[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 

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

                                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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                       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

                              ----------                              

                    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

                              ----------                              


                      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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