[Senate Hearing 110-871]
[From the U.S. Government Publishing Office]
S. Hrg. 110-871
HELPING FAMILIES SAVE THEIR HOMES: THE ROLE OF BANKRUPTCY LAW
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 19, 2008
__________
Serial No. J-110-124
__________
Printed for the use of the Committee on the Judiciary
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Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York LINDSEY GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
Bruce A. Cohen, Chief Counsel and Staff Director
Stephanie A. Middleton, Republican Staff Director
Nicholas A. Rossi, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois....................................................... 1
prepared statement........................................... 106
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 108
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 19
prepared statement........................................... 127
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 9
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 3
WITNESSES
Calhoun, Michael D., President, Center for Responsible Lending,
Durham, North Carolina......................................... 11
Dart, Thomas J., Sheriff, Cook County, Illinois.................. 5
Kittle, David G., CMB, Chairman, Mortgage Bankers Association,
Washington, D.C................................................ 7
Levitin, Adam J., Professor, Georgetown University Law Center,
Washington, D.C................................................ 17
Mayer, Christopher J., Senior Vice Dean and Paul Milstein
Professor of Real Estate, Graduate School of Business, Columbia
University, New York, New York................................. 15
Stengel, Scott, Partner, Orrick, Herrington & Sutcliffe, LLP,
Washington, D.C................................................ 13
QUESTIONS AND ANSWERS
Responses of Michael D. Calhoun to questions submitted by Senator
Durbin......................................................... 36
Responses of Thomas J. Dart to questions submitted by Senator
Durbin......................................................... 37
Responses of David G. Kittle to questions submitted by Senator
Durbin......................................................... 39
Responses of Adam J. Levitin to questions submitted by Senator
Durbin......................................................... 56
Responses of Christopher J. Mayer to questions submitted by
Senator Durbin................................................. 67
SUBMISSIONS FOR THE RECORD
Calhoun, Michael D., President, Center for Responsible Lending,
Durham, North Carolina, statement and attachment............... 70
Dart, Thomas J., Sheriff, Cook County, Illinois, statment........ 104
Height, Dorothy, Leadership Conference on Civil Rights, and other
Organizations , Washington, D.C., letter....................... 109
Kittle, David G., CMB, Chairman, Mortgage Bankers Association,
Washington, D.C., statement.................................... 111
Levitin, Adam J., Professor, Georgetown University Law Center,
Washington, D.C., statement and attachment..................... 129
Mayer, Christopher J., Senior Vice Dean and Paul Milstein
Professor of Real Estate, Graduate School of Business, Columbia
University, New York, New York, statement...................... 151
Slone, David P., Senior Vice President, AARP, Goverment Relations
and Advocacy, Washington, D.C., letter......................... 159
Stengel, Scott, Partner, Orrick, Herrington & Sutcliffe, LLP,
Washington, D.C., statement.................................... 160
Zive, Gregg W., President, National Conference of Bankruptcy
Judges, Bankruptcy Court, District of Nevada, Las Vegas,
Nevada, statement.............................................. 162
HELPING FAMILIES SAVE THEIR HOMES: THE ROLE OF BANKRUPTCY LAW
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WEDNESDAY, NOVEMBER 19, 2008
U.S. Senate,
Committee on the Judiciary,
Washington, DC
The Committee met, Pursuant to notice, at 10:05 a.m., Room
216, Hart Senate Office Building, Hon. Richard J. Durbin,
presiding.
Present: Senators Leahy, Feingold, Schumer, Whitehouse, and
Specter.
OPENING STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR
FROM THE STATE OF ILLINOIS
Senator Durbin. This hearing will come to order. I ask my
witnesses and guests, please take seats.
Good morning, and welcome to the hearing of the Senate
Judiciary Committee on Helping Families Save Their Homes: The
Role of Bankruptcy Law.
I thank Chairman Leahy for permitting me to hold this
hearing, and I thank my colleague in particular, Senator
Specter, the Ranking Member from Pennsylvania, for attending;
others have sent statements and some will join us.
In a few moments after I make my remarks, Senator Specter
will have his opportunity and we will then allow the panel of
witnesses to testify.
A year ago, I chaired a hearing before this committee on
the looming foreclosure crisis facing our Nation. At that
hearing, we heard about the combination of subprime loans,
falling housing prices, and resetting adjustable rate mortgages
that had put thousands of families out of their homes and
threatened millions more with foreclosure.
We heard predictions: how these foreclosures would result
in record decreases in home values across America; instability
in the financial service industry; and finally, a meltdown in
the economy. That was the crisis this committee was told we
were facing 1 year ago. Last year, I offered legislation to
avert this crisis, or at least to moderate it, by making a
simple change in the bankruptcy law.
My proposal was straightforward. Currently, a bankruptcy
judge in Chapter 13 proceedings can modify the structure of any
secured debt, except for a mortgage on a home, a primary
residence. I proposed removing that exception and permitting
mortgages on primary residences to be modified in bankruptcy
court just like mortgages on farms, ranches, vacation homes,
and other real estate.
As we heard at last year's hearing, the benefits were
clear. This proposal would significantly reduce the number of
foreclosures and help hundreds of thousands of families stay in
their homes. Mortgage modification and bankruptcy benefits
everybody--the homeowner, the lender, the neighboring
homeowners, and the economy--far more than a foreclosure
proceeding. My proposal would give lenders, servicers, and
investors a real incentive to voluntarily re-work mortgages, an
incentive that doesn't currently exist.
My proposal would not significantly raise the cost of
mortgage credit, since the costs associated with Chapter 13
bankruptcy are actually far less for lenders than the costs
associated with foreclosures. How many bankers have told me, we
do not like to cut the grass, provide security, clean the
windows, prepare a house for sale in foreclosure. That is not
what banks are supposed to do.
We've also discussed how many taxpayers' dollars my
proposal would cost: zero. There was a long list of
organizations supporting me--AARP, Leadership Council on Civil
Rights, Consumer Federation of America. They agreed this
proposal represented the best way to reduce the devastating
effect of foreclosures on America's families and communities.
Over the past year, I tried three times to pass this
proposal: as part of Majority Leader Reid's housing bill in the
spring, as part of the Senate Banking Committee's housing bill
in the summer, and as part of the financial rescue bill this
fall. Each time, the Mortgage Bankers Association and most of
the financial services industry opposed my proposal and nothing
got done. The very groups that helped to create this crisis
showed that they still have power on Capitol Hill by defeating
my amendment.
Here we are a year later. Now we are able to see that many
of the dire predictions we heard last year that may have
sounded like exaggerations actually came true. In fact, the
situation has become far, far worse than anybody could have
imagined a year ago when we considered this proposal.
The economic crisis we face today is as severe as any
America has faced since the Great Depression, and the heart of
the crisis, the canary in the coal mine? The foreclosure of
American homeowners. Proposal after proposal has been offered
to try to fix the economy and help keep families in their
homes. In the meantime, we have seen billions of dollars go to
prop up Bear Stearns and AIG. We have seen the government take
over Fannie Mae and Freddie Mac. We have seen a $700 billion
rescue plan, much of it going to the same banks that opposed
this proposal. We have seen a succession of voluntary housing
programs like Hope Now, Hope for Homeowners, and all sorts of
hope, and yet nothing has been successful in fighting the
foreclosure on the scale that is required across America.
The question that faces us now is this: after committing
over $1 trillion in taxpayer money to what has largely been an
unsuccessful effort to date to address the foreclosure crisis
and save our economy from a devastating recession, why don't we
take a step that would indisputably reduce foreclosures and
cost the taxpayers nothing?
Today we will hear from a distinguished panel of witnesses
about how bad the foreclosure crisis is and how much worse it
can get. I want to note in particular that my friend, Tom Dart,
the sheriff of Cook County, is here to talk about the impact of
the foreclosure crisis in the neighborhoods of Cook County,
around Chicago, Illinois. I thank him, and all the witnesses,
for being here today.
Make no mistake. The outlook for our economy is at best
guarded, and probably grim by most appraisal. But change is
coming to Washington, and I am confident that early next year
we will be able to take effective steps to finally address our
economic crisis where it started, by helping families save
their homes.
Now I would like to recognize my colleague, Senator
Specter, for his opening statement.
STATEMENT OF ARLEN SPECTER, A U.S. SENATOR FROM THE STATE OF
PENNSYLVANIA
Senator Specter. Thank you, Mr. Chairman.
I begin by agreeing with you, Senator Durbin, Mr. Chairman,
about the economic crisis which we face today. It is self-
evident. The increasing rate of mortgage foreclosures is an
enormous part of that problem. We also know that the mortgage
foreclosures triggered the current problem which we have now
with the very complex securities which were backing up the
mortgages. It is my view that action is required now. It is my
hope that the Congress would move on this subject before we
conclude for the year.
In saying that, I realize that it is unlikely, since we are
in a lame duck session and since our attention right now is
being directed at the automobile manufacturers, that the
problem of mortgage foreclosures and the tremendous increase in
the threat it poses to so many families to be homeless, ought
to deserve our attention on par, if not ahead, of our concern
for the automobile manufacturers.
The fact is, we can do both. To do that would require a
little more effort on our part. We passed a $700 billion bail-
out without following regular order and, I submit, very much to
the disadvantage of the country. The legislative process
requires, customarily, a bill, where we could read and analyze
it, then hearings where the proponents of the bill come
forward, and opponents, then a mark-up by the Committee, going
over the proposed legislation line-by-line, then floor action
where amendments can be offered and the Senate can work its
will on a bill. Similar action is then taken on the house side,
a conference ultimately occurs, and we meld the two bills
together and make a presentment to the President. That was not
done on the $700 billion bail-out, much to the disadvantage of
the country.
The paperwork grew from 4 pages originally proposed by the
Treasury Secretary to 110, and then before we voted, candidly,
with our backs against the wall after the House had defeated
the bill on September 29th, back on October 1st, 2 days later,
for a 7:30 vote, and it had a great deal of pork, which has
proved to be enormously embarrassing.
I spent the month of October traveling in Pennsylvania, in
accordance with custom, touching all of Pennsylvania's 67
counties, and heard enormous complaints from my constituents
about what had happened. It was my expectation that some of
that $700 billion would have been used on the mortgage
foreclosure point, and I believe that Treasury Secretary
Paulson is wrong when he says that that wasn't the intent of
our legislation.
I think a better approach has been the one advocated by
FDIC Chairwoman Bair, who has come forward with proposals. I
agree with Senator Durbin that it would have been very salutary
for the full Senate to consider the legislation which he
proposed, and at the same time, perhaps a day or two earlier, I
had proposed similar legislation with the point being to give
the bankruptcy courts jurisdiction to modify the interest rates
and to modify the time of payment.
I have concern with Senator Durbin's proposal because of
the impact it may have on the future of lenders if the
principal sum can be altered in bankruptcy. That was excluded
on first homes in order to maintain the availability of capital
from lenders without discouraging them.
There are innovative plans at work now across the country:
one in Cook County, Chicago; one in Philadelphia, Pennsylvania;
another in Pittsburgh. Senator Casey and I held hearings in
Pennsylvania on the two plans, and the essence of them is to
suspend foreclosures until the court has had an opportunity to
call in both the lender and the borrower to try to see if the
matter can be worked out.
Two days ago, I introduced legislation captioned ``The
Foreclosure Diversion and Mortgage Loan Modification Act of
2008'' to try to give Federal backing to these approaches,
where we try on a voluntary basis to suspend the foreclosure
matter and try to work out a schedule of payments so that the
homeowners may stay in their home and the lenders have a better
chance of recouping the money which they have advanced.
I conclude on the note that I do believe this requires
immediate attention and it would be my hope that we would find
some way yet to address this issue before we conclude our work
for the year, but to do so in regular order. It may take a few
more days, but I think the problem requires our effort in that
regard.
I thank you, Senator Durbin, for the work you have done in
this important field.
Regrettably, I am not going to be able to stay too long
because we are hard at work on the auto manufacturers' issue.
We are moving in many, many directions, so I might say to this
distinguished panel, if you do not see many Senators here it is
not that everybody is not hard at work, but there are so many
problems, we are like jugglers in the circus, trying to keep up
with the many problems we have to deal with.
Thank you, Mr. Chairman.
Senator Durbin. Thank you, Senator Specter. I just left a
meeting with Senator Reid on the automobile industry, so I
certainly know what you are talking about. We have very little
time and a lot of things coming at us, but I still think this
hearing is critically important and timely. I want to thank the
distinguished panel of witnesses who have come together. We are
going to give each of you 5 minutes for an opening statement.
You will see a timer in front of you. When the light turns
red, the Capitol Police come. No. When the light turns red,
your time is up and we hope you will conclude your remarks.
Since we have a large panel, we are going to hold as closely as
we can to the 5-minute time frame. Your complete written
statements will be included in the record. As is the custom of
this Committee, I ask that each of the witnesses stand to be
sworn.
[Whereupon, the witnesses were duly sworn.]
Senator Durbin. Let the record reflect the witnesses have
answered in the affirmative.
Our first witness is Sheriff Tom Dart of Cook County.
Sheriff Dart was sworn in as sheriff of Cook County in December
of 2006. Prior to that, he served for 12 years in the Illinois
General Assembly, and for 3 years as Chief of Staff in the Cook
County Sheriff's Office.
Sheriff Dart earned his bachelor's degree from Providence
College and his law degree from Loyola University in Chicago.
Last month, Sheriff Dart made national news when he became the
first sheriff in America to suspend mortgage foreclosure
evictions. At the time, Cook County was facing a record rate of
foreclosures and evictions and Sheriff Dart recognized that
mortgage companies often were not performing even basic due
diligence before foreclosing.
After a year in which he tried to negotiate with the
mortgage industry to address these concerns, Sheriff Dart
decided to take a stand on behalf of the people who were being
evicted. As a result of his efforts, Sheriff Dart was able to
ensure safeguards were built into the process to provide some
protection to those facing foreclosure.
Sheriff Dart, we appreciate your service in looking out for
the citizens you represent. Glad to have you here today. You
may proceed with your testimony.
STATEMENT OF SHERIFF THOMAS J. DART, COOK COUNTY, ILLINOIS
Sheriff Dart. Thank you, Senator. Good morning, Senator
Durbin, Ranking Member Specter.
Let me first say what an honor it is to be here before you
today, and what a privilege it is to be able to represent the
voices of the thousands of homeowners in Chicago and suburban
Cook County who are currently facing foreclosure, as well as
the thousands more who, despite their best efforts, know that
foreclosure is just a few days away.
I am here today because of the stand we took in Cook
County, as you mentioned, Senator, to stop all mortgage
foreclosure evictions. It was the first move of its kind in the
country and one that drew national attention to the crisis
faced by so many Americans.
That growing crisis in our county couldn't be ignored any
longer and a drastic step had to be taken. When I took office
just 2 years ago, there were 18,916 mortgage foreclosure cases
filed in Cook County. This year, we project 43,000 will be
filed. As a point of reference, Cook County is the second
largest county in the United States.
When I took office, we were evicting 1,771 families from
their homes due to foreclosures. This year, we are on track to
evict 4,500 families. Due to the injustice that I was
witnessing on a daily basis, we stopped all mortgage
foreclosure evictions until protections could be built into the
system.
The result of that stand was the creation of new layers of
protections for those living in foreclosed homes, as well as
for taxpayers, but it was a solution that was designed only for
Cook County. It was a Band-Aid that has helped problems
locally, but what became obvious was a need for a more
systematic solution.
Senator Durbin's plan to allow for the restructuring of
mortgage debt during a bankruptcy proceeding is exactly the
type of bold stand American homeowners need. It is clear from
the present economic conditions, as well as the continuing rise
in foreclosure cases, that the time for talking has long
passed. A solution is needed right now.
All you have to do is drive down one of the many blocks our
eviction teams drive down each and every day, from the
wealthiest suburbs to the inner city neighborhoods, and the
effects of this crisis are easy to see. Consider a block in
Chicago's poverty-ravaged Englewood neighborhood. Once home to
16, 20 homes, that block now has 4 homes standing. The rest
have been demolished, and two of the remaining homes are
boarded up. The third is about to have a knock on the door from
our deputies, explaining that everyone has got to get out.
There was a time when our Eviction Unit visited the
exclusive Barrington Township, Cook County's wealthiest area,
maybe six times a year. Today we are in Barrington and
surrounding towns once a week, carrying out foreclosure cases.
Boarded up and empty homes, as any law enforcement official
will tell you, are a breeding ground for criminal activity, but
they also represent a staggering loss in property taxes. Think
about that Englewood block for a minute. What once was a
thriving block with 16 to 20 homes adding to the city's tax
base has wilted to just 4. That means higher property taxes for
everyone else, a need for more police on that block, and yet
another house on the verge of being boarded up. That is an
impact everyone can feel.
Going out with our Eviction Unit, I get to hear first-hand
so many of the heartbreaking stories of how a family wound up
in foreclosure. They are both gut-wrenching and varied. Take,
for instance, Linda Gary, a mother of two, living on the west
side of Chicago, who took out a second mortgage to put her son
and herself through college. She borrowed at 9.5 percent. But
after her husband became terminally ill, she tried to refinance
it but she was told she couldn't. She filed for bankruptcy,
thinking it would solve her crisis. Instead, she learned there
were no bankruptcy protections that could help her and her
situation for the long term, something she said she was never
told before the filing.
Or the 74-year-old widow who had to turn for help from the
Chicago Coalition for the Homeless after losing her Southside
home to foreclosure in August. After her husband died in 2003,
their son moved in to help pay the bills on a house that had
been in their family for 20 years. When her son got sick, she
refinanced the house, hoping to make ends meet, and was told an
ARM was best for her. But when her son got sick again and her
adjustable rate changed, she just couldn't keep up with the
payments. She couldn't get any help from the bank, and she lost
her family's home in August.
These folks are just a few examples of the hardworking
people in this country whose lives have been destroyed and who
simply need a little bit of help to survive.
In October, Cook County's foreclosure filings were 31
percent higher than they were in October of last year. Right
now, 1 in every 313 houses in Cook County is in foreclosure. If
banks would just take a look, they'd see that many of these
cases involve someone not thumbing their nose at the mortgage
industry. Very often it's a hardworking family that simply
needs a helping hand.
That's why I'm so pleased to see the kind of opportunity
presented by Senator Durbin's bill. It's the kind of helping
hand so many people need at this time. You know, when I stopped
all mortgage foreclosure evictions in Cook County, there were
some who said I was a vigilante, that I was ignoring what I was
sworn to do. Critics said I was going too far, that this wasn't
the answer, and that we should just continue to talk through
this problem. It's not unlike what they're saying to you,
Senator Durbin.
But I can tell you first-hand that if we had just continued
to talk, which is what people kept pleading with us, and not
acted in Cook County, the list of victims would have continued
to grow on a daily basis. That's why it's clear the time for
talking is done. It's time for a bold stand. Senator Durbin,
your bill is exactly the kind of help that Americans need right
now.
Thank you all so very much for your time.
Senator Durbin. Thank you, Sheriff Dart.
[The prepared statement of Sheriff Dart appears as a
submission for the record.]
Senator Durbin. The next witness is David Kittle, chairman
of the Mortgage Bankers Association. Mr. Kittle previously
served as vice chairman of the Mortgage Bankers Association, as
well as chairman of the Association's Political Action
Committee. He is currently the executive vice president of
Vision Mortgage Capital in Louisville, Kentucky.
Mr. Kittle, thank you for joining us today. Given the
economy crisis we're now in and the impact it's had on
Americans, we're anxious to hear your testimony on plans that
you believe we should be pushing forward to reduce
foreclosures.
I look forward to your testimony, and you may proceed.
STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION, WASHINGTON, DC
Mr. Kittle. Thank you for the opportunity to appear before
you.
Mr. Chairman, my name is David Kittle. I'm a Certified
Mortgage Banker and have 31 years of experience in the field. I
have been working with customers, banks, and every part of the
mortgage industry during this time. While I am also chairman of
the Mortgage Bankers Association, I would like to speak to you
today from the perspective of a lender who is still in contact
with consumers.
Mr. Chairman, we all agree on the same goals: we all want
to help the consumers by stabilizing the market; we want to
help families stay in their homes; and we want to make sure the
market excesses we saw earlier in this decade do not return. We
all agree on that.
However, we disagree on the notion that bankruptcy would
help our Nation's consumers. We should be working on efforts to
help keep people out of the bankruptcy courts rather than
pushing people toward them.
Let me give you three reasons why bankruptcy is harmful to
consumers. First, no one should make filing for bankruptcy
appear attractive. There are real and severe consequences for
consumers who declare bankruptcy. Bankruptcy stays on a credit
report for 7 to 10 years. It makes it very difficult to acquire
future credit for a new home or car. It can stand in the way of
getting insurance. It can make it harder to get a new job, or
even rent a home or an apartment.
Two-thirds of those people who file for bankruptcy are
unable to fulfill the terms of their repayment plans. Two-
thirds. In other words, two-thirds of those who file will still
lose their home and still have the bankruptcy on their record.
Second, changing the law will force lenders to impose
tougher standards on people trying to get a mortgage. Cram-down
legislation would add new risk to the calculation lenders make
in setting prices. For the first time, lenders will have to pay
more attention to markets with the most volatility and those
with higher risks, such as rural areas, inner cities, and
subdivisions, where history shows the greatest fluctuation of
home values. This could even lead to a new era of red-lining.
Lenders will be forced to demand larger down payments and
raise interest rates to balance the risk from judges who would
change the mortgage contract and cause lenders or investors to
suffer an economic loss.
Third, as you know, our financial markets are incredibly
fragile right now. Cram-down legislation would only add more
instability. The only option for many low-income borrowers
today is to get an FHA-insured loan, where the government
minimizes the risk to the lender of making a low down payment
loan. Cram-down legislation would make it harder for borrowers
to get an FHA loan because lenders would face the possibility
that FHA insurance would not cover the loss from a principal
reduction.
The same is true for VA lending. In effect, Congress would
end the only meaningful lending option currently available to
most low-income borrowers almost overnight.
Mr. Chairman, throughout this debate I have heard again and
again about why bankruptcy laws should be changed, the idea
that rich people with vacation homes get cram-down protection
and that the middle class is somehow being cheated out of this
protection.
Let me clarify how current law works. If someone in
bankruptcy were to have a $400,000 mortgage on a vacation
property and the judge were to reduce that to $350,000, the
debtor would be required to pay off the entire $350,000 in
equal monthly payments during a 3- to 5-year repayment plan,
not over the course of 30 or 40 years.
More likely, the judge would force the debtor to sell the
vacation home. Vacation home customers pay for this added risk
in four ways: higher down payments, higher interest rates,
higher origination fees, and shorter, and more expensive loan
terms. Future home buyers can expect to see similar treatment
if Congress passes cram-down legislation.
In 1978, this Committee passed a broad rewrite of the
Bankruptcy Code. It specifically and purposefully excluded
primary residences from cram-down. Congress did so to keep the
cost of primary residence mortgages low. This is not a
loophole. This was an important effort by Congress to encourage
home ownership, which even today is the best way for American
families to build, grow, and maintain wealth.
Congress should continue to help consumers by keeping
mortgage costs low. Passing cram-down legislation during this
credit crunch will further destabilize the mortgage market and
it will not help significant numbers of families to stay in
their homes.
We at the MBA look forward to continuing to work with
Congress, our regulators, and the new administration to find
new, creative, and productive ways to address the current
crisis.
I look forward to addressing any questions that you may
have. Thank you.
Senator Durbin. Thank you, Mr. Kittle.
[The prepared statement of Mr. Kittle appears as a
submission for the record.]
Senator Durbin. My colleague, Senator Schumer, has joined
us here and I know that he is, like the rest of us, trying to
do a number of things in the closing hours of the session.
Senator Schumer, if you'd like to make an opening statement
at this point, then we'll return to the witnesses.
OPENING STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR
FROM THE STATE OF NEW YORK
Senator Schumer. Thank you, Mr. Chairman. I appreciate it.
I had thought the Banking Committee, where I had to introduce
the nominee for IG of the TARP, was at 9:30 and they switched
it to 10, so I apologize for being here late before I could
make an opening statement.
First, I want to thank you, Senator Durbin, for your
leadership on this issue. To me, this provision is the key to
unlocking the mortgage crisis--key to unlocking it. And you've
championed this for a long time, and I've been pushing this for
the last several--I've been a co-sponsor from the beginning,
but I've been pushing it for the last several months because I
think it's our only solution.
And let's talk business here. Let's look at the problem
which everybody ignores or pushes away: no voluntary program is
going to work. None. Mr. Kittle, you are standing in the way of
progress and it's going to hurt your own banks. I have to tell
you that. It's a short-sighted view that you suggest.
The reason is very simple. The reason is very simple. Most
mortgages, 90 percent, are held in lots of little pieces.
They're not held by one bank anymore. When any one of the
tranche holders objects to any change in the terms, there is no
change in terms. It's unconstitutional, it's a contract, so you
can't change it. That's why Secretary Paulson's plan, Chairman
Frank's plan, Senator Dodd's plan, all well intentioned, have
not done very much. They work out great if the bank still holds
the mortgage, but that was 20 years ago. Now, 40 tranche
holders hold the mortgage.
Let me explain it for a minute, if I might. You know it. If
the 40th tranche is the most risky tranche when they divided up
the mortgage, and they said if the home value goes to 98
percent of its value, you get wiped out, 40th tranche holder,
and everyone else gets repaid, then that 40th tranche holder
has no interest in seeing a refinancing, whereas, if the bank
had held that mortgage and it was 98 percent of its value, they
would.
But this tranche holder is only interested--or the
representative of the tranche holder--in his interest or her
interest, which is that portion that's 98 to 100. They got a
little more interest for it, they have to take the risk. But
they may as well sit around and wait for 10 years until housing
values come back up and the house will be 100 percent of its
value, or more. And so they hold up progress. That's their job.
But it's not our job. I would suggest to everyone on the panel,
it's not your job because you're representing the financial
system as well.
The only constitutional way--the only constitutional way--
to break into this contract is bankruptcy. Of course, every
other player in bankruptcy faces the risk that should their
borrower be unable to pay, that there's going to be a write-
down, except first mortgages. It makes no sense. It makes no
sense.
If we were to go and pass the legislation that Senator
Durbin has sponsored and I have co-sponsored, you would
immediately, with the cram-down provision, give that 40th
tranche holder the incentive to negotiate because that tranche
holder would say, hey, bankruptcy may wipe me out. If I can get
20 percent, or 30 percent, or 40 percent, I'm taking it. But
until that happens, we're not going to get any change, and
we're not going to find a floor to the housing market, and our
financial system will be precarious.
And Mr. Kittle, I would suggest to you your own
constituency is hurt more by not having this provision than by
having this provision. I have talked to some of the big
bankers, and they understand it. But the smaller bankers, who
probably hold a lot of mortgages, are not. But there's a
responsibility to the country here. Passing this provision
could be the difference between a medium recession and a deep
recession, or even worse. So we have a responsibility here. We
have a responsibility. We are not going to be able to pass this
in this Congress with 51 votes, Democratic votes, with the
President opposed. But I can tell you, Senator Obama, I know,
is for this provision. President-Elect Obama. Excuse me.
I think we had, in our negotiations, which I was part of,
on the TARP, we had three or four Republican Senators, once
they heard the arguments that I've just made here, who said
we're willing to go along. I believe it's going to happen. I
also believe it must happen.
So I want to thank you for holding this hearing. Again, to
repeat to the panel and to America: we will not get to the
bottom of this economic crisis until we solve the mortgage
crisis, until we find a bottom. We will not find a bottom to
the mortgage crisis until this legislation is passed. That is
because of the new way mortgages are structured, chopped up in
little pieces, with no one banker representing them.
The legislation that Senator Durbin has put in has been
carefully crafted not to raise the cost of future mortgages,
Mr. Kittle, because it's only aimed at previous mortgages, and
I believe he was willing--I don't know if it's in the
legislation--to limit it to subprime, and maybe ALT As, so all
the regular mortgages that are issued are not going to be
affected by this.
So let everyone rise to the occasion. We have a crisis that
can be solved by a simple and thoughtful piece of legislation
sponsored by Senator Durbin. We have to rise to that occasion.
Thank you.
Senator Durbin. Thank you, Senator Schumer.
Our next witness is Michael Calhoun, president of the
Center for Responsible Lending, a research and policy institute
on consumer lending issues. Mr. Calhoun has more than 25 years'
experience in consumer law and was a principal drafter of the
laws in North Carolina regulating predatory mortgage loans and
mortgage brokers and lenders. He has a bachelor's degree from
Duke, a law degree from the University of North Carolina.
Thank you for joining us. Please proceed with your
testimony.
STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR
RESPONSIBLE LENDING, DURHAM, NC
Mr. Calhoun. Thank you, Senator Durbin, and thank you,
Senator Schumer.
The economy cannot recover until we stem the tide of
foreclosures. American families are losing their homes at a
staggering rate, and it is only projected to get worse.
Foreclosures are currently happening at more than 2.3 million
homes per year. Credit Suisse projects that, over the next 5
years, 6.5 million families will lose their homes. That is 1
out of 8 of all mortgages outstanding in the United States.
This was not a typical or accidental foreclosure crisis.
Mortgage brokers, lenders, and securitizers were paid huge fees
and bonuses to steer families into risky, unsustainable
mortgages, even though the families qualified for much better
loans, though those loans paid much lower fees and bonuses.
Today, the most pressing need for families and the overall
economy is to help these homeowners stay in their homes. The
voluntary loan-by-loan modification efforts have fallen short
and will continue to do so. Recent reports have found that only
3.5 percent of delinquent subprime loans received modifications
in August of this year, and 8 out of 10 seriously delinquent
homes are not on track for any loss mitigation outcome.
The obstacles to this have been well documented:
securitization, investor concerns about lawsuits, second liens,
and lack of capacity. The most promising voluntary program
proposed to date is the FDIC's proposal to use some of the TARP
authority to provide guarantees to mortgages that are
sustainably modified, and we have urged Treasury to implement
that immediately.
But regardless of which voluntary programs are implemented,
lifting the ban on judicial modifications is a crucial element
to success for two reasons. First, it will provide the
incentive to lenders and servicers to engage in modifications,
and servicers will have the protection that they are acting in
an investor's best interests by entering into those
modifications.
Second, this reform will provide a critical backstop for
homeowners whose servicers for some reason still cannot, or
will not, participate in voluntary modifications. We note this
same approach was used successfully in the 1980s to resolve the
farm loan crisis, despite objections that sound virtually
identical to those raised to the proposal before this Committee
today.
Importantly, this bankruptcy reform is carefully tailored
to be targeted and fair. This may be the key point in all of my
testimony. Modifications to principal would be available only
for families whose homes would otherwise end up in foreclosure.
This is an additional requirement beyond the ordinary
requirements for eligibility to file for Chapter 13.
Thus, this reform encourages, rather than undercuts,
participation in voluntary modification programs. Lenders hold
the key to the courthouse. If they provide those modifications,
the borrower is not eligible for the bankruptcy relief.
Furthermore, in bankruptcy the relief is limited to market
interest rates, limited as to term, and principal reductions
can be no lower than the full value of the property. Homeowners
would have to meet the stringent requirements of the Bankruptcy
Code before receiving a permanent modification. That means
completing a rigorous 5-year plan.
I will close with the following: less than 2 months ago,
the Federal Reserve loaned AIG $85 billion as a lifeline. Since
then, AIG has incurred larger-than-projected losses on its
credit default swaps, contracts betting on the subprime
mortgages that are causing the current crisis. Last week, the
Fed responded to AIG's worsening condition by writing down this
$85 billion debt to $60, lowering the interest rate
substantially, and extending the repayment term to more than
double it.
Certainly for borrowers for whom the difference in losing
their homes and staying in their neighborhoods is only hundreds
of dollars a month, they should be afforded an opportunity for
reasonable modifications, especially when these modifications
are the key to stabilizing the whole economy.
In conclusion, bankruptcy is essential to resolving our
financial crisis. It can be implemented quickly and at zero
cost to taxpayers, and it should be enacted immediately.
Thank you.
Senator Durbin. Thank you, Mr. Calhoun.
[The prepared statement of Mr. Calhoun appears as a
submission for the record.]
Senator Durbin. Our next witness is Scott Stengel, partner
at the law firm of Orrick, Herrington & Sutcliffe. He practices
primarily in areas of insolvency, bank regulation, corporate,
and commercial law. He is a graduate of Notre Dame Law School,
and served as law clerk for Judge Douglas Tice on the U.S.
Bankruptcy Court.
Mr. Stengel, thank you for coming. Please proceed.
STATEMENT OF SCOTT STENGEL, PARTNER, ORRICK, HERRINGTON &
SUTCLIFFE, LLP, WASHINGTON, DC
Mr. Stengel. Thank you, Mr. Chairman. I'm grateful for your
invitation to testify today on the role that bankruptcy law
should play in the current housing crisis.
I'm a partner in the Washington, DC office of Orrick, and a
significant part of my practice is devoted to advising
participants in the capital markets on the application of
bankruptcy and other insolvency laws.
I appreciate the opportunity to share with you this morning
some observations from that perspective and to assist the
Committee in understanding the impact that proposed legislation
might have on the mortgage-finance market. I'm speaking only
for myself today and not on behalf of my law firm or my
clients.
At the outset, I want to express my gratitude to the
members of this Committee and to the other officials at
Federal, State, and local levels who have worked so tirelessly
to address the economic challenges facing our Nation.
Speaking just as a citizen, I am heartened by the
leadership that has been exhibited and am confident that, when
honest policy debates are combined with a collaborative spirit,
constructive solutions can emerge.
In the last 7 months, however, a dizzying array of
legislative and regulatory initiatives has been adopted that
represents a staggering level of Federal intervention in our
economy and a dramatic shift in many longstanding government
policies.
From my perspective as a lawyer advising market
participants, I can say that much in these programs is still
being digested and, in some cases, deciphered. Yet, what has
become clear is that each one is rippling through the financial
markets and the broader economy and is influencing the behavior
of both businesses and consumers in ways that no doubt were
intended and in other ways that may have been unforeseen.
This butterfly effect, in my view, should not be overlooked
or underestimated as changes in the bankruptcy laws are
considered and, in the current environment, counsels in favor
of especially careful deliberation.
Among the most pressing issues that I continue to perceive
in the capital markets, as a lawyer, is uncertainty in pricing
risk. Before the present credit and liquidity crises, this
process was facilitated by credit rating agencies independently
assessing the probability of default on a security and
assigning a corresponding rating.
In the last year, however, questions have been raised about
the degree of comfort that can be taken from such a rating, and
the resulting uncertainty has sparked a flight of capital,
especially among investors who relied heavily on credit ratings
in making judgments on pricing risk. This has resulted in
liquidity becoming increasingly scarce and market volatility
skyrocketing, which in turn have fueled a vicious cycle in
which the overall tolerance for uncertainty has declined
sharply.
From the standpoint of the capital markets, therefore, the
time would seem ripe for policies that are designed to provide
greater clarity and stability on issues that factor into
investment decisions and associated risk assessments.
A prominent example is the impact of bankruptcy and other
insolvency laws on the rights of creditors. An inordinate
degree of uncertainty attends the application of these laws
generally, not only because they have a more debtor-friendly
orientation than their counterparts in other countries, but
also because they are administered by courts that continue to
claim broad powers in equity.
This lack of predictability can generate material risk
premiums for liquidity from the capital markets, which
ultimately must be passed through to borrowers in the form of
higher interest rates or other charges if credit can be
extended at all.
In the same vein, this would seem an inopportune time to
propose initiatives that could increase uncertainty among
investors in pricing the risks associated with capital-markets
transactions. This includes, I fear, any legislation
authorizing bankruptcy courts to strip down or otherwise modify
the principal and interest that are due on a loan secured by a
debtor's principal residence.
The prohibition against such forced modifications in
bankruptcy is three decades old and, contrary to arguments that
have been advanced by some scholars, has little to do with the
kinds of mortgage loan products that were offered when the
Bankruptcy Code of 1978 was enacted. Rather, its purpose always
has been to foster a liquid and efficient mortgage finance
market, which I think we all agree is needed now more than ever
before.
I wholeheartedly agree that the rising tide of foreclosures
must be stemmed in order to stabilize the housing market, and
even more to alleviate the increasingly unsustainable burdens
on families across the country.
But with all due respect, I am equally convinced that a
change to the bankruptcy laws is not the answer. Instead, with
Fannie Mae and Freddie Mac in conservatorship and with
promising new financial products like covered bonds on the
horizon, I respectfully recommend that the Congress consider a
more holistic approach to reinvigorating our system of mortgage
finance and that, as a part of that framework, a comprehensive
protocol for voluntary loan modifications be established that
especially includes meaningful incentives to participate.
I would be pleased to answer any questions that the
Committee may have. Thank you.
Senator Durbin. Well, thank you very much, Mr. Stengel.
[The prepared statement of Mr. Stengel appears as a
submission for the record.]
Senator Durbin. Our next witness is Professor Christopher
Mayer. He's the Senior Vice Dean and Professor at Columbia
Business School. Previously, he held positions at the Wharton
School, the University of Michigan, and the Federal Reserve
Bank of Boston. He has a B.A. from the University of Rochester
and a Ph.D. in Economics from MIT.
Thanks for joining us. Please proceed.
STATEMENT OF DR. CHRISTOPHER J. MAYER, SENIOR VICE DEAN AND
PAUL MILSTEIN PROFESSOR OF REAL ESTATE, GRADUATE SCHOOL OF
BUSINESS, COLUMBIA UNIVERSITY, NEW YORK, NY
Professor Mayer. Thank you very much, Senator Durbin. Good
morning to the Committee. Thank you for inviting me to speak
today.
I have spent the last 16 years studying housing and credit
markets, including working at the Federal Reserve Bank of
Boston, and so I appreciate the opportunity to speak to the
Committee.
Preventing foreclosures is a crucial goal because of the
pain associated with residents losing a home and the negative
impacts on local communities and governments. However, it is
essential to consider the broader context of the housing and
foreclosure crisis. Reducing foreclosures through allowing
judicial strip-downs comes with many risks, including
reductions in future credit availability, as well as the
possibility of many millions of additional bankruptcy filings
and of substantially slowing down the recovery of housing and
mortgage markets.
These negative consequences would impact nearly all
Americans, not just those facing foreclosures. Instead,
policymakers should focus on restoring reasonable credit
through the mortgage market, a policy that could substantially
reduce foreclosures by reducing the rate of house price
declines, as well as benefiting tens of millions of homeowners
and potential homeowners.
I begin by providing a different interpretation of existing
research than that that will be presented by Professor Levitin.
Evidence from existing studies strongly suggest strip-downs or
delays in foreclosures reduce the amount of available mortgage
borrowing and may also increase mortgage rates. This is just
common sense. Lenders facing the possibility that borrowers can
walk away from their payments without the threat of losing
their home will charge more money for a mortgage or require
higher down payments.
A second issue with the current legislation is that it
provides disincentive to borrowers to negotiate under most
existing private and FDIC-sponsored loan modification programs,
likely delaying the resolution of the housing crisis.
Chairwoman Bair has stated that the recently announced FDIC
program to modify IndyMac mortgages provides a benchmark for
other private lenders to roll out large-scale programs to
quickly modify millions of loans, and other banks have
followed.
Yet, by allowing borrowers to file for bankruptcy and get a
permanent strip-down as an alternative to accepting loan
modification with forbearance, this bill would make loan
modifications under these current plans dead on arrival for
most of the borrowers. Evidence from Japan shows that long
delays in resolution can harm economic growth for years,
keeping credit markets frozen and leading to further losses for
banks, which unfortunately fall back in the hands of taxpayers.
One of the largest tragedies of the current subprime crisis
is the fact that some borrowers were misled into getting
mortgages they did not understand and would eventually not be
able to afford, yet the existing legislation includes all
subprime loans, or maybe a larger group of loans, both easily
understood fixed-rate mortgages, as well as much more toxic
228s and option ARMs.
Allowing fixed-rate borrowers with simple mortgages to
strip down their balance is unfair to the many other borrowers
who took on mortgages and bought houses they could better
afford. Applying strip-downs only to higher rate mortgages also
sends a strong message to lenders that they should be wary of
lending to risky borrowers in the future, setting back much of
the progress in the last decade of providing credit to risky
borrowers.
Along with Professor Glen Hubbard, I have put forth an
alternative proposal to fix the mortgage market. The Hubbard-
Mayer proposal would put a floor on house price declines, clean
up household balance sheets, and prevent foreclosures by
refinancing millions of homeowners into stable 30-year fixed-
rate mortgages.
We believe the appropriate course for policy is to
reestablish normal lending terms for housing finance and, given
that the government is originating more than 9 in 10 mortgages
through Fannie Mae, Freddie Mac, and the FHA, the government is
in a prime position to do this. The appropriate mortgage rate
today would be about 5.25 percent.
A second part of our plan is to create a modern equivalent
of the Homeowner Loan Corporation to help homeowners with
negative equity refinance into a stable 30-year fixed-rate
mortgage with a 95 percent loan-to-value ratio. Lenders and
taxpayers would split the losses on refinancing the mortgages
with the new agency, and in return the Homeowner Loan
Corporation would take an equity in the property so that
taxpayers would be protected.
The fiscal effect of this program is substantial. Lower
mortgage rates provide a stimulus of $118 billion per year in
lower mortgage payments and is a middle class program that
would benefit almost 20 million homeowners, allowing them to
reduce their mortgage payments by $350 a month.
The current mortgage melt-down and housing crisis has had
significant repercussions for the economy and our financial
system. Rather than using the bankruptcy courts, which might
take years and lead to higher lending costs in the future,
policymakers should focus on cleaning up the mortgage market.
In the process, taxpayers would protect the nearly $6 trillion
in mortgages and mortgage guarantees that now sit on the
Federal balance sheet. Without appropriate and prompt action,
the problems in the housing market will just get worse, with
serious consequences for all Americans.
Thank you very much.
Senator Durbin. Thanks for your testimony.
[The prepared statement of Professor Mayer appears as a
submission for the record.]
Senator Durbin. Our final witness is Adam Levitin,
Associate Professor of Law at the highly regarded Georgetown
University Law Center. Professor Levitin specializes in
bankruptcy and commercial law. He directs the Georgetown Hebrew
University in Jerusalem, and the Business and Commercial Law
program. Previously, Professor Levitin practiced in the
Business, Finance, and Restructuring Department of the law firm
of Weil, Gotshal & Manges.
Professor Levitin holds an undergraduate degree from
Harvard, two master's degrees from Columbia, and a law degree
from Harvard Law School. He served as a law clerk to Judge Jane
Roth on the Third Circuit.
Thanks for being here. We welcome your testimony.
STATEMENT OF PROFESSOR ADAM J. LEVITIN, GEORGETOWN UNIVERSITY
LAW CENTER, WASHINGTON, DC
Professor Levitin. Senator Durbin, Mr. Chairman, members of
the Committee, good morning. My name is Adam Levitin and, as
you noted, I'm an Associate Professor of Law at Georgetown
University Law Center.
I wish to make two points this morning. First, permitting
bankruptcy modification in mortgages will have only a minimal
impact on mortgage credit. Second, bankruptcy modification is
the only method for dealing with the obstacles to loan
modification created by securitization.
Bankruptcy modification will only have a de minimis impact
on mortgage credit. Mortgage costs will not go up and mortgage
credit availability will not be reduced, except at the very
margins. For the average borrower, there will likely be no, or
almost no, impact.
This is because lenders typically lose less in bankruptcy
modification than in foreclosure. Indeed, by definition, the
Bankruptcy Code guarantees a mortgage creditor at least as much
of a recovery as in foreclosure, namely, the value of the
property.
I've conducted the only research that examines the
foreclosure modification tradeoff for lenders. Currently,
foreclosure losses for lenders are running at around 55 percent
of loan principal. Cram-down, even in lenders' worst-case
scenarios, like Riverside and San Bernadino, California, would
only result in an average 23 percent loss of loan principal.
As foreclosure losses are greater than bankruptcy
modification losses, lenders will not price against bankruptcy
modification. The Mortgage Bankers Association, however, has
been touting a bogus claim that bankruptcy modification will
result in a 150 basis point across-the-board increase in
mortgage interest rates.
Let me be very clear. The Mortgage Bankers Association's
150 basis point number is false. It is grossly irresponsible
and it is disprovable. It is the result of a cherry-picked
comparison between interest rates on investor property
mortgages, which can be currently modified in bankruptcy, and
single-family mortgages, which cannot be.
The Mortgage Bankers Association claims that the entire
rate spread between these mortgage types is due to the
different in bankruptcy modification risk. Not only does this
ignore the milieuxed other risks that attend investor property
mortgages, like whether the investor can find a tenant or
whether that tenant will pay the rent, but is also cherry-
picked.
An honest approach would note that there is no difference
on interest rates on private mortgage insurance rates or on GSE
delivery fees between single-family mortgages, which cannot be
modified currently in bankruptcy, and two-family mortgages,
which can already be modified. These mortgages have different
risk exposures to bankruptcy, but no price difference. This
strongly suggests that the market does not price against
bankruptcy modification.
So if modification is such a better outcome than
foreclosure for lenders, why aren't we seeing more voluntary
modifications? The answer lies with securitizing and the
contractual and incentive problems it creates. Securitization
separates beneficial ownership of mortgage loans from the
servicing of loans. This creates several problems for loan
modifications, two of which I will touch on now.
First, the servicers contracts, in almost 40 percent of
securitization deals, limit their ability to perform
modifications. Servicers are often banned from writing down
principal, from reducing interest rates, from changing
amortization, or they are limited in the number of loans they
can modify.
As Senator Schumer noted, these contractual obligations can
only be removed with the 100 percent unanimous consent of the
mortgage-backed security holders. That will be difficult, if
not impossible, to get in many cases. The contractual obstacles
to efficient loan modifications created by securitization
cannot be circumvented in any way except bankruptcy.
Securitization also creates economic incentives for
foreclosure. If we want to understand why we are seeing such
dismal voluntary efforts at loan modification, we have to take
the advice of Deep Throat and ``follow the money''. That trail
leads to mortgage servicers, like many of the members of the
Mortgage Bankers Association. Servicers are supposed to manage
securitized loans in the interest of mortgage-backed security
holders, yet servicers' compensation creates an incentive for
servicers to foreclose, even if modification is in the interest
of investors.
When servicers modify a loan, they received fixed-rate
compensation. But in foreclosure, the servicer is compensated
off the top of foreclosure sale proceeds on a cost-plus basis.
There is no one monitoring the cost and there is no one
monitoring the plus.
This compensation structure creates a powerful economic
incentive for servicers to foreclosure, regardless of the
impact on investors, on homeowners, and on communities.
Bankruptcy modification would shut down this gravy train and
will move the economic incentive for servicers to foreclose.
Bankruptcy modification would hurt servicers' bottom line,
and that is why servicer trade organizations like the Mortgage
Bankers Association have been fighting so hard against it, even
as mortgage-backed security holders have been largely silent.
I will note that there is no one on this panel who speaks
for mortgage-backed security holders. Bankruptcy modification
is the only method for dealing with the contractual and
incentive problems to loan modification created by
securitization. Unless those problems are addressed, we will
not be able to abate the flood of foreclosures. I strongly urge
Congress to pass the Helping Families Save their Homes in
Bankruptcy Act.
Thank you. I look forward to your questions.
Senator Durbin. Well, thank you for your testimony.
[The prepared statement of Professor Levitin appears as a
submission for the record.]
Senator Durbin. I welcome to the Committee hearing today
not only Senator Whitehouse, but also the Chairman of the
Committee, Senator Leahy.
Before we ask questions, Senator Leahy, would you like to
make an opening statement?
STATEMENT OF HON. PATRICK J. LEAHY, CHAIRMAN, COMMITTEE ON THE
JUDICIARY, A U.S. SENATOR FROM THE STATE OF VERMONT
Chairman Leahy. I would. Thank you very much. I apologize
for coming in and leaving. I think this is an extraordinarily
important issue. Senator Durbin and I had talked about this a
number of times when we were out of session. He has been a
leader in this area, and urged that we have the hearing.
Senator Durbin, I thank you for holding this. I couldn't help
but notice, on one side of the table you have a professor from
our alma mater, the Georgetown University Law Center.
And then Sheriff Dart, Cook County sheriff. I must say,
I've watched you on television and heard some of your
statements on eviction. I applaud you, as the people in Vermont
did, too. I thought you showed not only a sensitivity, but a
sensible attitude. I applaud you and your department.
Everyone knows that home ownership is a fundamental part of
the American dream. The housing crisis has contributed
enormously to the economic downturn. Home ownership is a
primary source of financial well-being, and the most valuable
investment most Americans are going to make. Home ownership
helps Americans find security, community, stability, and pride.
Those are values that Federal policy should preserve.
In 2003, President Bush made increased home ownership a
central part of his domestic policy. He said, ``This
administration will constantly strive to promote an ownership
society in America. We want more people in their own homes. It
is our national interest...'' and so on.
Five years later, as thousands of American families have
been evicted from their homes, the administration has sided
with banks, not ordinary Americans, through their opposition to
our efforts to provide authority to bankruptcy judges to adjust
the terms of mortgages on primary residences.
Sheila Bair, the chair of the Federal Deposit Insurance
Corporation, has proposed a relief program that provides
significant incentives for lenders to modify the interest rates
for borrowers. She has proposed to use a portion of the funds
that we have already authorized in the bail-out package to
assist homeowners and protect lenders, which would complement
additional authority in the bankruptcy courts. Unfortunately,
Secretary Paulson and the administration have not embraced this
proposal. They have continued to insist our funds be used only
to help banks.
In December 2007, the Committee held a hearing on the
Helping Families Save their Homes in Bankruptcy Act of 2008, S.
2136. A number of witnesses endorsed the measure. Economist
Mark Zandy estimated that such authority could keep 600,000
people in their homes. It was far from a bail-out. It was a
mechanism to help the economy.
Homeowners who gained relief from bankruptcy court would
continue to pay each month toward the satisfaction of the debt.
You halt mortgage defaults; it is a critical component of our
economy recovery.
In March and April, this Committee considered, and voted to
report, Senator Durbin's legislation to authorize bankruptcy
courts to modify primary home mortgages. The bill was reported
in July and the Committee report was filed in September. The
proposal has been blocked. In a few weeks, the Obama
administration is going to have to look at something similar.
Banks, critical of providing this authority to bankruptcy
courts, claim that doing so will cause interest rates to rise,
and will make mortgages harder to obtain.
What has caused the difficulty in obtaining mortgages is
the unprecedented credit crisis, as seen in the enactment of a
$700 billion rescue plan. The credit crisis did not stem from
bankruptcies, but from far more fundamental and serious
concerns about practices of the financial institutions
themselves.
Now, Senator Durbin, I recently received a letter from the
National Conference of Bankruptcy Judges. They expressed
confidence that the bankruptcy courts are well-equipped to
handle this authority that you have been proposing, and that
the existence of such authority may spur parties to come to
agreement without judicial intervention. There has been too
little meaningful progress in the private sector to modify home
mortgages, and we already give bankruptcy courts the authority
to modify mortgages on family farms and second homes.
Now, there is no reason not to do so, especially when so
many Americans are struggling. I am confident that the men and
women who serve as bankruptcy judges will exercise that
authority very carefully. The bottom line is, American families
need relief. With all that we have done to provide relief to
the country's biggest banks and financial institutions, I think
Americans are right to ask Congress: what are you going to do
for ordinary, hardworking people, whether they're in Illinois,
Rhode Island, Vermont, or Pennsylvania, where Senator Specter
is from.
We all agree, you cannot simply solve an economic crisis by
having an unprecedented number of foreclosures and people out
in the streets. That is not helping anybody, and it's certainly
not doing anything to stabilize the price of homes. It is
something that creates a severe crisis in communities. There
are some parts of this country where whole communities have
been literally devastated and they have lost their community
identity because of this.
There have been instances of speculation that should not
have occurred, but there are a lot of hardworking men and women
who had a home, a roof over their head for themselves and their
children, and something should be done to help them.
So, Senator Durbin, I thank you for doing this. I thank
Senator Whitehouse, who has worked so hard on this, and others.
Senator Specter is here. I just hope we can come to a
conclusion before we see a lot more bankruptcies.
Sheriff, thank you.
Senator Durbin. Thank you, Chairman Leahy.
We will now go to questions. I'd like to start, first.
Sheriff Dart, it's only been a few weeks since you announced
that you weren't going to enforce eviction orders. What has
been the impact? Have you seen any measurable change?
Sheriff Dart. No, we have not seen any change. We sat down
with the judiciary in our area to try to work out some new
parameters to try to assure that things were going to be
handled appropriately. There is hope that there will be some
change in the future, but since this agreement about a month
ago we have had 110 evictions to do and I've called off 107 of
them. We've gone out there and it's not what it's supposed to
be.
Senator Durbin. Weren't you running into situations where
renters were dutifully making their monthly payments?
Sheriff Dart. Senator, the stories we have are just mind-
boggling. That's the point about your legislation. It's so
important. I've read through it. It makes such sense, and the
urgency of this is there. I've walked into these homes time
after time, looking at stunned people who have no idea why I am
there.
I walked into a family in Englewood: a mother, father, a
16-year-old, a 5-year-old, and two 9-month-old twins. He's
standing there showing me his lease agreement he had signed
with the mortgage holder. The lease agreement was signed after
the foreclosure had already been done, and they were still
doing these things. He is wondering what he's going to do. In
the old procedures, frankly, before I stopped them, he and his
family would have been out on the street.
We have had constant--to have a person come and say,
Sheriff, is there some way we can work this out, we want to
pay, we want to work something out--they have nowhere to go. I
just can't emphasize enough to you, it sounds so antiseptic
until you go out there and you see these people. There's
nothing nice about evictions, I think we all agree with that.
But until you actually are out there and you see every piece of
furniture, every item that someone owns, it's heartbreaking.
And children, more often than not, are involved.
What little they own is taken out to the street, and in
most of the areas where we work, most of those things are
stolen between the time we put them out and the time they're
able to get transportation to move these things. So this is
something you can't have here. You have to have precision, A.
But B, you also have to have options, which are clearly not out
there right now. This is just absolute chaos. It's clear, the
banks and the industry, they don't even know where they're
sending us out to.
We went out to do an eviction a couple of months ago. It
had been an eviction--a foreclosure eviction, had been in the
system for a while. We go out there, there's no house there!
The house is gone. It's a vacant lot. The house had burned down
2 years prior, but no one from the bank, the mortgage holder,
had even cared to go out there.
It's similar to what Senator Schumer was talking about, how
there's so many people with pieces of this. Nobody knows who
has what anymore. It's a piece of paper, but there's real
families involved. I just can't emphasize enough to you,
Senator, it is absolute chaos out there.
Senator Durbin. Mr. Kittle, you've got a tough assignment
here because, with the upcoming Christmas season, you're taking
on the role of Scrooge in this, basically saying, tough luck,
foreclosure happens and that's the way it's got to be. If
mortgage bankers don't want to renegotiate, so be it; you
signed the mortgage.
I listened to Professor Levitin, and I think he opened my
eyes to something I'd never heard, and I'd like to hear you
respond to. We used to have a Senate president in Illinois that
Tom remembers named Cecil Partee, and he used to say, ``In
politics, for every issue there's a good reason and a real
reason.'' We've heard a lot of good reasons why the mortgage
bankers don't want to see the bankruptcy court rewrite the
terms of the mortgage to keep people in their homes: oh,
there's this moral hazard thing, which has diminished in
credence since we decided to give $700 billion to banks with
rotten portfolios.
But now comes Professor Levitin who says, guess what?
Follow the money. The mortgage bankers don't make as much money
when you have a modification. They make their money in
foreclosure on a cost-plus basis. So if you want the real
reason why they're resisting this, it's because they're about
to lose money if there's a modification. How would you respond?
Mr. Kittle. Well, thank you again for having me here today,
Senator. I am not Scrooge, and neither is my association or my
members. I would say, first of all, in response to that, that
this legislation, in my oral testimony, seven--almost seven--67
percent, two-thirds of everybody that goes to the bankruptcy
court will fail. So the real Scrooge in this is the
legislation, in that they will lose their house anyway, their
credit will be destroyed for 5 to 7 to 10 years. They can't get
an apartment, they can't get a house, a car.
Senator Durbin. Could you address his point?
Mr. Kittle. I'm about to. I'm about to. Mr. Levitin's
information is inaccurate, flawed, and misleading. He went
online with his information and used online quote generators to
derive his paper, a paper that, even on his web site, he says
is a work in progress. It hasn't even been vetted by his peers.
He doesn't factor in people's salary or their debt-to-income in
his statistics. We lose--
Senator Durbin. Is it true that it's a cost-plus situation
in foreclosure?
Mr. Kittle. We lose--the point that he made and that you
just asked me, that we make more money on a foreclosure than
helping somebody, what he failed to mention is that we lose the
VA guarantee, the FHA insurance, and the private mortgage
insurance either gets reduced or eliminated when this happens.
That wasn't factored into this. He admits that lenders would
require, in his paper--buried, but he admits it--that we will
require, going forward, higher loan-to-value loans. That is an
interest rate increase calculated into our 150 basis points.
Senator Durbin. I want to give him a chance to respond.
Professor Levitin?
Professor Levitin. First of all, it seems Mr. Kittle has
not read the most recent version of my paper. It sounds like
he's working off of a working version that goes back to
February. So if he were to look at the most recent version that
is publicly available on the Internet, all the citations can be
checked, and has gone through several rounds of peer
conferences, first, what he would see is that the paper he's
responded--that he's talking about does not actually address
the servicer incentive issue. He's talking about a different
paper.
Second, what I would like to point out is, in his comments,
in his response to you, he didn't actually address the question
of how servicers are compensated. When servicers get cost-plus
compensation in foreclosure, they are entitled under the
mortgage contract to get the cost of the foreclosure. There's
no one monitoring the costs. The only time these costs get any
scrutiny is when there is a bankruptcy filing.
The results then have been shocking. Professor Katherine
Porter at the University of Iowa has a paper that goes through
and details this in amazing detail. You see stories like Wells
Fargo levying a $250 collateral inspection fee on an underwater
property in Louisiana. This property was not financially under
water, it was physically under water. Wells Fargo did not send
out a scuba team to inspect the house. It was in flooded
Jefferson Parish, Louisiana. This is not a one-off incident.
There is a distinct pattern of illegal fees in foreclosures
being driven by this cost-plus economic model, and bankruptcy
is the only way to cut that off. Bankruptcy is the only way to
scrutinize the cost of foreclosure, it's the only way to change
the incentive structure.
I would also add, regarding the two-thirds of Chapter 13
plans failing, that number does not account for the fact that
homeowners are unable to deal with their largest single debt in
Chapter 13 right now, with mortgages. If you make mortgages
modifiable in Chapter 13, that two-thirds number is going to
look very different.
So arguing that we're going to see two-thirds of bankruptcy
plans fail, just--it's a meaningless number because it's not
accounting for the impact of this legislation.
Senator Durbin. Thank you.
The order of questions. If Senator Specter returns, he
would be first. But since he's not here: Senator Feingold,
Senators Leahy, Schumer, and Whitehouse.
Senator Feingold?
Senator Feingold. Thank you, Mr. Chairman, for holding the
hearing, but more importantly, for your tremendous leadership
on this issue. I want to start by noting that you are the one
who sounded the alarm on this problem almost a year ago. Your
hearing in December 2007 was entitled ``The Looming Foreclosure
Crisis.'' As we have seen this severe economic downturn take
shape over the past few months, a significant cause of which
has been the huge numbers of foreclosures on subprime
mortgages, you would have every right to say, ``I told you
so.''
You tried to reduce the number of foreclosures, which might
have had an effect on falling real estate prices. You tried to
protect more Americans from losing their homes. But the lending
industry said absolutely not to letting these bad mortgages be
modified in a bankruptcy proceeding, and the Nation is now
reaping what that self-centered and short-sided position has
sown.
Even as late as October when the bail-out package was being
considered, this one simple and eminently reasonable change in
the law, which is perhaps the only proposal out there that is
guaranteed to have a significant impact on the number of
foreclosures, was somehow taken off the table. No, we were
told, that would be going too far. No, it was said the banking
industry simply would not stand for that change. From what we
have heard today, it still won't.
What was the result? The voluntary loan modifications
effort to date have completely failed to slow the rising number
of homes going into foreclosure. Just last month, foreclosures
increased in our State in Milwaukee County by 41 percent
compared to the previous month, and foreclosure rates across
Wisconsin have increased by over 20 percent compared to last
year. About a million home loans nationwide had gone into
foreclosure at the end of 2007. By the end of this year, 2
million more may meet the same fate.
One estimate is that over 10 percent of all residential
borrowers could be in foreclosure by 2012. These are obviously
frightening numbers. There simply is no more time to waste. The
next Congress must act very quickly to take your advice, Mr.
Chairman. The ripple effects of rising foreclosures are
enormous. Foreclosures lead to falling real estate prices,
which lead to more foreclosures. Local businesses are deeply
affected as well, and empty houses lead to crime and greater
costs for social services offered by local governments.
I want to make one other point and then ask a couple of
questions. One thing that I think is not well understood is
that because of the complex structure of these securitized
mortgages that are at the root of the financial calamity the
Nation finds itself in, voluntary programs to readjust
mortgages may simply be doomed to failure. The securities
themselves in many cases prohibit reducing the principal owed
or otherwise changing the terms of the mortgage, so it's not
just a matter of a single lender deciding to take a little bit
of loss to save a homeowner from foreclosure. Many of these
mortgages have long since been sliced and diced, and sold and
re-sold. Senator Schumer, I understand, alluded to this problem
earlier.
So a voluntary program won't help. It just won't do it.
Only a bankruptcy court has the power, if Congress would only
grant it, to rewrite these mortgages to prevent them from
losing even more value.
So again, of course, I thank you, Mr. Chairman, for
sticking with this issue. I offer you my full support, with the
hope that we can finally prevail early next year.
Now, Sheriff Dart, let me ask you, first, about the need to
extend some assistance in this crisis to renters, since your
temporary suspension of evictions in Cook County has generated
a lot of interest nationwide.
Providing safe and affordable rental housing is a key
component of our Federal housing policy. I have introduced
legislation that would significantly boost affordable rental
housing problems. The renters who pay their rent on time every
month may not know that the owner of their property is actually
delinquent in payments and may be facing foreclosure.
Certain States, including my State of Wisconsin, do not
have protections in place for these folks who face eviction
through no fault of their own. To help this issue, Senator
Kerry from Massachusetts has introduced legislation requiring
that renters who live in a foreclosed property be given at
least 90 days' notice before being evicted, and granting the
right to stay in rental units, within certain limitations.
Could you comment on how this proposed legislation would
assist your efforts in Cook County, and are there other
solutions that Congress should undertake to better protect
renters?
Sheriff Dart. Yes, Senator. It's a fantastic question. The
stories I have are amazing. I go out on a lot of our evictions
myself. To see the people--I mean, I can't put a fine enough
point on this--completely stunned. They have no idea why we're
at the door. Traditionally, until I made some of the changes--
the tradition was, if nobody was at the residence we would use
whatever means necessary to enter the house, remove the
property, put it out, and off we'd go to our next one. These
are people who had paid all their rent, had paid everything.
They are off at work, their children are at school, and they're
coming home to find everything they own out on the street.
There's humiliation, obviously, but in addition to that, most
of their stuff is stolen while it's out there.
I have more cases I can name. That's why we started
adjusting it. But what we started doing, frankly, was an ad hoc
process, Senator, that we were doing, some legal authority we
were looking for. But there was not any type of systematic way
of trying to address this. And we had a statute that went into
effect in Illinois just this past year that was to allow
renters a 120-day window when a foreclosure would go through so
that they could get their things together.
The problem was, once again--and I had mentioned this
earlier, and you just alluded to it, too, Senator--because
there is such complete and absolute chaos out on the streets
right now in this area, with nobody knowing who holds what, who
owns what, the banks and mortgage industries have no idea what
they're holding anymore. There's no way to know who gets the
120 days. There's no way to be assured that the people have
been given notice that they have that available to them. It's
just, if we get lucky when we go out to the eviction and we
happen to get the homeowner there and are able to tell them
this, then maybe they can get that 120 days.
Our budgets are so limited at this date. I've hired a
social worker now who goes out with our eviction teams, to go
out and try to talk with these people. I have an attorney now I
brought on who specifically is on the phone to talk to these
people, because we're trying to guide them on what to do
because they are completely stunned.
Senator, I mentioned a couple different stories. I had one
renter--and this is not unusual. I had one renter. We went out
there to do the eviction. Once again, completely stunned. He's
there with his wife, four children. Two of them are 9-month-old
twins. Normally, before I stopped things, he would have been
out on the street. He shows me a document, which is a lease, a
lease that was signed with him and the owner of the property,
after the foreclosure had already occurred. This guy is out
leasing the property. We just stopped it.
You know, people questioned our legal authority to do some
of this stuff. But the renters right now, Senator, you're
definitely on to something. As far as a group of people who are
being victimized left and right every single day, it is truly
the case. We have modest things we're doing now, but it's
really bad.
Senator Feingold. Thank you, Sheriff. Are you comfortable
then with the Kerry legislation? Is that something you're
familiar with?
Sheriff Dart. I'm somewhat familiar with it. I know it
would go a long way to helping.
Senator Feingold. Could we send you a question and have you
answer it in writing afterward?
Sheriff Dart. Yeah, I'd be happy to.
[The question and answer appear as a submission for the
record.]
Senator Feingold. The Chairman has allowed me one more
question, and I really do appreciate it. I thank Senator
Whitehouse.
Each of you, Mr. Calhoun, Mr. Levitin, mentioned in your
written testimony the issue I mentioned in my statement
concerning contractual road blocks and the voluntary
restructuring of many of these loans. Yet, you believe that a
major positive effect of giving bankruptcy courts the power to
modify the loans would be to encourage more voluntary
modifications.
How big of a problem do you think these contractual issues
will pose for that prediction, and do we have any idea of how
many of these mortgages simply cannot be modified except by a
court? Mr. Calhoun?
Mr. Calhoun. We believe that the biggest impact of this
legislation will be an increase in voluntary modifications.
First off, if I can go back to just this point about the
misincentives that are in the market today, about the servicer
misaligned incentives, you don't have to just argue about it.
Market participants have recognized this. For example, Fannie
Mae and Freddie Mac found that, because of these misaligned
incentives for servicers, that servicers were pushing people
into foreclosure when it led to a greater loss for Fannie and
Freddie.
So they adopted a policy of providing additional cash
payments to servicers if they would explore other options other
than foreclosures. Unfortunately, the private trusts that
control 75 percent or more of the mortgages don't have that
option. They don't have the authority to make those cash
payments.
Sheila Bair made the same--reached the same conclusion. Her
plan includes payments--I think it's up to $1,000--to servicers
to engage in modifications, recognizing, unless you change that
current incentive structure, that the modifications won't
happen.
Senator Feingold. Thank you. I'm going to just ask for a
quick response from the Professor, because I'm already well
over my time.
Professor Levitin. To answer the statistical question you
had, how many of these securitization deals or modifications
contractually--we don't have a great sense of that. There is a
study by Credit Suisse that looks at a very small sample of
deals, about 31 deals, and it finds that in almost 40 percent
of those modifications, they are in some way restricted. That
number is actually under--that 40 percent, though, is actually
probably too low because Credit Suisse was not looking at all
possible modification limitations.
So we don't know exactly, but there's a lot of deals out
there where there are contractual obstacles to modification.
That's going to be a real problem, even with incentive payments
to servicers, or some sort of bounty.
Senator Feingold. Thank you, Professor. Thank you, Mr.
Chairman. Thank you, Senator Whitehouse.
Mr. Calhoun. Mr. Chair, if I may add, this is just an
example of where the system was created with these built-in
obstacles. This ban against modifications was put in, in large
part, because servicers typically have to advance delinquent
principal and interest when a loan falls behind. So servicers
were kind of gaming that system and avoiding having to advance
those payments by engaging in modifications: just modify the
loan, then it's current, you don't have to advance it.
So in response, the drafters of these pooling and service
agreements put in these anti-modification programs to address
that. But it shows once again just how many technical obstacles
and structural obstacles there are in a just voluntary program.
Mr. Kittle. Mr. Chairman, may I respond to that, please?
Senator Durbin. Senator Whitehouse, do you want to ask or
should I allow Mr. Kittle?
Senator Whitehouse. If he'll be brief. We are in my time at
this point.
Mr. Kittle. Just to say that we look forward to working
with Sheila Bair at the FDIC on her proposal. We think it has
merit. It's another tool in the toolbox to say that we don't
need the foreclosure. But to get to the strips, Senator Schumer
said that none of these were being modified, and that's
inaccurate. There are some in the strips and tranches being
modified. We would like to see more, but to blanketly state
that all the strips and tranches are having no modifications is
inaccurate. It is happening on a limited basis. Thank you.
Senator Durbin. Senator Whitehouse, thank you for your
patience.
Senator Whitehouse. On how limited a basis?
Mr. Kittle. I'm sorry?
Senator Whitehouse. On how limited a basis, Mr. Kittle?
Mr. Kittle. I can get you that information. I'm happy to. I
can't give you a percentage today, but I'll be happy to get it
for you.
Senator Whitehouse. I would appreciate it, yes.
Mr. Kittle. All right. You'll have it.
[The information appears as a submission for the record.]
Senator Whitehouse. Is it Professor Mayer, Dean Mayer, Mr.
Mayer?
Professor Mayer. Professor.
Senator Whitehouse. Professor Mayer, when the prohibition
on primary residence mortgage modification was put into the
Bankruptcy Code, I think in 1978, what then was the status of
the mortgage securitization industry?
Professor Mayer. There was very little securitization at
that point.
Senator Whitehouse. Almost none, in fact. Correct?
Professor Mayer. Yes.
Senator Whitehouse. So this has been a significant new
development since that original piece of legislation, the
mortgage securitization process. Correct?
Professor Mayer. Yes.
Senator Whitehouse. And that mortgage securitization
process has significantly influenced the ability of a homeowner
to renegotiate their mortgage, has it not?
Professor Mayer. It really depends on the securitization.
Fannie Mae and Freddie Mac securitize their portfolios. They
represent, by far--people have been talking about 80, 90
percent of mortgages outstanding being securitized. There's
nothing inherent in the securitization process that would limit
that. In fact, the initial growth, and by far the biggest part
of that, really is Fannie and Freddie securities.
Senator Whitehouse. Then why are we seeing so many--here's
what I see in Rhode Island. The community banks that hold the
mortgages say they have no foreclosure problem and that the
foreclosure problem is almost entirely with the securitized
mortgages. So, there's one piece that I see from my home State.
Secondarily, I don't know who you go to renegotiate. You
heard the Sheriff, who does this, say his people, they don't
know who to talk to.
Professor Mayer. Right.
Senator Whitehouse. Then you've got a mortgage servicer
who's got behind him a whole string. This thing could have been
sliced and diced into 20 strips. They've gone to the four
winds. You don't know who's out there. All of those investors
have a potential claim against the bank. Why is that not a
disincentive for the bank to renegotiate? That puts them in a
more difficult position with respect to renegotiation than the
community bank that holds the mortgage. Are you telling me
they're in the same position?
Professor Mayer. No.
Senator Whitehouse. They're in a more difficult position--
Professor Mayer. Yes.
Senator Whitehouse [continuing.]--With respect to
renegotiating.
Professor Mayer. Absolutely.
Senator Whitehouse. Absolutely.
Professor Mayer. I would--I would make one other comment on
this, which is, it's useful to look at what banks are doing
with their own portfolio mortgages where they don't have those
restrictions. So a number of the banks have put out programs
and basically the bulk of those programs rely on forbearance as
opposed to stripping down the mortgage. The difference between
forbearance and stripping down the mortgage is, under
forbearance, some portion of the principal remains tied to the
property but you're not paying interest on that portion.
So, in other words, you're writing down the payments but
you're not so-called stripping down, or cramming down, the
mortgage balance. That is a big distinction in the way the
Bankruptcy Code--the way the bill is currently being crafted
versus how banks are dealing with their own loans on their own
portfolios where there are no restrictions on what they're
doing. The place where the banks have been doing--
Senator Whitehouse. The difference is that those homeowners
stay in their homes. Correct?
Professor Mayer. Yes.
Senator Whitehouse. Yeah. That's a pretty significant
difference, isn't it?
Professor Mayer. But it does suggest that a program that
completely strips off the balance goes much further than
protecting the lender and actually goes to the point of
imposing losses on the lenders, where the lenders now are
choosing a different approach. And, in fact, Sheila Bair has
specifically, in the FDIC IndyMac program, also relies on
forbearance, not strip-downs. So that's a very appreciable
distinction.
Senator Whitehouse. But is there not also an appreciable
distinction between being Sheila Bair and being the FDIC and
having the power of the Federal Government behind you, and
being in possession of a bank or in control of a bank that has
entered your jurisdiction, I believe, for insolvency reasons
than it is to be a private banker, looking over your shoulder
at potential liability to all those owners of all those strips?
Professor Mayer. Oh, I completely--my point in bringing up
what banks are doing on their own portfolio is kind of
understanding that this bill goes much further than even what
Sheila Bair is proposing with the view of trying to protect the
FDIC shareholders. She very much believes in doing--in
obviously doing things to reduce foreclosures and helping out
investors.
Senator Whitehouse. Correct. But it doesn't go further than
the Bankruptcy Code goes, say, for second home mortgages, does
it?
Professor Mayer. That's--but again, the distinction is--
Senator Whitehouse. I asked a question. Is there an answer
to it?
Professor Mayer. Huh?
Senator Whitehouse. I think I'm entitled to an answer to my
question. It doesn't go further than the Bankruptcy Code goes
with respect to second home mortgages.
Professor Mayer. That's correct.
Senator Whitehouse. Correct. And it doesn't go further than
the Bankruptcy Code with respect to commercial debt, correct?
Professor Mayer. Both of which are more expensive.
Senator Whitehouse. So if the Mortgage Bankers Association
were to go into bankruptcy tomorrow, they would enjoy precisely
the benefit that they are trying to deny American homeowners as
they argue here today. Is that not correct?
Professor Mayer. I'm not defending the Mortgage Bankers
Association. I don't agree with them on many of the things
they're talking about, so I have no stake in that--in that--in
that view.
Senator Whitehouse. All right. Well, I thank you.
I thank the Chairman.
Senator Durbin. I want to get back to this question about
just what kind of question is being made to renegotiate.
Mr. Calhoun, you quoted an October 2008 Credit Suisse
report which said that 3.5 percent of subprime mortgage
delinquent loans were being renegotiated.
Mr. Calhoun. In the month of August. And that's consistent
with all the other objective reports we see. The Attorney
General's Working Group issued a report recently that found
that voluntary modification efforts were profoundly
disappointing.
But if I can go back just 1 second, I think these
criticisms about both the cram-down and about, the MBA doesn't
want to push consumers into bankruptcy, miss the very
fundamental point of this legislation. If you want to avoid
cram-down, if you want to avoid consumers having to go into
bankruptcy, it's real simple: modify the mortgages like you've
been saying for the last 2 years you would do.
But if you're not going to do that, you can't leave the
consumers empty handed. They have to have another option. So
they're asking to have it both ways. They say, don't push us
into these things we don't like, and don't make us do the
modifications. This bill just says, pick which one you want to
do. You say you want the modifications and you're going to do
them? Well, them do then and you don't have to worry about
bankruptcy.
Senator Durbin. Mr. Kittle, you talked a lot in your
statement about moral hazard. To try to bring that down to
understandable terms, I think that means that people just
aren't embarrassed anymore, in your point of view, of going
into bankruptcy court. To them, it's just a trip to Disneyland
and they'll be back home again soon. They should take this
seriously. If they're going to go into bankruptcy court, they
ought to understand that this is not something that America is
joyful over, and they're going to pay a price for it. I think
that's what your testimony said.
I don't buy that, because I've been to bankruptcy court as
a trustee and representing people. I don't know many of them
who go there joyfully. I think most people go there with a
sense of embarrassment. They wish they hadn't reached this
point. But medical bills, mortgage foreclosure pushed them to a
point where they have no place to turn. For many of them, they
literally have no place to turn. So I don't think that this is
something that people will skip off to and say, oh, don't worry
about paying the mortgage, we can always go through bankruptcy.
I just don't think people are going to do that. I think they
understand how serious it is.
That was the argument that was made a year ago by your
organization. Don't you think that argument has really lost
some credibility now that we have decided to give $700 billion
to banks who have made rotten, miserable decisions when it
comes to their own portfolios and continue to take outrageous
bonuses, and parachutes, and commissions despite their proven
incompetence? What about the moral hazard argument there? Do
you think there's a problem with your argument now?
Mr. Kittle. Senator Durbin, I just quickly looked over my
testimony and I didn't see the word ``Disneyland'', anybody
being happy going to bankruptcy. I never saw that in my
testimony.
Senator Durbin. Well, I can tell you what you said then.
Let me quote what you said.
Mr. Kittle. Well, I've got it here and I don't see
``Disneyland''.
Senator Durbin. ``Keep people out of bankruptcy court.
Don't make it appear attractive.'' Do you think it's attractive
to people to go to bankruptcy court? That was a quote.
Mr. Kittle. I think we are encouraging people to go to
bankruptcy court, Senator.
Senator Durbin. You really do?
Mr. Kittle. I think it's wrong when you have two-thirds of
them--and I'll restate it. Two-thirds of them fail, regardless
of what Levitin says.
Senator Durbin. We've been through that already.
Mr. Kittle. It's the same--
Senator Durbin. But let me just ask you--
Mr. Kittle. It's the fact.
Senator Durbin. Step back and get to 30,000 feet and look
down on this world that we live in, and explain to me how you
can say to these people that Tom Dart has to evict that it's
just a damn shame, those things are going to happen. That's
foreclosure and you've got to pay a price, you and your family,
buddy. But for the bank downtown, your tax dollars were just
sent over to them in the form of billions of dollars to get
them through some miserable decisionmaking that they made. Do
you see a problem there with that logic?
Mr. Kittle. Well, first of all, you mentioned the bail-out.
I didn't vote for it.
Senator Durbin. Would you have voted for it?
Mr. Kittle. Personally, sir?
Senator Durbin. Yes.
Mr. Kittle. No.
Senator Durbin. OK. So what would you have done as an
alternative?
Mr. Kittle. I believe that there are certain things that
happen to certain people, and we have places and processes.
Senator Durbin. That's a political answer, but that's not
an answer.
Mr. Kittle. Well, this is a political setting. And what I'm
telling you is, some people have to fail, some businesses have
to fail.
Senator Durbin. So you would just say, step back, Federal
Government--
Mr. Kittle. Can I talk to you about personal responsibility
for a second?
Senator Durbin. Well, talk to me about this for a second.
Mr. Kittle. I will. I'm going to--
Senator Durbin. We have a Federal Government.
Mr. Kittle. I'm going to put myself in the middle of it.
Senator Durbin. We have a bipartisan proposal from an
administration to provide $700 billion--some say a trillion
dollars--to help these banks that have made these bad
decisions. Do you struggle at all with the concept of what
you're saying to the evicted family as opposed to these banks?
Does that create a problem for you?
Mr. Kittle. A year and 2 months ago, Senator, I had to
close my own company because of what's happening in this
mortgage business. My wife and I have lived out of our savings
for the last 14 months and an income that I do out of
consulting, while maintaining a straw, very small company
that's still there. I had to lay off most of my employees.
During that time I was prudent enough, and fortunate enough,
and blessed enough to put enough money away to get through
these 14 months. And I am sorry for those people that can't, so
I feel the pain out there. I've been able to avoid filing
bankruptcy myself. I've been able to make all of my payments on
time. So this has affected me personally. I'm here telling you,
yes, sir, I feel the pain, and I can look you in the eye and
tell you that.
Senator Durbin. I am not going to get an answer, obviously,
to that. I'm sorry for your misfortune, but obviously you
weren't at the highest levels of banking and financial
institutions where some people are being protected.
But let me go back to this point that's been made over and
over again. Senator Schumer, being from New York, can use the
word ``tranche'', Senator Whitehouse can use ``strips''. To me,
it reminds me of a trip to Chuck E. Cheese with the Whack-A-
Mole: every time you hit one, another one pops up. That seems
to be the situation with securitization of mortgages. Once
you've got several people satisfied, another one pops up and
says we're not satisfied, so we won't agree to modification. Do
you concede that that is a fundamental problem in this
conversation?
Mr. Kittle. I see that it is a problem with the strips and
tranches to try and find out. I don't think we've ever said
that it's not, but I still--
Senator Durbin. How would you solve it?
Mr. Kittle. How would I solve it?
Senator Durbin. Uh-huh. How would you solve it? How would
you get these--if they're 10, 20, 30, or 40 different elements
in securitization, how do you get them all to the table and
all--
Mr. Kittle. I will tell you that right now, our members are
doing, and they are solving it, and they are doing loan
modifications.
Senator Durbin. Three and a half percent.
Mr. Kittle. That's his number.
Senator Durbin. No, that's Credit Suisse.
Mr. Kittle. Citi Mortgage just announced three or 4 weeks
ago they were going to take an aggressive plan to help people,
their customers, modify loans who weren't even in trouble yet,
to talk to them. Please call us. Their chairman was on CNBC
saying this program is being implemented. B of A, one of the
largest servicers in the United States, Citi and B of A, two of
the top five, are modifying loans as quickly as they can. They
are making progress and they're doing the job.
Senator Durbin. So, Mr. Calhoun, have you seen that
progress?
Mr. Calhoun. There have been some efforts, but way too
little. You evoked some holiday movies, I think. Maybe the more
apt one is, it's about that time of year where they show ``A
Charlie Brown Christmas'', and we have Lucy holding the
football, promising that Charlie Brown is going to get to kick
it. Those who think voluntary modifications alone are going to
fix this must think Charlie Brown is going to get to kick the
football this year. They're not going to do it, for these very
reasons. We've been at this for the last 2 years. It isn't like
the crisis has only been with us for a couple of months. And
we've heard promises for the last 2 years, that just voluntary
modifications would take care of the problem. They're not.
If I can respond to one other point that keeps getting
raised about, two-thirds of bankruptcies currently fail. Well,
one of the main reasons for that is, currently the court can do
little to help borrowers with their largest, most troublesome
debt: their mortgage. For example, in Georgia and other States
that have non-judicial foreclosures, the only way you can avoid
immediate foreclosure, because we don't have our sheriff from
Cook County there, is to file bankruptcy. But all it can do is
buy you a little more time to get out of the house, because the
court lacks the authority to deal with that debt.
Then finally, again, all the lenders and servicers have to
do is engage in reasonable modification efforts, and then they
have the power to take bankruptcy off the table. That's all
that you're asking them to do, is to do what they say they're
going to do anyway. Then all this parade of horribles about
bankruptcy becomes moot.
Senator Durbin. Mr. Stengel, you talked about the fact that
if you start changing the law--I don't want to put words in
your mouth, you can correct me--that there's a certain
instability here, or unpredictability, and that's not good for
the credit markets. Is that a fair summary of what your message
is?
Mr. Stengel. I think so. Having listened to a number of
follow-up comments, maybe just stepping back 1 second. I think,
just as a preliminary matter, one issue that's been ignored is
the takings issue for appreciating assets. So I think that in
contrast, perhaps, to Senator Schumer's position, there may be
constitutional infirmities with this approach. But assuming
that those can be resolved in an acceptable way, I think that
our mortgage finance system is in peril and has broken down.
Senator Durbin. Do you think that voluntary renegotiation
has been successful?
Mr. Stengel. Not in their current form, no. I think there
are no meaningful incentives that have been provided and there
are many disincentives, for servicers, in particular. No one
has mentioned the litigation threat.
Senator Durbin. May I also suggest to you, when we did the
reform of the Bankruptcy Code a few years back, I don't
remember a constitutional argument saying that it was a
``takings'' as we changed the terms of what you could recover
in bankruptcy in those days, because it was to the benefit of
creditors. They were all as happy as could be with the notion
that they were going to come out in a better position in
bankruptcy than before the reform. So I don't necessarily buy
the takings.
But let me get back to the unpredictability part of it.
Isn't there some unpredictability in the world--in this credit
world today in terms of foreclosures, and isn't it a fact that
a foreclosure is a pretty disastrous economic event for many
creditors?
Mr. Stengel. I agree completely. I agree completely with
you. But I think that we can't lose sight of what the world is
going to look like tomorrow. That 40th tranche holder isn't
going to put money into the system, or they're going to put
money into the system at prices that are going to price
borrowers out of the market. So unless whatever is done for
foreclosures is done in a holistic way, thinking about what our
mortgage finance system is going to look like tomorrow for
people are going to provide the money, I think that we're
walking down a fairly dangerous path.
Senator Durbin. So we may see the abandonment of the notion
of no-doc loans.
Mr. Stengel. It's hard to make an argument on the other
side of that. When I took out my own loan and someone said, now
you're going to have to provide documented income, I said, how
can that possibly not be the case? So--
Senator Durbin. But it was.
Mr. Kittle. Could I respond to that, Senator?
Senator Durbin. Certainly.
Mr. Kittle. The Mortgage Bankers Association and its
members are making the best loans today than we've made in 15
years. We're back to very stringent underwriting guidelines.
Very, very few, if any, of the no-doc loans are being made. So
to me, that would--
Senator Durbin. You're still making no-doc loans? Excuse
me. Are they still making no-doc loans?
Mr. Kittle. I would say, in some cases small banks that
know their customer, that come in, that have assets, that are
putting 30 to 40 percent down, in that particular business
decision they are probably making them. Yes, sir.
Senator Durbin. Do you think, Mr. Kittle, that--
Mr. Kittle. Can I respond to something, just, if you don't
mind?
Senator Durbin. Well--
Mr. Kittle. Senator Schumer singled me out on four
occasions and he said something, and I just--he's not here. I
would like a chance to respond just to one of those. He said
that me, and MBA, that we were very short-sighted. Part of this
is exactly what Mr. Stengel addresses here. If this legislation
goes through, we will be putting a permanent tax on everybody
that buys a house going forward of $295 a month, over $3,000 a
year. We have a 31-year precedent already set. The last time
this bankruptcy went through--
Senator Durbin. Are you going to present some evidence of
what you just said?
Mr. Kittle. Yes, sir. And--
Senator Durbin. When?
Mr. Kittle. Regardless--
Senator Durbin. When will you present this evidence?
Mr. Kittle. Regardless of their race, gender, or income
level--
Senator Durbin. Sir--
Mr. Kittle.--this tax will go on them.
Senator Durbin. Would you respond? When will you present
the evidence to back up this?
Mr. Kittle. We can get it to you quickly.
Senator Durbin. Quickly. Didn't bring it with you today?
Mr. Kittle. Well, we--I could--the numbers are already
there. The precedent is already there. When it was changed in
1978, it went up 2 percent.
Senator Durbin. Well, Professor Levitin, how did you miss
that? Two hundred and ninety-five dollars a month, it's going
to cost.
Mr. Kittle. Because he didn't use the correct calculations.
Senator Durbin. Well, what--
Professor Levitin. The correct calculations? I mean, I
would hope that the Mortgage Bankers Association, of all
entities, would know that there are--even if we didn't have
bankruptcy at all in the world, there would still be a price
spread between investor properties and owner-occupied
properties. They're just different risks. If you're going to
have an investor property, you need to find a tenant. Sometimes
you can't do that. Sometimes you find a tenant and the tenant
doesn't pay, or you find a tenant and the tenant trashes the
place. To come up with this really nonsense 150 basis point
number, which I'm guessing, but I can't be sure, is the basis
for Mr. Kittle's calculations, it just--I mean, it boggles the
mind how one can make this argument with a straight face.
Senator Durbin. I thank the panel for their testimony
today. Obviously there may be some questions submitted to you.
Mr. Kittle is going to provide us with his analysis that led to
his last conclusion.
Sheriff Dart, thank you. Thanks to each and every one of
you for your testimony. We will leave the record open for
others who may submit some written questions in the near term,
but as of now this Committee stands adjourned. Thank you.
[Whereupon, at 11:47 a.m. the Committee was adjourned.]
[Questions and answers and submission follow.]
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