[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
STRAIGHTENING OUT THE MORTGAGE MESS: HOW CAN WE PROTECT HOME OWNERSHIP 
    AND PROVIDE RELIEF TO CONSUMERS IN FINANCIAL DISTRESS? (PART I)

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 25, 2007

                               __________

                           Serial No. 110-159

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel


                            C O N T E N T S

                              ----------                              

                           SEPTEMBER 25, 2007

                                                                   Page

                           OPENING STATEMENTS

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     2
The Honorable Hank Johnson, a Representative in Congress from the 
  State of Georgia, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     4
The Honorable Tom Feeney, a Representative in Congress from the 
  State of Florida, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     4

                               WITNESSES

The Honorable Marilyn Morgan, United States Bankruptcy Court, 
  Northern District of California, San Jose, CA
  Oral Testimony.................................................     7
  Prepared Statement.............................................     9
The Honorable Steve Bartlett, The Financial Services Roundtable, 
  Washington, DC
  Oral Testimony.................................................    11
  Prepared Statement.............................................    13
Eric Stein, Esquire, President, Center for Community Self-Help, 
  Durham, NC, on behalf of the Center for Responsible Lending
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
John Rao, Esquire, National Consumer Law Center, Inc., Boston, 
  MA, on behalf of the National Association of Consumer 
  Bankruptcy Attorneys
  Oral Testimony.................................................    47
  Prepared Statement.............................................    49

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................     6


STRAIGHTENING OUT THE MORTGAGE MESS: HOW CAN WE PROTECT HOME OWNERSHIP 
         AND PROVIDE RELIEF TO CONSUMERS IN FINANCIAL DISTRESS?

                              ----------                              


                      TUESDAY, SEPTEMBER 25, 2007

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 3:53 p.m., in 
room 2237, Rayburn House Office Building, the Honorable Linda 
Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Johnson, Lofgren, Watt, 
Cannon, Feeney, and Franks.
    Staff present: Susan Jensen, Majority Counsel; Zachary 
Somers, Minority Counsel; and Adam Russell, Majority 
Professional Staff Member.
    Ms. Sanchez. Okay. This hearing of the Committee on the 
Judiciary, Subcommittee on Commercial and Administrative Law 
will now come to order. And I will recognize myself for a short 
statement.
    The skyrocketing foreclosure numbers are a sobering 
reminder of this Nation's growing mortgage crisis. What was 
once a small problem attributed to economically struggling 
areas is quickly becoming a national phenomenon.
    In 2006, there were 1.2 million foreclosures in the United 
States, representing an increase of 42 percent over the prior 
year. And this year's numbers are looking even worse. Last 
month's foreclosures were 115 percent greater than those 
reported for August in 2006.
    It is estimated that, between this year and next year, 
there will be a whopping $400 billion worth of mortgage 
defaults. As many as 2 million households may be at risk of 
losing their homes to foreclosure, a rate approaching that of 
the Great Depression. And economic conditions will worsen, 
given the fact that a substantial portion of subprime mortgages 
will reset their interest rates in the coming months.
    We are in the middle of a mortgage meltdown. Falling real 
estate prices and a substantial change in the ease of obtaining 
loans are making it more difficult for overstressed homeowners 
to either refinance their way out of trouble or simply sell 
their homes. We need to act quickly to shift the balance of 
power between borrowers and lenders. The question is how?
    I was very pleased to join my colleague from North 
Carolina, Brad Miller, last week as an original co-sponsor of 
the Emergency Home Ownership and Mortgage Equity Protection Act 
of 2007. This measure goes to the very heart of the problem--
protecting homeowners so desperate that they must file 
bankruptcy. H.R. 3609 allows, for the first time in nearly 30 
years, a debtor in a chapter 13 case to reorganized his or her 
home mortgage obligations, just like any other debt. And unlike 
some proposals, it provides guidance to the courts in terms of 
how this restructuring may be done.
    This legislation provides an important exception to the 
mandatory requirement that consumers receive credit counseling 
before they file for bankruptcy relief. The bill excuses a 
chapter 13 debtor from this requirement, if he or she submits 
to the court a certification that a foreclosure action has been 
commenced against the debtor's home. And this legislation 
provides important protections against lenders assessing 
excessive fees and hidden charges against chapter 13 debtors, 
who are trying to save their homes from foreclosure.
    The Emergency Home Ownership and Mortgage Equity Protection 
Act is a measured response to the mortgage crisis, and one that 
I strongly support. I look forward to working with my 
colleagues on this Subcommittee, as well as the full Committee, 
to move this bill and explore other necessary reform.
    It is my hope that today's hearing will provide an 
opportunity for us to gain a better understanding of the causes 
and possible solutions to the mortgage mess facing consumers 
and our economy. Accordingly, I look very much forward to 
today's hearing and to receiving the testimony from all of our 
witnesses.
    At this time, I would now like to recognize my colleague, 
Mr. Cannon, the distinguished Ranking Member of the 
Subcommittee, for his opening remarks.
    Mr. Cannon. Thank you, Madame Chair.
    Home ownership has been one of the primary ways that 
American families have built wealth. Even during the rapid 
growth of the stock market in the 1990's, real estate continued 
to eclipse stocks as a share of most households' portfolios. In 
recent years, subprime lending has increasingly become a part 
of the mortgage industry, allowing even more families to build 
wealth through home ownership.
    Subprime lending has greatly expanded the pool of credit 
available to borrowers who, for a number of reasons, would 
otherwise be denied credit. Subprime lending has benefited a 
great number of borrowers--borrowers who otherwise would not 
have been able to achieve the dream of home ownership.
    The benefits of subprime lending have not come without 
their negatives, of course, which is why we are here today. It 
appears that we are currently facing two problems. One, how to 
help homeowners avoid foreclosure and stay in their homes; and 
two, how to store liquidity and stability to the full mortgage 
market and other credit markets.
    Several legislative proposals have been made that claim to 
fix the first problem through amendments to the bankruptcy 
code. Initial analysis suggests, however, that these proposals 
will not only serve to exacerbate the second problem. 
Significantly changing chapter 13 as it applies to home 
mortgages has the potential to restrain the flow of capital in 
the home lending market.
    Reducing liquidity will not only have a broad influence on 
the housing market in general, but it will reduce the 
availability of credit to Americans that desperately need it. 
In other words, it appears that the proposals being floated to 
help consumers may actually have the opposite effect. This is 
because allowing mortgages to be modified or rendered unsecured 
through bankruptcy will make it far more difficult to originate 
or sell mortgages in the secondary market.
    The proposed changes to the code introduce substantial 
risks that the terms of loans will be changed in unpredictable 
ways. Accordingly, lenders will be forced to increase the costs 
of mortgages to reflect the additional risk.
    As groups such as the U.S. Chamber of Commerce and the 
National Association of Homebuilders have pointed out, these 
problems would reduce liquidity and make it harder for 
Americans to obtain a new mortgage or refinance their existing 
mortgage--the exact opposite of what the mortgage market needs 
now.
    While it makes common sense to help families save their 
homes, these proposals may have the exact opposite effect. And 
they may make it difficult for families to purchase homes in 
the future. The proposals that have been circulated thus far 
have little to do with helping families facing default on their 
mortgages because of subprime loans. The proposals have not 
targeted the problem. For example, seven of 11 provisions of 
Senator Durbin's Helping Families Save their Homes Act have 
nothing to do with mortgage finance. And those provisions that 
do deal with mortgage finance applied to all mortgages, not 
just true subprime loans made to marginal borrowers.
    We are committed to working to make sure that American 
families are able to weather the current downturn and the 
problems associated with subprime mortgages. Members of the 
minority are working in a bipartisan fashion on Committees on 
both sides of the Capitol to craft solutions to the mortgage 
crisis.
    But whatever solutions we come up with, we must remember 
that broad legislation aimed at the primary residence exception 
in chapter 13 affects not only those borrowers facing default 
from rising interest rates on subprime loans, but future prime 
and subprime borrowers as well. Reform of the primary residence 
exception does not occur in a vacuum. We must resist the urge 
to place the cost of the downturn on the backs of the lenders, 
simply because they are easy targets. No one questions that 
they share the blame. However, saddling lenders with the cost 
will merely cause lenders to shift that cost to future 
borrowers in the form of higher risk premiums.
    I look forward to the testimony today and hope that the 
witnesses will keep in mind that this issue, like other issues 
in bankruptcy, involves the balancing of many competing 
interests. I hope the witnesses can help shed light on where we 
should strike the balance regarding the primary residence 
exception, or whether the proper balance has already been 
struck.
    Thank you, Madame Chair. And I yield back.
    Ms. Sanchez. Thank you. I thank the gentleman for his 
statement. But now, at this time, I would like to recognize Mr. 
Johnson for his opening statement.
    Mr. Johnson. Thank you, Madame Chairwoman. Madame Chair, 
the cornerstone of the American dream has always been to own a 
home. Some versions of the dream feature a white picket fence 
and two-car garage. Some may have a large yard with a swing set 
and toys scattered around. But whatever the dream entails, and 
sometimes it can be a condominium or a town home, but whatever 
that dream entails, it always features home ownership.
    And that dream now is quickly vanishing and becoming a 
nightmare for many people who have turned to subprime loans to 
obtain that goal. And many people have not just turned to them, 
they have been steered into them. What was once a niche 
product, subprime loans have taken a significant share now of 
the mortgage market. Combined with lax practices, lack of 
monitoring, aggressive marketing and disproportionate 
targeting, these loans have mushroomed into a mortgage crisis 
that has not only reverberated in this country, but also in the 
international markets.
    This hearing comes at a time, Madame Chair, when the State 
of Georgia, where I hail from, has experienced the second 
highest rate of home mortgage foreclosures in the country, with 
one out of every 299 homes being reclaimed by the lender. The 
ripple effect of Georgia's foreclosure rate has not only 
affected home and resale values, but even school enrollment, 
which threatens the budgets of school systems.
    In a recent article in the Atlanta Journal-Constitution, 
about 10,000 fewer students than expected enrolled in Atlanta's 
school system this year. When there are maybe up to 2 million 
households in our Nation on the verge of losing their homes 
this year, it is imperative that Congress steps in. I plan to 
offer legislation that would eliminate some of these onerous 
provisions of the bankruptcy law that only act as another 
hurdle to receiving relief.
    But I thank the Chairwoman for holding this hearing to find 
some relief for those under the weight of subprime mortgages--
those families who are being crushed under the weight of these 
subprime mortgages. The Administration has taken credit for 
putting more families in homes. But if Congress doesn't step in 
right away, many will soon face the streets.
    Thank you, Madame Chair. And I yield back.
    Ms. Sanchez. I thank the gentleman for his opening 
statement.
    And the gentleman from Florida, Mr. Feeney, is recognized 
for his opening statement.
    Mr. Feeney. I thank the Chairwoman. And I don't think there 
is anybody that doesn't have sympathy for a homeowner that has 
been devastated, either by the subprime loans and teaser rates, 
or because their home has lost value, or because they lost 
their job, perhaps through no fault of their own--maybe a 
health reason. And in America, the way we do it is to give 
people a second chance. And so I support bankruptcy 
opportunities for relief.
    But I also want to make sure the law of unintended 
consequences doesn't hurt a lot more people than we are trying 
to help. The primary cause of the housing bubble is excess 
liquidity and the fact that there were very little checks at 
the table for a lot of closings going on.
    Virtually everybody at a closing table makes money, whether 
a good loan is made or not. The attorney that closes the loan--
the surveyor gets paid. The appraiser gets paid. The real 
estate agent gets paid. The mortgage broker gets paid. Lots of 
other people get paid. And ultimately the two people affected 
are the people that hold the loan when it's--by the way, 
typically the bank and the original lender gets paid, because 
they have repackaged the loan into the secondary market.
    So it is whoever ends up with the loan that is affected. 
And I don't feel bad for any of those people particularly. 
They, in return for high returns on capital investments, took 
risks. I feel terribly bad for homeowners that, in some cases, 
were sucked into loans that they simply could not afford. I 
think we all share a lot of those sentiments.
    But let me warn you where we are in the housing market 
today. I used to close a lot of real estate loans. I used to 
represent some real estate developers, builders, homeowners, 
buyers, purchasers. Liquidity has dried up. It is making it 
very difficult to sell a home, unless you happen to be 
fortunate to have huge amounts of equity in your home. When 
liquidity dries up, it means that there are fewer home 
purchasers available, because there are fewer dollars available 
to make loans.
    The market has over-corrected. What used to be too loose 
with capital now is too tight in many places. And you are going 
to see the market, in and of itself, require higher down 
payments, tougher credit checks, more restrictions on the 
people that they tend to loan to, and higher interest rates--
certainly a lot fewer teaser rates.
    If you add, at a time of tough, tight liquidity in the 
housing market, another risk to the lender--that is that a 
bankruptcy judge is going to come in and to take away some of 
their secured equity, which is what some of these proposals 
do--you are going to affect not just the homeowners that are 
worried about foreclosure today. You are going to affect every 
homeowner out there that would like to one day sell their home, 
or a second home, or an investment property. And you are going 
to affect every potential buyer out there by making it more 
difficult for them to get credit.
    The market is correcting itself. In fact, it is probably 
over-corrected. And when you add a huge risk to a lender on top 
of the burdens that the lending community is already suffering, 
you potentially will elongate the period of time before the 
housing market becomes stable again. You may throw states like 
Florida, and perhaps the country, into a recession. And you may 
infect other parts of the American market with a depression.
    So let us be careful that the horses slow down. The free 
money ride in the mortgage loan market has stopped. And it is 
over-corrected. The horse is barely walking or moving now. If 
you are going to shoot it, just be aware of what you are doing 
is the only advice I have to my colleagues.
    And with that, I will yield back the balance of my time.
    Ms. Sanchez. Thank the gentleman.
    In the interest of time, I am going to say that, without 
objection, other Members' opening statements will be included 
in the record. Without objection, the Chair will be authorized 
to declare a recess of the hearing at any point.
    [The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law

    I don't think there is any doubt that we are in the middle of a 
major economic crisis that will undoubtedly worsen over the next year 
or longer. This mortgage mess, as the title of today's hearing aptly 
notes, is jeopardizing the financial stability of American families 
across our Nation.
    Just last week the Administration, which initially tried to 
downplay this crisis, finally acknowledged that 500,000 homeowners--
one-quarter of the two million Americans who have subprime mortgages 
scheduled to reset to higher interest rates over the next 18 months--
were likely to lose their houses.
    Sadly, there's another statistic we must acknowledge. According to 
the Congressional Research Service, subprime loans are 
disproportionately used by the elderly and members of minority groups. 
And, even more disturbing, there is evidence that ``minorities who 
could qualify for cheaper prime loans are sometimes borrowing in the 
more expensive subprime market.'' If there is any doubt about that, you 
are more than welcome to visit Wayne County, Michigan, which earlier 
this year had the highest rate of home foreclosures among all other 
major metropolitan areas in the United States. In fact, the state of 
Michigan ranked fourth highest in the Nation in the number of 
foreclosure filings last month.
    Today's hearing will undoubtedly shed some light on such important 
issues as to how did we got into this mess and who is to blame. But, I 
really hope this hearing will yield real and immediate solutions to 
this crisis. I will suggest at least three.
    First, a homeowner in financial distress should be able to use 
bankruptcy to reorganize all of his or her debts. There is absolutely 
no reason to retain the current prohibition that prevents Chapter 13 
debtors from modifying their home mortgages as part of a repayment 
plan.
    Second, we should establish a homestead exemption floor for debtors 
over 55. Without this protection, many elderly debtors cannot use 
bankruptcy to save their homes if the equity in their homes--often 
representing their entire life savings--exceeds the low homestead 
exemptions allowed in some states.
    Third, we should eliminate the various pitfalls and onerous 
requirements created as a result of the 2005 Amendments to the 
Bankruptcy Code. As we have heard at hearings held earlier this year, 
many of these new requirements simply serve as ``gotchas'' to catch the 
unwary and ill-advised consumer debtor.
    Home ownership is one of the most important goals that all 
Americans should be able to aspire to in this Nation. That goal, 
however, is under siege right now and we need to act immediately.

    Ms. Sanchez. I now would like to recognize the gentle lady 
from California, Ms. Lofgren, who wanted the honor of 
introducing our first witness.
    Ms. Lofgren. Thank you, Madame Chairwoman. It is indeed an 
honor to introduce our first witness, the Honorable Marilyn 
Morgan. Judge Morgan was appointed on June 16, 1988, to the 
United States Bankruptcy Court in the Northern District of 
California. She is a frequent participant in programs sponsored 
by the Bankruptcy and Commercial Law Section of the Santa Clara 
County Bar Association, the Bay Area Bankruptcy Forum, the 
California Bankruptcy Forum and the National Association of 
Bankruptcy Trustees.
    Judge Morgan is a member of the National Conference of 
Bankruptcy Judges. And on a personal note, I have known Judge 
Morgan since the mid-1970's, before either one of us held a 
public office. We volunteered together on many county bar 
association committees. And she was known at that time as one 
of the most skilled lawyers in our bar association--known as 
really a scholar, someone with integrity and a hard worker. And 
that reputation has carried forward to the bench.
    She is respected nationwide for her expertise in 
bankruptcy. And it is just a delight to see Marilyn Morgan here 
today. And I thank the gentle lady for allowing me to introduce 
my friend.
    Ms. Sanchez. Thank you.
    And welcome Judge Morgan.
    Our second witness is former Congressman Steve Bartlett. 
Mr. Bartlett is the president of Financial Services Roundtable. 
He served as a Member of Congress for the Third District of 
Texas from 1983 to 1991, and as mayor of Dallas, Texas from 
1991 to 1995. I will admit that this is the second time that 
Congressman Bartlett has testified before this Subcommittee 
during this congressional session. So we welcome you back. The 
first was during the bankruptcy oversight hearing. It is good 
to have you again with us. And we appreciate your time in 
coming.
    Our third witness is Mr. Eric Stein. Mr. Stein is president 
of the Center for Community Self-Help, a non-profit community 
development lender. And he serves as chief operating officer 
for Self-Help and its affiliates. He was formerly the executive 
director of CASA, a non-profit organization that develops 
housing for primarily homeless persons with disabilities. Prior 
to CASA, Mr. Stein worked for Congressman David Price.
    Welcome.
    And our final witness is Mr. John Rao. Mr. Rao is an 
attorney with the National Consumer Law Center, Incorporated. 
He focuses on consumer credit and bankruptcy issues and has 
served as a panelist and instructor at numerous bankruptcy and 
consumer law trainings and conferences. Before coming to NCLC, 
Mr. Rao served as a managing attorney of Rhode Island Legal 
Services and headed the program's consumer unit.
    And I want to welcome you all today to the Subcommittee. 
Without objection, your written statements in their entirety 
will be placed into the record. And we are going to ask that 
you limit your oral remarks to 5 minutes.
    For those of you who have not testified before Congress 
before, there is a lighting system. It will turn green when you 
are to begin your testimony. Four minutes into your testimony, 
you will get the yellow warning light. At the end of the 5 
minutes, you will get the red light, letting you know that your 
time has expired. If you are mid-sentence, we would just ask 
you to complete your thought, so that we could move on to our 
next witness.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute rule. At this time, I would invite Judge Morgan 
to please proceed with her testimony.

   TESTIMONY OF THE HONORABLE MARILYN MORGAN, UNITED STATES 
BANKRUPTCY COURT, NORTHERN DISTRICT OF CALIFORNIA, SAN JOSE, CA

    Judge Morgan. Chairwoman, Zoe Lofgren, and Members of the 
Subcommittee, I very much appreciate the opportunity to appear 
before you today on this most important subject. And I also 
appreciate the significant thought that clearly all of you have 
put into the subject.
    My jurisdiction covers Silicon Valley. This economic engine 
and its high housing costs is very different from the other end 
of my jurisdiction, Salinas, which is the salad bowl of the 
United States. It has a large population of farm workers.
    In the nearly 30 years that I have worked with the 
Bankruptcy Code, I have seen many different industries go 
through economic downturns that have resulted in the filing of 
bankruptcies by large numbers of consumers. This is the first 
time in my memory, however, where the framework of the 
Bankruptcy Code provides no remedy for those in the most 
critical economic distress--those facing the imminent 
foreclosure of their homes.
    In preparation for my testimony, I was able to meet with 
about a dozen lawyers from Salinas and San Jose, who are on the 
front lines, grappling with the issues you are considering. I 
asked them about the willingness of home lenders to modify loan 
terms to enable their clients, the distressed homeowners, to 
save their homes from foreclosure.
    They told me that, in contrast to the talk about voluntary 
forbearance, the reality is that lenders have been unwilling to 
offer workouts to these debtors. They tell me that homeowners 
don't return phone calls. Or they keep debtors and attorneys 
hanging around for an answer, while a foreclosure sale date 
approaches. Among the attorneys that I spoke with, not one 
could report a single meaningful workout with a home lender.
    I heard many heartbreaking stories, though, when I talked 
with these attorneys. I heard about hard-working Americans with 
real emotional investments in their homes and in the American 
way of life. I heard that these people have lost hope. Worse, 
because of the strong family culture in many of these ethnic 
communities, whole families--the aunts, the uncles, the 
grandparents--are being financially tapped out in an effort to 
save a home from foreclosure. I heard about grown men crying in 
their attorneys' offices.
    Every week, I hold a court calendar where lenders seek 
authority to proceed with foreclosures. This calendar 
historically has been actively contested with lawyers and their 
clients going through the emotional experience of fighting to 
save a family home, and trying to come up with a plan to cure 
the defaults. Now, however--and this has been true for the past 
6 months--90 percent of these motions go unopposed by debtors; 
because there is no remedy available in my court. And there is 
no hope for these homeowners.
    Too many homeowners find that, even if they could cure the 
default, they can't afford the terms of the loan going forward 
because of the steep increase in the interest rate or other 
changes in the terms of the loan. Congress is in a unique 
position to alter this reality. And I believe you can do so 
with a very narrowly targeted change to the Bankruptcy Code 
that will help families avoid foreclosure.
    As others have pointed out, under the Bankruptcy Code, a 
mortgage on the debtor's residence is the only debt that the 
bankruptcy courts cannot modify. And the home is the only asset 
that can't be protected. The Bankruptcy Code already provides 
relief for those whose loans on investment properties or on 
second homes have gotten them into financial trouble. But this 
relief doesn't extend to the working and middle-class families 
who are seeking to protect their residences.
    The mortgage market today is very different than it was in 
1978, when this provision was included in the Bankruptcy Code. 
Through the 1970's and the early 1980's--and you all probably 
remember this--fixed interest rate loans, with relatively low 
loan-to-value ratios, were the rule. Today's mortgage market is 
dominated by these so-called exploding ARMs, where monthly 
payment increases and double within a year or two, even as 
interest rates and the overall economy remain constant. These 
loans have left many borrowers with payments they cannot afford 
and mortgages that exceed the value of their homes.
    One question I have to ask myself is what the impact of the 
proposed changes will be on the courts. Clearly there are a lot 
of abusive loans in my jurisdiction. And if Congress enacts 
this legislation, there will be a lot of work to be done. On 
the other hand, bankruptcy judges are trained to value 
property. And we are trained to determine appropriate interest 
rates. This is what we do.
    I don't like to think that we are unpredictable. I think 
that, if you implement this proposed legislation in a way that 
allows us--if you give us clear standards in the legislation, 
our job is easier. And the process will be more efficient. The 
results will be more predictable for both lenders and 
borrowers. I think that your legislation can be consistent with 
the types of roles that we fulfill and will help improve the 
system.
    Let me say that, speaking for myself, it bothers me to see 
a wrong without a remedy, and to work within a legal system 
that is not responding to the needs of the community. As 
judges, all we have is time. It is just a question of 
understanding our priorities. And we look to you to help 
establish those priorities.
    Ms. Sanchez. Judge Morgan----
    Judge Morgan. Thank you.
    Ms. Sanchez. Regrettably, your time has expired.
    Judge Morgan. Thank you. I am sorry.
    [The prepared statement of Judge Morgan follows:]

           Prepared Statement of the Honorable Marilyn Morgan

    Chairwoman Sanchez, Ranking Member Cannon, and Members of the 
Subcommittee, I am honored to have the opportunity to address you on 
this most important subject.
    My name is Marilyn Morgan. I have served as a bankruptcy judge 
seated in San Jose, California for the past 19 years. My jurisdiction 
covers Silicon Valley, with its economic engine and high housing costs, 
and Salinas, the salad bowl for the nation, with its large population 
of migrant farm workers.
    In the nearly thirty years that I have worked with the Bankruptcy 
Code, I have seen many different industries go through economic 
downturns that have resulted in the filing of bankruptcies by large 
numbers of consumers. This is the first time in my memory, however, 
where the framework of the Bankruptcy Code provides no remedy for those 
in the most critical economic distress--those facing the imminent 
foreclosure of their homes.
    Nationwide, the home foreclosure rate doubled in the last year. 
And, according to statistics reported by RealtyTrac (an Irvine, CA real 
estate company), California's foreclosure rate is now second only to 
Nevada's. California's foreclosure filing rate in August 2007 reached 
one in every 224 households--twice the national average. This is a 363 
percent increase from the same month a year before. In the semi-rural 
counties where I sit (San Benito, Monterey, and Santa Cruz), there are 
currently more than 1,350 homes in the process of foreclosure, and 
close to 800 that were recently sold in foreclosure. In Santa Clara 
County, where San Jose is situated, nearly 4,000 homes are currently in 
foreclosure, and nearly 1,000 recently were sold in foreclosure. This 
is only the tip of the iceberg. As others have documented, the 
foreclosure problem is likely to get worse very soon.
    A look at the bankruptcy filings for the same community shows a 
significant increase. In August 2007, there were 413 bankruptcy filings 
in the San Jose Division--the highest number of bankruptcy filings 
since the Bankruptcy Abuse Protection and Consumer Protection Act went 
into effect in October 2005. But clearly, the thousands of homeowners 
facing foreclosure are not filing for bankruptcy protection because the 
Bankruptcy Code provides no remedy.
    In preparation for my testimony before you, I met with a dozen 
lawyers from Salinas who are on the front lines grappling with the 
issues you are considering today. I asked them about the willingness of 
home lenders to modify loan terms to enable distressed homeowners to 
save their homes from foreclosure. They told me that, in contrast to 
the ``talk'' about voluntary forbearance, the reality is that lenders 
have been unwilling to offer workouts to debtors who are losing their 
homes. Home lenders either don't return phone calls at all, or they 
keep debtors and their attorneys hanging without an answer as the 
foreclosure sale date fast approaches. Among the attorneys I spoke 
with, not one could report a single meaningful workout with a home 
lender.
    I heard many heartbreaking stories when I talked with the 
attorneys. Hard-working Americans with a real emotional investment in 
their homes and the ``American way of life'' have lost hope. Because of 
the strong family culture in many ethnic communities, whole families 
are being financially tapped out in an effort to save a home from 
foreclosure. I heard of grown men crying in their attorneys' offices.
    And, while some home foreclosures are due to purchases with 100 
percent+ financing, many others are losing homes they have owned for 
years. Some of these debtors refinanced their homes in order to pay off 
credit cards or make home repairs. The fine-print and confusing 
mortgage loan provisions are beyond the comprehension of many 
borrowers. The attorneys I met with described many instances in which 
loan brokers had ``explained away'' homeowners' questions about how the 
payments on a new loan would work with reassuring but misleading 
statements that any payment or interest rate increases noted on the 
paperwork would be avoided in the future.
    Every week, I hold a court calendar where lenders seek authority to 
proceed with foreclosures. This calendar historically has been actively 
contested, with lawyers and their clients going through the emotional 
experience of fighting to save the family home and come up with a plan 
to cure a default. Now, however, ninety percent of the motions to 
foreclose go unopposed by the debtors, because there is no remedy 
available in my court and no hope for the homeowners. Too many 
homeowners find that even if they could cure the default, they can't 
afford the terms of the loan going forward because of the steep 
increase in the interest rate or other changes in the terms of the 
loan.
    One such case involved an elderly couple who were persuaded to 
refinance the residence they had owned for many years in order to 
replace all their windows--a not uncommon situation affecting older 
homeowners who have been subjected to aggressive marketing pitches. The 
thousands of dollars for windows and high origination fees 
significantly increased their mortgage. To the homeowners, it looked 
like a very good deal because their monthly payments even went down a 
little bit. What they didn't understand was that the decreased payments 
were based on negative amortization, resulting in the mortgage actually 
increasing rather than being paid down over time. In order to just keep 
even with the interest, the monthly payment was almost twice the 
negatively amortized payment--and well beyond their financial 
capability. With falling home values, they cannot refinance their home. 
Because of the current bar in Chapter 13 to the restructuring of home 
mortgages, this couple has no remedy to prevent the loss of their home.
    Congress is in the position to alter this reality. You can do so 
with a narrowly targeted change to the Bankruptcy Code that will help 
families avoid foreclosure.
    As others have previously pointed out to this Subcommittee, under 
the Bankruptcy Code a mortgage on the debtor's residence is the only 
debt that the bankruptcy courts cannot modify, and the home is the only 
asset that cannot be protected in this way. The Bankruptcy Code does 
provide relief for those whose loans on investment properties or second 
homes have gotten them into financial trouble, but this relief does not 
extend to the working and middle-class families who are seeking to 
protect their residences.
    The mortgage market today is very different than it was in 1978, 
when this provision was inserted in the Bankruptcy Code. Throughout the 
1970s and early 1980s, fixed interest rate loans with relatively low 
loan-to-value ratios were the rule. Sub-prime lending has increased 
significantly in recent years, and today's mortgage market is dominated 
by so-called ``exploding'' ARMs, where monthly payment increases can 
double within a year or two, even as interest rates in the overall 
economy remain constant. These loans have left many borrowers with 
payments they cannot afford and mortgages that exceed the value of 
their homes.
    Without being able to restructure these debts, borrowers cannot 
save their homes and get back on their feet financially. If Congress 
addresses this serious problem by enacting legislation to permit 
Chapter 13 debtors to modify mortgages on their primary residence, many 
thousands of homeowners throughout the nation may be able to avoid the 
loss of their homes. It is my experience that a home is the largest and 
most important asset a family has, and the mortgage loan is the 
family's largest single debt. The exclusion of the principal residence 
from modification prevents bankruptcy protection from reaching where it 
is needed most.
    One question I have to ask myself is what the impact of the 
proposed changes will be on the courts. Clearly, there are a lot of 
abusive loans in my community and if Congress enacts this legislation, 
there will be a lot of work to be done. On the other hand, bankruptcy 
judges are trained to value property and to determine appropriate 
interest rates. This is what we do. Implementing the proposed 
legislation will be consistent with the scope of our current duties. 
And, if clear standards are provided in the legislation, our job will 
be easier, the process more efficient, and the results more predictable 
for both lenders and borrowers.
    Speaking for myself, it bothers me to see a wrong without a remedy 
and to work within a legal system that is not responding to the needs 
of the community. As judges, all we have is time. It's just a question 
of understanding our priorities, and we look to you to establish those.
    In closing, let me say that I appreciate the opportunity to testify 
before you today. I am happy to answer any questions you may have.

    Ms. Sanchez. It goes very quickly. Thank you for your 
testimony.
    At this time, I would like to invite Mr. Bartlett to 
present his testimony.

          TESTIMONY OF THE HONORABLE STEVE BARTLETT, 
       THE FINANCIAL SERVICES ROUNDTABLE, WASHINGTON, DC

    Mr. Bartlett. Madame Chair, and Ranking Member Cannon, and 
Members of the Subcommittee, my name is Steve Bartlett. I am 
president of Financial Services Roundtable, which represents 
about 100 companies that have 65 percent of the residential 
mortgages that are made in this country.
    The topic of the hearing today, it seems to me, is not 
about mere technical points of bankruptcy law. In reality, I 
think that this hearing is about whether Congress would 
consider converting secured debt into unsecured debt through 
well-intentioned changes, but I think disruptive changes, in 
the bankruptcy process.
    Such an action would not only not help homeowners, but 
would in fact make things much worse for today's homeowners 
and, more importantly, for millions of future borrowers, who 
could be frozen out of the opportunity to buy homes themselves. 
Those with less than perfect credit would be priced out of home 
ownership. And even those with perfect credit would pay higher 
rates.
    Let me hasten to say that I do appreciate the good 
intentions of the Chair and Members of the Subcommittee. I 
realize that this is a difficult time we are experiencing. And 
there is a tendency to want to do something. But unfortunately, 
opening the bankruptcy law to convert secured debt to unsecured 
debt would do more harm than good.
    Now, the good news is that there is some good news on the 
home mortgage front, although admittedly it doesn't always feel 
like it. Beginning in early summer of 2007, our lenders began 
concentrated efforts to call, to reach out, to call every 
single borrower in the subprime mortgage prior to a reset, and 
to help borrowers and to modify those loans on an unprecedented 
scale. Now, this is the end of September. And that began to be 
happening in an aggressive way in June.
    Also, chapter 13 is working to save homes. It has been 
estimated that chapter 13 is successful in stopping 
foreclosures in some 97 percent of the cases. And that is with 
the current law.
    So my testimony today will focus on five items. First, I 
wanted to share with you affirmative steps that lenders are 
taking at this time to contact borrowers and modify home 
mortgages. Second, I will describe an industry initiative 
called HOPE. I actually brought the chart that has provided the 
opportunity for free counseling to over 120,000 homeowners so 
far--about half of those with significant outcomes being able 
to keep their homes.
    Third, I will discuss developments in the securitization 
industry that also brings some good news. Again, recent 
developments--and I have entered some of those into the 
record--to provide some needed flexibility to modify the home 
mortgages. Fourth, some evidence that indicates that chapter 13 
is in its current form is a very successful law. And last, I 
will address some of the specific bankruptcy proposals in the 
recently introduced legislation.
    Madame Chair, let me state that I have 5 minutes to do all 
that. So most of that will be in my written testimony, which is 
submitted for the record.
    Ms. Sanchez. Certainly.
    Mr. Bartlett. Let me start with Roundtable member 
companies. I will tell you today that every single company that 
I represent--there are some 65 percent of the market--are 
actively working to contact their borrowers, particularly with 
those facing adjustable rate mortgages, resets.
    We are calling every single subprime borrower, every single 
one, writing them letters. Some of our companies are actually 
going to their--door to door, if they can't reach them, to try 
to reach those borrowers before the reset. Some of our 
companies are starting 6 months before the reset. And they all 
start 60 days before the reset.
    And they are offering forbearance. They are offering loan 
modification. And they are offering to work with the borrower 
in some way to try to modify to meet the current income. It 
doesn't always work, because foreclosures and inability to make 
your payment is due to a lot of factors. But it is working in 
about half of the cases of the people that we can reach. One of 
my messages today is to everyone that you talk with, please 
invite them to contact their lender or contact our independent 
counselors; because the worse solution is a foreclosure. And it 
can be prevented in virtually every single case.
    I do take note of Judge Morgan's testimony, meeting with a 
group of attorneys. And let me state that some of that is 
perhaps dated information. Some of it is because of the nature 
of people that have then stopped talking with their lenders or 
never did. And they reached their attorneys. But I do offer, to 
any of those attorneys or others, to call me directly, to call 
our organization, to call this number. And we will work with 
them.
    For those borrowers who are unable to make their mortgage 
payments, and where refinancing is not an option, lenders have 
adopted loss mitigation efforts to help them avoid foreclosure 
in every single case, to include forbearance agreements, loan 
modifications, enhanced counseling programs, reduced payment 
amounts, lowering interest rates, and extending the terms of 
the loans to subprime borrowers.
    Madame Chair, I will submit the balance of my testimony for 
the record and be prepared for questions on any of the 
testimony. Thank you.
    [The prepared statement of Mr. Bartlett follows:]

           Prepared Statement of the Honorable Steve Bartlett

    Good morning Madam Chair, Congressman Cannon and Members of the 
Subcommittee. I am Steve Bartlett, President and CEO of The Financial 
Services Roundtable. I appreciate the opportunity to testify before the 
Subcommittee today.
    The topic of this hearing is not about mere technical points of 
bankruptcy law. In reality, this hearing is about whether Congress will 
consider converting secured debt into unsecured debt through changes in 
the bankruptcy process. Such an action would not only NOT help 
homeowners, but would in fact make things much worse both for today's 
homeowners, but, more importantly, for future borrowers. Those with 
less than perfect credit would be priced out of homeownership, and even 
those with perfect credit would pay higher rates.
    Let me hasten to say I do appreciate the good intentions of the 
Chair and members of the Subcommittee. I realize that with the 
difficult time we are experiencing, there is a tendency to want to do 
something. Unfortunately, opening the bankruptcy law to convert secured 
debt to unsecured does a lot more harm than good.
    The good news is there is good news on the home mortgage front. 
Companies are reaching out to help borrowers in trouble on an 
unprecedented scale. And Chapter 13 is working to save homes. According 
to one prominent bankruptcy practitioner who represents homeowners, 
Chapter 13 is successful in stopping foreclosures in 97% of cases. This 
means Chapter 13 is highly successful. I am reminded of the old adage, 
``if it isn't broken, don't fix it.''
    My testimony today will focus on five items. First, I will discuss 
affirmative steps lenders are taking at this time to contact borrowers 
facing interest rate resets. Next, I will describe an industry 
initiative called HOPE that has provided the opportunity for free 
counseling to over 120,000 homeowners, often with significant 
successful outcomes. Third, I will discuss developments in the 
securitization industry that will create much-needed flexibility to 
modify mortgage loans. Fourth, I will simply cite some evidence that 
indicate Chapter 13 in its current form is a very successful program 
which should be continued. And finally, I will address some of the 
specific bankruptcy proposals in the recently-introduced legislation, 
HR 3609.
    The Roundtable, through our Housing Policy Council which represents 
over 65 percent of originated mortgages in the United States, has not 
been sitting idly by as some borrowers have begun to face difficulties. 
We have been working to develop proactive strategies to prevent 
foreclosures. We believe that no one wins from a foreclosure.
    There is not much positive in the press about subprime mortgages 
and foreclosures. Hopefully, the Fed's recent decision to cut interest 
rates may eventually lessen the credit crunch and help homeowners 
facing interest rate resets later this year. But I would like to share 
some more immediate good news.
    Because Roundtable member companies, and all responsible lenders, 
want customers to be successful, major national lenders and servicers 
are actively working to contact their borrowers, particularly those 
facing adjustable rate mortgage resets. In addition, we are helping our 
customers through a national partnership with NeighborWorks(r) America 
and the Homeownership Preservation Foundation. It is estimated that 
about 50 percent of homeowners facing foreclosure never contact their 
lender. Our members are trying to overcome that challenge through 
active efforts to reach out to their borrowers. Our members are 
aggressively adopting new programs and products to address the specific 
difficulties subprime borrowers may have, with a particular focus on 
those with adjustable rate mortgages in this challenging interest rate 
environment and the slowing housing market.
    Our members are taking action to offer options before a borrower is 
in default that are designed to ensure that borrowers are in the best 
possible position to anticipate and manage the challenges they may face 
with upcoming payment adjustments.
    These actions include proactively contacting borrowers through a 
variety of channels--direct mail, email, interactive websites, inbound 
and outbound calling up to six months in advance of rate adjustments--
to let them know of affordable refinance opportunities or of mutually 
agreeable payment plans that will keep borrowers in their homes.
    For those borrowers who are unable to make their mortgage payments 
and where refinancing is not an option, lenders have adopted loss 
mitigation efforts to help them avoid foreclosure. These efforts 
include forbearance agreements of varying lengths (up to 12 months in 
some cases), loan modifications, enhanced counseling programs and 
increased staffing to assist customers. With regard to loan 
modifications, lenders are reducing payment amounts, lowering interest 
rates and/or extending the terms of the loans held by subprime 
borrowers.
    For those borrowers who are reluctant to contact their lender or 
are just not aware of the options open to them, industry participants, 
led by the member companies of the Roundtable's Housing Policy Council, 
have formed a national foreclosure prevention partnership with 
NeighborWorks(r) America and the Homeownership Preservation Foundation, 
to reach out to these homeowners in trouble and offering them help.
    This national partnership is based on the successful Chicago 
Homeownership Preservation Initiative (HOPI), an innovative partnership 
between the City of Chicago, the Federal Reserve Bank of Chicago, the 
Neighborhood Housing Services of Chicago, the Homeownership 
Preservation Foundation and several lenders who worked together to 
tackle the city's foreclosures. By all measurements, this program has 
been a success. In the year of the program, over homeowners 4,000 in 
the Chicago test market received counseling, over 1,300 families 
avoided foreclosure, and the program resulted in $267 million in 
collective savings for the City of Chicago, its homeowners and HOPI 
lender partners. We have expanded these successes on a national scale.
    Building on the successful Chicago HOPI program, the Housing Policy 
Council and fifteen of its member companies have partnered with Fannie 
Mae, Freddie Mac, the Mortgage Bankers Association, other lenders, and 
respected national non-profits, NeighborWorks America and the 
Homeownership Preservation Foundation, in a national foreclosure 
prevention campaign.\1\ All participants are united in the goal of 
helping homeowners avoid foreclosure whenever possible. Through this 
new and innovative program, our member companies are taking exceptional 
measures to help any homeowner who is experiencing a financial crisis 
and potential foreclosure.
---------------------------------------------------------------------------
    \1\ As of September 2007, the national partners of this program 
are: American General Financial Services, a member of AIG, Inc.; Bank 
of America; Barrett Burke LLP; Citigroup; Countrywide Home Loans; EMC 
Mortgage; Fannie Mae; Freddie Mac; GE Money; GMAC ResCap; Housing 
Policy Council; HSBC--North America; JPMorgan Chase; LaSalle Bank; 
Mortgage Bankers Association; National City Mortgage Co.; Ocwen Loan 
Servicing, LLC; Option One Mortgage; State Farm Insurance; SunTrust 
Banks, Inc.; Washington Mutual; and Wells Fargo Home Mortgage.
---------------------------------------------------------------------------
    Free phone counseling is available, which can be reached by dialing 
the Homeownership Preservation Foundation's hotline, 888-995-HOPE. 
Every counselor is an independent specialist in foreclosure prevention, 
certified by the Department of Housing and Urban Development. When it 
is appropriate, the counselor acts as an intermediary on behalf of the 
homeowner, contacting their lender and discussing options available. 
Free in-person counseling is also available through local 
NeighborWorks affiliates. The hotline is now available in all 50 
states and Puerto Rico and bilingual services are available. In June 
2007, the Ad Council introduced a new campaign promoting the 
Homeowners' Hope hotline in television, radio and print advertisements. 
The tag line of the campaign is a message I cannot emphasize enough: if 
you are in financial difficulty, call the hotline for help because 
``nothing is worse than doing nothing.''
    In 2006, over 48,000 homeowners called the HOPE Hotline while in 
2007, counselors have already fielded over 80,000 calls from at-risk 
homeowners, with almost 40,000 of those completing counseling. The 
average daily call volume in August was 1600. Nearly half of those 
counseled have avoided foreclosure either through a loan modification 
or pre-foreclosure home sale. That is, over 120,000 Americans have had 
the opportunity for free counseling and about 60,000 borrowers have 
been able to stop a foreclosure. The Homeownership Preservation 
Foundation is seeing some significant trends in callers from July and 
August that I would like to share with you:

          More callers are reaching out earlier. 23% are less 
        than 30 days late at the time of contact (up from 14% in Q1 and 
        21% in Q2). The earlier the borrower reaches out, the more 
        options available. This is a positive trend potentially 
        attributable to the national Ad Council campaign.

          More homeowners with ARM products are calling. Those 
        with an ARM product is up to 44%, (up from 34% in Q1 and 40% in 
        Q2). Of all the homeowners counseled in July and August, 31% 
        had ARMs at 8% or higher interest rate (up from 24% in Q1 and 
        30% in Q2). 34% of those counseled have fixed rate products.

          California is the state with the highest call volume, 
        accounting for 15% of calls. In August, 8600 Californian 
        homeowners called the hotline. Other states with high call 
        volume include Ohio (11% of calls), Georgia (9.5% of calls), 
        Florida (7.3% of calls), and New York (5.9% of calls).

    Now I want to share with you some good news in the securitization 
area. One of the most exciting developments in the field of mortgage 
lending has been the growth of mortgage-backed securities. Mortgages 
are now routinely pooled and sold to buyers who rely on the income 
stream from borrowers. This has provided for the regeneration of 
capital to permit lenders to make additional mortgage loans to even 
more aspiring homeowners. Because of the secondary markets, the capital 
markets have been making a much larger pool of capital for home 
mortgages. But if enacted, HR 3609 could have a de-stabilizing effect 
on the mortgage markets, which are now begging to stabilize.
    But there was a problem. Market actors in the securitization 
process were not as well-equipped as we should have been to handle a 
downturn. Earlier this year, the Roundtable worked with the holders of 
mortgage-backed securities to allow for loan modifications for 
distressed customers in a way that is best for everyone. By June, 2007, 
the American Securitization Forum created guidance to encourage 
companies that service mortgages which have been sold into the 
secondary market to modify loans to prevent foreclosure. Now servicers 
can speak for investors and permit loan modification. Under this 
guidance, servicers are permitted to reduce principal in some cases. I 
would ask consent that a June, 2007 Statement of Principles related to 
loan modifications be entered into the record. The lesson here is that 
mortgage servicers and the holders of mortgage-backed securities see 
the problems facing some American homeowners and have responded by 
offering flexibility and demonstrating a willingness to work with 
borrowers. As this Statement of Principles becomes more widely adopted 
in the marketplace, we should expect more and more homeowners with 
subprime mortgages to get needed relief.
    I hope all that I have described dispels the misperception that 
lenders actually want to foreclose. The exact opposite is true; 
responsible lenders wish to avoid foreclosure. Foreclosure is a losing 
proposition for all parties: the borrower, the neighborhood, and the 
lender. Lenders lose money in a foreclosure and they also lose a 
customer; responsible lenders want customers for life who can benefit 
from other services and products they offer.
    Chapter 13 as it currently stands is an effective government 
program. One prominent Chicago bankruptcy lawyer argues on his website 
that Chapter 13 is effective at staving off foreclosure for 97% of all 
cases. And since the 2005 reform law, the percentage of Chapter 13 
cases has jumped to around 35-40% of all consumer cases. Another 
prominent bankruptcy attorney described Chapter 13 as a ``lifeline'' 
and is ``the best way to save a home.'' And a February, 2007 study 
financially supported by the Federal Reserve Bank of Philadelphia notes 
that 80% of Chapter 13 filers have a plan confirmed by a judge, even 
though some portion of these debtors will not complete the plan for one 
reason or another.
    Finally, I want to address proposals to change bankruptcy law as it 
relates to mortgages. Radical, risky reforms to bankruptcy will have 
the devastating effect of increasing risk for lenders to an 
unacceptably high level. HR 3609 contains a provision that could have 
this detrimental impact. Section 3 of the bill would authorize 
bankruptcy judges to unilaterally reduce the loan amount of any 
mortgage and convert part of the mortgage to an unsecured status. It is 
important to note that this applies to all mortgages, even prime, 
fixed-rate loans that are fully current. This will force mortgage 
lenders to charge much higher interest rates for all types of mortgage 
loans. This will dry up credit for many Americans who may not be able 
to afford these higher rates.
    If courts can simply reduce the value of collateral, a mortgage 
loan can effectively become unsecured and lenders will offer interest 
rates that more closely resemble the much higher interest rates for 
unsecured loans. Such greatly increased costs will fall hardest on 
lower income borrowers seeking to purchase a home. And these increased 
costs will make it hard for young families to afford a first home.
    Allowing for wholesale, involuntary revisions to mortgage loans by 
bankruptcy judges will likely also harm the secondary market for 
mortgage loans. As I mentioned earlier, the industry is working hard to 
create flexibility for borrowers. As we all know, the secondary market 
is a crucial source of liquidity, permitting mortgage lenders access to 
funds to make new loans to more Americans pursuing the dream of 
homeownership. Bankruptcy law revisions must not have the effect, even 
if unintended, of reducing liquidity that flows from the secondary 
market.
    Similarly, it would be highly unwise for Congress to give 
bankruptcy judges unlimited discretion to effectively re-amortize 
loans. Section 4 of HR 3609 could do just that by stretching payments 
to mortgage lenders over an even longer period of time. As with 
converting secured debt to unsecured debt, this proposal would increase 
risks, chill the secondary market and result in fewer mortgages and 
higher interest rates. Again, low and middle income Americans would be 
the big losers in this scenario.
    In the short term, there is a real possibility that the voluntary 
work-out programs currently being used and expanded could be disrupted 
if Chapter 13 were modified to give bankruptcy judges unlimited 
discretion to modify loans. After all, if a borrower--any borrower, 
even a solvent borrower who is current on a prime and fixed-rate loan--
can simply file for bankruptcy and a judge could re-write almost all 
aspects of the loan--as HR 3609 proposes to do--there is a greatly 
reduced incentive to work things out with a lender.
    Finally, I am truly mystified by the idea that Congress would 
exempt homeowners from counseling as a pre-condition for filing 
bankruptcy. As our HOPE projects shows, counseling can help save homes. 
It us therefore counterintuitive to remove the counseling requirement 
for homeowners as Section 5 of HR 3609 would do. I urge the 
Subcommittee not to deprive homeowners of the financial training and 
education that comes with high quality counseling.
    Madam Chair, Chapter 13 has worked well at saving homes while 
preserving access to mortgage credit and paying unsecured lenders after 
satisfying secured debt. I recognize that you have the best of 
intentions. But converting secured debt into unsecured debt will make 
things worse. With due respect, HR 3609 is a step toward higher 
interest rates and higher fees and lower rates of homeownership. We 
stand ready to discuss how Congress might help in the face of the 
credit crunch, but we are compelled to oppose changes in bankruptcy law 
that undermine the very foundation of low-cost secured lending. As I 
have stated earlier, mortgage lenders and servicers are working hard to 
help borrowers. We have a hotline with free counseling that is working. 
The financial services industry is looking to avoid foreclosures and 
create positive outcomes for both borrowers and lenders. Thank you for 
inviting me to testify. I look forward to your questions.

                               ATTACHMENT





    Ms. Sanchez. I appreciate your testimony, Mr. Bartlett. And 
thank you very much for staying within the 5-minute rule.
    At this time, I would invite Mr. Stein to present his 
testimony.

    TESTIMONY OF ERIC STEIN, ESQUIRE, PRESIDENT, CENTER FOR 
 COMMUNITY SELF-HELP, DURHAM, NC, ON BEHALF OF THE CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Stein. Madame Chairwoman Sanchez, Ranking Member 
Cannon, Members of the Subcommittee, thank you for inviting me 
and holding this hearing.
    My day job is as a lender. I am chief operating officer of 
Self-Help, which has done $5 billion worth of financing to 
55,000 families across the country--primarily home ownership. 
Our losses have been less than 1 percent. I am also affiliated 
with Center for Responsible Lending, which is an affiliate of 
Self-Help, which is a non-profit research and policy 
organization.
    Clearly, subprime foreclosures have triggered a national 
crisis. We believe it is primarily through reckless lending 
that 2.2 million families, without a healthy intervention, lose 
their home to foreclosure. The decreases in property values are 
the greatest since the Great Depression.
    One hundred lenders have gone out of business. Entire 
neighborhoods have lost value. These 2.2 million who are going 
to lose their home, that affects everybody around them. And 
their wealth will be reduced by $265 billion. So it is not just 
the people affected by losing their home. It is all their 
neighbors as well.
    As a lender, our strong experience has been that people 
will do practically anything to save their home. And that is 
why our loan loss rates are so low, if the loan is a reasonable 
one. However, in today's environment, there are simply few 
options for borrowers.
    Four million borrowers are in subprime exploding ARMs--as 
Judge Morgan was talking about--that are scheduled to reset. 
And what are they going to do? They are not going to be able to 
afford the payments, which are going to jump up by 40 percent. 
Interest rates are going to go from 8 percent to 12 percent. No 
one can afford that.
    So what are their options? They were sold these loans, 
because the lenders said oh, don't worry about the interest 
rate, we will refinance you. But that option is rapidly 
disappearing. As property values fall, prepayment penalties 
keep them from doing it. And lenders go away.
    The second option would be to sell the house, which is 
frequently an option. But oftentimes it doesn't provide enough 
money to pay back the loan. So you are left with two choices, 
and only two. One is loan modification, that Congressman 
Bartlett was talking about; and the second is foreclosure.
    Bankruptcy, one would think, would be the option of last 
resort for people, but it really is practically useless for 
these situations. While it is true that it stops foreclosure, 
that is only for a month or so, because the judge can't modify 
the home debt. And that is the thing that is causing the 
financial problem. The lender can come in and object. And 
within a month, generally speaking, the foreclosure will 
proceed. So it stops it, but not for long.
    And the data shows that servicers, in fact, are not 
modifying loans in substantial numbers. Moody's had a report 
that was just issued last week where they surveyed servicers 
representing 80 percent of the market and found that most of 
those services, only 1 percent of the loans were modified that 
reset in January, April and July of this past year--only 1 
percent.
    So if modifications aren't happening, and there are a lot 
of reasons why that doesn't happen, that leaves foreclosure. 
And that is why First American CoreLogic said that up to half 
of the 450,000 families scheduled to have resets in the next 3 
months will lose their home to foreclosure.
    There is only one solution. And that is this tweak to the 
Bankruptcy Code. That is the only solution. As a lender, it is 
not like the first thing that came to mind was oh, let us go 
change the Bankruptcy Code. But we went through all the 
alternatives through a process of elimination. There is nothing 
else. This is it.
    I think it is important to mention that we are not going 
back to the 2005 act. This goes back to 1978. 2005 was trying 
to move people into payment plans in chapter 13. And all we are 
saying is let us make those payment plans have some effect, 
because right now they are not effective. Investors and 
speculators can use this provision to have their--can have 
their loans modified in bankruptcy. Let us let middle-class 
homeowners have that same right.
    Bankruptcy law is like a life preserver. We are reserving 
it for the strongest swimmers, while hundreds of thousands of 
families drown. We believe that 600,000 families will have 
their homes saved if this provision is implemented. It won't 
happen all at once.
    And the beauty of it is that most of them won't even have 
to file bankruptcy, because one reason that lenders aren't 
modifying is they are scared of being sued by different classes 
of investors who are affected differentially. And if bankruptcy 
is a fallback, then that is a good defense against the lawsuit. 
That will save $72.5 billion for neighbors. It is a win-win for 
lenders.
    What I would say--and borrowers and the economy, is that 
this is already unsecured debt we are talking about. It is 
unsecured now, because it is over the value of the house. If 
the lender were to foreclosure, they would not get the full 
value of the loan. They would only get--in fact, they get less 
than what we are talking about. We are talking about the fair 
market value. We should look at whether liquidation value is 
the more appropriate standard.
    But they are going to get less in foreclosure. Neighbors 
aren't going to see their houses decline. Taxpayers won't have 
to pay a dime. Neighbors will be helped, and the economy will 
be helped. It is a much greater risk to the economy with all 
these foreclosures than this little change that would affect 
only about 1 percent of mortgages outstanding.
    For 15 years until 1993, in four circuits, this strip-down 
provision was adopted. And there was no problem with the 
housing market at that time. All other assets classes can be 
modified now from 1978 until today. And the markets work fine. 
And I think it will in this case too.
    Thank you.
    [The prepared statement of Mr. Stein follows:]

                    Prepared Statement of Eric Stein





















































    Ms. Sanchez. Thank you very much, Mr. Stein. I appreciate 
your testimony. And at this time, I would invite Mr. Rao to 
begin his testimony.

 TESTIMONY OF JOHN RAO, ESQUIRE, NATIONAL CONSUMER LAW CENTER, 
  INC., BOSTON, MA, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                 CONSUMER BANKRUPTCY ATTORNEYS

    Mr. Rao. Madame Chair, Ranking Member Cannon and Members of 
the Subcommittee, thank you for inviting me to testify today 
regarding solutions to the foreclosure crisis. I testify here 
today on behalf of the low-income clients of the National 
Consumer Law Center, as well as on behalf of the National 
Association of Consumer Bankruptcy Attorneys.
    A fundamental goal of chapter 13 bankruptcy has always been 
to provide an opportunity for consumers to repay their 
obligations. Unfortunately, this has become exceedingly 
difficult in recent years, for homeowners, because our 
bankruptcy laws have not kept pace with the enormous change in 
the mortgage marketplace that has occurred since those laws 
were first enacted over 30 years ago. New nontraditional loan 
products have challenged the ability of hard-working families 
who have fallen on difficult times to use chapter 13 to save 
their homes.
    The most effective tool for saving homes from foreclosure, 
which Congress provided for consumers when chapter 13 was 
enacted, is the right to cure defaults. It has long played an 
important role, because consumers often need more than the 6 to 
8 months repayment plans that many lenders have been willing to 
offer to get current on a default. I personally have helped 
many borrowers save their homes using the chapter 13 right to 
cure and have witnessed the incredible joy, pride and release 
these individuals experience when they are able to turn things 
around and to preserve their home ownership dream.
    Widely discussed and well-documented changes in the 
mortgage marketplace over the past 20 years have eroded the 
viability of the chapter 13 safety net for homeowners in 
foreclosure. There has been great growing concern, from those 
on the front lines, including housing counselors, legal 
services office, bankruptcy attorneys and other attorneys, who 
assist homeowners in foreclosure, that options for curing a 
mortgage default, whether under chapter 13 or under voluntary 
repayment plans, have become increasingly inadequate for 
helping homeowners with high-cost loans, especially with those 
loans that did not give proper consideration to the homeowners' 
ability to pay.
    Sadly, the problems have really become more acute in recent 
years, because of the widespread use in the subprime market of 
nontraditional loan products, such as hybrid ARMs. In my 
written testimony, I provide examples of the affects of rate 
adjustments under these loans. Even under the more conservative 
examples I use, it is evident that such rates and changing 
payment amounts can cause serious affordability problems for 
many homeowners who live paycheck to paycheck and do not have 
the flexibility to make adjustments to their household 
expenses.
    For a consumer who is in chapter 13, there is even less 
flexibility, because the consumer's disposable income based on 
his or her expenses is fixed at the time the plan is confirmed 
and must be paid to the trustee to satisfy the creditors' 
claims. In effect, every dollar the family earns is accounted 
for. And whatever small cushion they family may have in their 
budget will cover only minimal additional expenses. A change in 
mortgage payment over $500 during the 3 to 5 years of a plan, 
or as much as $700 if there was a teaser rate in the loan, can 
be more than the average family spends on their entire food 
budget in a given month.
    Simply put, the traditional tools of the bankruptcy system 
to help consumers in foreclosure are no longer adequate. The 
right to cure provision does not permit the homeowners to 
change the timing of installment payments or the amounts. And 
bankruptcy courts are currently powerless to prevent payment 
increases under ARMs during the 3 to 5 years of a plan.
    There is a way to make chapter 13 as viable today in 
helping consumers as it was in comparative terms to when it was 
first enacted. It does not involve a major rewrite of our 
bankruptcy laws. In fact, the solution is already in the 
Bankruptcy Code for chapter 11, 12 and 13 provisions.
    A targeted solution would involve two changes. First, 
permit mortgages on residences to be modified during a chapter 
13. There is no longer any justification for the special 
protection afforded to home mortgage lenders added in 1978. 
This special protection should be eliminated, so working 
families have the same right to modify loans as corporate 
debtors have for commercial loans, and wealthy individuals for 
investment properties and family farmers for all kinds of 
loans.
    Second, permit reamortization of the modified loan. 
Modification by itself does not fully address the problem based 
on the current structure of the Code. That is because the 
modified secured claim needs to be paid during the plan. And 
there really needs to be a way to address the long-term effect 
of the plan. Thank you, Madame Chair.
    [The prepared statement of Mr. Rao follows:]

                     Prepared Statement of John Rao















































    Ms. Sanchez. Thank you, Mr. Rao. Your time has expired.
    We will now begin our round of questioning. And I will 
begin by recognizing myself for 5 minutes.
    Judge Morgan, in your written testimony, you indicate that 
Congress should enact legislation to change chapter 13 of the 
Bankruptcy Code, so that bankruptcy courts can modify the 
mortgage on the debtor's primary residence. What standards for 
implementing this change would make your job easier, make the 
process more efficient, and give more predictable results for 
both the lenders and the borrowers?
    Judge Morgan. We need your help setting standards, so that 
we have a formula that would allow us to set interest rates, 
particularly, appropriately. I think that the legislation that 
I have seen does make suggestions that appear to me to be 
appropriate and would be very helpful in creating that kind of 
predictability, so that I can say to the people in the 
audience: It is not the judge who is stripping down the loan. 
It is Congress that has determined that this is the appropriate 
standard to use.
    So in all honesty, that would be the approach that I would 
take. And I would hope that you would give us very firm 
standards.
    Ms. Sanchez. Thank you. If bankruptcy judges are given the 
authority to order easier terms for borrowers, should borrowers 
who were subject to predatory lending be treated differently 
than those borrowers who knowingly entered into those risky 
mortgage agreements?
    Judge Morgan. Okay. One thing that you all probably need to 
be reminded of is the fact that there is a good faith standard 
for chapter 13. And so I wouldn't expect that we would see 
people filing cases that were not acting in good faith. 
Moreover, there are some very stringent rules for chapter 13 
that would be applicable to whoever is filing. And it is the 
kind of thing that people wouldn't voluntarily want to subject 
themselves to.
    Ms. Sanchez. Great. I thank you for your answers.
    Mr. Bartlett, the current provisions of chapter 13 allow 
borrowers who are wealthy enough to own two homes or 
speculators whose investments have gone bad to obtain relief 
from the mortgages on their vacation or investment homes. Yet 
the Bankruptcy Code prohibits chapter 13 debtors from modifying 
their home mortgage for their primary residence.
    Do you think it is fair that, under current law, owners of 
vacation or investment homes are entitled to special 
protections that are not available to mostly low-wealth and 
middle-class families that own only a primary residence?
    Mr. Bartlett. Good question, Madame Chair. I don't think it 
is right that security for vacation homes or second homes 
should be also exempted and then allow a judge to withdraw the 
security or alter the security in any way. Congress chose to do 
that some years ago.
    I would point out that the result of that is that vacation 
home mortgages are harder to get. They have tougher conditions. 
And the rates are higher. So that is one of the reasons that 
they cost more, and they are harder to get, is because a 
bankruptcy can put the security aside. The same would happen in 
the primary market, if we eliminated secured debt.
    Ms. Sanchez. But do you agree that it seems fundamentally 
unfair not to allow people----
    Mr. Bartlett. I think it is unfair. And I think it also is 
disruptive to the market. And if the Committee wished to 
eliminate the ability of a bankruptcy court to set aside the 
security for a primary residence, that would be a good thing to 
do.
    Ms. Sanchez. Thank you.
    Mr. Stein, it has been argued that, if a mortgage loan can 
be modified or rendered unsecure during bankruptcy, it will be 
far more difficult to originate or sell mortgages in the 
secondary market. As a result, it has often been argued that 
the cost of mortgages would have to increase to reflect this 
additional risk. How would you respond to that argument?
    Mr. Stein. I honestly don't understand how it would hurt 
the market, because what we are talking about are borrowers how 
are going to face foreclosure if they don't do bankruptcy. As 
Judge Morgan said, why would somebody subject themselves to the 
strict expenditure requirements if they could otherwise pay 
their mortgage without it?
    So lenders are going to get hurt worse, because they are 
going to get foreclosure value. And secondly, other property 
values are going to decrease with foreclosure, if people stay 
in the homes and the property be kept up. Thirdly, we have 
experience from that. So what I am saying is I don't see a 
secondary market problem. From 1978 to 1993, there was no 
problem in the 4th Circuit that allowed strip-downs at that 
time.
    And I don't see--I have never heard the pricing of vacation 
homes debt or investment property is to be affected by the 
bankruptcy change. I think it has more to do with the risk 
inherent in someone's non-primary residence. And finally, all 
other secured debts have vital markets now. And finally, we are 
only talking about 1 percent of the total loans. So I just do 
not see a secondary market impact to this.
    Ms. Sanchez. Great. I appreciate that. And last question, 
which I am going to get in under time. Opponents of Government 
intervention into the mortgage crisis have argued that 
borrowers and lenders should be penalized for entering into 
these risky mortgage agreements. How would you respond to that 
argument?
    Ms. Sanchez. Well, I think that Chairman Greenspan just 
said in Newsweek that most mortgages were sold and not bought 
recently. If I had to decide, okay, I want a loan that the 
interest rate will skyrocket in 2 years, I can't get out of it 
for 2 years, because of a prepayment penalty. These loans were 
sold and not bought. Everybody trusts somebody when they get a 
mortgage. When I got a mortgage out of law school, I trusted 
the person who was giving it to me, because I didn't understand 
it. These people just trusted the wrong people.
    And the final point I would make is that we are not just 
talking about the borrowers, we are talking about all their 
neighbors. If there are vacant boarded-up houses on your block, 
you are going to be in a lot of trouble in your house.
    Ms. Sanchez. Thank you.
    My time has expired. I will recognize our distinguished 
Ranking Member, Mr. Cannon, for his 5 minutes of questions.
    Mr. Cannon. Thank you, Madame Chair. This is really 
actually a very, very complicated issue. And I appreciate 
everybody's perspective on the panel. I just can't help but 
say, Mr. Stein, that I never trusted a mortgage lender. But I 
have been in the situation where I could afford that, even--you 
know, a house is a big enough investment that I have gone to 
that extent.
    But we have a market here with a bunch of people who have 
been sold a bill of goods. I think that is really, frankly, 
that is in many, many cases the problem. And that has happened 
because of other changes in our financial markets.
    But there are a lot of questions about this bill. But let 
me, Judge Morgan, just ask you. I think the bill that we are 
looking at, or at least the one that has been introduced by 
Senator Durbin, allows the judge to reset the mortgage for 30 
years, and then has guidance based upon interest rates. I think 
it is the published yields on mortgage loans, the most recently 
published yield, plus a premium for risk, whatever that might 
be. And then, frankly, I don't think that premium for risk is 
such a concern. You are going to have something there. And 
something is better than the standard rate.
    But that locks a lot of money up for a very long period of 
time. In a volatile market, where you go up and down, maybe 
people refinance. But if interest rates go up, then a lender is 
stuck for up to 30 more years. Is there a way to deal with this 
issue in a shorter time frame, say 1 year or 2 or 3-year 
extension, or some period, maybe it is 5 years, so that a 
person with credit problems can get back on his feet, continue 
to make payments, get credit in place and then go back to the 
credit markets to either get a new loan that he can afford for 
the long-term, or perhaps sell his house.
    And Mr. Bartlett, it seemed to me that the one thing we 
don't want are a whole raft of repossessions and forced sales 
on the market that blow value away. Is there someplace where 
the industry, the lending industry can agree on a shorter term 
context for redoing mortgages?
    Judge Morgan?
    Judge Morgan. Yes. Well, there are many ways that lenders 
structure loans. And there is a whole breadth of ways that you 
could recommend to the courts that will you look at this 
problem. On the other hand, when a lender gave the loan, it was 
generally a 30-year loan. It may have reset and moved up. But 
it was generally a 30-year loan. I think that if it was a 15-
year loan, you would want the court to do the same thing as the 
original 15-year loan.
    Mr. Cannon. I think the current bill allows for the judge 
to set 30 years from the time of filing. So even if it was a 
15-year loan, I think, the way it reads, it could become a 30-
year loan.
    Judge Morgan. Okay. Actually I have seen proposed 
legislation that offered it, both from the commencement of the 
loan and perhaps, I don't remember seeing it----
    Mr. Cannon. Let us talk about a guy who walks in. As a 
judge, what do you think would work best for the whole system, 
including the debtor that is before you? Can we do it with a 
relatively shorter term, so that he has his options for a 
period of time?
    Judge Morgan. Representative Cannon, it is not my role to 
make policy. And so I am going to defer on that to these people 
who maybe can speak to you better. It is really just my role to 
enforce the law that you give me.
    Mr. Cannon. And it is a very hard thing to do, I will grant 
you, especially under these circumstances. But as a judge, if 
you were asking for the ability to do something here, and it is 
in the context of bills that have filed, which you are not 
responsible for.
    But I am wondering, as we talked about it from a policy 
point of view, does 5 years, or is there some period of time 
that would give you the discretion to do something, so that 
people could keep their houses, where you maintain order in the 
economy. We don't foreclose on too many houses and give people 
a chance. Is that something that you think would solve the 
problem? Or do we need to give you 30 years of discretion?
    Judge Morgan. No, I don't think you need 30 years of 
discretion, necessarily. But I don't have a crystal ball. And I 
really don't feel qualified to answer the question for you.
    Mr. Cannon. I guess the real concern is going to be on the 
part of Mr. Bartlett and those who are supporting him. 
Bartlett, what do you think?
    Mr. Bartlett. Congressman, first of all, I think it is true 
generally and specifically in this case that the other body's 
proposed legislation is far worse that this body's proposed 
legislation. But I am a creature of this body from history. So 
I will say that, on the foreclosure, a foreclosure is the 
absolute worst outcome for everyone--worst for the borrower. It 
is worst for the neighborhood, worst for the city, and worst 
for the lenders.
    We do everything we can to avoid that, including paying for 
this gladly, by the way, inviting independent counselors, 
120,000 counseling sessions. We are now running at the rate of 
1,600 a day, which is huge. And we will modify the loans. We 
will work with the borrower to provide a solution. Introducing 
bankruptcy court into it would stop that process or at least 
slow down the process.
    Mr. Cannon. Before I run out of time, if you are doing 
1,600 a day--Madame Chair, may I ask a question?
    Ms. Sanchez. I will allow you to finish up your question. 
And I will allow the response.
    Mr. Cannon. That has got to be nearly everybody out there. 
That is a big portion of people that are in trouble with their 
mortgages.
    Mr. Bartlett. We invite all--there are actually more, 
unfortunately. We are advertising. We have a national ad 
council campaign, if you haven't seen it, in which the tag line 
is: There is nothing worse than doing nothing. So we are doing 
everything we can to invite, to bring, to cause borrowers to 
call us. We put them up with an independent counselor, a 
certified counselor by HUD, and provide a counseling session. 
And then we transfer them directly, with the counselor still on 
the line, to the lender.
    The difficulty has been that borrowers oftentimes don't 
want to call. And they are embarrassed. And it is difficult to 
reach them. But once we reach them, we can avoid a foreclosure 
in virtually every case.
    Ms. Sanchez. The time of the gentleman has expired.
    At this time I will recognize the gentleman from Georgia, 
Mr. Johnson, for his 5 minutes of questions.
    Mr. Johnson. Thank you.
    This would be directed to anyone on the panel. What forces 
in the finance industry have contributed to the current 
mortgage crisis?
    Mr. Stein. I think Mr. Feeney had it right that the way 
that our mortgage market is structured, that people got paid. 
And they weren't paid based on how the loan performed. That 
used to be the case. You would walk into your savings and loan. 
And the person who made the loan was responsible for the 
ultimate losses. So they cared whether you made your mortgage 
payments or not.
    But with the rise of mortgage brokers, with lenders who 
sell the loans off, with rating agencies that get paid when the 
securities are rated, with the investment banks that get paid 
when the mortgages are sliced and diced and securitized, and 
then the ultimate investor who may be in Europe or Asia or 
somewhere like that--every party along there gets paid and 
therefore succeeds, as soon as the loan is made, no matter how 
bad.
    And the only ones that bear the cost are ultimately the 
holders at the lower tranches, the investors, who are just now 
realizing what it was they invested in. I think most didn't 
realize--and then the homeowner. And so I think that we have a 
mortgage system which has been great at bringing liquidity in. 
But it has not been good about making sure that liquidity 
serves the long-term purpose of home ownership.
    And if you think about it, a loan where the interest rate 
is set to explode after 2 years makes no sense, if you are 
worried about someone staying in a home for 30 years.
    Mr. Bartlett. I concur with that, with both gentlemen. I 
think it has been a perfect storm. And it has not been very 
pretty. I do want to say--and this doesn't necessarily make us 
all feel better--but remember that the subprime market was 
developed to increase the home ownership among--in the 
affordable market; because too many people had been frozen out 
of the home ownership for too long. And when I was in Congress, 
also mayor, I saw that too much.
    So 85 percent of the subprime loans are good loans. And the 
borrowers are paying them back and can pay them back, and will 
continue to. That other 15 percent is way too high. And we have 
got a problem that we have to deal with. So the causes have 
been a combination of the marketplace and making bad loans, of 
underwriting standards that were, at best, sloppy, bad credit 
decisions on behalf of both lenders and also borrowers, 
sometimes just loss of income though. There are traditional 
reasons that people can't make their mortgages. Sometimes it is 
loss of income or medical emergency.
    The securities market today, in the nonconforming area, is 
frozen. There is no mortgage-backed securities market today. So 
that also contributes.
    We believe that, beginning in about January of this year, 
the underwriting standards that we submitted to regulators, and 
they adopted as guidance, has essentially established strong, 
good underwriting standards for good credit decisions going 
forward. So it is the old ones that we are dealing with, and we 
are dealing with them----
    Mr. Johnson. And these old underwriting standards, or lack 
thereof, have resulted in a crisis that confronts our economy 
here in this country, with people losing their homes, rendering 
secured assets unsecured at this point. I guess what would be 
the worst thing to happen?
    Would it be for this amendment to the Bankruptcy Act 
allowing the bankruptcy court to change the interest rates on 
mortgages that have already threatened the homeowner with 
foreclosure, thus potentially becoming unsecured. What would be 
worse? That kind of scenario or just a simple glut of mortgage 
company owned property that they were unable to sell in a over-
glutted market, with homes sitting on a shelf. Which would be 
worse?
    Mr. Bartlett. Fair question, Congressman. We can choose a 
better way, which is to let the lenders modify the loans that 
they are doing now, provide forbearance, work it through.
    Mr. Johnson. Well, I mean sometimes, though, those lenders 
are not as aggressive about working those situations out as 
possible, because it hurts their securities that have gone down 
the line.
    Mr. Bartlett. One of the things in my testimony is that 
beginning in July, we reached an agreement with the securities 
industry to eliminate that as a problem. But candidly, that was 
a problem up until June or July. And I put in the record, the 
principles that we got adopted. It is a complicated problem.
    My concern about this approach is that it will make the 
problem better by further freezing up the market and then 
denying credit to millions of borrowers for the next 10 years.
    Mr. Johnson. Well, now as I see it, you are forced with a 
dilemma: either have all of this inventory of unsold property 
that is unsecured and nonperforming, or to have consumers able 
to get out from under onerous and oftentimes unfair upticks in 
their interest rates that don't bear any relationship on their 
ability to pay.
    Mr. Bartlett. And we choose the second course. And we 
believe that that can be done and is being done today without 
removing our security in the bankruptcy court.
    Ms. Sanchez. The time of the gentleman from Georgia has 
expired. At this time, I would recognize the gentleman from 
Arizona, Mr. Franks, for any questions he many have.
    Mr. Franks. Well, thank you, Madame Chair.
    One of the challenges that occurs to me that has been at 
the core of this potential meltdown--I mean, it has impacted 
the country significantly. And if it spills over into 
commercial paper, I am concerned that it could have a very 
significant impact on their Nation's economy.
    And as I understand, the primary challenge has been that 
those who were people that measured the borrowers' credit, 
those who were the ones that measured the worth of the 
property, or that were the ones that estimated the property's 
worth--that there was sort of a cross-pollenization there with 
some of those who were securing the loan in the first place. 
And that the motivation was to try to qualify lenders that 
really weren't qualified, or to try to ascribe value to a 
property that was perhaps not as much as it should have been, 
and also to not have the kind of meticulous scrutiny of the 
income of the particular borrower.
    And I am of the conviction that that which gets rewarded 
gets done. And the reward here was to do all the wrong things 
for the subprime borrower. And so I am wondering if any of you 
believe that there is any advantage or any favorable 
consideration of a bill or a policy that would separate those 
entities and not allow the intrinsic--I am not sure what you 
would call it--conflict of interest. I hate to use that term. 
It is probably at the very core of where we are right now.
    I mean, I saw, in the meltdown in 1986, the tax laws 
changed. And what happened was a lot of the S&Ls were heavily 
invested in commercial properties and second properties. When 
the tax laws changed, it adversely changed the status of those 
properties, and those portfolios were devalued sometimes 40 
percent to 50 percent, which would just about break any S&L. 
And that was something Government did here. And I am wondering 
if Government hasn't failed to make sure that we have a 
separation of powers, as it were, in the lending process.
    Ms. Morgan, I will ask you to comment on that first, if you 
have been able to divine what I am saying at all here.
    Judge Morgan. I do understand. And with respect to 
regulation outside of my field, I don't know that I have a 
suggestion. It strikes me that perhaps Mr. Stein is the best 
person to respond.
    Mr. Franks. Mr. Stein, I think she has got a good idea.
    Mr. Stein. I agree with you that a large problem has been 
that the incentive's not been aligned between the person making 
the loan and the person receiving the loan. And I think that 
that is a problem. I mean, I think in the Financial Services 
Committee, they are talking about duties that originators would 
have to the borrower that currently don't exist. I mean, a 
mortgage broker has no duty to put the borrower in the best 
loan, or to give them even a good loan--none at all. And so I 
think that that should be looked at. And I think that is a 
significant cause of the current crisis.
    Mr. Rao. Congressman, can I also add that one of the--in 
addition to the questions you asked about conflict of interest, 
there is also the question of the current situation in which 
these loans are transferred to different entities, and they are 
securitized. And I think one thing, a step, that would help is 
to make sure that all of the parties that are involved in the 
transaction, at all ends, are responsible for the bad acts of 
the originating lender.
    Mr. Franks. I am glad you were able to put it better than I 
was. But I think in the bottom line, that is what happened. 
Those that were securing these loans or procuring them, as it 
were, were not doing it for themselves. They were the middle 
person that really didn't care what happened to either the 
borrower or the lender. And when you have a large resale of 
these loans that are packaged and then sold off to institutions 
and ultimately backed up, perhaps by large measure commercial 
paper down the road, think that that is the challenge.
    So I guess my last question here is this. Do you think we 
have seen the end of this? I mean, with Government having to 
essentially subsidize and back up this process to try to let 
the industry stabilize itself or--I should say not just the 
industry, but the whole process stabilize itself--it seems to 
me this has some pretty significant future implications. And I 
am wondering what your own predictions are, and what we can do 
while there is still time, if it is possible.
    Mr. Stein. About 4 million of these loans are still 
scheduled to reset. So we have not seen even the beginning of 
the problem----
    Mr. Franks. About a year.
    Mr. Stein. A lot of--for the next year and a half, I would 
say.
    Mr. Franks. Pretty frightening.
    Mr. Bartlett. Madame Chair, if I could take 30 seconds.
    Ms. Sanchez. Certainly.
    Mr. Bartlett. The pipeline will continue until mid-to third 
quarter of 2008. And that is a real problem. That is why we are 
calling every single borrower without exception to try to reset 
the loans. After that, though, the pipeline is not getting 
fuller. The national standards, the strong underwriting 
standards, are now in place. And so we are not adding to the 
problem from here. So the problem will stay about where it is, 
maybe get worse for the next year. And then it will start to 
work its way out.
    Ms. Sanchez. The time of the gentleman----
    Mr. Franks. Madame Chair, is there anyone on the panel that 
suggests legislation to change this cross-pollenization I 
talked about?
    Ms. Sanchez. Not to my knowledge. The time of the gentleman 
has expired. I understand that Judge Morgan has a plane that 
she must catch. So I will thank and excuse her.
    Good luck in catching that flight.
    And we will continue with our round of questioning.
    Again, thank you for your testimony. And safe travel.
    Judge Morgan. Thank you.
    Ms. Sanchez. I know that flight well.
    At this time, I would like to recognize Ms. Lofgren for her 
5 minutes of questions.
    Ms. Lofgren. Thank you.
    And I guess I will see you at home, Judge Morgan. I will 
ask my question of you at home relative to the statute and the 
exigent circumstances. It surprises me that courts--I am 
inclined to think we need to change the Act, the 1978 Act. But 
pending foreclosure not being a sufficient exigent circumstance 
to merit deferral of the counseling requirement, does the bench 
have the right under the current law to find a foreclosure to 
be an exigent circumstance under the current act? Or do we 
really need to change the law on that as well do you think?
    Judge Morgan. We are really only able to avoid counseling 
in very, very limited circumstances. It is much stricter than 
simply just a foreclosure.
    Ms. Lofgren. So we need to address that.
    Judge Morgan. This is an area that I think is somewhat 
noncontroversial. I don't know that even Mr. Bartlett would 
disagree with----
    Ms. Lofgren. Well, thank you very much.
    Judge Morgan. Okay. Thank you so much.
    Ms. Lofgren. I have some questions for the other witnesses. 
I was actually thinking about--you know, it is interesting, I 
actually worked on the 1978 Act. Don Edwards, then the chair of 
the what was called Subcommittee 4 that had jurisdiction over 
bankruptcy, and Allan A. Parker, who was the general counsel--
and I actually e-mailed Allan as I was sitting here. And I 
think why did we do this? You know? I can't recall what the 
rationale was in 1978. Certainly there was not a lot of 
discussion that I remember on how to preclude mortgages from 
reorganizations.
    And I think it may have been that the whole market was so 
different. But it seems to me a mistake on several levels to 
not change the law. Number one, just equitable issues. Number 
two--I guess this is a question. There has been a concern 
expressed, and I think we need to be mindful of the impact of 
whatever we do on liquidity and the ability to affect the 
market.
    But it seems to me, in most States--in, for example, 
California--we are an anti-deficiency State. And so if 
somebody--you just walk away from that mortgage, and what we 
have got now in California are homes that are now valued more 
than the market. And so you have got banks ending up with this, 
they are eating it anyhow. It is a loss for the banks. But it 
is also a loss for the individual. So I don't see how the 
ability to restructure is actually going to be worse than the 
current situation. That is question number one.
    And question number two, I guess, really is, does anybody 
else remember what the 1978 Act rationale was? I have been 
searching the memory bank. But I am not coming up with it. So 
whoever can answer those----
    Mr. Stein. Congresswoman, I wonder if I can address those. 
On the first issue, I agree with you completely that I think 
that the proposal to modify the chapter 13 provisions in the 
way that we suggest really goes to the very heart of loss 
mitigation policy, which the lending community has embraced at 
this point. It really would turn a nonperforming loan into a 
profitable asset and would preserve for lenders much of the 
value of the original obligation. So I think you are absolutely 
right, especially in States like California, where the option 
for the lender is that it really is just an asset that is only 
good for its liquidation value. This actually would return more 
than that.
    As far as the reasoning for the 1978 addition for the 
protection for mortgage lenders, very little actual direct 
legislative history. In my testimony, I included a decision 
which goes through, looks at very carefully. The only thing I 
would say is that it was a time when interest rates were going 
up.
    Ms. Lofgren. Well, maybe what I will do is, when Allan 
Parker e-mails me back, I will share the answer with the 
Committee. And I would just like to--as I have listened--I 
mean, we have got a very significant problem on our hands as a 
country. And I think it is important that we act. I recall my 
grandparents in the Great Depression had a little house that 
they built. And every house on the block was going to be lost. 
And the banks went and said if you could just pay the interest, 
they wouldn't take the house, because they didn't want any more 
houses.
    You can't really do that now, because of the securitization 
of these mortgage instruments. And I think, in some ways, the 
bankruptcy courts could fill in for what the banks themselves 
did in the Great Depression in this country. So I see the light 
is on, and my time is up. And I haven't had a chance to let 
everyone answer. But perhaps we can get the answers in writing. 
I don't want to abuse the time.
    Ms. Sanchez. Thank you.
    The time of the gentle lady has expired. At this time, I 
would like to recognize one of the original co-sponsors of the 
proposed legislation and the very distinguished Member from 
North Carolina, Mr. Watt, for his 5 minutes of questions.
    Mr. Watt. Thank you, Madame Chair.
    Mr. Lofgren actually didn't get an answer to the question 
that I wanted to try to get an answer to, which was the 
historical justification for this. I have searched. And it 
didn't seem to me to make a lot of sense. I have some theories, 
I guess. If you were quickly selling home mortgage loans in 
situations where securitizers were not regularly looking at the 
terms of the loans, I guess it makes sense.
    But other commercial loans are securitized and spun off, 
and securitizers are obligated to look more closely at those. 
So I think this is one of those situations where we need to 
incentivize securitizers to have a higher level of vigilance 
about what it is they are buying.
    I think--at least Mr. Bartlett and Mr. Stein know that I 
probably spend as much time on this issue between the Judiciary 
Committee and the Financial Services Committee as most anybody. 
And it seems to me that this is a rational request. And if 
there is a justification for not doing it permanently, we need 
to look at at least doing it temporarily. And I am not sure 
that I understand that there would be a justification for not 
doing it permanently.
    In fact, one of the reasons that I signed on to the Miller 
bill is that they approach that he was using seemed to me to be 
the most reasonable approach. And so I guess I would use part 
of my time to invite Mr. Bartlett to please take a closer look 
at the Miller bill, the House bill, which doesn't have a lot of 
the provisions that I understand--I don't know if Senator 
Durbin has even introduced his bill.
    It was in proposal form at the time that we were looking at 
it and had a number of provisions in it that went beyond the 
bill that I joined, with the Chair of this Subcommittee, and 
Congressman Miller and Congressman Frank and a number of other 
people, who were thinking that this was a reasonable step. So I 
hope that the lender community will take a closer look at that 
bill and perhaps give us some very constructive suggestions 
about how it may be implemented.
    So there seems to be a great deal of disparity between what 
Mr. Bartlett is saying about what lenders are doing, and what 
Mr. Stein and Judge Morgan were saying about willingness. Can 
you give me any backup information about what is happening in 
the market about willingness of lenders to re-look at these 
outstanding loans? What is your justification that it is not 
taking place, when Mr. Bartlett seems to be saying that it is 
taking place at record rates?
    Mr. Stein. As I mentioned, Moody's looked at loans serviced 
by 80 percent of the industry and found only 1 percent of 
loans, post-reset, were being modified. Counseling agency--
Consumer Credit Counseling in California--who sees 1,000 cases 
a month, said lenders are simply not modifying loans where the 
problem is the rate reset. If it is a temporary income problem, 
like a loss of job, they are. But if it is a rate rest which is 
causing the problem, he said lenders are uniformly not 
modifying loans. It is just not happening.
    Mr. Watt. I just give my personal experience. I finally did 
get a letter last week, after I had refinanced out of the loan, 
offering to reset my rate. Now, I had already taken the step to 
get out of the adjustable rate loan. So maybe it is just 
beginning to trigger in that lenders are finding this to be in 
their interests.
    But I hope that the lender community will look at the bill 
that we have introduced. And let us roll up our sleeves and try 
to solve this problem.
    Ms. Sanchez. The time of the gentleman has expired.
    I want to thank all of the witnesses for their testimony 
today. Without objection, Members will have 5 legislative days 
to submit any additional written questions, which we will 
forward to the witnesses and ask that you answer as promptly as 
you can, so that they can be made a part of the record. Without 
objection, the record will remain open for 5 legislative days 
for the submission of any other additional materials.
    Again, I want to thank everybody for their time and 
patience. This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 5:08 p.m., the Subcommittee was adjourned.]

                                 
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