Obama resists effort to include bankruptcy law change in stimulus

President-elect Obama and his advisers are resisting attempts to include a provision in the economic stimulus bill backed by congressional Democrats that would allow bankruptcy judges to shrink mortgages.

In a hastily convened Democratic Caucus meeting last week, Obama economics adviser Jason FurmanJason FurmanOn The Money: Five things to know about the August jobs report Dates — and developments — to watch as we enter the home stretch In surprise, unemployment rate falls, economy adds jobs MORE made it clear to lawmakers that Obama thinks the so-called “cramdown” provision would cost GOP votes and endanger bipartisan support in the Senate.

He committed to dealing with the issue after the bill passes, as did House Speaker Nancy Pelosi (D-Calif.).

ADVERTISEMENT

Lead supporters of the cramdown provision say the time to deal with the issue is now. Rep. Jerrold Nadler (D-N.Y.) said it’s worth losing some Republican support to help homeowners.

“I would take that risk,” Nadler said. “I don’t think you’re going to get a lot of Republican votes anyway.”

The bankruptcy provision helps homeowners who owe more than their house is worth and file for bankruptcy. It would allow a bankruptcy judge to reduce, or “cram down,” the principal on a home loan to the value of the home.

Democrats have pushed for the change in the law as a way to help homeowners caught in the foreclosure crisis. They say it would force lenders to modify more home loans voluntarily for fear of having a bankruptcy judge cut payments more severely.

But lenders have fought the idea, arguing that it would cause an increase in mortgage rates, because they’d have to charge more for loans that might later be changed by a judge.

Obama’s opposition is likely to slow the progress of a deal on cramdowns cut between Citigroup and Sen. Dick DurbinRichard (Dick) Joseph DurbinTumultuous court battle upends fight for Senate McConnell focuses on confirming judicial nominees with COVID-19 talks stalled Senate Republicans signal openness to working with Biden MORE (D-Ill.) that had been expected to be included in the Senate version of the stimulus.

ADVERTISEMENT

Citigroup Inc. agreed to the change in law as long as it is limited to loans made before the bill is signed. Durbin urged other lenders to follow suit, but they have resisted.

Durbin’s cramdown provision was shot down three times in the Senate last year. At one point, Durbin spoke about it on the Senate floor for seven hours.

A spokesman for Durbin disputed the suggestion that Obama would oppose including the cramdown provision in the stimulus bill.

“This provision is likely to be in the Senate version of the bill, and we have every expectation it will pass the House and Senate,” said Matt Gleischman, the spokesman.

The issue got charged enough last week that it spilled out of a Thursday morning caucus meeting and forced an unscheduled afternoon meeting to continue discussions. At that meeting, two committee chairmen who agree on the issue got into a shouting match about it.

House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) demanded to know why cramdowns weren’t in the $825 billion stimulus plan that House Appropriations Committee Chairman David Obey (D-Wis.) announced the day before.

Agitated, Conyers asked whether he was supposed to go back to his constituents and tell them this didn’t happen because Obey didn’t want to do it. Obey responded that no one, including the chairman of the relevant committee, had asked him to put it in the bill. As Judiciary chairman, Conyers helms the relevant committee.

With the rest of the caucus looking on, Conyers and Obey then argued back and forth over whether Conyers had written Obey and whether Obey had gotten the letter. One attendee called the exchange “comical.”

Some members suggested that cramdowns could be inserted into an “omnibus” spending bill that would finish the appropriations work Congress left undone last year. The House is to take up the bill as soon as it moves the stimulus to the Senate. They could also be put in legislation revising terms of the $700 billion bailout passed in the fall. But many don’t expect that bill to pass the Senate.

“They just want to see that there will be a train leaving the station,” said a Democratic aide. “We just have to find a new vehicle.”

But members like Nadler complain that people are losing their homes to foreclosure every day, so the provision should be passed as quickly as possible.

“How do you go back to your constituents and say, ‘We got it in the bill, but it’s too late for you’?” Nadler asked.