When Americans started facing the threat of foreclosure at the height of the 2008 financial crisis, Barack Obama campaigned on a promise of a simple, straightforward, and elegant solution: Force big banks to accept some losses and write down the amounts homeowners owed on their mortgages, thereby avoiding mass foreclosures. Soon after winning office, Obama abandoned the pledge to the delight of his Wall Street donors.
Now, new data suggests that had Democrats instead used their huge congressional majorities to deliver relief, they could have rescued hundreds of thousands of families who were thrown out of their homes while Obama’s administration was bailing out the banks.
Separate data, meanwhile, suggests that lessening the blow of the housing crisis on middle-class families may have averted Donald Trump’s narrow victory in 2016.
The data provides a powerful cautionary tale to President Biden and congressional Democrats as financial analysts have warned of the possibility of a significant increase in foreclosures this year.
Cramdown Could Have Stopped 600,000 Foreclosures
The new study evaluates so-called mortgage “cramdown,” whereby bankruptcy judges reduce outstanding home-loan debts in order to keep people in their houses. The Supreme Court restricted the procedure in 1993, leaving judges unable to use cramdown to reduce middle-class Americans’ debts on their primary residences — even though judges were free to keep using cramdown to shield wealthy people’s investment properties and vacation homes from creditors.
Comparing data from courts that had previously used cramdown with courts that did not use cramdown, the analysis from researchers at the University of Minnesota, the University of Texas, and PUC Chile finds that cramdown “reduces the five-year foreclosure rate by 29 percentage points … stabilizes living arrangements and circumstances of households” and is associated with a reduction in crime rates.
In early 2009, Obama’s incoming administration pledged to “reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws” — and the new administration had recent history as a validator of its pro-cramdown rhetoric. When the federal government extended cramdown to rescue family farmers in the 1980s, it had the effect of compelling lenders to preemptively write-down the mortgage principal to avert bankruptcy proceedings, according to Federal Reserve Bank research.
But after Wall Street banks that bankrolled Obama’s campaign mounted a furious lobbying blitz, the White House quickly backed down — and Democratic lawmakers said Obama officials abandoned the effort, dooming it to defeat.
“The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place,” said Illinois Sen. Dick Durbin after a failed Senate effort to pass cramdown in 2009.
Ultimately, between 2007 and the end of Obama’s first term, banks foreclosed on more than four million households who were unable to use cramdown in the same way corporations and wealthy investors can use the provision to shield their own property.
Researchers conservatively estimate that cramdown may have prevented roughly six hundred thousand foreclosures — and maybe significantly more.
Data compiled by the Center for American Progress suggests that Trump ended up turning the foreclosure disaster into a huge political opportunity for himself, increasing Republican electoral support in areas that were particularly hard hit by the housing crisis.
“Larger proportions of underwater homeowners were prominent features of counties where support for the Republican Party increased from 2012 to 2016, compared with where the Democratic Party gained or maintained a foothold in 2016,” CAP’s analysis found. “In addition to declines among suburban and rural voters, Democrats experienced shrinking margins of victory in several distressed metropolitan areas. This may have played a role in turning Michigan and Wisconsin from blue to red in (the 2016) presidential election.”
Cramdown Is Still Not on the Books
During the COVID-19 pandemic, millions of homeowners have taken advantage of mortgage forbearance programs to put off home payments. Though that has stemmed the tide of foreclosures for now, recent data shows an uptick in new foreclosure proceedings.
A recent Federal Reserve analysis estimated “current forbearance programs may prevent about 500,000 foreclosures that otherwise would have occurred” last year — almost exactly the number of foreclosures that the new cramdown research said would have been prevented during the last housing meltdown.
The provisions allow for more bankruptcy protections and discharged debts even if debtors missed some mortgage payments on a residential home — as long as the missed payments were related to hardship incurred by the COVID-19 pandemic.
However, those protections are temporary and end later this year.
At the end of 2020, Sen. Elizabeth Warren introduced legislation to reinstate cramdown. As a bankruptcy law professor, she was one of the most outspoken voices for the policy.
The legislation has not yet been reintroduced in the new Congress.