Act, which effectively shifted housing finance from local banks to the NY banks (surprise). Prior to this legislation, S&L’s which controlled residential mortgage issuance, could only hold 20% of assets in commercial holdings. Afterwards, the limit was raised to 90%. Because the S&Ls were now forced to compete with the NY commercial banks (CItybank the big one) they engaged in risky investments, foreign assets, etc. with the resulting disaster. Ironically, only the 1980s recession slowed it down. and the early 1990s recession prevented growth as well. But, the kicker was the repeal of Glass Steagel that dismantled regulation between banks and investment entities. Because mortgage regulation was already decoupled from local control and mortgage funds already sitting in secondary markets (with the big difference that each mortgage was still “whole” and untranched), when Glass Steagel allowed mixing of assets between banking and wall street, it lit the tinder with all the mortgage funds. It was only a matter of time. THAT was the first phase. The second phase was the foreclosure fraud and the plan to confiscate middle class property. Because it was a confiscation plan. There is a smoking gun (Cynthia’s on it, see the link within her “Affidavit post” to the Florida depositions of a servicer employee).

    The timeline thing I’m trying to get my head around is exactly when & how it morphed from a bubble (and then a derivative bubble on steriods) to an outright fraud. There has to be a point in time when the mechanism clicked.
    Is this what you are pointing at EW? That the failure of the cramdown triggered the systematic fraud? Because then the get-out-of-jail free cards were issued?

    • bigbrother says:

      Really good explanation. I am a renter now and see the explosion of demand starting to drive rental prices up. 1980 I bought, 25% down on a new house, the neighborhood was decimated by job losses and the values plummeted by 50%. I moved to S.CA find work and gave it to a property management company to rent for me. The company that held the mortgage was bought out. There was a big market in second at high interest at the time. Resolution Trust was building a huge portfolio. My huge student loan were due…underwater I did an Estopel deed of trust to the new mortgage to protect my credit followed by a bankruptcy filing. All a nightmare. My hope is Elizabeth Warren has the power and the vision to create protection from the banksters who are merciless buzzards creating profit out of our losses. And when the securitised debt holders have to face these losses gold and commodities will go of off the charts.

  16. jcgrim says:

    Both officials, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

    Oh My. The poor dears were overwhelmed. It’s comforting to know our administration is empathetic to overwhelmed mortgage lenders. It certainly clarifies who makes it on to Obama’s prayer list.

    They sure aren’t so forgiving of overwhelmed, over worked, teachers and other public servants. Recall, Arne thinks Katrina was the best thing to happen to the New Orleans public schools and Michelle Rhee is the good witch who saved poor inner city kids by mass firings of teachers.

  17. parsnip says:

    In response to posaune @ 24

    Wasn’t the Lehman bankruptcy the point after which the bubble burst, the frauds started to come out, jobs were hemorrhaging, which led to a torrent of defaults and foreclosures?

    It is my opinion that what was planned was nationalization of housing in the hands of the concentrated banking industry. Mortgages henceforth were never intended to be paid off. Rather, they were written, and serviced so as to require refinancing every 2-3 years when the resets made them unaffordable. This enabled equity-stripping at each refi, via fees extracted. In effect, we are all meant to be merely renters, never able to ever pay off our mortgage, or become freeholders.

    But the bubble burst, and since the chains of title had never been maintained [why bother, if the borrowers were never expected to pay off?], the fabrication of documents was necessitated, in order to foreclose on the cascade of defaulters. At this point the banks faced the dilemma of having to admit to their insolvency if they foreclosed and sold off their REOs at a loss. But there is a way around this: stop paying the taxes, and use straw buyers to buy the house back at tax lien sales. Scribe commented to the effect that there are late-night TV ads seeking straw buyers.

    There won’t be many people in future willing or able to buy homes, but the banks will probably be in the rental business at that point.

    • Sara says:

      “It is my opinion that what was planned was nationalization of housing in the hands of the concentrated banking industry. Mortgages henceforth were never intended to be paid off. Rather, they were written, and serviced so as to require refinancing every 2-3 years when the resets made them unaffordable. This enabled equity-stripping at each refi, via fees extracted. In effect, we are all meant to be merely renters, never able to ever pay off our mortgage, or become freeholders.”

      This is exactly what was intended. The intention was to return to the pre New Deal structure of most home ownership, by eliminating the straight forward Mortgage Finance structures.

      Pre 1929 crash, virtually all Mortgages were called “Contract for Deed” The terms were usually a five year note, directly negotiated with a banker, at the end of which was a balloon payment, and if the borrower did not have cash to pay out the balloon, The banker could write another Contract for Deed, with changed interest rates. The key was to allow the banker to move interest rates on property where the borrower had equity. If the borrower went into default, then the property was returned to the bank, which could of course resell the property with improvements, leaving the initial borrower stripped of his/her home.

      Now move to the much more fancy present, and take a look at the ARM, the mortgage type that allows for automatic resetting of the interest rates, much like the Contract for Deed did back in 1929. The point of the ARM is just to detach the interest rate from the actual mortgage, though these days the Green Eyeshades Bankers are gone, and instead electronics have replaced him. Makes it much more easy to chop up mortgages into securities, and really obscure who the lender actually is, and at the same time totally dishonor the principle that Mortgage Lenders, Banks that operate as lenders, and certainly the County Property Records Offices, are dealt out of their traditional roles, Namely proper tracking of equity and ownership on the part of the individual citizen in real property.

      In 1929, and a few years thereafter, the system fell apart because Banks had speculated with their own deposits, and by 1933, lost much of that wealth, and could no longer offer a new Contract for Deed no matter the quality of the original purchaser. Eer, the refinance option was off the table, as in today’s language. And of course today’s circumstances are more tangled, because of extra add on’s, such as home equity lines of credit and second and third mortgages, college loan financing, and all the rest — but the principle is exactly the same. Find a way to raise interest, fees, and above all new sorts of payments into the relationship when an actual mortgage is somewhat mature, and use that complexity to wipe out the equity of the initial borrower.

      And in 2008 it fell apart for the same reasons it did in the early 30’s. The credit markets froze up, and refinancing was off the table. The game cannot continue without constant credit refreshment.

      So does HOLC offer a model for a way out — I think so. Can it be called Cramdown this time? You can call it what you want.

      What HOLC did was offer 20 year, straight reduction, low interest permenant rate mortgages to home owners with orphan mortgages, meaning with banks that closed for good in the early 30’s and the bank inspections that came via the 1933 Bank Holiday. Others came into HOLC as Banks were reorganized. As banks and Savings and Loans were reorganized, (and came under deposit insurance rules) the new HOLC mortgages were assigned to both Banks and S&L’s as held Bank reserves, reserves that had to be serviced. The finance for the program came out of the Reconstruction Finance Corporation, which much like TARP, had been passed at the end of the Hoover Administration for the purpose of providing liquidity to the Banks. Roosevelt just repurposed the funds.

      HOLC lasted less than two years — meaning, it only wrote new Mortgages between 1933 and 1935. In the mid 50’s when the last of the Mortgages were retired, default rate was less than one percent, and virtually everyone “made” money on the program. In 1935 it was replaced with the FHA Loan Systems, which put much more emphasis on new quality construction, and other matters — but the basics were in FHA, and subsequently would be the model for VA housing programs. It was a huge Middle Class Wealth Builder. I should add, when HOLC Loans were negotiated with borrowers, many modifications were made that accounted for matters such as Local Property Tax Rates, the impact on prices of the depression era, new zoning and the like, but that was done on the initial HOLC Loan by HOLC/RCF federal officers authorized to issue the mortgages. So yes, in today’s lingo, there was Cramdown in 1933. Cramdown is but one element in the general process.

      My own interests here are pretty simple, I want to see re-regulation of the entire Mortgage Market so as to put all the parties to a housing transaction on a fair and equal footing. Get the Casino out of the system, and recognize that housing is a very special kind of purchase, and absolutely requires strong regulation. Purchasers should be able to comprehend the simple rules, and any private entitity working in the process ought to be subject to equally transparent rules. People in the industry ought to be licensed, with grave consequences for rules violations. And yes, Banks and S&L’s ought to have hard rules.


      During a Moritorium several things need to be accomplished.

      First, all the non performing mortgages need study. The paperwork all needs to be collected, and the actual lenders reconnected with the borrowers. Where mortgages have been broken into securities, then need to be reconnected. Only then, and after necessary modifications that result from so much fraud in the system, (All sides, account for people walking away from Mortgages when they could afford to pay), Just begin to issue new clean Mortgages where property records are in order, and after cramdowns, tax modifications and all, for “owners” and purchasers who meet standards set in real regulations. Force Banks and S&L’s to establish human scale, dignified local offices where such transactions take place, and of course, any Insured Bank and S&L ought to be required to do this business.

      Will such end all Foreclosures, No, but it will force modifications. The incentive should be such that new clean mortgages, simply written, emerge from the process. This must be done with State and Local Property Tax authorities involved, (probably zoning too), as all too much Public Services such as schools, police, fire, and all the rest, depend on the system. This is something for Elizabeth Warren to get cracking on in short order.

      We will have to FORCE CONGRESS to pass legislation that takes this to the next step — simply because it must be national law. A simple menu of quality Mortgage Types with their rules need to be tabled, and the business of public education about the need for this needs to be done — nationally. If you want to see what was once required, go back and read the history of Robert Wagner’s Housing Fights in Congress in 1935-36, and you will get the idea. Those were the fights that produced more than a 50 year stable Mortgage Market, and the ability of the American Middle Class to become home owners, and directly benefit from the housing security it provided.

      I still think “Man’s Home is his Castle” (as elaborated by old Sam Ervin on Watergate TV with all Jowels working) is the best sort of PR something like this needs. It has to be fundamental.

      Sadly these days all too many folk don’t read History very deeply, nor do they make clean differences between their particular cases and circumstances so as to understand this as a SYSTEMS PROBLEM and not a personal or moral one. If we want to be effective advocates, we have to clarify that this has happened before in American History, that we did in fact find ways to fix the system, and it produced very good outcomes, and yes indeed it was a Program of the Federal Government. This is what people meant back in the 40’s and 50’s when they said Roosevelt saved the Family Home, or the Family Farm. But I suppose Grandpa is dead now, long gone, the story is vague, and maybe the home is just a browning in snapshot in an old photo book. But that is not the point — the point is we did fix the system once, and then the bastards came back and screwed it up again.

      Forget about sending the bastard bankers to jail — won’t help. You have to get out there on the hustings and demand the reforms, and help all sorts of people to comprehend the thinking that will support the reforms. Jail doesn’t get us to that very well. Many of those little bankers are just bright eyed hirlings, and while they need to be named, they fell for the Casino Morality, and it is for that they need heavy blame. But until recently, entry level Mortgage Banking was apparently a good career move.

  18. wavpeac says:

    I think that this is the only way we can save the economy. All these properties have some value. Right now the bottom is no where in sight, but by refinancing these properties in a way that they can be paid off instead of foreclosed on, will give a bottom line in regard to the value again. Right now there is no foundation for these prices. A new bottom line has to be set. The market has to be reset.

  19. wavpeac says:

    The fraud was occurring as early as 2001. The system had begun at that pt. I think it had to do with the repeal of Seagull Glass. Or maybe they knew once a Bush was president that they could begin. I know that Bush sent out memos to the A.G’s not to prosecute mortgage fraud AND that I was “steered” into the sub prime loan in 2001. I had a credit rating of 750. AT the time I was a single woman buying a house. I was told by a lawyer friend who said that these companies had been targeting women, minorities and the elderly as early as 2001. I had a broker who never used the word sub prime…but I have to admit I would not have known what that meant back then. No where on the loan did it say this is what it was. It’s true I did not put 10% down, but we had not had to do that for the first house I owned and I did not know this meant it was sub prime. (I guess in my first house loan when I was married to my ex, it was model home and they paid the down payment).

    • spanishinquisition says:

      Obama’s new National Security Advisor was one of the heads of Fannie Mae during this time where what he did was keep investigator out. Obama has a lot of people (such of Rahm) who were tied up with Fannie Mae during the time this stuff was going on.

  20. FrankBurns says:

    Let’s also not forget that the cramdown debate prompted that ass on CNBC howling about “freeloaders,” and in doing so made mention of the need for “tea parties” (with the already registered websites going straight into operation). It’s generally not remembered that it was the effort to keep people in their homes that fueled this supposedly “populist” movement.

  21. edur says:

    Now RENEGING on their DEM former EXCUSES! Foreclose on all Occupants of the OBAMAVILLA at the Casa Blanca buck stop NLT 2012; if not sooner for war criminality in the civil Class CONFLICT (not to mention the illegal, unConstitutional, Obamanible Bush Wars abroad)!

    • bigbrother says:

      Were “Looking Forward” and it ain’t pretty. The Bankster robber barons are fullt indemnified from accountability by Obama, the Democrats and the Republicans. To borrow a phrase “Wish I had someone to vote for”. Without accountability the forgeign policy of the USA is severely crimped. Imagine Gates going to North Vietman hat in hand this week!

  22. watstearns says:

    This is why I just freakin’ hate the Times and the Post. The Post:

    Both officials, …. said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

    This is such lying shit. Here’s what Ellen Brown says on Counterpunch:

    Yves Smith of Naked Capitalism has uncovered a price list from a company called DocX that specializes in “document recovery solutions.” DocX is the technology platform used by Lender Processing Services to manage a national network of foreclosure mills. The price list includes such things as “Create Missing Intervening Assignment,” $35; “Cure Defective Assignment,” $12.95; “Recreate Entire Collateral File,” $95.

    Notes Smith:

    [C]reating . . . means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder. This means most importantly the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.

    Furthermore, she goes onto explain:

    All of the mortgages in question were “securitized” – turned into Mortgage Backed Securities (MBS) and sold off to investors. MBS are typically pooled through a type of “special purpose vehicle” called a Real Estate Mortgage Investment Conduit or “REMIC”, which has strict requirements defined under the U.S. Internal Revenue Code (the Tax Reform Act of 1986). The REMIC holds the mortgages in trust and issues securities representing an undivided interest in them.

    Denninger explains that mortgages are pooled into REMIC Trusts as a tax avoidance measure, and that to qualify, the properties must be properly conveyed to the trustee of the REMIC in the year the MBS is set up, with all the paperwork necessary to show a complete chain of title. For some reason, however, that was not done; and there is no legitimate way to create those conveyances now, because the time limit allowed under the Tax Code has passed.
    The question is, why weren’t they done properly in the first place? Was it just haste and sloppiness as alleged? Or was there some reason that these mortgages could NOT be assigned when the MBS were formed?

    Denninger argues that it would not have been difficult to do it right from the beginning. His theory is that documents were “lost” to avoid an audit, which would have revealed to investors that they had been sold a bill of goods — a package of toxic subprime loans very prone to default.

    So’s there’s really no validity at all to the “overwhelmed” argument. F**king poisonous toads need to go to jail, that’s all.

  23. parsnip says:

    In response to Sara @ 40

    Thank you immensely for the history lesson. I hope you will make this into a diary and post it at the Seminal with a title that will catch attention so that we can get beyond complaining, moralizing and sharing personal horror stories, and face the real problem, which is an order of magnitude beyond the intellectual grasp of people who fail to learn the lessons of history. When you describe how this is another front in rolling back the New Deal and really is intended to equity-strip and take away the entire concept of homeownership, making us all permanent rent slaves to the banks in every way, it takes it to another level, and makes Axelrod’s statement that the WH is ok with this even more clear that the government is facilitating the bankers’ predation.

    It’s even more chilling when he states that “Our hope is this moves rapidly and that this gets unwound very, very quickly.” In context this can only mean that the plan is to continue to foreclose as quickly as possible. But he doesn’t say a thing about any plans to help out the homeless hordes that will result. Eric Cantor stepped into that breech with: “People have to take responsibility for themselves.”

    • klynn says:

      I agree. Sara your comment would make a great diary. I have made some of the same points on Cynthia’s posts and have tied them to my own experience in dealing with the bank on getting financing to buy a house. The bank refused to explain how their loan approval board came up with a financing figure 20% above what we had figured we could afford. We still bought at the number we figured we could afford.

      You should have seen our bank officer when we confronted her and said, “You want us to be in a position to never pay off our mortgage. The bank has bad intentions and is operating in a conflict of interest. This is pre 1929 banking practices. History will repeat itself.”

      And a FYI:

      Get the Casino out of the system, and recognize that housing is a very special kind of purchase, and absolutely requires strong regulation. Purchasers should be able to comprehend the simple rules, and any private entitity working in the process ought to be subject to equally transparent rules. People in the industry ought to be licensed, with grave consequences for rules violations. And yes, Banks and S&L’s ought to have hard rules.

      40% of the homeless living out of cars today are families with children.

      BTW, over 5 years ago, some of the biggest commercial real estate companies in Florida knew the loans were being bundled and sold for their risk value. Someone needs to talk to them about “how” the big guys knew this fact.