Servicers Only Respond to Stick Not Carrot

When you are thinking about the upcoming elections, let’s take a little walk down memory lane, full article on Bloomberg here:

Campaign Promise

The week before the 2008 election, soon-to-be Vice President Joseph Biden Jr. told a campaign crowd in Ocala, Florida, that he sympathized with the hundreds of thousands of Floridians who were upside down on their mortgages.

“If we can help Wall Street, folks, we sure can help Silver Springs Boulevard right here in Ocala,” Biden said.“That’s why we believe we should reform our bankruptcy laws, giving bankruptcy judges the authority to reduce the amount of principal owed, give them the authority to go out and reset the terms of the mortgage so people can stay in their homes.”

Obama also said in 2008 that he backed the change in bankruptcy law, popularly known as “cram-down.” While the change in law could have given people in dire straits an avenue to rebuild their finances, it was vigorously opposed by lenders.

The campaign promise wasn’t kept. The White House never publicly changed its stance but didn’t push for passage when a cram-down bill came to a vote in the Senate in April 2009. The measure failed, with 12 Democrats voting against it.

Peter Swire, who coordinated housing finance policy at the National Economic Council from 2009 to 2010, said the White House and the Treasury Department were so focused on getting banks to raise capital in the wake of the 2008 financial crisis that they had no ability to also push for cram-down. In addition, cram-down would be a complicated process that they believed would not work for every troubled borrower.

‘Huge Priority’

“Getting the financial system to work was a huge priority,” said Swire, an Ohio State University law professor.“The vote on cram-down happened in that context.”

Another former White House official, speaking on condition of anonymity because the internal discussions were private, said the White House thought it couldn’t win the cram-down fight and stayed out to preserve political capital.

The White House focused on developing the voluntary Home Affordable Modification Program and the Home Affordable Refinance Program, known by the easily confused names of HAMP and HARP, which paid lenders an incentive fee for each loan they modified if borrowers could meet a long list of criteria.

“Instead of using sticks, they tried to use carrots,”said Jeff Gentes, managing attorney at the Connecticut Fair Housing Center, who often tries to stop foreclosures by taking banks and other firms that service mortgages to court. “Obama abandoned the campaign promise to pursue cram-downs, which would have given us a stick. Servicers are incorrigible. They only respond to sticks.”


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