[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 II)

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



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 30, 2007

                               __________

                           Serial No. 110-164

                               __________

         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

                              ----------                              

                            OCTOBER 30, 2007

                                                                   Page

                           OPENING STATEMENT

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 Tom Feeney, a Representative in Congress from the 
  State of Florida, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................    11

                               WITNESSES

Dr. Mark M. Zandi, Ph.D., Chief Economist, Moody's Economy.com, 
  Inc., West Chester, PA
  Oral Testimony.................................................     2
  Prepared Statement.............................................     4
William E. Brewer, Jr., Esq., The Brewer Law Firm, Raleigh, NC, 
  on behalf of the National Association of Consumer Bankruptcy 
  Attorneys
  Oral Testimony.................................................    99
  Prepared Statement.............................................   101
Mr. David G. Kittle, CMB, Chairman-Elect, Mortgage Bankers 
  Association, Washington, DC
  Oral Testimony.................................................   109
  Prepared Statement.............................................   111
Richard Levin, Esq., Cravath, Swaine & Moore LLP, New York, NY, 
  on behalf of the National Bankruptcy Conference
  Oral Testimony.................................................   126
  Prepared Statement.............................................   128

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Letter from the National Association of Federal Credit Unions, 
  submitted by the Honorable Tom Feeney, a Representative in 
  Congress from the State of Florida, and Member, Subcommittee on 
  Commercial and Administrative Law..............................    13
Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and Ranking 
  Member, Subcommittee on Commercial and Administrative Law......    16
Material submitted by the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and Ranking 
  Member, Subcommittee on Commercial and Administrative Law:
    Prepared Statement of the Honorable Steve Chabot, a 
      Representative in Congress from the State of Ohio..........    26
    Prepared Statement of the Securities Industry and Financial 
      Markets Association........................................    32
    Prepared Statement of Steve Bartlett, on behalf of the 
      Financial Services Roundtable..............................    37
    Prepared Statement of the American Bankers Association and 
      America's Community Bankers................................    43
    Prepared Statement of Edward J. Kulik, Senior Vice President, 
      Real Estate Division, Massachusetts Mutual Life Insurance 
      Company before the Committee on the Judiciary, United 
      States Senate..............................................    57
Material submitted by the Honorable Linda T. Sanchez, a 
  Representative in Congress from the State of California, and 
  Chairwoman, Subcommittee on Commercial and Administrative Law:
    Letter from Robert Shiller, The Cowles Foundation for 
      Research in Economics......................................    72
    Prepared Statement of Eric Stein, Center for Responsible 
      Lending....................................................    78
    Article from The New York Times, dated October 8, 2007, 
      titled ``The American Dream in Reverse''...................    93
    Letter to the Honorable John Conyers, Jr., Chairman, 
      Committee on the Judiciary, and the Honorable Lamar Smith, 
      Ranking Member, Committee on the Judiciary.................    94
    Memo from the Congressional Research Service (CRS)...........    96
    Letter from the Honorable Richard Cordray, Ohio Treasurer of 
      State......................................................   152
    Special Report by Moody's Investor Service...................   153

                                APPENDIX
               Material Submitted for the Hearing Record

Letter to the Honorable Linda T. Sanchez, a Representative in 
  Congress from the State of California, and Chairwoman, 
  Subcommittee on Commercial and Administrative Law, from J. Rich 
  Leonard, Judge, United States Bankruptcy Court, Eastern 
  District of North Carolina.....................................   160
Letter to 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, and the Honorable Linda T. Sanchez, a 
  Representative in Congress from the State of California, and 
  Chairwoman, Subcommittee on Commercial and Administrative Law..   163


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

                              ----------                              


                       TUESDAY, OCTOBER 30, 2007

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

    The Subcommittee met, pursuant to notice, at 1:18 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Linda 
T. San-
chez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Conyers, Johnson, Cannon, 
and Feeney.
    Also Present: Representatives Chabot and Miller of North 
Carolina.
    Staff Present: Susan Jensen, Majority Counsel; Zachary 
Somers, Minority Counsel; and Adam Russell, Professional Staff 
Member.
    Ms. Sanchez. The Subcommittee on Commercial and 
Administrative Law will come to order.
    I want to welcome everybody. Unfortunately, the Committee's 
other hearing this morning went unavoidably longer than 
anticipated, and I want to thank everybody for their patience 
and their flexibility.
    One of our witnesses, Dr. Mark Zandi, unfortunately will 
have to leave shortly. So to permit him to give his testimony 
and take questions, we are going to sort of do things in a 
little bit different way this afternoon. We are going to take 
his testimony first, followed by a round of questions that any 
Members may have for him. And then we will return to opening 
statements and to our other witnesses.
    Dr. Zandi is the Chief Economist and the cofounder of 
Economy.com, which provides economic research and consulting 
services to corporations, governments and institutions, 
maintaining one of the largest online databases of economic and 
financial time series.
    Dr. Zandi's recent work includes a study of the outlook for 
national and regional housing market conditions, the 
determinants of personal bankruptcy, the location of high 
technology centers and the impact of globalization and 
technological change on real estate markets.
    In addition to being regularly cited in The Wall Street 
Journal, New York Times, Business Week, Fortune and other 
leading publications, Dr. Zandi also appears on ABC News, Wall 
Street Week, CNN and CNBC.
    Dr. Zandi, welcome. Your full written statement will be 
made part of the record and we would ask that you please limit 
your oral remarks to 5 minutes. And at this time, I would 
invite you to please give your testimony.

  STATEMENT OF MARK M. ZANDI, Ph.D., CHIEF ECONOMIST, MOODY'S 
              ECONOMY.COM, INC., WEST CHESTER, PA

    Mr. Zandi. Thank you very much. Thank you for the 
opportunity to present this testimony today. I also would like 
to thank the Mecklenburg Health Center for the opportunity to 
use their facility. It was very kind of them, and their 
hospitality has been wonderful.
    I will make six points in my remarks. First, the Nation's 
housing and mortgage markets are suffering a very severe 
recession. The housing activity peaked over 2 years, and since 
then home sales have fallen nearly 20 percent, housing starts 
by 40 percent and house prices by 5 percent. Over half the 
Nation's housing markets are currently experiencing substantial 
price declines with double-digit price declines occurring 
throughout Arizona, California, Florida, Nevada, in the 
Northeast Corridor and industrial Midwest.
    Further significant declines in construction and prices are 
likely throughout next year as a record amount of unsold 
housing inventory continues to mount. Given the impact of the 
recent subprime financial shock and its impact on the mortgage 
securities market and, thus, mortgage lenders, it is reasonable 
to expect national house prices to fall by at least 10 percent 
from the peak of their eventual trough late next year. This, of 
course, assumes that the economy avoids recession and that the 
Federal Reserve will continue to ease monetary policy.
    Second, residential mortgage loan defaults and foreclosures 
are surging, and without significant policy changes, will 
continue to do so through 2008 and well into 2009. Falling 
housing values, resetting adjustable mortgages for recent 
subprime and all day borrowers, tighter lending underwriter 
standards and most recently a weakening job market are 
conspiring to create the current unprecedented mortgage 
problems.
    I expect approximately 3 million mortgage loan defaults 
this year and next, of which 2 million will go through the 
entire foreclosure process forcing these homeowners to leave 
their current homes. The impact on these households, their 
communities and the broader economy will be substantial.
    Foreclosure sales are very costly after accounting for 
their substantial transaction costs in certain significantly 
depressed, already reeling housing markets, as foreclosed 
properties are generally sold at deep discounts from prevailing 
market prices. These discounts are estimated to be well over 30 
percent.
    Third, there is a substantial risk that the housing 
downturn in surging foreclosures will result in a national 
economic recession. The stunning decline in housing activity 
and prices is sure to severely crimp consumer spending into 
next year, and the job market appears increasingly weak as it 
struggles with layoff in the housing-related industry. Regional 
economies such as California, Florida, Nevada and the 
industrial Midwest are already near or in recession.
    Fourth, without a policy response, mortgage loan 
modification efforts are unlikely to prove effective in 
forestalling the increase in foreclosures. A recent Moody's 
survey of loan servicers found that very little modification 
had been done, at least through this past summer.
    There are a large number of impediments to modification 
efforts. Some tax, accounting and legal hurdles appear to have 
been overcome, but large differences in the incentives of first 
and second mortgage lienholders and the various investors in 
mortgage securities are proving to be daunting. While the total 
economic benefit of forestalling foreclosure is significant, 
these benefits do not accrue to all of the parties involved in 
determining whether to proceed with the loan modification.
    Fifth, the legislation to give bankruptcy judges the 
authority in Chapter 13 to modify mortgages by treating them as 
secured only up to the market value of the property will 
significantly reduce the number of foreclosures. To limit any 
potential abuses, Congress should provide firm guidelines to 
the bankruptcy courts, such as providing a formula for 
determining the term to maturity, the interest rate and the 
property's market value.
    Properly designed legislation could reduce the number of 
foreclosures through early 2009 by at least 500,000. This would 
be very helpful in reducing the pressure on housing and 
mortgage markets and the broader economy.
    Six, this legislation will not significantly raise the cost 
of mortgage credit, disrupt secondary markets or lead to 
substantial abuses. Given that the total cost of foreclosure is 
much greater than that associated with a Chapter 13 bankruptcy, 
there is no reason to believe that the cost of mortgage credit 
across all mortgage loan products should rise. Indeed, the cost 
of mortgage credit to prime borrowers may decline.
    The cost of second mortgage loans, such as piggyback 
seconds, could rise as they are likely to suffer most in 
bankruptcy, but such lending has played a clear contributing 
role in the current problems.
    There is also no evidence that secondary markets will be 
materially impacted after a period of adjustment as other 
consumer loans, which already have similar protection in 
Chapter 13, have well functioning secondary markets.
    The residential mortgage securities market will go through 
substantial changes in response to the recent financial shock 
and will adjust to these new rules. Abuses should also be 
limited, given that a workout in Chapter 13 is a very costly 
process for borrowers. Indeed the number of bankruptcy filings 
has remained surprisingly low since late 2005 bankruptcy 
reform, likely affecting the higher cost to borrowers.
    Finally, I think it is important that the changes to 
bankruptcy law in this legislation sunset after several years. 
Based on historical experience, changes to bankruptcy law can 
have unintended consequences. I believe the changes in this 
legislation--proposed legislation, will have significant 
benefits, both short- and long-run, but lawmakers may decide 
otherwise after several years of experience.
    Allowing the legislation to sunset should also help 
dissuade concerns that this legislation is an effort to 
readdress other issues in the Bankruptcy Code. The housing 
market downturn is intensifying and foreclosures are surging. 
Odds are quickly rising that is self-reinforcing a negative 
dynamic of foreclosures beginning house price declines to 
getting more foreclosures will develop in many neighborhoods 
across the country. There is no more efficacious way to short 
circuit this cycle than adopting legislation to allow 
bankruptcy judges the authority to modify mortgages by treating 
them as secured up to the market value of the property.
    Thank you.
    Ms. Sanchez. Thank you for your testimony Dr. Zandi.
    [The prepared statement of Mr. Zandi follows:]
                  Prepared Statement of Mark M. Zandi
    Mr. Chairman and members of the Committee, my name is Mark Zandi; I 
am the Chief Economist and Co-founder of Moody's Economy.com.
    Moody's Economy.com is an independent subsidiary of the Moody's 
Corporation. My remarks represent my personal views and do not 
represent those held or endorsed by Moody's. Moody's Economy.com 
provides economic and financial data and research to over 500 clients 
in 50 countries, including the largest commercial and investment banks; 
insurance companies; financial services firms; mutual funds; 
manufacturers; utilities; industrial and technology clients; and 
governments at all levels.
    I will make six points in my remarks. First, the nation's housing 
and mortgage markets are suffering a very severe recession. Housing 
activity peaked over two years ago, and since then home sales have 
fallen nearly 20%, housing starts by 40%, and house prices by 5%. Over 
half the nation's housing markets are currently experiencing 
substantial price declines, with double-digit price declines occurring 
throughout Arizona, California, Florida, Nevada, in the Northeast 
Corridor and industrial Midwest. Further significant declines in 
construction and prices are likely throughout next year as a record 
amount of unsold housing inventory continues to mount give the impact 
of the recent subprime financial shock and its impact on the mortgage 
securities market and thus mortgage lenders. It is reasonable to expect 
national house prices to fall by at least 10% from their peak to their 
eventual trough late next year. This assumes that the economy will 
avoid recession and the Federal Reserve will continue to ease monetary 
policy.
    Second, residential mortgage loan defaults and foreclosures are 
surging and without significant policy changes will continue to do so 
through 2008 and into 2009. Falling housing values, resetting 
adjustable mortgages for recent subprime and Alt-A borrowers, tighter 
lending underwriting standards, and most recently a weakening job 
market are conspiring to create the current unprecedented mortgage 
credit problems. I expect approximately 3 million mortgage loan 
defaults this year and next, of which 2 million will go through the 
entire foreclosure process, forcing these homeowners to leave their 
current homes. The impact on these households, their communities, and 
the broader economy will be substantial. Foreclosed sales are very 
costly after accounting for their substantial transaction costs, and 
serve to significantly depress already reeling housing markets, as 
foreclosed properties are generally sold at deep discounts to 
prevailing market prices. These discounts are estimated to be well over 
30%.
    Third, there is a substantial risk that the housing downturn and 
surging foreclosures will result in a national economic recession. The 
stunning decline in housing activity and prices is sure to severely 
crimp consumer spending into next year, and the job market appears 
increasingly weak as it struggles with layoffs in housing related 
industries. Regional economies such as California, Florida, Nevada and 
the industrial Midwest are already near or in recession.
    Fourth, without a policy response, mortgage loan modification 
efforts are unlikely to prove effective in forestalling the increase in 
foreclosures. A recent Moody's survey of loan servicers found that very 
little modification had been done, at least through this past summer. 
There are a large number of impediments to modification efforts. Some 
tax, accounting and legal hurdles appear to have been overcome, but 
large differences in the incentives of first and second mortgage lien 
holders and the various investors in mortgage securities are proving to 
be daunting. While the total economic benefit of forestalling 
foreclosure is significant, these benefits do not accrue to all of the 
parties involved in determining whether to proceed with a loan 
modification.
    Fifth, the legislation to give bankruptcy judges the authority in a 
Chapter 13 to modify mortgages by treating them as secured only up to 
the market value of the property will significantly reduce the number 
of foreclosures. To limit any potential abuses, Congress should provide 
firm guidelines to the bankruptcy courts, such as providing a formula 
for determining the term to maturity, the interest rate, and the 
property's market value. Properly designed, the legislation could 
reduce the number of foreclosures through early 2009 by at least 
500,000. This would be very helpful in reducing the pressure on housing 
and mortgage markets and the broader economy.
    Sixth, this legislation will not significantly raise the cost of 
mortgage credit, disrupt secondary markets, or lead to substantial 
abuses. Given that the total cost of foreclosure is much greater than 
that associated with a Chapter 13 bankruptcy there is no reason to 
believe that the cost of mortgage credit across all mortgage loan 
products should rise. Indeed, the cost of mortgage credit to prime 
borrowers may decline. The cost of second mortgage loans, such as 
piggy-back seconds, could rise, as they are likely to suffer most in 
bankruptcy, but such lending has played a clear contributing role in 
the current credit problems. There is also no evidence that secondary 
markets will be materially impacted after a period of adjustment, as 
other consumer loans which already have similar protection in Chapter 
13 have well functioning secondary markets. The residential mortgage 
securities market will go through substantial changes in response to 
the recent financial shock and will adjust to the new rules. Abuses 
should also be limited given that a workout in Chapter 13 is a very 
costly process for borrowers. Indeed, the number of bankruptcy filings 
has remained surprisingly low since the late 2005 bankruptcy reform, 
likely reflecting the much higher costs to borrowers.
    Finally, I think it is important that the changes to bankruptcy law 
in this legislation sunset after several years. Based on historical 
experience, changes to bankruptcy law can have unintended consequences. 
I believe the changes in this proposed legislation will have 
significant both short and long-term benefits, but lawmakers may decide 
otherwise after several years of experience. Allowing the legislation 
to sunset should also help assuage concerns that this legislation is an 
effort to re-address other issues in the bankruptcy code.
    The housing market downturn is intensifying and mortgage 
foreclosures are surging. Odds are quickly rising that a self-
reinforcing negative dynamic of foreclosures begetting house price 
declines begetting more foreclosures well develop in many neighborhoods 
across the country. There is no more efficacious way to short-circuit 
this cycle than adopting legislation to allow bankruptcy judges the 
authority to modify mortgages by treating them as secured only up to 
the market value of the property.

    Ms. Sanchez. We will now begin with a round of questioning 
because we know that you cannot stay long with us. So I will 
recognize myself for 5 minutes.
    It is a little interesting because you have not heard the 
testimony of our other panelists, and yet my first question 
deals with some testimony that was presented by Mr. Kittle in 
his written testimony that he submitted.
    He states that if these provisions were enacted, it would 
increase the cost and reduce the availability of mortgage 
credit for principal residents; and I am interested in hearing 
your response to that statement.
    Mr. Zandi. You know, I don't think that will be the case. I 
think, most fundamentally the reason is that the cost of 
foreclosure, the total cost of foreclosure, is measurably 
higher than will be the cost of a bankruptcy in Chapter 13 
under this proposal.
    In terms of the cost of foreclosure they are quite 
significant. It is not only the difference in the mortgage 
amount and the market value of the property. It is all of the 
transaction costs involved, including the legal cost, the 
maintenance cost, the cost associated with realtors selling 
property post-auction.
    It also is the time involved. There is a period of a year 
or two that could pass before foreclosure actually takes place 
and a person is asked to leave the home, and there is lots of 
depreciation and other costs associated with that.
    And, finally, I don't think we should discount the cost to 
the broader economy of foreclosures and the impact that has on 
the communities and the broader economy. It serves to reduce 
market values for all homes in those communities, and that is 
also a cost.
    So I think the point is that when you consider the wide 
range of costs involved in a foreclosure it is very, very 
significant. Someone bears it, and those costs are measurably 
greater than the cost that would ensue in a Chapter 13 
bankruptcy under this proposed legislation.
    So, in my view, it is hard to argue that the cost of 
mortgage credit will rise in aggregate. You may argue that 
certain groups will suffer higher costs, that those folks that 
are making piggyback seconds definitely will have higher costs, 
but for the vast majority of mortgage buyers I don't think it 
will make a difference.
    Ms. Sanchez. Thank you.
    It has also been argued that if a mortgage loan can be 
modified or rendered unsecured during bankruptcy it will be far 
more difficult to originate or sell mortgages in the secondary 
market. As a result, it has been argued that the cost of 
mortgages would have to increase to reflect this additional 
risk. How would you respond to that argument?
    Mr. Zandi. I don't think that will be the case either. It 
is a change, and therefore, the secondary market will have to 
adjust to that change; but I think it is a relatively 
straightforward thing to do.
    The issue for the secondary market is, what is the loss on 
the mortgage in a foreclosure and how is that different from a 
loss that would incur in a Chapter 13 bankruptcy under this 
proposed legislation. I mean, the worst-case scenario for the 
securities market would be just to assume what they are 
assuming now about the loss in foreclosure. That would be sort 
of the most conservative outside estimate of the cost. But I do 
think with time they will figure it out.
    The other point is--and they can do that relatively 
quickly.
    And the other point is, the market is broken; as it is, it 
is not functioning well. A lot of changes have to occur to make 
this market function appropriately. And this is a perfect time 
to ask them to make this kind of a change because they have to, 
in a sense, redo the plumbing because the plumbing is broken. 
And why not put in better pipes while you are at it?
    Ms. Sanchez. Great.
    And the final question, also in his prepared testimony--
and, again, it is kind of weird because you have not heard the 
testimony. Mr. Kittle states that the proposed reform to 
section 1322(b)(2), which allows a Chapter 13 debtor to modify 
a home mortgage, would result in higher down payments and that 
the borrower would have to pay 1 to 3 points on the entire 
loan, an additional three-eighths of a percent in the mortgage 
interest rate; and he also estimates that borrowers would see a 
200 basis point jump in interest rates with a 5-to-10-percent 
down payment home mortgage with no points or fees at closing.
    And I am interested in getting your reaction to that 
assertion.
    Mr. Zandi. I don't agree. This is very similar to the first 
question about the interest rate costs.
    There are numerous ways that you can raise the cost to the 
borrower. One is the interest rate, the other is the size of 
the down payment. I think, in aggregate, when you consider all 
mortgage borrowers and all mortgage lending, that we will not 
see any significant increase in the cost, whether it be through 
an interest rate, whether it be through the size of the down 
payment or other lending terms that are offered up to 
borrowers.
    And just to reiterate, there will be some groups where the 
cost will rise. I mean, I do think that some borrowers wished 
to put very little down and relied on a piggyback second to be 
able to fit into the home 100 percent cumulative loan-to-value 
ratio or above. Those borrowings will be, under this 
legislation, will be more difficult. But in my view, a large 
part of the foreclosures or problems that we are facing are 
related to that kind of a lending; and I don't see any downside 
to having that be restricted to some degree by the marketplace.
    Ms. Sanchez. Great. Thank you.
    My time has expired, so at this time I would like to 
recognize our distinguished Ranking Member, Mr. Cannon, for 5 
minutes of questions.
    Mr. Cannon. Thank you for joining us, Mr. Zandi. I am 
actually looking forward to the time when we cannot not all be 
here together and participate the way you are participating. I 
think this is the first time we have actually had a witness on 
a videoconference.
    Ms. Sanchez. Yes.
    Mr. Cannon. So thank you for breaking the ice here and 
setting a precedent. Mr. Chairman of the whole Committee, I 
hope you are taking note that this works pretty well.
    Mr. Zandi, you made a comment that made me wonder if we are 
talking about the same thing. You mentioned a sunset, but the 
Miller bill does not have a sunset. Do you think it needs a 
sunset?
    Mr. Zandi. I do. I think that any legislation should have a 
sunset provision, because as we all know from previous 
bankruptcy reform changes, there are always things that we do 
not anticipate. And I fully believe that this proposed change 
is a good idea that will work out in the short run and the long 
run. But I would counsel that a sunset provision will be 
advisable so that we can go back 3, 5 years down the road and 
evaluate whether this was an appropriate change or not.
    Mr. Cannon. We have people saying that this problem may be 
very short-term, others saying that the resets in mortgages may 
happen over a long period of time through 2010--2009.
    How long, if you had to put a number on it, how far out 
would you put that sunset?
    Mr. Zandi. I would put it out at least 3 years, because the 
problems will be very severe through the spring, summer of 
2009; post that, the recent tightening in underwriting 
standards will have benefits and the foreclosure problems will 
abate significantly by late 2009 into 2010. And by that point, 
we will have enough data points to really judge whether this 
was appropriate or not.
    Mr. Cannon. Given what I think is a risk--and you sort of 
presented a no-cost solution here; I don't agree with that. But 
given what I think are the risks, should we think in terms of a 
2-year sunset so 2009, about this time, we have to reauthorize 
it if it has worked and if it is necessary.
    Mr. Zandi. Well, I think 2 years might be a little too 
short because you need to get the data, you need to see it come 
in, and there are lags involved.
    Now, suppose that, as I am anticipating foreclosure 
problems, continue into the spring of 2009. It will take at 
least until the end of 2009, early 2010, to get all the 
information in and be able to really digest it, make sense of 
it and make sure that things are working properly.
    So I would counsel 3 years.
    Mr. Cannon. We are moving in a world with quicker data; and 
in a case like this, I would hope that we could focus the data, 
because the risks, I think, are high. Let me ask one other 
question.
    My experience--and this is anecdotal and that is why we are 
here; but my sense is that many subprime lenders are now 
yielding windfall profits by repossessing houses of people who 
can't sell their house or can't make their payments and then 
selling them in a market that is actually artificially high, 
but which has been supported by purchases. And while they are 
doing it at a discount--you talked about deep discounts for 
foreclosed houses--my sense is the discounts are not so deep, 
and that there is a big incentive on the part of the forecloser 
to take the house and resell it at a profit from the house.
    I suspect that if you give the borrower the time frame and 
context to cram down that loan in bankruptcy that the system 
will not heal itself so quickly.
    Am I wrong about some lenders getting windfall profits from 
foreclosing? And secondly, do we have to worry about not 
solving the problem by giving borrowers who are in over their 
heads more leverage?
    Mr. Zandi. I am not aware of a significant amount of profit 
being made in the foreclosure, in post sales, post-foreclosure 
sales. My sense of the data that I am seeing, which is now 
coming in quite quickly, is that prices are falling and they 
are falling very rapidly. And all indications are that they 
will continue to fall very rapidly, at least for the 
foreseeable future.
    Fundamentally, the problem here is that there is a massive 
amount of unsold inventory, and it is rising because of the 
fall in home sales and because of the increase in foreclosure. 
So I would be surprised if what you described is occurring in a 
very significant broad base; and if it is now, I doubt it will 
be in a few months because of the market conditions which are 
eroding exceptionally quickly. So I don't think that is an 
issue.
    Now, with respect--or it soon won't be.
    Secondly, with respect to giving more power to the borrower 
in the cram-down, to some degree that is the idea. That is the 
purpose here. Lenders and servicers and investors are having a 
very difficult time coming to terms and figuring out how to 
make loan modifications work, even though we all sense that in 
a broad--when you consider all the costs of all the 
foreclosures, that it would make sense to go through this 
process because for each one of the individual parties involved 
in the process, they may not make a profit, they may lose.
    So it is very, very difficult for everyone to come to terms 
on this. And by giving the borrower a little bit more power in 
the process, I think you crystallize a sense of urgency on the 
part of the lenders, the servicers and the investors to come 
together, come to terms and try to figure this out quickly. 
Because the problem is now, it is not 6 months from now or 12 
months from now, it is now.
    Mr. Cannon. I notice, Madam Chairman, that my time has 
expired. But I will just point out, if I might take a moment, 
that what we are debating here on this bill is exactly what Mr. 
Zandi has said, which is, Where do we put the thumb on the 
scale here and how heavily do we press?
    Thank you, and I yield back.
    Ms. Sanchez. The time of the gentleman has expired. We have 
just been notified that we have votes across the street, but I 
think we have time for Mr. Conyers' round of questions. Mr. 
Conyers is recognized for 5 minutes.
    Mr. Conyers. Thank you, Chairwoman Sanchez. I want to thank 
everyone for arranging this.
    There are only two questions that I have. One is that the 
industry tells us that they are on top of the problem and that 
if we trust them, they can solve this. I know that the ``trust 
me'' question always suggests the obvious answer.
    But why would they give us this kind of information?
    Mr. Zandi. You are asking me, Congressman?
    Mr. Conyers. Yes, sir.
    Mr. Zandi. Well, I think that many parties involved are 
well intentioned. They would like to help solve this 
foreclosure problem. But, you know, there are a lot of 
countervailing incentives--second-lien versus first-lien 
holders, the various flavors of investors, the servicers versus 
the investors.
    So I think the problem is that they may be well 
intentioned, they want to make it work, but given the 
incentives that are present and the conflicts that are 
involved, it is going to be extraordinarily difficult for them 
to come to terms of agreement, at least quickly enough to make 
a big enough difference for the people who are losing their 
homes today and next year and the year after.
    Mr. Conyers. In other words, they have got vested interests 
that don't lead them to be as concerned about resolving this 
problem as quickly as we can?
    Mr. Zandi. That is one way of looking at it.
    Or their view is that they can solve this problem in a 
different way and a better way, a more profitable way than 
another person or party involved and can't come to terms.
    Mr. Conyers. Well, you know, the problem that I am finding, 
Mr. Zandi, is that some of them were in on the predatory 
lending and the incredible schemes that got people into this 
mess to begin with.
    Mr. Zandi. Yeah. You know, there are certain cases of that, 
and certainly there is, I think, evidence that lenders were 
overly aggressive, many of whom were in the nonregulated part 
of the industry or the lightly regulated part of the industry.
    But I think, broadly the industry wants to do the right 
thing. They want to do good; they are working hard. But my 
point is, because of the impediments in their way, they are 
just not going to be able to get it together quickly enough to 
make a big difference. And I think with this proposed 
legislation it will allow for some of those impediment barriers 
to come down, and we will get something done, something 
worthwhile, something that will make a difference to this 
market and to these households before it is too late.
    Mr. Conyers. The last question, Chairwoman, is this to Mark 
Zandi.
    I have just been encouraged by some of my friends that want 
us to freeze all foreclosures and allow American families to 
retain their homes. The monthly payments and rent should be 
made to banks, designated banks, which can use the funds as 
collateral for normal lending practices, thus recapitalizing 
the bank system. These payments will be factored into new 
mortgages reflecting the deflating of the housing bubble and 
the establishment of appropriate property valuations and 
reduced interest rates.
    Has that occurred to you recently?
    Mr. Zandi. Yeah. I wouldn't agree with that. I think that 
would be a very significant mistake.
    I think--what you are discussing, I think, today in the 
form of this legislation is a good middle ground and something 
that will do right by lenders and by borrowers. But by 
completely shutting down the foreclosure process, I think that 
would do more harm than good--particularly to the very people 
that I think you would like to help in the long run.
    So I really believe that this legislation is a piece of 
legislation that will strike the right balance.
    Mr. Conyers. I think so, too. I am a cosponsor of it.
    And I thank you very much for your comments, Mr. Zandi.
    Thank you, Madam Chairman.
    Ms. Sanchez. The time of the gentleman has expired, and I 
think this is a good time to take a natural break. We need to 
go across the street to vote.
    Dr. Zandi, I want to thank you for your participation. I 
know by the time we get back, you will have to run. But Members 
will be submitting written questions that we will ask you to 
answer as quickly as possible to be made a part of the record 
as well. Again, we want to thank you for your patience and all 
of our panelists for their flexibility.
    We are going to be in recess while we vote, and we will 
come back to finish the hearing.
    [Recess.]
    Ms. Sanchez. This hearing on the Judiciary Subcommittee on 
Commercial and Administrative Law will come to order. We are 
trying to speed things along, given our late start. And 
normally we would do full-blown opening statements. I am going 
to actually recognize Mr. Feeney to give the minority opening 
statement. The gentleman is recognized. I will respond, and 
then we will proceed with the testimony of our panelists.
    Mr. Feeney is recognized.
    Mr. Feeney. Well, thank you, Madam Chairman. I think it is 
important that we had a second hearing. Some of us were very 
concerned that we had rushed through the first consideration. 
And I remain determined to point out that the unintended 
consequences that may adversely impact credit markets 
throughout America in this bill really need to be examined by 
the Financial Services Committee, which has the bulk of the 
expertise.
    Having said that, that decision is admittedly way beyond my 
pay grade, as to whether or not the Financial Services 
Committee ought to consider what potentially could be the most 
damaging impact on credit availability in the homeowners' 
market in America of any bill that--in the 6 years since I have 
been here. I will say that all of us are sympathetic with the 
plight of homeowners that for whatever reason may be foreclosed 
on in their homes. So there is an enormous amount of sympathy 
with the 1 or 2 or 3 percent of Americans that may suffer this.
    But ultimately, there is a price to be paid for allowing a 
judge to arbitrarily cram down the mortgage after the fact. And 
that price I am afraid could be huge. The protection for home 
lending in the Bankruptcy Code goes back at least to 1898. In 
1978, Senator DeConcini pointed out the intent of section 
1322(b)2 of the code was to preserve the availability of 
residential mortgage funding for individuals of modest means. 
We need to determine I think as a Congress what it means if we 
do away with the availability of mortgages for individuals of 
modest means.
    Justice Stevens, no right wing justice, in the case of 
Nobelman v. American Savings Bank, pointed out that it was the 
intent of Congress all along in enacting that very section to 
assist with home ownership. And I quote him from that case: 
``At first blush, it seems somewhat strange the Bankruptcy Code 
should provide less protection to an individual's interest in 
retaining possession of his or her home than of other assets. 
The anomaly is, however, explained by the legislative history, 
indicating the favorable treatment of residential mortgages was 
intended to encourage the flow of capital into the home lending 
market.''
    I would note that we had an economist earlier--and of 
course, Ronald Reagan famously remarked that he wished he could 
find a one-armed economist because you can always find an 
economist that will say, on the one hand, this may occur, and 
the other hand, the opposite may occur. To his credit, the 
economist that testified, he thought on balance this proposal 
would probably be helpful. Also acknowledged in Mr. Zandi's 
testimony that the unintended consequences of such legislation 
often outweigh the intended positive consequences, and so that 
was the sole entire reason why he suggested that we sunset any 
reform of the Bankruptcy Code.
    There are other economists, presumably who are advising 
some of the major players in the lending industry, including 
the American Bankers Association, National Association of Home 
Builders, the U.S. Chamber of Commerce and others, that are 
asserting the importance of protecting availability of credit 
to homeowners throughout the country by preserving this section 
of the code. And I would also like, Madam Chairman, to ask for 
unanimous consent because there is at least one entity that 
acts as sort of a mutual fund. That would be the National 
Association of Federal Credit Unions, which is not a profit-
making entity. I would like to ask permission, unanimous 
consent to insert a letter addressed from the National 
Association of Federal Credit Unions to Chairman Conyers and 
Ranking Member Lamar Smith.
    Ms. Sanchez. Without objection, so ordered.
    [The information referred to follows:]
     Letter from the National Association of Federal Credit Unions




    Mr. Feeney. And finally I would point out that the adverse 
consequences are not just going to be potentially to people of 
modest means who want to buy homes in the future. If you want 
to sell your home to somebody of modest means, there could be 
huge adverse consequences because the pool of buyers that have 
access to credit may dry up. If you merely want to retain 
ownership of your home because there are fewer buyers for like 
homes, the equity that otherwise might grow in your home will 
be depressed by this variable, this uncertainty that is thrown 
into the ability to collect markets, so even people that want 
to hang onto their homes for the next 20 or 30 years, in my 
view, will be likely to suffer some damage if this is imposed, 
not to mention realtors, home builders, title companies, 
mortgage companies, surveyors.
    As you diminish on the margins the number of people that 
could access credit or you reduce the credit availability to 
people to buy a larger home or a nicer home than they would--if 
it hadn't been for the uncertainty we are putting in the market 
here by removing this section of the code, you diminish the 
value of all residential real estate in the country.
    And with that, Madam Chairman, I would yield back the 
balance of my time.
    Ms. Sanchez. The gentleman yields back.
    And I will yield myself just a couple of minutes to respond 
to some of what has been said.
    Last month, this Subcommittee held a hearing on the 
subprime mortgage meltdown, this very same issue, and we got to 
hear from experts on how we got into this mess, and we heard 
their views on how to fix it. We have already heard testimony 
from one witness today with respect to the proposed legislation 
that Congressman Brad Miller and I introduced, H.R. 3609. And I 
am pleased to recognize my colleague and welcome him to our 
Subcommittee hearing today.
    I know it has kind of been a quirky and out-of-order 
hearing. But I think everybody will agree, and I think all of 
our witnesses at the last Subcommittee hearing on this issue 
agreed that foreclosure is the worst possible option for 
everybody in all instances. And so I think the legislation, as 
crafted by Mr. Miller and I, while we are open to some 
suggestions for improving it, I think really strikes at the 
heart of what could provide some real relief and some 
reasonable measures that are not going to--not going to over 
address the problem, if you will.
    With that, I am going to yield back my time. And we will, 
without objection, allow Members to submit their written 
statements for the record. Without objection, the Chair will be 
authorized to declare a recess of the hearing at any point.
    [The prepared statement of Mr. Cannon follows:]
 Prepared Statement of the Honorable Chris Cannon, a Representative in 
 Congress from the State of Utah, and Ranking Member, Subcommittee on 
                   Commercial and Administrative Law
















    Ms. Sanchez. And at this point, I am pleased to introduce 
the witnesses for today's hearing. Our first witness is William 
Brewer, Jr., certified as a specialist in consumer bankruptcy 
law by the North Carolina State Bar. Mr. Brewer has represented 
the debtors in a series of cases in the Eastern District of 
North Carolina dealing with the effect of purchasing money 
security interest in bankruptcy cases. Mr. Brewer has been an 
NACBA member since 1993 and a NACBA director since 1997 and has 
served as an extremely popular panelist at NACBA's previous 
conventions.
    Mr. Brewer served as a law clerk to Judge R.A. Hedrick of 
the North Carolina Court of Appeals before beginning private 
practice in 1977. I want to thank you and welcome you for your 
patience and for being here today.
    Our second witness is David Kittle. Mr. Kittle is chairman 
elect of the Mortgage Bankers Association and president and 
chief executive officer of Principle Wholesale Lending, Inc., 
in Louisville, KY. He started with American Fletcher Mortgage 
Company and became a top loan originator before moving to 
management in 1986. In 1994, Mr. Kittle opened his own company, 
Associates Mortgage Group, Inc., and sold it in January of 
2006. We want to welcome you here today.
    He is the former chairman of MORPAC, MBA's political action 
committee, a former vice chairman of the MBA Residential Board 
of Governors and is a member of MBA's Advisory Committee. Mr. 
Kittle is also a member of the Fannie Mae Advisory Council.
    We already heard from our third witness Dr. Zandi a little 
out of order.
    Our final witness is Richard Levin, vice chair of the 
National Bankruptcy Conference. Mr. Levin is a partner at 
Skadden Arps, concentrating on corporate restructuring, 
insolvency and bankruptcy issues. He was counsel to a House 
Judiciary Committee Subcommittee and was one of the principal 
authors of the Bankruptcy Code and the Bankruptcy Reform Act of 
1978. I will note that this is the second time that Mr. Levin 
has testified before this Subcommittee during this 
congressional session. The first being during the executive 
compensation hearing that we had.
    And we welcome you back, Mr. Levin.
    Mr. Levin. Thank you very much for having me back, Madam 
Chair.
    Ms. Sanchez. Not at all. Without objection, all of the 
witnesses' written statements will be placed into the record in 
their entirety. And we are going to ask that you please limit 
your oral remarks to 5 minutes. We have a lighting system that 
starts with a green light. At 4 minutes, it will turn yellow to 
remind you that you have about a minute left in your testimony. 
And when the light turns red, we will ask you to summarize your 
final thoughts so that we may hear from all of our panelists. 
After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    With everybody understanding the rules, I will invite Mr. 
Brewer to please begin his testimony.
    Can you please hit your microphone? Okay. I might recommend 
you try the other microphone. Your microphone doesn't appear to 
be working. And we will reset your time. All right. Is it 
working? None of the microphones are working. Okay.
    We are going to pause for just a moment to see if we can 
get the microphones working.
    Mr. Cannon. Madam Chair, while we are paused, may I ask 
unanimous consent to introduce several items into the record?
    Ms. Sanchez. Of course.
    Mr. Cannon. The first is a statement by Representative 
Steve Chabot. The second is a Securities Industry and Financial 
Markets Association statement and the third is a testimony or 
statement from Financial Services Roundtable, also a statement 
from the American Bankers Association and a statement of Edward 
J. Kulik, that is K-U-L-I-K--before a 1978 Senate Judiciary 
Committee hearing on bankruptcy.
    [The information referred to follows:]
 Prepared Statement of the Honorable Steve Chabot, a Representative in 
                    Congress from the State of Ohio












           Prepared Statement of the Securities Industry and 
                 Financial Markets Association (SIFMA)










        Prepared Statement of Steve Bartlett, on behalf of the 
                     Financial Services Roundtable












      Prepared Statement of the American Bankers Association and 
                      America's Community Bankers




























  Prepared Statement of Edward J. Kulik, Senior Vice President, Real 
Estate Division, Massachusetts Mutual Life Insurance Company before the 
            Committee on the Judiciary, United States Senate




























    Ms. Sanchez. Without objection, so ordered.
    And since we are still trying to get the microphones 
working, I will ask unanimous consent to enter into the record 
a letter from Professor Robert Shiller with the Cowles 
Foundation for Research in Economics at Yale University; a 
statement by Eric Stein, on behalf of the Center for 
Responsible Lending; a New York Times article dated October 8, 
2007, entitled, ``The American Dream in Reverse;'' a letter 
from a diverse group of consumers, civil rights, labor, housing 
and community organizations; and also, from the Congressional 
Research Service, a memo regarding the 1978 bankruptcy 
legislation and secured lending supplement. Without objection, 
so ordered.
    [The information referred to follows:]
         Letter from Robert Shiller, The Cowles Foundation for 
                         Research in Economics












    Prepared Statement of Eric Stein, Center for Responsible Lending






























    Article from The New York Times, dated October 8, 2007, titled 
                   ``The American Dream in Reverse''


 Letter to the Honorable John Conyers, Jr., Chairman, Committee on the 
Judiciary, and the Honorable Lamar Smith, Ranking Member, Committee on 
                             the Judiciary




           Memo from the Congressional Research Service (CRS)






    Ms. Sanchez. How are we doing with the microphones down 
there? Okay.
    Mr. Drew Brewer, we will try this one more time. We invite 
to you open your testimony.

TESTIMONY OF WILLIAM E. BREWER, JR., ESQ., THE BREWER LAW FIRM, 
RALEIGH, NC, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER 
                      BANKRUPTCY ATTORNEYS

    Mr. Brewer. Okay. Working good now.
    Chairwoman Sanchez, Ranking Member Cannon and Members of 
the Subcommittee, I am grateful to have the opportunity to 
offer testimony today that hopefully will facilitate 
congressional action that will enable many thousands of your 
constituents to avoid losing their homes to foreclosure. My 
name is William E. Brewer, Jr., and I am on the Board of 
Directors of the National Association For Consumer Bankruptcy 
Attorneys.
    From that title, you might conclude that I am an officer in 
this battle over the proposed amendments of the bankruptcy law, 
but I am just a foot soldier. I practice law in Raleigh, North 
Carolina, as a sole practitioner. From my 20 years of 
representing debtors, I know as much or more as any person in 
this room about debtors. What they are like, what motivates 
them, what gets them in financial trouble, the great lengths to 
which they will go to avoid filing bankruptcy. These things I 
know, and that is a perspective I bring to this debate today.
    I consult every day with clients who face the stark reality 
of losing their homes to foreclosure. When I look into their 
faces, I see fear and hope; fear that they are going to lose 
their homes, but hope that I, through the bankruptcy process, 
can help them save their home. Unfortunately, with increasing 
frequency, I am forced to confirm their fears and eliminate 
their hopes.
    Here is a typical dialogue.
    I say: If you are going to keep your house, you have to 
resume making your full house payments.
    The client says: But they are too high. That is why I am 
here.
    Me: I know but that is the rule.
    Client: Well, I was making them at first, but the payments 
kept going up. They are $500 more now than when I started. 
Doesn't the bankruptcy law allow me to reduce the amount of the 
debt or the interest rate? You said we could do that on my car. 
My house is more important than my car.
    I say: I know. It makes no sense. But calling Congress can 
change it.
    The culprit, as you know, is section 1322(b)2 of the 
Bankruptcy Code, which prohibits the modification of loans 
secured solely by a debtor's principal interest. The blanket 
bar to modification is unique to home loans. For example, a 
debtor who owns residential rental property can modify a loan 
secured by property.
    The solution is simple, remove the bar to modification. The 
mortgage industry opposes any change to the anti-modification 
provision. Others propose that the bar be removed only as to 
these 2/28 adjustable rate mortgages and that the bar continue 
to apply only to future loans.
    Unquestionably, the bar to modification should be 
eliminated across the board to existing and future loans. 
Though ARMs represent the bulk of these troublesome loans, 
there are a plethora of other subprime loans and other 
predatory high-interest loans in the market contributing to the 
foreclosure crisis. The homeowners trapped in these loans are 
no less deserving than the ARM borrowers of a chance to save 
their homes from foreclosure. Congressional policy that grants 
relief to one and not the other has no defensible rationale. 
The same is true for future loans.
    The mortgage industry created a mortgage market predestined 
for disaster. Through the fragmentation of the various segments 
of the industry and the securitization of mortgage, it promoted 
the meteoric rise in the issuance of these ill-advised 2/28 
ARMs. The mortgage brokers and the loan originators either 
didn't pay attention to the fact or perhaps just didn't care 
that these loans were no good. They made their money and passed 
the risk of loss up the line through securitization.
    Metaphorically, the disaster created by the mortgage 
industry is a conflagration, putting people out of their homes 
all over this country. The incendiary device are these 
exploding ARMs. The fire must be put out.
    As more and more homes are foreclosed, property values are 
driven lower and lower, and neighborhoods are being destroyed. 
The industry claims it will get the fire under control with its 
voluntary modification program. Do we really want to turn over 
that responsibility to the people who started this mess by 
playing with matches?
    In conclusion, you were elected to deal with this kind of 
problem. I implore each of you, whether you be Democrat, 
Republican, Blue Dog Democrat to cooperate in a bipartisan way 
to enact this legislation which is so badly needed by so many 
homeowners. While these financial fires continue to burn, don't 
just sit here in Washington playing your fiddles.
    [The prepared statement of Mr. Brewer follows:]
              Prepared Statement of William E. Brewer, Jr.
















    Ms. Sanchez. Thank you, Mr. Brewer. I appreciate your 
testimony.
    And at this time, I would invite Mr. Kittle to begin his 
testimony.

  TESTIMONY OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, MORTGAGE 
              BANKERS ASSOCIATION, WASHINGTON, DC

    Mr. Kittle. Thank you, Madam Chairman, Ranking Member 
Cannon. Thank you for the opportunity to testify before you on 
this most important issue.
    H.R. 3609 is a well-meaning attempt to close what is 
mistakenly described as a bankruptcy loophole and to ensure 
that people don't lose their homes to foreclosure with no 
material effect on the real estate financial system. 
Unfortunately, this bill will have a devastating impact on 
current and future homeowners. This legislation would repeal 
anti-modification protections on home loans that have been in 
existence since the Bankruptcy Act of 1898 and that were 
confirmed by the Bankruptcy Code of 1978 and by unanimous 
Supreme Court in 1993.
    These protections are not loopholes. They were created by 
Congress to ensure the continued lowered cost and free flow of 
mortgage credit for primary residences. The anti-modification 
protections are sound public policy and have helped generations 
of families by keeping mortgage interest rates down. Changing 
the law will have serious consequences for home buyers, 
homeowners with existing mortgages. The hardest hit will be 
people in areas with declining home prices.
    Members of this Committee have discussed their goal of 
keeping people in their homes. We at the Mortgage Bankers 
Association share that goal. It pains all of us and me 
personally to look at the statistics and the real families 
behind them. None of us wants to see a family pushed out of 
their home. Current law already provides sufficient protection 
to keep borrowers in their homes. As soon as a borrower in 
foreclosure files for bankruptcy, the foreclosure is stayed. 
The borrower is then allowed 3 to 5 years to repay their 
delinquency without fear of foreclosure if they pay their bills 
on time. By reorganizing and ultimately discharging the 
unsecured debts, money is freed up to pay the mortgage and 
arrearage.
    H.R. 3609 would have a tremendous impact on the mortgage 
finance system. If this bill becomes law, we believe mortgage 
rates would jump significantly, going up 1.5 to 2 percent for 
everyone taking out a loan, holding loan terms, credit, the 
economy and everything else constant. Our home finance system 
is based soundly on the idea that mortgage debt is secured 
lending. If borrowers do not pay their bills, the lender can 
take possession of the home and partially recover from the bad 
debt.
    The current security and protections in bankruptcy mean 
that home lenders are not taking as much risk as creditors take 
with them. For example, credit cards. This is why, at the most 
basic level, you pay more interest on unsecured debt, such as 
credit cards, than for a mortgage. If you chip away at the 
security created on home mortgages--and this bill is not a 
small chip; it is a sledgehammer attack--you chip away at the 
entire core of the mortgage finance system.
    In order to account for the added risk, you will add 
significant cost to obtaining a mortgage. What does this mean? 
Assume you take out a 30-year fixed rate mortgage for $300,000 
in today's market. If you are a prime borrower, you will 
receive a rate of about 6 percent with no points, giving you a 
principal and interest payment of about $1,800 per month. If 
you pass this bill, we estimate the same loan at the same terms 
could cost as much as 8 percent. That increases your payment to 
about $2,200 per month. This will be an increase of $400 per 
month, $4,800 per year, for a total over $144,000 over the life 
of a loan. This is a massive backdoor tax increase on 
homeowners.
    Members of the House can take considerable pride in the 
steps you have taken already to address the problems in the 
mortgage market. You have passed legislation giving the Federal 
Housing Administration a greater ability to help troubled 
borrowers refinance. You have made it possible for people to 
exclude discharges of debt on primary residences from gross 
income, saving borrowers from higher tax bills. The House has 
passed GSE reform and established an Affordable Housing Trust 
Fund. The Financial Services Committee is working on a bill to 
ensure that the problems we have recently seen never happen 
again. Chairman Frank intends to have that bill on the floor of 
the House by the end of this year.
    I urge you to reconsider your support for the bill and 
assure you that we will work with the House in addressing the 
mortgage crisis. This bill is not the answer to the problems, 
and we urge you to oppose it. Thank you.
    [The prepared statement of Mr. Kittle follows:]
                 Prepared Statement of David G. Kittle






























    Ms. Sanchez. Thank you for your testimony, Mr. Kittle.
    At this time, I would invite Mr. Levin to give his 
testimony.

TESTIMONY OF RICHARD LEVIN, ESQ., CRAVATH, SWAINE & MOORE LLP, 
 NEW YORK, NY, ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE

    Mr. Levin. Thank you, Ms. Chairman, and Members of the 
Subcommittee. It is an honor and a pleasure to be here, to be 
invited back.
    I am here on behalf of the National Bankruptcy Conference, 
which is a voluntary nonprofit, nonpartisan organization 
committed to the improvements in the bankruptcy law. The 
National Bankruptcy Conference was formed in the 1930's at the 
request of this Committee to assist the Congress in 
deliberations on this complicated and technical area.
    I stress that we do not represent any economic interest. We 
pledge when we meet to leave our clients at the door and focus 
on what we believe is sound bankruptcy policy.
    We believe that a bill along the lines of H.R. 3609 is 
sound bankruptcy policy. You have my prepared statement. I will 
not review all of the points in there. I would like to make 
just a few remarks based on what has been said already. But I 
cover obviously a lot more territory in the prepared statement.
    It is our experience, as Mr. Brewer has said, that 
bankruptcy is not a first resort. It is a last resort. It is a 
last, last resort. People tend to head toward the bankruptcy 
court at 11:59 and 59 seconds. Many of the things that have 
been proposed by the Mortgage Bankers as ways of alleviating 
the mortgage crisis are helpful, but they are not a complete 
solution. I note that, just last Friday, the Joint Economic 
Committee majority staff produced a report on the subprime 
lending crisis. It proposes many of the things that the 
Mortgage Bankers have suggested and more, including an 
amendment to Chapter 13. And it traces the history and effect 
of the crisis quite well, and I commend its reading to the 
Subcommittee.
    But the fact is, voluntary measures will not work. We need 
a backstop, a last resort if lenders are to come to the table 
and negotiate in good faith with borrowers over restructuring 
mortgage loans.
    H.R. 3609 only recognizes economic facts. It does not 
impose losses that are not already present on the ground. The 
real estate has lost value. A foreclosure will cause it to lose 
even more value, increasing the cost to the lender through 
foreclosure expenses, taxes, insurance, maintenance and cost of 
resale. H.R. 3609 provides a better solution that is a win-win, 
that keeps families in their homes and allows lenders to 
mitigate their losses.
    We must focus on this. This is the very fabric of our 
neighborhoods that we are trying to protect.
    We believe that the bills and the law as it currently 
exists have adequate safeguards already against abuse. To file 
a Chapter 13 case, a debtor--the court must find that the 
debtor acted in good faith in filing the case and in proposing 
the plan of arrangement.
    The debtor must devote all of his or her disposable income 
to the plan for 3 to 5 years, and the debtor is hampered in 
filing--or restricted from filing bankruptcy because of the 
adverse effect it will have on the debtor's credit report, 
which will stay on I think it is at this point 10 years, but I 
defer to Mr. Brewer on that.
    We have no evidence, reading the cases, talking to the 
judges, following this area closely, that solvent bankruptcies 
are running to the bankruptcy court. And the other protections 
that are present are the two Supreme Court decisions within the 
last 10 years Rash against Associates Commercial finance, which 
provided for what we will call fair market value of an asset 
such as a home where the debt is being adjusted until, which 
sets forth the Supreme Court's interpretation of a market rate 
in interest. The bankruptcy courts are bound by both of these 
restrictions if they are to have the power to approve plans and 
adjust mortgage interest rates.
    Finally, just a word on the effect on rates. Before the 
Supreme Court decided Nobelman in 1993, four Circuits permitted 
mortgage modifications, and many, many, many bankruptcy courts 
did as well. We did not see any perceptible effect on credit 
rates, mortgage rates in those jurisdictions than in the only 
one circuit that went the other way when the Supreme Court took 
up the Nobelman case, the Fifth Circuit.
    Second, what H.R. 3609, by recognizing the economic facts 
on the ground that are already going on, when lenders go to 
foreclose, most the lenders get is the value of the property, 
which is what 3609 proposes. And that--even though that has 
been the economic fact, if not the law, has not affected 
mortgage lending. And finally, every time a change in the 
bankruptcy law is proposed that is adverse to lenders, the 
statement is made, this will hurt credit rates. The converse 
also ought to be true. If rates--if bankruptcy law is made more 
generous to lenders, one might think that rates would come 
down. Have you looked at your credit card bill recently? Have 
your rates changed in the 2 years since the adoption of the 
2005 amendments?
    Thank you, Ms. Chairwoman.
    [The prepared statement of Mr. Levin follows:]
                  Prepared Statement of Richard Levin






























    Ms. Sanchez. Thank you, Mr. Levin. Your time has expired.
    We are now ready to begin questioning, and I will begin by 
recognizing myself for 5 minutes.
    Mr. Brewer, Steve Bartlett, on behalf of the Financial 
Services Roundtable, stated in his prepared testimony for last 
month's hearing that mortgagees are reaching out to help 
consumers in trouble on an unprecedented scale. And I am 
interested in getting your response to that statement.
    Mr. Brewer. I would like Mr. Bartlett's phone number 
because I have got some clients that I need to call him about. 
Because whether they are reaching out in record numbers, I 
don't know. Are they reaching out enough? The answer is, it is 
just a tiny little bit of help based on what the problem is.
    And I think you have got to look at two issues. One is, 
just how many people are they reaching, which is small. And 
then, what are they doing when they reach them? I think that is 
where the key is. If you look at the testimony here by Mr. 
Kittle, it talks about, well, these mortgage servicers are not 
going to modify the loans to the extent that this bankruptcy 
will. They are talking about maybe letting folks skip two or 
three payments, capitalize, put the loan at the end. The 
modifications are not real. They are not meaningful as far as 
dealing with the underlying problem, which is property that is 
worth a whole lot less than what the debt is and interest rates 
that, when these ARMs reset, hit, you know, get up to 13, 14, 
15 percent. And they are one-way ARMs. They are ARMs in which 
they, you know, they never--they were adjustable rate but only 
adjustable upwards, never could go beyond that initial teaser 
rate. So the answer is, in the real world where I practice--I 
only know about Raleigh, North Carolina--it is not happening.
    Ms. Sanchez. Okay.
    In your prepared statement, you note that homes sold in 
foreclosure generally sell for only 70 to 75 percent of the 
actual fair market value. I want you to please explain your 
basis for that statement.
    Mr. Brewer. Well, that is just a rule of thumb that I 
have--I mean, obviously I have filed many bankruptcies for 
folks who have, perhaps, didn't try to save their home from 
foreclosure, so it foreclosed before they came to see me. I 
looked at what the value is, based on what appraisal they had, 
what tax values were, they have told me it was worth. I see 
what the deficiency is. North Carolina is one of those States 
that allows a deficiency judgment. When it sells at 
foreclosure, the difference the debtor owns. And that is my own 
unscientific numbers. You can actually find some cases back in 
history--at one point, that was an issue about bankruptcies, 
about whether the property brought a fair value at foreclosure 
sale. And that was a pretty fairly accepted number. If you have 
seen the TV shows where folks are sitting at home and they are 
going to make lots of money sitting at home, normally they are 
talking about buying these homes at foreclosures at these 
bargain basement prices and flipping them and making money off 
of them.
    Ms. Sanchez. Thank you.
    Mr. Levin, what is your recollection of why the exception 
or carve out for home mortgages was included in section 
1322(b)2 when you helped draft the 1978 bankruptcy amendments? 
Because we have heard them described as loopholes but to me are 
more appropriate as a carve out.
    Mr. Levin. It is not a loophole. Mr. Kittle is correct. It 
was a policy decision made at the time. This Committee had a 
different view. This Committee thought that the mortgage, 
mortgages should be permitted to be modified.
    I heard Mr. Feeney say earlier that this was a provision in 
the law since 1978. In one sense, that is correct. But the 
difference in 1978 was that, before 1978, no secured debt could 
be modified, homes, cars, vacation homes, investment property, 
nothing. The 1978 law moved a long way in permitting 
modification of secured debt but excepted out mortgage debt 
because that was the Senate's view. It was not the House's 
view. It was not this Committee's view. This Committee thought 
it was sound policy at the time to permit it. But as part of a 
compromise to get the legislation enacted, which did a 
tremendous amount of good for many people for many years, the 
House receded on that point. 
    Ms. Sanchez. Okay. I have here a quote. The Fifth Circuit 
in 1984 wrote that the section 1322(b)2, the exception for home 
mortgages was included--and I am quoting here from them--
``apparently in response to perceptions or to suggestions 
advanced in the legislative hearings that home mortgage lenders 
performing a valuable service through their loans needed 
special protection against modification thereof.'' And I am 
interested in getting your response to that.
    Mr. Levin. A couple of responses to that. The first, that 
came from I think the statement of the organization represented 
by the gentleman sitting on my right. And it is nice to know 
that their position has not changed over 30 years.
    Second and more important, the home mortgage lending was 
very different in 1978 than in 2007, 2006, 2005; 80 percent 
loan to value, 20 percent down payment, fixed rates, no 
exploding ARMs, no negative amortization, no securitization. 
The local bank held your mortgage. These were people you knew 
and who supported the community. That is not the market we are 
in today anymore.
    If anything, the progress of bankruptcy law should keep up 
with the changes in the economy, not go back to 1978, unless, 
of course, the mortgage industry would like to go back to 1978, 
and maybe that would--maybe that would solve this crisis in a 
lot of respects.
    Mr. Kittle. Madam Chairman, can I comment on that?
    Ms. Sanchez. Thank you, Mr. Levin.
    My time has expired. If I can get unanimous consent for 30 
seconds, we will allow you to respond. Without objection.
    Mr. Kittle. Thank you, Mr. Chairman.
    It was nice to know Mr. Levin was there in 1977. I am not 
sure I was born in 1977.
    Ms. Sanchez. We are going to check your driverss license 
after that statement.
    Mr. Kittle. The Senate at that time held for all 
protections as far as the bankruptcy went. The House held for 
no protections, and a compromise was gained. And I am sure he 
would concur with that.
    There was a witness, Mr. Edward Kulik, senior vice 
president of Mutual Life Insurance. His views were captured and 
actually put into law. And he pointed out that reducing a 
mortgagees's claims to the actual value of any real estate 
securing the claim would have a dramatically negative impact on 
the mortgage industry. That is what he said. That was embraced 
by the Committee, and it became part of the statute.
    I will close by saying, Supreme Court Justice Stevens said 
also in the 1993 decision: At first blush, it seems somewhat 
strange. The anomaly is, however, explained by the legislative 
history, indicating that favorable treatment of residential 
mortgagees was intended to encourage the flow of capital into 
the home lending market. It was there for a purpose.
    Ms. Sanchez. Thank you. My time has expired.
    At this time, I will recognize the Ranking Member of the 
Subcommittee, Mr. Cannon, for 5 minutes.
    Mr. Cannon. I am always pleased to take my time. And by the 
way, thank you for letting the gentleman respond without taking 
my time.
    I would also like to thank Mr. Levin for being here today. 
You know, I have worked very closely with the National 
Bankruptcy Conference and appreciate the expertise and the 
tremendous work that was done, especially on the passage of the 
bankruptcy bill a couple of years ago, which took great effort.
    I think that quote, by the way, was Senator DeConcini, not 
the National Mortgage Bankers Association, and he was a 
Democratic Senator. Just I think that might play interestingly 
in the record. We will have to look a little more on that. I 
think that is the quote that we had before us.
    For the record, Mr. Conyers is going to do the research on 
that. And if it turns out it was Mr. DeConcini, the Democratic 
Party may disown him, although that may not be relevant at this 
stage of his life.
    Mr. Levin, you talked about--I think you said something to 
the effect, voluntary measures might get--won't get the job 
done or won't get lenders to the table; the problem is more 
urgent. But they are the guys who have the most to lose, are 
they not?
    Mr. Levin. I am sorry for interrupting you.
    Mr. Cannon. Go ahead.
    Mr. Levin. They are not actually the guys to lose. In 1978, 
they were the guys with most to lose because the local banker 
was making the loan and keeping it on his books. Now these 
loans are securitized in pools into mortgage-backed securities 
which are purchased by collateralized debt----
    Mr. Cannon. Let me say, rather than the lenders, let me 
say, the owners of the paper are the ones who have the most to 
lose. People who ought to be getting there and solving the 
problem and by minimizing their losses if it costs so much to 
go through a foreclosure process, they ought to be the ones in 
there that are driving that forward.
    Mr. Levin. You would think so. However, they are not the 
ones who are at the table. The ones who are at the table are 
the mortgage loan servicers, and the servicers get a fee for 
the work they do. And they get a bigger fee when they foreclose 
because that is a big process.
    Mr. Cannon. Right. The guys that are going to have to pay 
that fee, whoever that--that may be a mutual fund. It may be 
all kinds of folks out there that own this kind of paper. There 
ought to be terrific pressure on those folks to solve the 
problem.
    Mr. Levin. There ought to be. But what happens is, there is 
a certain assembly line mentality to this. It i simpler and 
easier to work through the process than to try to custom tailor 
a solution to every single problem.
    Mr. Cannon. Well, Mr. Brewer talked about that he is not 
seeing much--and he noted, it was anecdotal--with the 
industry's attempt to rework these issues, and maybe Mr. Kittle 
would like to speak about this. But I think--was it Mr. Brewer 
we had here or Mr. Bartlett--was talking about something in the 
neighborhood of 1,500 renegotiations per week. So over a 
couple-year period between now and the end of 2009, you are 
talking about 150,000. We heard on the last panel, there may be 
as many as 500,000 of these such houses that will go into some 
kind of crisis mode. One would expect that as the word gets 
out--and by the way Mr. Brewer, I suspect that you can find the 
phone number online. And I think there is a pretty strong----
    Mr. Brewer. I have called it. I have called it. It is a 
black hole.
    Mr. Cannon. Well, I guess my point is, what is the best 
thing for America to have a black hole that gets light over 
time because you have huge incentives by the owners of this 
paper to solve the problem short of blowing the market apart 
with foreclosures, or a bill that would fundamentally transform 
how we securitize the biggest segment of wealth in America? And 
you obviously have something to say, Mr. Brewer.
    Mr. Brewer. Well, if that question is put to me, the answer 
is, I don't see why we can't do both. I mean, if these folks 
are going to fix the problem or fix--I think your numbers will 
make--I think that might represent--if those numbers are real--
I doubt they are--but that may be 30 percent of the problem.
    Mr. Cannon. Pardon me. I am about out of time, and I would 
like Mr. Kittle to have the opportunity to respond to those 
issues.
    Mr. Kittle. Thank you, Congressman Cannon.
    Our Members are reaching out, but communication is a two-
way street, which I think Mr. Brewer would agree. We call the 
consumer on a regular basis, can provide the data to show that, 
many times, many times, the calls are not returned. We are 
joined with NeighborWorks; our Home Loan Learning Center Web 
Site has gone from getting hits as low as 200,000 per month up 
to 1.6 million hits in August alone. We spent over----
    Mr. Cannon. Those numbers--you are talking about numbers 
that are big enough to solve the problem and would indicate 
that--I mean, this is a complicated world with different people 
owning paper. This is not like 1978. But if I understand what 
you are saying right, there is a massive outreach by your 
industry to help proactively solve the problem.
    Mr. Kittle. There absolutely is a massive outreach. Are we 
reaching everybody? No. Because, again, sir, communication is a 
two-way street.
    Ms. Sanchez. The time of the gentleman has expired. I would 
request unanimous consent for 30 seconds for Mr. Brewer to 
continue his thoughts since we allowed Mr. Kittle during my 
round of questioning to do the same.
    Mr. Brewer. Thank you. My point is that the idea of 
voluntary modifications to the extent that the real--to the 
extent they actually help people save their homes is good. 
Folks will turn to that first. But I am telling you from that, 
down there in the trenches, it is not enough. It is not even 
anywhere close to enough. So this Congress needs to do 
something for those people that those voluntary modifications 
are not reaching. And, again, I think that the real issue is 
the fact that what they are offering folks in a way of 
modifications do not fix the problem. We are talking--they are 
negotiating with the same people who sold them on the idea of 
these exploding ARMs in the first place.
    Mr. Kittle. That is not accurate.
    Mr. Cannon. Madam Chair, may I ask 15 seconds to say 
something conciliatory here?
    Ms. Sanchez. Fifteen seconds, Mr. Cannon, and then we are 
going to move on to Mr. Conyers.
    Mr. Cannon. The Chairman of the full Committee is laughing 
because he knows I can do it in 15 seconds.
    Ms. Sanchez. Your time starts now.
    Mr. Cannon. This is a matter of where the thumb goes on the 
scale. And I suggest that the overwhelming weight that we are 
talking about putting on the scale here may distort it to the 
great detriment of your clients in the future and hope that we 
can find something that will balance the problem.
    Thank you, Madam Chair.
    Mr. Kittle. Can I correct the inaccurate statement?
    Ms. Sanchez. I apologize. We do want to ensure that 
everybody gets an opportunity to ask questions. And we have 
gone a little long.
    So I will at this time like to recognize Mr. Conyers for 5 
minutes of questioning. And before we begin, Mr. Conyers' time, 
I want to recognize Mr. Chabot, the gentleman from Ohio, who 
has been sitting in for the last 30 minutes or so on this 
hearing. I know he has a keen interest in this issue, and we 
welcome you to the Subcommittee and thank you for your 
interest.
    And now I will recognize Mr. Conyers for 5 minutes.
    Mr. Conyers. Thank you, Madam Chairman. The Detroit area 
has the fourth largest number of foreclosures of anyone. 
Atlanta comes in number seven. It is a serious problem. And 
most of our experts agree that it is going to get worse before 
it gets better. How did a nice guy like Kittle get involved in 
this stuff, representing the mortgage people? I mean, what 
happened in your life that created this----
    Mr. Kittle. Well, I chose to be here, Congressman. And 
mortgage bankers are nice people, just like I am. So I am 
pleased to be here to represent them today.
    Mr. Conyers. Well, that is very reassuring. And if anyone 
could do it, it would be you that make us feel reassured.
    But you know, this Committee is quite collegial with Chris 
Cannon and Tom Feeney and Mr. Chabot from Cincinnati; Brad 
Miller is over here. We have got a real political situation 
here. And that is that we can talk all we want. But this bill 
is going to be tough to get through the House and the Senate, 
gentlemen. It is not going to be an easy thing to do, and 
unless we can get Mr. Chabot and Mr. Miller and this Committee 
together, that to me is my goal. We have sensational 
discussions and exchanges on this Committee. But you see, there 
are a lot of people that are now--I will be putting out a press 
release later on, and so will a lot of others--but the problem, 
Chris, is that we have got people who will be listening and 
looking at this and say, good night, the Sanchez Committee is 
really getting us taken care of. We are talking upward of 
500,000 people or families now. And help is on the way.
    The Members, the witnesses that have been invited here 
today, is there anything you can recommend out of your vast 
experience? I know Mr. Brewer and Attorney Ted Kalo from North 
Carolina know of each other. But tell me, knowing the 
difficulties of getting both Houses of the Congress together, 
what I am beginning to get worried about is what is going to 
really happen? I mean, it will be a noble effort and all these 
people are saying, ah, boy, Chairman Conyers, I know he would 
do it. And I knew Chabot would do it. I knew Brad Miller could 
come through. Sanchez has got more work than any other 
Subcommittee in the Judiciary. Where are we? Mr. Brewer.
    Mr. Brewer. If you are asking me how you get this bill 
passed, that is way above my pay grade, but I mean----
    Mr. Conyers. So tell me anyway.
    Mr. Brewer. Well, I think you either do it sooner or you do 
it later because I--if I am right, if what I am hearing is 
these modification--these voluntary modifications are going to 
fix the problems, I will come back here and admit I was wrong. 
But I will bet anybody here any amount of money that we will 
come here--you wait until next spring and you don't do 
something and this foreclosure crisis, this fire I am talking 
about, is going to be burning out of control, and you will have 
to do something, you know, because people will ultimately 
demand it.
    Ms. Sanchez. Attorney Levin, what say you?
    Mr. Levin. I don't know where the middle ground is to 
answer your question directly. But the answer is not, do 
nothing. The answer is not, let the lenders decide when they 
want to give up value.
    To Mr. Cannon's thumb-on-the-scale point, it is a very 
important consideration in all bankruptcy legislation. At this 
point, my experience tells me that homeowners with homes with 
values that have fallen and cannot afford the payments do not 
have anything on their side of the scale. I think passing 
something along these lines would give them a little bit of 
negotiating leverage. Now they have none. And it would be 
cabined and regulated by the bankruptcy judges under the 
Supreme Court's decision. But I don't think doing nothing is 
the answer.
    Mr. Conyers. Madam Chairwoman, could I ask Mr. Kittle for 
his advice?
    Ms. Sanchez. I will grant you an additional 30 seconds 
because your time has expired so that Mr. Kittle may respond.
    Mr. Kittle. Thank you, Madam Chairman. First of all, to 
correct what he said earlier, that the people are not dealing 
with the same people that originated the loans. The servicers, 
in many cases, bought those loans from brokers who had no 
fiduciary responsibility in the transaction. So they are 
talking with a servicer who is there who wants to help them 
work the loan out.
    Congressman, if could I give you a quick example of how 
this cram down bill will harm the people that you want to 
protect, and the quick example is: On an FHA loan, there is a 
statute in FHA loans that says they cannot insure when you do 
the cram down. Therefore, the part you would cram down--and I 
will use an example of a $150,000 loan, and it gets crammed 
down to $100,000. The FHA insurance can't pay on that $50,000. 
It goes back to the servicer. The servicer has to eat that 
money. It has to pay that money to Ginnie Mae, and the servicer 
takes the cost. That is a statute.
    Therefore, those loans, because of higher risk, in many 
cases, will not be made unless interest rates are raised or 
points or fees to mitigate the risk going forward.
    Ms. Sanchez. The time of the gentleman has expired.
    Mr. Cannon. Madam Chair, may I ask unanimous consent for 30 
seconds to compliment--that is not compliment Mr. Conyers, but 
complement--make a statement that is complementary to the 
statement that he had just made.
    Ms. Sanchez. You can compliment Mr. Conyers, too.
    Mr. Cannon. I do that at almost every opportunity I get, 
and I will do that right now.
    Ms. Sanchez. If you will be brief, I do want to give 
everybody an opportunity to ask questions, Mr. Cannon. But go 
ahead.
    Mr. Cannon. The gentleman has talked about the people 
watching this Committee hearing today. And I think many people 
in America may actually be watching it. Therefore, I think it 
is extraordinarily important that they begin taking 
responsibility for their own lives because the likelihood that 
this bill will get passed in a way that will actually affect 
them is I think fairly minor. And so let me point out that the 
global flow of capital is dramatically important here. If we 
want capital in America to continue making loans, we are going 
to need to deal with this.
    And I would love to have Mr. Kittle say for the record how 
people can get in touch with the association that is dealing 
with these mortgages so people can start calling up and 
screaming at bankers and telling them what they can do and what 
the value of their house is.
    Ms. Sanchez. I will allow Mr. Kittle to do that, but I 
would like to get through our round of questions first.
    At this time, I will recognize the very patient Mr. Feeney 
for 5 minutes of questions.
    Mr. Feeney. Thank you.
    And again, I want to thank the Chairman for having a second 
hearing on this very important issue.
    I think all of us sympathize with people who have to come 
see you, Mr. Brewer. Nobody wants to be in that position. And I 
will tell you that I serve on the Financial Services Committee. 
And you know, for 30 years, Congressmen and Congresswomen have 
been beating up, begging, brow beating the credit industry to 
make credit more available to nontraditional borrowers. We are 
now up to 70 percent home ownership. America is the first 
country in the history of the planet where 70 percent of 
families could actually live in a home that they own. That is a 
miraculous thing.
    But let's acknowledge that much of the bubble that has been 
created in real estate is because of credit that was too loose. 
Loans that just simply didn't make sense unless market prices 
were going to dramatically increase forever.
    The market has already overreacted. It has overreacted so 
severely that policymakers in this building, as we are trying 
to make credit more risky and therefore tighten credit 
availability, the Financial Services Committee is actually 
encouraging Fannie Mae and Ginnie Mae to loosen credit 
availability. We have the Fed that just dropped interest rates 
by half a point in order to make sure that we don't dry up 
credit markets and literally turn a partial recession in one 
market of our economy into a deep depression in all areas of 
the economy.
    So the question here is not whether the patient is sick. I 
happen to agree with your proposed analysis and the gentleman 
from Moody's, too, that the situation is likely to get worse in 
the next 6 to 12 months, not get better. I happen to agree with 
that. But like medieval blood letting by doctors, my question 
is, are we making the situation worse by being sympathetic? My 
question is, what happens going forward to credit markets? 
Because, ultimately, the way to relieve yourself of a problem 
of debt on a piece of property is to have a rising--unless you 
can get a job that pays you twice as much--is having rising 
property values. That only happens if there are buyers 
available. The problem in today's market across the country and 
especially in the States that have had double-digit declines is 
that there are just no buyers to sell to at the price that the 
owner needs to cover the cost of his mortgage.
    Now I think there may be things that we can do to get the 
holders of these mortgages and the folks that actually service 
the loans in better contact with. That is what this Committee 
and the Financial Services Committee ought to be doing. I 
talked to a local judge because at our last panel we had a 
bankruptcy judge testify that almost none of the servicers or 
securitized holders of mortgages were available to assist the 
individual that needed help. And just as Mr. Levin said, you 
can't deal with this on a case-by-case basis when it is 
happening across the country.
    I talked to an Orlando judge who happens to be a friend of 
mine, and he does foreclosure, not bankruptcy, admittedly a 
different animal, but similar. He said that, on a regular 
basis, he can dial up a phone at 2 in the afternoon and tell 
the servicer of a loan that the property is going to be sold 
the next day. One thing all of the witnesses both in this panel 
and the previous panels have agreed, in this market, especially 
with declining real estate values, holders of mortgages do not 
want that property back. It cost them months of interest rate 
payments, of paying attorneys, of paying realtors to remarket 
and fix-up costs. So it is in the interest of the holders of 
securitized mortgages across the country to find a way to 
negotiate these loans.
    But what you do in this piece of legislation that the two 
of the three of you have endorsed is you have said to all 
future lenders that you are adding uncertainty into the credit 
markets. All creditors, all lenders abhor risk. They abhor 
uncertainty, and you are adding to the uncertainty. And what 
you are doing is to say that a judge arbitrarily can modify the 
terms of the mortgage despite what is in the best interest of 
the long-term economy. And you are taking that decision out of 
the hands of the people that now are at risk.
    So I understand that none of the three of you--maybe Mr. 
Levin, maybe you have an economics degree. I think Mr. Kittle 
has referred--I don't know whether you are an economist. But I 
am worried about the long-term economic impacts. And I am 
afraid, like medieval doctors, we are taking a sick patient, 
and we are letting blood all over the place so that we can 
argue, as Mr. Levin said, we are doing something. And 
admittedly, the American people want us to do something. But I 
am afraid for the patient in the future.
    With that, if the Chairman would allow, I would be happy to 
invite comments.
    Mr. Brewer. Do you want my comment on that? Because this is 
my thought. I was with you because what you were describing was 
a situation in which doing nothing is bad because we are going 
to have all these foreclosures. There are going to be losses in 
the community. There is not going to be enough people buying 
these houses. Why don't we let the people who are in the houses 
now, who could make these payments at a reasonable rate and who 
could pay for the house at its current fair market value? In my 
area, the market is not that depressed. I understand, in other 
places, it is terrible. But wherever that level is--and this is 
not arbitrary. The court--you know, you determine the fair 
market value. They pay that lender a reasonable interest rate. 
If you want to let it be like the till rate that is done on car 
loans, fine. If this Congress wants to set what that rate is--
--
    Mr. Feeney. Well, respectfully, this bill contains no 
constraints whatsoever on the bankruptcy judge, and it takes 
out--there are no constraints whatsoever in this bill.
    Ms. Sanchez. The time of the gentleman has expired.
    And I would also just like to comment briefly on that last 
point that bankruptcy judges tend to be experts in assessing 
the value of assets. I am going to ask--pardon me--unanimous 
consent to enter into the record a letter from Richard Cordray, 
the Ohio Treasurer of State, who sent a letter in support of 
H.R. 3609, and also I would ask unanimous consent to enter into 
the record--Moody's did a subprime mortgager survey on loan 
modifications with the finding that less than 1 percent of 
serviced loans that experienced a reset in the months of 
January, April and July of 2007 were actually modified by the 
mortgagees. Without objection, those will be entered into the 
record.
    And at this time, I would like to recognize the gentleman 
from Georgia, Mr. Johnson, for his 5 minutes of questions.
    [The information referred to follows:]
   Letter from the Honorable Richard Cordray, Ohio Treasurer of State


               Special Report by Moody's Investor Service




    Mr. Johnson. Thank you, Madam Chair. In our background 
material, it recites that, in 2006, there were 1.2 million 
foreclosures in the United States, representing an increase of 
42 percent over the prior year, an explosion in foreclosures. 
And economists estimate that 5 percent of all mortgage holders 
are expected to default on their mortgage loans this year and 
next, resulting in a whopping $400 billion worth of defaults 
and $100 billion in losses to investors in mortgage securities.
    And that being the projection, and it being foreseeable 
that this would have a tremendously negative impact on the 
economy of this Nation, I want to ask Mr. Kittle, what would be 
worse, for that situation to unfold, or would it be better for 
a bankruptcy court to be able to ensure that many of those 
loans, instead of going into default and becoming 
nonconforming, would be continuing, would be allowing loans to 
continue to perform but only partial performance? Which would 
be better, nonperformance or partial performance, to the 
lending industry in this country?
    Mr. Kittle. Thank you, Congressman. I am happy to address 
that.
    I think it would be better for the market to let it correct 
itself----
    Mr. Johnson. Well, now, that is a different question.
    Mr. Kittle. But I will finish and answer your question the 
way you put it.
    --and I think it would be better for it to play out and not 
to have this legislation go through.
    And here is why: There are a couple of points and 
statistics that have not been given today. We keep talking 
about the mortgage products putting these people into 
foreclosure.
    Mr. Johnson. Well, you haven't answered my question.
    Mr. Kittle. I am going to.
    The three main reasons for foreclosure, Congressman, are 
unemployment, divorce and illness, not the mortgage products. 
So that needs to be said.
    Mr. Johnson. If you have got a mortgage, if you have got an 
adjustable rate mortgage which is getting ready to adjust 
upward, and it will cause the--and the value of your property 
is going down because of foreclosures around it----
    Mr. Kittle. But it is not the mortgage products all the 
time that are causing the foreclosures around the property.
    Mr. Johnson. Whatever the cause might be, wouldn't it be 
better to enable the debtors to continue to pay something on 
those loans as opposed to ensure that they go into default?
    Mr. Kittle. No, and for this reason.
    Because if you enact this legislation, the future interest 
rates will be up by 2 percent. Borrowers will not be able to 
obtain credit because the risk will be so high some investors 
will pull out of the market. You will hurt future purchases.
    Mr. Johnson. I heard you say that. But now you have got a 
market of lending as to debtors' principal residences. Then you 
have got a number of loans that are made for investment 
property in real estate. You have got commercial property 
loans. The residential lending industry that is consumed or 
that portion of the residential lending industry consumed by 
debtor-occupied homes is probably not as great as that overall 
market, but yet the overall market allows for a bankruptcy 
judge to come in and modify the loans.
    Mr. Kittle. Are you speaking on the investment loans?
    Mr. Johnson. Any other kind of property, other than a 
debtor's primary residence.
    Mr. Kittle. Well, there is equity in those properties, 
that's correct.
    Mr. Johnson. Let me ask Mr. Brewer.
    Do you understand the question?
    Mr. Brewer. Yeah, I do.
    Mr. Johnson. We are only talking about a portion of the 
whole market.
    Mr. Brewer. It is obviously the industry--I mean, it is 
like you are trying to force them to do what is in their best 
interest. And the most efficient way to modify these loans is 
not through this cumbersome jump through all these hoops 
counselor's process, but for those people who cannot make their 
loan payments, to modify them through a bankruptcy; and it is 
the most efficient way to do it.
    Mr. Johnson. Let me add that according to Moody's back in 
August, a study by Moody's, only 1 percent of the loans that 
qualified for a workout were actually being voluntarily worked 
out by the industry.
    Mr. Levin, what can you add to that?
    Mr. Levin. On that specific question, as I said earlier, 
sometimes lenders need--let me put it this way.
    If I am going to negotiate with you about something and you 
get to make the final decision, you don't have to take my views 
into account at all, and you invite me to the negotiating 
table, take it or leave it. What negotiation is there? Whenever 
one party to a negotiation has all of the decision-making 
authority, there is no real negotiation; it is a unilateral 
decision.
    What this law would do would be to try to put some 
negotiating leverage on both sides, regulated by a bankruptcy 
judge, regulated by Supreme Court decisions, constraints on the 
process where the Supreme Court has said, a valuation has to be 
done according to this standard, interest rates have to be done 
according to that standard.
    There is nothing in these bills that talks about valuation 
and interest rate. It is already in the law. These bills would 
hitch onto that. That is what I think about voluntary 
negotiation.
    Sure it can be done, but why would it be?
    Mr. Johnson. And it works very well in circumstances other 
than debtors' primary residences, which is what is causing the 
big problem that we are faced with today and which this 
legislation, H.R. 3609--which was introduced by Representative 
Miller, who is seated to my right, along with Representative 
Sanchez and others--seeks to address.
    And so, with that, I will yield back my time.
    Ms. Sanchez. The time of the gentleman has expired. I want 
to thank all of our----
    Mr. Kittle. Madam Chairman, may I make one 15-second 
comment, please?
    Ms. Sanchez. I will allow you 15 additional seconds and 
nobody else gets additional time.
    Mr. Cannon. I ask to give him 20 seconds so he can announce 
a phone number and we page.
    Ms. Sanchez. I will allow you 15 seconds for that purpose, 
and we are watching the clock.
    You are on, Mr. Kittle.
    Mr. Kittle. Okay.
    I wish Mr. Zandi were here--and he is not--because the 1 
percent figure you just allude to is misleading and inaccurate. 
He says 1 percent of all ARMs, 50 percent of the subprime ARMs, 
almost 50 percent, have already refinanced. There is a high 
percentage of those subprime ARMs that are paying on time. 
Therefore, his using 1 percent of all ARMs is totally 
inaccurate.
    I would encourage you to ask Mr. Zandi to verify his 
statistics. And also ask him if his own company, Moody's, even 
supports the bill.
    Ms. Sanchez. The gentleman's time has expired.
    And we appreciate again the patience of all the witnesses. 
We have had a number of scheduling difficulties with this 
hearing.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask that they answer as promptly as they 
can so that we can make them a part of the record. Without 
objection, the record will remain open for five legislative 
days for the submission of any additional materials.
    Again, I want to thank everybody for their time and their 
patience. I want to thank Representatives Miller and Chabot, 
who joined us. Back in the old days they would have had an 
opportunity to participate in the asking of questions of our 
panelists, and I am sorry that that was not the case today. But 
I do appreciate your presence here and your interest in this 
issue.
    And this hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Letter to the Honorable Linda T. Sanchez, a Representative in Congress 
     from the State of California, and Chairwoman, Subcommittee on 
Commercial and Administrative Law, from J. Rich Leonard, Judge, United 
      States Bankruptcy Court, Eastern District of North Carolina






                                

Letter to 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, and the 
Honorable Linda T. Sanchez, a Representative in Congress from the State 
     of California, and Chairwoman, Subcommittee on Commercial and 
                           Administrative Law









                                 
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