[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
 HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY ACT OF 2009, AND THE 
           EMERGENCY HOMEOWNERSHIP AND EQUITY PROTECTION ACT

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



                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

                         H.R. 200 and H.R. 225

                               __________

                            JANUARY 22, 2009

                               __________

                           Serial No. 111-10

                               __________

         Printed for the use of the Committee on the Judiciary


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



                  U.S. GOVERNMENT PRINTING OFFICE
46-615                    WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office  Internet: bookstore.gov Phone: toll free (866) 512-1800 
Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 20402-0001



                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida               STEVE KING, Iowa
STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
  Georgia                            JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
LUIS V. GUTIERREZ, Illinois          JASON CHAFFETZ, Utah
BRAD SHERMAN, California             TOM ROONEY, Florida
TAMMY BALDWIN, Wisconsin             GREGG HARPER, Mississippi
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
[Vacant]

            Perry Apelbaum, Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel


                            C O N T E N T S

                              ----------                              

                            JANUARY 22, 2009

                                                                   Page

                               THE BILLS

H.R. 200, the ``Helping Families Save Their Homes in Bankruptcy 
  Act of 2009''..................................................     3
H.R. 225, the ``Emergency Homeownership and Equity Protection 
  Act''..........................................................    11

                           OPENING STATEMENTS

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Committee on the 
  Judiciary......................................................     1
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.    19
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California............................................    20
The Honorable Maxine Waters, a Representative in Congress from 
  the State of California........................................    21
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina....................................    23
The Honorable William D. Delahunt, a Representative in Congress 
  from the State of Massachusetts................................    24
The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee.............................................    25
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia.............................    26

                               WITNESSES

The Honorable Brad Miller, A Representative in Congress from the 
  State of North Carolina
  Oral Testimony.................................................    27
  Prepared Statement.............................................    29
The Honorable Jim Marshall, a Representative in Congress from the 
  State of Georgia
  Oral Testimony.................................................    30
Mr. Adam J. Levitin, Associate Professor of Law, Georgetown 
  University Law Center, Washington, DC
  Oral Testimony.................................................    35
  Prepared Statement.............................................    38
Mr. David M. Certner, Legal Counsel and Legislative Policy 
  Director, AARP, Washington, DC
  Oral Testimony.................................................    65
  Prepared Statement.............................................    74
Mr. Matthew J. Mason, Assistant Director, UAW-GM Legal Services 
  Plan, Detroit, MI
  Oral Testimony.................................................    81
  Prepared Statement.............................................    82
Mr. Christopher J. Mayer, Paul Milstein Professor of Real Estate 
  and Senior Vice Dean, Columbia Business School, New York, NY
  Oral Testimony.................................................    87
  Prepared Statement.............................................    89

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Chairman, Committee on the Judiciary...........................   168


 HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY ACT OF 2009, AND THE 
           EMERGENCY HOMEOWNERSHIP AND EQUITY PROTECTION ACT

                              ----------                              


                       THURSDAY, JANUARY 22, 2009

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:23 p.m., in 
room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Committee) presiding.
    Present: Representatives Conyers, Scott, Watt, Lofgren, 
Jackson Lee, Waters, Delahunt, Cohen, Johnson, Pierluisi, 
Sherman, Wasserman Schultz, Maffei, Smith, Goodlatte, 
Sensenbrenner, Coble, Lungren, Issa, King, Franks, Gohmert, 
Jordan, Poe, Chaffetz, Rooney, and Harper.
    Staff present: Perry Apelbaum, Staff Director and Chief 
Counsel; Susan Jensen-Lachmann, Majority Counsel; George 
Slover, Majority Counsel; Daniel Flores, Minority Counsel; and 
Zachary Somers, Minority Counsel.
    Mr. Conyers. The hearing will come to order. Thank you, 
ladies and gentlemen. We are delighted to have our colleagues 
in front of us again who work so diligently on the subject 
matter.
    At 1 o'clock this afternoon, we had a vote after extensive 
debate on House Joint Resolution 3, a bill entitled, ``Relating 
on the Disapproval of Obligations Under the Emergency Economic 
Stabilization Act of 2008.''
    The vote was 270 in support of the resolution of 
disapproval and 155 against the resolution of disapproval. And 
I think that reflects accurately the mood of the American 
people. It so happens that we are in the process of catching up 
with them.
    Now, the genesis of this hearing goes back to the evening 
that the then secretary of the treasury, Henry Paulson, met 
with the leaders of the first branch of Government, the 
legislature, and he had three sheets of paper. And here is what 
were on them.
    The first thing was the fact that he needed new and 
extensive authority never before granted a treasury secretary 
in the history of this country.
    The second thing that was on the second sheet of paper was 
that he needed $700 billion.
    And on the third sheet of paper were two other provisos, 
one which said we need this money right away and the other 
proviso on the third sheet of paper said, and we want this 
authority that we are asking you to legislate not to be 
reviewable by any court nor even the legislative process 
itself.
    And this was the beginning of some of the, to me, 
foreseeable problems that bring us here today.
    Now, we inquire under the jurisdiction of the Judiciary 
Committee on a very limited set of circumstances. What we are 
here this afternoon to determine are some very simple 
questions. They have been outlined by my staff and actually 
they have been recaptured by one of our witnesses on the second 
panel, Professor Levitin.
    And they boil down to these questions with regard to what 
we do about the basic problem that caused the subprime mortgage 
meltdown and, further, what can we do to assist the victims of 
this meltdown who happen to be homeowners?
    And so I offer you these suggestions: that, first, the 
voluntary efforts to relieve the foreclosure crisis have been 
unsuccessful. And, second, the bankruptcy provisions in our 
bills are the modification of them to allow cram-down 
reopening, examination, can only be accomplished through 
revising the bankruptcy law; longer terms, less interest, 
making sure that the mortgage itself does not exceed the value 
of the property.
    And then a couple of other considerations that nothing 
harmful will come through this bankruptcy modification because 
there will be no further interest rates that will go higher, 
nor will these modifications create any unjust benefits or 
somehow make this some kind of an easy-escape method for 
undeserving mortgagors.
    And so I am happy to begin this discussion with two of the 
leaders in the Congress about how we came to this point. I am 
so glad that you are with us, Congressman Miller and 
Congressman Marshall.
    I turn now to the Ranking Member from Texas, Mr. Lamar 
Smith.
    [The bills, H.R. 200 and H.R. 225, follow:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, this country is faced with a foreclosure 
crisis of historic proportions. Many were complicit in the 
creation of this crisis. It was brought on largely by 
irresponsible mortgage policies.
    These policies were implemented by lenders and encouraged 
by Government entities like Fannie Mae, who were all too 
willing to put profits ahead of prudence.
    Their irresponsible behavior was encouraged by Congress, 
and too often borrowers, spurred on by cheap credit and little 
or nothing as a down payment, borrowed more than they could 
afford.
    We in Congress are now considering solutions to the 
foreclosure crisis. The legislation before us today represents 
the so-called bankruptcy solution.
    It is tempting to some because allowing bankruptcy courts 
to rewrite home mortgages does not require up-front taxpayer 
dollars. In that sense, it may appear costless.
    But despite their superficial attractions, the bankruptcy 
proposals create real problems and will cost future homeowners.
    My overriding concern with the bankruptcy proposals is that 
they undermine personal accountability. Although an unusual 
number of people took on mortgages they could not afford, the 
vast majority of Americans simply did not. They took on loans 
for which they assumed responsibility and continued to pay 
their mortgages on time.
    Americans undoubtedly want solution to the foreclosure 
crisis, but I do not believe that they want proposals that 
amount to absolving borrowers of their personal responsibility. 
I fear that the broad terms of the two bills we are considering 
today do just that.
    Both of these bills are open-ended and place no limits on 
who is eligible for relief. They also give little, if any, 
guidance to debtors and bankruptcy judges as to how mortgages 
may be modified in bankruptcy.
    Because this bankruptcy legislation is overly broad, it 
will send shock waves through the mortgage lending, credit and 
housing markets. This legislation will increase the risks 
associated with mortgage lending and discourage investment in 
the mortgage-backed securities market.
    In turn, this will lead to fewer mortgages being written, 
and those that are written will come with higher interest rates 
and higher up-front costs. Future homeowners will pay a steep 
price.
    Further, because many borrowers will be eligible for 
relief, these bills may open the flood gates to an 
unprecedented wave of bankruptcy filings. Current estimates are 
that 5 million homeowners are delinquent and another 12 to 15 
million owe more than their houses are worth.
    If a significant number of these homeowners choose 
bankruptcy, then bankruptcy filings could double or triple as a 
result. And this legislation will unnecessarily tempt them by 
promising the ability to reduce principal and interest rates.
    Finally, this legislation will not supplement but compete 
with the targeted loan modification programs lenders and the 
Government are now using to help struggling homeowners. As a 
result, this legislation will undermine many of those prograMs.
    Any relief should be targeted at the mortgages that are at 
the heart of the current crisis. Relief must be short-lived so 
that we can return quickly to the normal operation of the 
bankruptcy code.
    Debtors and bankruptcy courts must be given concrete 
guidance as to how loans are to be modified to reduce monthly 
payments to affordable levels.
    Finally, if bankruptcy relief is to be considered, it must 
be done in a manner that does not undermine personal 
accountability. It must not unfairly reward those who acted 
irresponsibly.
    And it must not be an affront to those who did act 
responsibly, borrowed only what they could afford, and have 
been working hard to make their monthly payments.
    Unfortunately, the legislation we consider today, in my 
opinion, will create more problems than it will solve.
    Mr. Chairman, thank you, and I will yield back.
    Mr. Conyers. Thank you so much.
    I do not see the gentleman from Arizona, Trent Franks, 
here.
    Mr. Smith. He is not here.
    Mr. Conyers. He is not here.
    We move, then, to the gentlelady from California, 
Chairwoman of a Financial Services Subcommittee, Maxine Waters 
of California.
    The gentlelady is recognized.
    Ms. Lofgren. Ms. Waters has asked that I precede her.
    Mr. Conyers. Oh, I didn't have your name down. That is----
    Ms. Lofgren. I will be brief, both because I am eager to 
hear from our two witnesses, and also I am losing my voice.
    I would first like to thank Congressman Miller and 
Congressman Marshall for the tremendous leadership that they 
have exhibited on this issue. It has been important and very 
wise. And I think the country is really very much in their debt 
for that leadership.
    I would just like to note that I think this is a time when 
disagreements over this issue are starting to disappear, and 
people are coming together in conclusion that something should 
be done in this arena.
    We are mindful that the Constitution itself, in Article 1, 
Section 8, provides for the bankruptcy laws of the United 
States, so we are doing nothing that was not in the thinking of 
the founders when we take a look at our bankruptcy laws.
    Let me just say that I was here and worked on the 1978 
bankruptcy bill as a young staffer for Congressman Don Edwards, 
who was the Chairman of the Committee--Subcommittee of 
jurisdiction. And honestly, I could not recall that we had 
excluded principal mortgages from the bankruptcy revisions.
    And when that became apparent, I actually called Alan 
Parker--many of you remember him--who was the general counsel 
for the Subcommittee, and I said, ``Why did we do that?'' And 
he said, ``Oh, no, we didn't do that.''
    It turns out that was added in on the Senate side without a 
lot of discussion. There was no huge policy issue involved. It 
became part of the law, but it never really became a focus, a 
public policy focus, until we had this meltdown of the mortgage 
market.
    And that is because mortgages were a very different 
creature back in the late 1970's. And now, of course, we have 
subprimes and Alternate-As and actually a collapse of the 
housing market.
    We have been advised by Mark Zandi, who is a very noted 
economist and, I would note, the principal economic adviser to 
Senator John McCain during his presidential run, that this 
change in bankruptcy law is an important element of halting the 
collapse of the housing market.
    Why is that? Well, right now, we are engaged in watching 
not only the subprime market collapse but the prime market as 
well.
    And I will give you some examples from my own district, 
where people who bought a $700,000 home a year ago, not with a 
subprime instrument, with a--you know, equity down, 20 percent 
down or more, are now faced with a neighbor next door who has a 
house for sale in bankruptcy that--or a short sale at $250,000 
that won't sell.
    The value of everybody's property, including those who did 
nothing wrong, has been depressed. And until the lending 
institutions are able to put a floor under these losses, we are 
not going to pull out from this disaster.
    I would note that Citigroup has come out in favor of a 
bankruptcy provision as part of this, so I do know that we can 
come together if there are issues--you know, I would honestly 
prefer to simply repeal the provision that I think was 
misguided.
    But I think coming together, we can come up with a 
provision that perhaps limits it to existing mortgages, to work 
and reason together to really solve this problem for our 
country.
    So I honor you, Mr. Chairman, for holding this very 
important hearing and for all the Members who I know will work 
together in good faith on behalf of the American people.
    And I yield back and thank the gentlelady for yielding to 
me.
    Mr. Conyers. I would like now to recognize the gentlelady 
from California, Maxine Waters, a longtime Member of the 
Judiciary Committee, and also a Subcommittee Chair of the 
Finance Committee as well.
    Ms. Waters. Thank you very much, Mr. Chairman, and I do 
appreciate that you have made this literally the first order of 
business for this 111th Congress.
    It is so important, and I want to remind everyone that this 
Committee passed H.R. 3609, the Emergency Home Ownership and 
Mortgage Family--Mortgage Equity Protection Act, on December 
12, 2007, and that the House failed to pass the legislation in 
the 110th Congress. We are way behind on this issue.
    And let me give you an example why what we are doing now 
will not solve the crisis that we are in. Last evening, 
``Nightline'' showed what they had done in looking at the loan 
modifications, or lack of, by financial institutions. They 
stayed in my office literally for 2 days.
    I implement or help to facilitate loan modifications for my 
constituents, against the advice of the Ethics Committee. I am 
bombarded with people who are losing their homes, whose homes 
are about to be in foreclosure, who have tried everything that 
they possibly could try to get a loan modification.
    They can't get through to the servicers. The servicers and 
the offices--many of them owned by some of our big banks, like 
Wells Fargo, Bank of America, Countrywide or the former 
Countrywide, what have you.
    And so you are on the telephone waiting for hours. They 
play music for you. You get cut off. ``Nightline'' followed 
through with me on one that I was working on for a couple of 
hours. I sat on the telephone for an hour with the Wells Fargo 
servicing company, on and on and on.
    You cannot get these modifications done one by one. All of 
those counselors that are certified by HUD who work with the 
volunteer program, Hope Now, are not trained in loan 
modifications. These people are trained to do counseling for 
first-time home buyers. They can't get through to the 
servicers. The servicers don't pay any attention to them.
    The closest we have come to doing credible loan 
modifications has been with Sheila Bair of IndyMac, where she 
took the IndyMac portfolio and was able to do almost 6,000 
because she developed a more systematic way of doing these 
modifications.
    Even now, for some of the servicers who do modifications--
they don't do what I would consider a real modification. They 
will sometimes extend the time of payment and load it up on the 
back end, but they are not marking down interest rates.
    They are not taking adjustable-rate mortgages and 
converting them to 30-and 40-year loans that would reduce the 
amount of the mortgage payment. And so you have this glut of 
foreclosed houses just building up throughout the United States 
of America, much of it now in disrepair.
    And even the money that I helped to orchestrate to 
stabilize communities is not enough. We put $4 billion out 
there for a stabilization program, but still, as Zoe Lofgren 
just said, these houses are in disrepair. The value is being 
lost. They are under water.
    And so you have whole communities that are devastated, and 
the homes are losing value. So we have got to do something 
real. We have got to modify or change the bankruptcy law.
    And I want to commend you for taking leadership, both of 
you--Mr. Marshall, Mr. Miller--because I think, despite the 
fact we are--because the banking industry is just so powerful. 
They are so powerful they have owned this Congress for far too 
long. And we have got to break this up.
    Judges must have the ability to put these into the 
bankruptcy proceeding and do the modifications themselves. And 
so I think we are on our way. And you know, when Citigroup--and 
they say that yes, it makes good sense, everybody ought to be 
on board to do it.
    So, I am hopeful, Mr. Chairman, that we can move forward 
with this. We would like to see it--Zoe and I would to see it 
in the stimulus package. That is where we want it. We want it 
done quickly, and we want it done now. So let us see how far we 
can get.
    I thank you for being here today, my colleagues.
    I thank you again, Mr. Chairman. I will continue to try and 
implement loan modifications, but it is like dropping a little 
rock into a huge ocean, and it won't get the job done. But 
bankruptcy will get it done. Thank you very much.
    I yield back the balance of my time.
    Mr. Conyers. Well, that is very informative, because the 
Speaker of the House has just come out in acceptance of the 
proposal that is being made here today.
    I might put it in the record without objection. The 
question was--this is dated January 22, 2009----
    [The information referred to follows:]

    
    

    Mr. Conyers. And I now turn to a former Subcommittee 
Chairman of the Judiciary, Melvin Watt of North Carolina, who 
is now a Subcommittee Chairman on the Finance Committee.
    Mr. Watt. Thank you, Mr. Chairman. And I see both of the 
witnesses at the table looking at their watches and wondering 
when they are going to get to testify, so I am very much 
aware----
    Mr. Miller. I have no where to go that is more important 
than being here.
    Mr. Watt [continuing]. That you want to move this on. I do 
want to pick up where my colleague on financial services, 
Maxine Waters, left off because we do have the unique blessing 
or curse of serving on both the Judiciary Committee and the 
Financial Services Committee. And not only do I want to commend 
these two gentlemen, who have taken the lead on this bankruptcy 
bill, but I want to commend her for the tremendous amount of 
work that she has done on this whole foreclosure issue to try 
to effect some solutions short of bankruptcy, in addition to 
supporting the bankruptcy provision.
    She is absolutely right. We are regularly, because of our 
position, in either friendly or sometimes not so friendly 
conversation with financial institutions. And about a year and 
a half ago or more, I said to the folks in the financial 
services, the lenders, some of them that they needed to line up 
and support this for several reasons.
    First of all, when you have a foreclosure in a lot of 
states, and there is a public sale, that is all they--the 
lender can get. There is a provision under North Carolina law, 
for example, that you can't go and get anything beyond that 
foreclosure amount. And it is not at all to be above 40 percent 
when you sold a foreclosure. Now it is down to about 20 percent 
or 10 percent, Mr. Marshall probably has more information on 
that. And they ain't getting much in a foreclosure sale. They 
would actually get more, I think, if these loans were 
restructured and rewritten in the bankruptcy courts, and I just 
think they would--the lenders would be better off. So their 
position was short sighted.
    Second, it just seemed to me that their concern about this 
was overstated, and I did share one concern, which I have 
expressed publicly, and I think we need to address, and I am 
sure Mr. Marshall will address it, one of the concerns they 
have had is that it will encourage people to go into 
bankruptcy.
    And I have that concern because I don't want to rush 
anybody into bankruptcy solely for the purpose of 
restructuring, but the threat of going to bankruptcy, I think, 
is important. Bankruptcy has some negative impacts that go well 
beyond--so we don't want to be in a position of encouraging 
people into bankruptcy. But I think that can be dealt with in 
the legislation.
    And finally, over the last month or so, those same people 
that I talked to a year and a half or two, are coming back to 
me and saying, ``Yes, you did suggest to us that this was a 
good idea and maybe it is not such a terrible idea.'' So maybe 
we are coming full circle. I think we are going to get there 
pretty soon. We just need to keep pushing, and I applaud the 
Chair for having the hearing today and for that purpose. 
Because it is part of that push to keep the pressure on to do 
this. And with that, I yield back, Mr. Chairman.
    Mr. Conyers. Thank you. Did Bill Delahunt have his hand up 
or not?
    Mr. Delahunt. I will be very brief, Mr. Chairman.
    Mr. Conyers. All right.
    Mr. Delahunt. I would just echo the sentiments expressed by 
my colleagues. I think the speaker responded to those questions 
with a clear sense of urgency. And I would just say, if we 
don't move quickly that we are going to be accused of fiddling 
while Rome is burning.
    This financial crisis that we are in at this point in time 
was precipitated by the mortgage crisis. I think what is clear 
is that no voluntary program has worked to date. And will not 
work because the order of magnitude is such that it is going to 
take time. We don't have any time left. And if you don't 
believe that, watch the Dow Jones today and yesterday and the 
day before. If we really want to precipitate a free fall in 
terms of a financial crisis, then let us just sit here and 
debate and not move expeditiously on the bills that are put 
forth by our two esteemed colleagues.
    And by the way, Mr. Chairman, their proposals will not cost 
the taxpayers a single dime. I think that is very important to 
discuss or to mention. And that the public should be aware of 
that.
    This is not authorizing the expenditure of $700 billion or 
$350 billion. This is an effort to resolve the mortgage crisis, 
the housing crisis, if you will. And until that happens, 
because that crisis has infected all of our economy, we are not 
going to solve the problems of an economic meltdown that we are 
currently facing.
    And with that, I yield back.
    Mr. Conyers. Okay. Thank you very much.
    Steve Cohen, have you given up any opportunity to make a 
comment?
    Mr. Cohen. Many times in the past, but not today, Mr. 
Speaker.
    Mr. Conyers. The gentleman is recognized.
    Mr. Cohen. Thank you, Mr. Chairman. And I apologize for 
being late. As I explained as I was coming in, I was speaking 
on the floor on H.R. 104, something dear to this Committee, the 
bill that the Chairman put in to study the possible abuses of 
the Bush-Cheney administration, a commission to look at that, 
which I think is important.
    I appreciate the gentleman who came forward with this bill 
and the others who have come forward with similar bills. And I 
was very proud to be a member of our democratic caucus when 
caucus members from throughout the range of the caucus spoke up 
in favor of this type of law and putting it in the stimulus 
package.
    Mr. Chairman, I most appreciate Speaker Pelosi and 
appreciate her response. But Speaker Pelosi always speaks of 
what Dr. Martin Luther King spoke about, and that is the fierce 
urgency of now.
    And I believe the fierce urgency of now not only requires 
us to pass these bills out, but to see to it that they are part 
of the stimulus package. Because that is the bill that we know 
is going to pass. That is going to pass.
    If we have this as a free standing bill, we don't know when 
it will pass or if it will pass because senators will have more 
reason to vote simply against this bill. In the stimulus 
package, there will be things in there for their constituents 
and they know, as Mr. Delahunt well said, that we are in an 
economic crisis and we need to act. And there are enough 
republicans in that senate, in addition to the democrats, to 
pass this because they know the financial structure of our 
country is in the balance. They may not pass the bankruptcy 
bills as stand-alone measures. So I would urge us to do all we 
can, and I know the Chairman will, to include it.
    What we have seen so far in the TARP is helping out folks 
that are in essence the officers who sent people into battle. 
But the casualties, which are the homeowners, have not been 
treated. The casualties are still laying out there in the field 
of combat and not having any regard, any treatment whatsoever, 
or anybody apparently interested in their condition. And every 
day that we go, we miss people.
    Memphis, my home, has one of the highest levels of subprime 
mortgage lending in the country and Tennessee has the highest 
per capita bankruptcy filings in the country. There are 7.6 
bankruptcies per 1,000 people in Tennessee, and that is the 
highest. I don't know exactly the number of foreclosures, but 
each day we go by, there are people losing their homes. And how 
can you expect people to get jobs or to feel comfortable 
spending money if they and their families are put out of their 
homes?
    The Congressional budget office estimated a similar bill 
would be a net $17 million gain to our budget in savings and 
increased revenues if we pass such a bill. So I appreciate the 
Chairman giving me some time. I appreciate the sponsors. And I 
join with them in whatever efforts we can make to see to it 
that homes are put on the same level as yachts, as secondary 
vacation homes, as airplanes and commercial real estate and can 
be modified in bankruptcy. That is because they are even more 
important and should be put at least on that level where they 
can be saved for people and not lost.
    Thank you, Mr. Chairman.
    Mr. Conyers. Hank Johnson is exercising his prerogatives as 
new Subcommittee Chairman from Georgia, and he will be the last 
Member to make a comment before our distinguished witnesses 
begin.
    Mr. Johnson. Thank you, Mr. Chairman. And I will say that 
my first term of Congress, I did a lot of listening and I plan 
on continuing to do that during this second term. But I would 
be remiss not to speak out in favor of both of these pieces of 
legislation, both of which I am a co-sponsor of.
    The need in my state and in my district for this kind of 
assistance is almost overwhelming. In the fourth district of 
Georgia, which is the second most affluent African-American 
majority district in the Nation, we have been targeted for many 
years by predatory lenders who, despite the fact that residents 
are eligible for prime loans, they have been targeted 
aggressively with these high cost predatory loans, with 
exorbitant interest rate swings and of course our real estate 
market has been good. We have put a lot of people into homes. 
In fact, the home building market has been a great economic 
stimulus for the economy of the State of Georgia.
    Now, with the foreclosures having ravaged our area and the 
home building market being decimated, the State of Georgia is 
now looking at a $2 billion deficit. And so things are quite 
tight.
    The genesis of the financial meltdown crisis that we are in 
now arose from the mortgage-backed securities that had been 
sold throughout the world to investors and that became 
worthless.
    And it became worthless due to the fact that so many 
properties had been foreclosed upon. And this trend of 
foreclosures, ladies and gentlemen, 2008, 2.3 million houses 
went into foreclosure. Eight hundred sixty thousand of those 
were actually repossessed, and those numbers are expected to 
climb this year. And so it continues, this problem of 
foreclosures contributing or being the cause of this economic 
meltdown. We must stop the meltdown, and we must do so quickly 
and effectively. And instead of--this is what we call instead 
of trickle-down economics, which has not worked, this is 
rebuilding the economy from the ground up.
    And so, you know, I believe that both pieces of legislation 
will deal with this fundamental issue that impacts the world 
economy. And I think that it is a shame that if you are a 
millionaire, and you had, say, seven properties, you may have 
more properties than you even know of, more homes. And you get 
into trouble and you file bankruptcy and you can modify the 
terms of the mortgages on all of your other properties. You can 
select that suppose where your principle residence would be. 
That might be the one that has the lowest balance on the 
principal owed. And then you can get adjustments on all of your 
other properties.
    Why is it that just a regular common man or woman is not 
able to have in bankruptcy their adjustment for their primary 
residence, their only home? Why is it that a millionaire, who 
made choices and should be personally responsible and 
accountable for overspending be able to get relief under the 
Bankruptcy Act when regular people who only own one residence 
are barred? It just doesn't make sense, so the time is now for 
so many reasons for us to deal with both pieces of legislation.
    I was privileged to hear an eloquent and persuasive 
statement from my Georgia colleague Professor Marshall and 
Attorney Marshall, by the way, on this issue in a Democratic 
caucus meeting where he strongly advocated for inclusion of 
this legislation or idea, this legislative idea, in the 
economic stimulus package. And I support that also, but if we 
need to do in a stand-alone, let us go ahead and do it right 
away.
    I commend the speaker of this Committee for showing that 
this a priority, and I look forward to supporting this 
legislation.
    Mr. Conyers. Brad Miller is the distinguished 
representative from North Carolina, who sponsored in the last 
Congress legislation to protect homeowners from predatory 
mortgage lending. He has earned a Master's degree at the London 
School of Economics and a law degree from Columbia University, 
and we welcome him at this time.

  STATEMENT OF THE HONORABLE BRAD MILLER, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Miller. Thank you, Chairman Conyers.
    Chairman Conyers, Ranking Member Smith, Members of the 
Committee, thank you for this opportunity to address pending 
legislation to empower bankruptcy courts to modify home 
mortgages just as bankruptcy courts already can modify every 
other kind of secured debt.
    The mortgage industry treats that peculiarity in the law as 
if it were brought down from Mount Sinai on stone tablets, but 
Ms. Lofgren remembers correctly. It was just a sloppy political 
compromise in the Senate in 1978, and that nonsensical quirk in 
the law is now responsible for much of the paralysis in our 
Nation's response to the foreclosure crisis, and we are just 
beginning to see the effects of the foreclosure crisis.
    The Census Bureau estimated that 69.2 percent of American 
families owned their own homes in the second quarter of 2004, 
and 67.9 percent owned their own homes in the third quarter of 
2008. That is a fairly slight drop to this point, but the 
number will go much, much lower.
    Credit Suisse now estimates that 8.1 million families will 
lose their homes to foreclosure in the next 4 years, and the 
number will rise to 10.2 or as many as 10.2 million families if 
the recession becomes more severe, a frighteningly real 
possibility.
    In 2006, about 2.5 million families were under water or 
owed more on their mortgages than their homes were worth. 
Moody's now estimates that 12 million homeowners are under 
water & and the number will rise to 14.6 million by the fall if 
the climb in home values reaches 10 percent, an additional 10 
percent, as Moody's expects.
    Homeowners who owe more on their homes than their home is 
worth are stuck. They can't sell their house to pay off their 
mortgage. They can't refinance, and they almost certainly can't 
qualify for any other kind of credit. Even if homeowners can 
make their current monthly payments, they have no wiggle room 
if anything goes wrong, if anyone in the family gets seriously 
ill, or if anyone loses their job, or if they go through a 
divorce.
    Foreclosures are contributing to the decline in home 
values. The decline in home values is contributing to the 
foreclosure crisis, and both are contributing to the decline in 
the economy. Vacant foreclosed homes are stigmatizing 
neighborhoods and pushing down homevalues, and priced-to-sell 
foreclosed homes are flooding real estate markets around the 
country. Half the homes on the market in the bay area of 
California are foreclosures.
    Families that lose their homes to foreclosure lose their 
membership in the middle class, probably forever, and almost 
all middle class homeowners are seeing their life savings 
evaporate with the collapse in their home's value.
    A homeowner who has seen his home decline in value by 20 or 
30 percent is going to be in no hurry to buy a new car. If 10 
million families lose their homes to foreclosure in the next 4 
years, nothing else we do to revive the economy is going to 
work.
    Ms. Waters was correct. Voluntary modifications are not 
even touching the problem. Three quarters of the voluntary 
modifications that the industry claims are just payment 
schedules with no reduction in principal or interest. Half the 
modifications in November were forbearance agreements that 
allowed the homeowner to catch up back payments and actually 
resulted in a higher monthly payment than the original 
mortgage.
    If a homeowner defaulted on a lower monthly payment, what 
are the chances that homeowner can make a higher monthly 
payment? Industry has one explanation after another for why 
there are so few real voluntary modifications, but after a 
while it all just sounds like ``the dog ate my homework.''
    One explanation that critics of the financial industry 
offer is that the industry is facing millions of mortgages in 
default, but they are paralyzed, consumed by the fear that they 
are not getting as much as possible out of each homeowner in 
default. One witness to that on the second panel criticizes the 
legislation, both Mr. Conyers' bill and mine, as one-size-fits-
all.
    Mr. Chairman, Members of the Committee, with 10 million 
families facing foreclosure, we can't afford a lot of 
elaborate, individualized tailoring. We know exactly what will 
happen in foreclosure--in bankruptcy rather. It may not be in 
this bill, but there is a wealth of case law. We know exactly 
what the court will do.
    It will result in predictable, orderly, sensible 
modifications. The court will limit the amount of debt secured 
by the home to the value of the home. Any indebtedness that 
exceeds the value of the collateral is not really secured by 
the collateral anyway, and the court would treat that portion 
of the debt as unsecured, which it really is.
    Now, the court would then set a term for the mortgage and 
set an interest of prime plus maybe 1 percent. Those terms make 
perfect sense. It is what industry should be doing voluntarily 
already.
    The legislation does not help homeowner who bought too much 
house. It does not help homeowners who live beyond their means. 
It only helps homeowners who can afford their house but not 
their mortgage. It does not help speculators. Mortgages on 
investment property can already be modified in bankruptcy.
    A year ago, I spent hours--I spent time and energy refuting 
each argument by the financial industry against this 
legislation. Many of you remember those arguments. They said 
that their lawyers told them the legislation was 
unconstitutional and would never survive a court challenge. If 
their lawyers told them that, they need to get some new 
lawyers.
    A year ago, union members were reluctant to question the 
financial services industry. They believed what the financial 
industry said. After all, the financial industry made 40 
percent of all corporate profits in America in 2007, so those 
guys must be really smart.
    If you think that still, go home this weekend and ask the 
people you represent how much credibility they think the 
financial should still have with Congress. I think Mr. Conyers 
is right. The vote we had just a short while ago on TARP tells 
us a great deal, speaks volumes of what Americans now think 
about the financial industry and the conduct that got us in the 
mess we are in.
    We spent a year and a half, a precious year and a half, a 
year and a half we could not afford to waste, on failed efforts 
to encourage voluntary modifications. We have offered industry 
carrot after carrot. It is time for a stick.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Miller follows:]
 Prepared Statement of the Honorable Brad Miller, a Representative in 
               Congress from the State of North Carolina
    Chairman Conyers, Ranking Member Smith, members of the Committee, 
thank you for this opportunity to address pending legislation to 
empower bankruptcy courts to modify home mortgages, just as bankruptcy 
courts already can modify every other kind of secured debt. The 
mortgage industry treats that peculiarity in the law as if it were 
brought down from Mount Sinai on stone tablets. In fact, it appears to 
have been just a sloppy compromise in the Senate in 1978, and that 
nonsensical quirk in the law is now responsible for much of the 
paralysis in our nation's response to the foreclosure crisis.
    We are just beginning to see the effects of the foreclosure crisis.
    The Census Bureau estimates that 69.2 percent of American families 
owned their own homes in the second quarter of 2004, and 67.9 percent 
owned their own homes in the third quarter of 2008. The number will go 
much, much lower.
    Credit Suisse now estimates that 8.1 million families will lose 
their homes to foreclosure in the next four years, and the number will 
rise to 10.2 million families if the recession becomes more severe, a 
frighteningly real possibility.
    In 2006, about 2.5 million families were ``underwater,'' or owed 
more on their mortgages than their homes were worth. Moody's now 
estimates that 12 million homeowners are underwater, and the number 
will rise to 14.6 million by the fall if home values decline another 
ten percent, as Moody's expects.
    Homeowners who owe more on their home than their home is worth are 
stuck. They can't sell their house and pay off their mortgage, they 
can't refinance, and they almost certainly can't qualify for any other 
kind of credit. Even homeowners who can make their current monthly 
payments have no wiggle room if anything goes wrong, if anyone in the 
family gets seriously ill, or if anyone loses their job, or if they go 
through a divorce.
    Foreclosures are contributing to the decline in home values, the 
decline in home values is contributing to the foreclosure crisis, and 
both are contributing to the decline in the economy. Vacant foreclosed 
homes are stigmatizing neighborhoods and pushing down home values, and 
priced-to-sell foreclosed homes are flooding real estate markets around 
the country. Half of the homes on the market in the Bay Area of 
California are foreclosures.
    Families that lose their homes to foreclosure lose their membership 
in the middle class, probably forever. Almost all middle-class 
homeowners are seeing their life's savings evaporate with the collapse 
in the value of their home. And a homeowner who has seen his home 
decline in value by 20 or 30 percent is in no hurry to buy a new car.
    If ten million families lose their homes to foreclosure in the next 
four years, nothing else we do to revive the economy is going to work.
    Voluntary modifications are not even touching the problem. Three 
quarters of the voluntary modifications that industry claims are just 
payment schedules with no reduction in the principal or interest. Half 
of the modifications in November were forbearance agreements that 
allowed the homeowner to catch up back payments, and actually resulted 
in a higher monthly payment than the original mortgage. If a homeowner 
defaulted on a lower monthly payment, what are the chances the 
homeowner can make a higher monthly payment?
    Industry has one explanation after another for why there are so few 
real voluntary modifications, but after a while it all just sounds like 
``the dog ate my homework.''
    One explanation that critics of the financial industry offer is 
that the industry is facing millions of mortgages in default, but they 
are paralyzed, consumed by the fear that they are not getting as much 
as possible out of each borrower in default. One witness today 
criticizes the legislation before this committee as ``one size fits 
all.'' Mr. Chairman, with ten million families facing foreclosure, we 
can't afford a lot of elaborate, individualized tailoring.
    We know exactly what will happen in bankruptcy. It will result in 
predictable, orderly, sensible modifications. The court will limit the 
amount of debt secured by the home to the value of the home. Any 
indebtedness that exceeds the value of the collateral is not really 
secured anyway, and the court would treat that portion of the debt as 
unsecured. The court would then set a term and an interest rate of 
prime plus maybe one percent.
    Those terms make perfect sense. It is what industry should already 
be doing voluntarily.
    The legislation does not help homeowners who bought too much house. 
It only helps homeowners who can afford their house but not their 
mortgage. It does not help speculators. Mortgages on investment 
properties can already be modified in bankruptcy.
    I spent a lot of time and energy a year ago refuting each argument 
by the financial industry against this legislation. Many of you 
remember those arguments. They said their lawyers told them the 
legislation was unconstitutional and would never survive a court 
challenge. If their lawyers told them that, they need to get some new 
lawyers.
    But a year ago, many members were reluctant to question what the 
financial industry said. After all, the financial industry made 40 
percent of all corporate profits in 2007, so those guys must be really 
smart.
    If you still think that, go home this weekend and ask the people 
you represent how much credibility they think the financial industry 
should have with Congress now.
    We've spent a year and a half on failed efforts to encourage 
voluntary modifications. We've offered industry carrot after carrot. It 
is time for a stick. This legislation is the stick.
                               __________
    Mr. Conyers. Thank you, Mr. Miller, for your excellent 
work.
    Now, Jim Marshall of Georgia is known as a military man. He 
interrupted his education at Princeton to join the infantry 
combat mission in Vietnam. He came back, thank goodness, and 
subsequently obtained his law degree from Boston University, 
and we welcome him here this afternoon.

 TESTIMONY OF THE HONORABLE JIM MARSHALL, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Marshall. Thank you, Mr. Chairman, Members of the 
Committee.
    I guess I ought to start by adding to what the Chairman 
described as my background, the fact that I have spent years as 
a bankruptcy lawyer, bankruptcy law professor, taught 
creditor's rights courses, advised banks, had written 
extensively in this area and have been married for many, many 
years to a Chapter 13 trustee, who handles one of the largest 
volumes of Chapter 13 cases in the country. So I am extremely--
oh, and I have done a lot of Chapter 11s. My expertise is in 
business bankruptcy, typically representing lenders, sometimes 
representing debtors.
    When Dan Miller came to me as the subprime crisis was 
unwinding a couple of years ago and suggested that we permit 
modification of mortgages and Chapter 13, I said I wouldn't 
support it.
    Largely, Mr. Smith, I wouldn't support it for the reasons 
that you described, and I have got 30 years of background in 
this subject matter. It took me about 2 months of thinking 
about it before I realized that probably a modified version of 
what Mr. Miller is suggesting is absolutely necessary under our 
circumstances, national circumstances, and it can be enacted in 
a way that doesn't hold out all the problems that you, I think, 
correctly have identified as the things to be worried about 
with regard to legislation like this.
    It should only apply to preexisting loans. It shouldn't 
apply prospectively.
    That eliminates, probably altogether, but certainly 
diminishes substantially the worry that the consequence of this 
will be to increase costs for everybody who wants to get a 
mortgage in the future because it doesn't really threaten 
future mortgages.
    When I made my proposal and not in the form of written 
legislation but sort of an outline to different folks a couple 
of years ago, I not only suggested retroactivity. I suggested 
that it be limited to certain types of loans, that they be 
subprime, Alt-A, maybe constrained to a certain period of time.
    The reason I was absolutely convinced that we need today 
move and move quickly is because there really is no other 
mechanism available to us to address this crisis. Whether you 
are interested in helping out the homeowners, or you are 
interested in helping out the rest of us, the folks who didn't 
drag us into this mess, the people who were not irresponsible 
borrowers, the people who were not irresponsible lenders but 
who are caught up in all of this, seeing our home values 
plummet, jobs disappear, the economy in tatters, if you are 
interested in helping and you are interested in focusing on 
what dragged us into all of this mess, let us get the parties 
that dragged us into this to resolve their problem between 
themselves without having a whole bunch of houses on the 
market, foreclosed on, vacant, dragging down the portfolio of 
values for all of the lenders that I used to represent, causing 
them to have all kinds of problems meeting capital 
requirements, having FDIC come in and close banks.
    It is a tidal wave that is slowly sweeping the country 
causing misery and tragedy to a whole bunch of folks when it 
wasn't necessary and, certainly, could have been slowed down if 
we had just been a little bit more open minded to the only 
mechanism that is really available to slow it down; and that is 
modification of these notes in a Chapter 13 setting.
    Now, why won't it work out in Chapter 13? It is pretty 
simple. Most of these folks who get to the point where they 
have got to modify their mortgage, they have got credit card 
issues, alimony issues, child support issues, hospital bill 
issues. They have got many, many other creditors. The amounts, 
relatively, are fairly small. There is effectively no such 
thing as custom modification and workouts in consumer cases 
because the amounts are too small to put the effort into it for 
the industry.
    So it is a--apparently, somebody is going to be dismissive 
of Brad's proposal. I would modify Brad's proposal. But it is 
the individual who is dismissive on the notion that this is a 
one-size-fits-all problem. Yes, it is a one-size-fits-all 
problem from the perspective of the industry because these are 
consumer cases.
    And so you cannot expect to take taxpayer dollars, put them 
into homeowner relief or mortgage relief or what have you and 
expect it is going to have much effect because these folks have 
other debt problems that aren't going to get resolved even if 
their home mortgage debt problem does get resolved. A small 
percentage, yes. But the vast majority, no.
    The efforts that we have made so far to try and help folks 
whose properties are going to go into foreclosure, who are 
going wind up homeless, who are going to wind up out of the 
middle class and, perhaps, as Brad suggests, never to return to 
the middle class. The program we have come up with so far, they 
are just not going work for the reasons I just described. It is 
too big a problem.
    Now, Chapter 13 is a very fair process for all parties 
concerned. It is one that has safely and effectively modified 
loans in all kinds of other circumstances except primary 
residences. And the bankruptcy process generally deals with 
this modification problem time and time again.
    Mr. Smith, I found myself agreeing with the items that you 
listed as reasons to be concerned. And I would like to quickly 
just address those different items.
    First, you identified one reason to be fairly comforted by 
the prospect of making this change in our law. And that is, in 
effect, it says to the parties who are dragging us into this, 
the lenders, call it the debtors and the creditors, you deal 
with this among yourself. Don't let it play out in our 
neighborhoods across the country. You are going to settle this 
thing, and we are going try and keep more people in--you are 
not going to drag down the portfolio values of all these banks 
that are innocent. You are not going drag down the value of my 
house. I am innocent.
    So it is attractive that no taxpayer dollars need to be 
used in order to accomplish that. And what taxpayer dollars are 
used can be blended into the realities that would then exist 
under the circumstances of modification. There is no reason to 
suggest that somehow a program permitting loan modification in 
Chapter 13 would undermine our other efforts, just supplement 
them and actually diminish the necessity for them, which is 
very attractive to me.
    There should be no long-term increase in mortgage rates if 
it is only retroactive and, in fact, there is scholarship out 
there that suggests that there wouldn't be an increase in 
mortgage rates anyway; that the impact is too small; that there 
are others that differ.
    Yes, there will be a lot of bankruptcy filings. I think 
there is a very legitimate concern. And it is a concern that 
the bankruptcy system could get overwhelmed. And that is 
something that this Committee needs to be thinking about.
    How do you simplify the process? How do you make valuation 
easy and more reliable? Is this going to be full relief for 
appraisers, you know, many of whom are responsible for dragging 
us into this by giving high valuations to start out with? 
Because they will all be testifying in bankruptcy courts and 
running the clock at the time--full relief for lawyers, full 
relief for trustees.
    Some attention must be given to trustee fees here. If 
payments are made outside of the bankruptcy plans and there is 
a huge increase in volume, there may not be enough money in the 
system to handle that. So there are issues that need to be 
focused on in light of the fact that this would increase 
dramatically the amount of filing. There is no doubt about 
that.
    But this system is set up to handle exactly this problem. 
We don't have any other system that is set up to handle it, and 
there is no other system that can handle it. You can't do it 
voluntarily. And the industry itself is not going to be able to 
deal with this.
    And the final thing, I wholeheartedly agree on personal 
responsibility. There is all kinds of scholarship out there 
that clearly indicates that people don't take out loans 
thinking, as a fallback, I am going file bankruptcy if I can't 
pay this thing. There is lots of scholarship to that effect.
    But what worries me more than the concern about personal 
responsibility and somehow undermining personal responsibility 
is that bankruptcy judges are human. Humans err. They are not 
perfect. They are going to make mistakes where valuation is 
concerned. And I don't think it is fair for a debtor to get a 
windfall just because a judge made a mistake on valuation or 
for unsecured creditors who then might get some payments that 
they wouldn't otherwise have gotten to get a windfall.
    And so I have thought and I proposed a couple of years ago 
that inaddition to this being retroactive, that what we ought 
to have is what is referred to sometimes as a claw-back 
position. Basically, the idea is that, at least initially, when 
the judge makes a valuation determination, that is fine; it is 
final. We move on. There is an appeal right? But most creditors 
are not going to appeal. There is just not enough money in it.
    We move on. But the creditor, actually, for a certain 
period of time gets 100 percent of the upside if that property 
is sold. And gradually rights transfer, equity transfers to the 
debtor. It seems to me that that is one way to reduce the 
number of filings that are just sort of--well, I am going take 
a shot at maybe getting a reduced price on my house. And it is 
a way to reduce any likelihood at all that somehow personal 
responsibility is going to be undermined and people are going 
to be filing in order to take advantage of the bankruptcy 
process instead of just being up front and straight in their 
relationships with their creditors.
    There are a number of other issues here, Mr. Chairman. You 
are going to have to worry about eligibility for Chapter 13. 
Right now, as eligibility is currently defined, there are going 
to be some folks who are not eligible that you would probably 
want to be eligible if you are going to offer this areas a 
solution to our national problem or one of the--part of the 
solutions there.
    There ought to be restraints on the judge's ability to 
modify loans. There should be a cap on the number of years. 
There should be some limitation on what the judge can do as far 
as interest rate, et cetera, is concerned. Most judges aren't 
going to get carried away, but it would be good if the 
legislation covered those things.
    Trustee compensation, I have already mentioned that. The 
valuation process somehow injecting speed, simplicity, and 
diminishing costs--those are important, also. And the final 
thing I would say is that I have never been one to appreciate 
the ways in which, in bankruptcy law, people like me can sort 
of get you. Find a technical problem and, as a result of having 
found that technical problem with your paperwork or your filing 
or you didn't throw three rocks over your left shoulder at the 
right time in order to truly establish your rights, all of a 
sudden, you are not properly secured.
    And it seems to me we ought to ask the industry to identify 
ways in which the mortgage-backed security process and 
securitization of debt generally has caused problems with 
enforcement. And we ought to invite the industry to suggest 
language that could be included in this bill that would assist 
the creditor in getting to an equitable solution here so that 
both sides are fairly treated.
    Bankruptcy courts are courts of equity. We should long 
ago--a year and a half ago--have permitted bankruptcy courts to 
have the authority to modify, with certain limitations that 
take care of some of the problems that Mr. Smith has correctly 
identified. And we ought to do it as quickly as we can.
    Thank you, Mr. Chairman.
    Mr. Conyers. Thank you very much, both of you.
    I successfully restrained the Members of the Committee who 
have dozens of questions that they would like to put to you 
now. But as you know, our custom is that we do not enter into 
the question process with our distinguished colleagues who come 
before us.
    Mr. Marshall. Mr. Chairman, if I could offer all Members 
who would like to at all further with me about this in an 
informal setting or in a formal setting--it doesn't matter to 
me. I am happy to do it. As I said, I was originally a no. It 
took me a couple of months of thinking about our circumstances 
and how we could work this out to conclude that we really ought 
to do it. And I would be happy to share my--respond to 
questions in another setting at any time.
    Mr. Miller. And, Mr. Chairman, I would, too. I have had 
many, many conversations. Ms. Lofgren has also played an 
important role in trying to work compromises on this. My 
caution is that that process not slow things down. We need to 
act quickly.
    Mr. Chairman, thank you. I think we would be both willing 
to take questions. Thank you for relieving us of that.
    Whatever else I may accomplish as a Member of Congress, I 
think I can now claim fairly to be the only Member of Congress 
who has succeeded in persuading Jim Marshal to change his mind 
about anything.
    Mr. Conyers. Your message is very well received. Thank you, 
both.
    Ms. Jackson Lee. Mr. Chairman?
    Mr. Conyers. I am sorry.
    The next witness is Professor Adam Levitin from George 
Washington University, who will be followed by David Certner of 
the AARP. And the final witness is Matt Mason, associate 
director of the United Automobile Workers GM Legal Services.
    Professor Levitin is really from Georgetown University Law 
School. My error. He has presented us with one of the longest 
statements for the record that I have encountered because it 
was in very small print and it still went to 27 pages, which 
will be duly entered into the record.
    He specializes in bankruptcy and commercial law. He has 
practiced business and finance and restructuring in the 
department of Weil, Gotshal, and Manges in New York, and is an 
adviser to the Congressional oversight panel supervising the 
Troubled Asset Relief Program.
    All of your statements will be entered into the record. And 
I want to invite you, Professor Levitin, to begin our 
discussion.

   TESTIMONY OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW, 
        GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, DC

    Mr. Levitin. Mr. Chairman Conyers, Ranking Member Smith, 
and Members of the Committee, good afternoon. My name is Adam 
Levitin, and I am an associate professor of law at Georgetown 
University Law Center.
    I am here this morning to testify in support of H.R. 200 
and H.R. 225. I think it is interesting to look back at where 
we were, where we were standing a year ago. A year ago, the 
idea of modifying mortgages in bankruptcy looked radical to 
many people.
    But then 6 months ago, who would have thought that this 
Congress would have approved the single largest expenditure in 
U.S. government history? The $700 billion Troubled Asset Relief 
Program, the TARP.
    Today, bankruptcy modification not only looks like the only 
free meal in town, but it is also, by far, the most moderate 
response that can possibly deal with the foreclosure crisis. 
And it is truly the only serious option on the table.
    Our choices today are bankruptcy modification or nothing. 
And it is important to realize doing nothing is a choice, and 
it is a very bad choice.
    I wish to make two points in my oral testimony. First, 
permitting bankruptcy modification of mortgage will have only a 
minimal impact on mortgage credit. And second, bankruptcy 
modification is the only guaranteed method for dealing with 
obstacles to loan modification created by securitization.
    Bankruptcy modification will only have a de minimus impact 
on mortgage credit. Mortgage costs will not go up for 
prospective borrowers, and mortgage credit availability will 
not be reduced except at the very margins.
    For the average borrower, there will likely be almost no 
impact. This is because lenders would typically lose less in 
bankruptcy modification than in foreclosure.
    Indeed, by definition, the bankruptcy code guarantees a 
secured creditor, like a mortgage creditor, at least as much of 
a recovery as in foreclosure--namely, the value of the 
property.
    Now, basic economic theory posits that lenders will charge 
more when faced with larger potential losses. And I think you 
will hear more from Professor Mayer about this.
    Professor Mayer and I are on the same page about this, but 
Professor Mayer focuses on what I believe is the wrong 
question. The question is not the trade off between bankruptcy 
losses and no losses.
    Instead, the relevant question when trying to gauge the 
economic impact of bankruptcy modification on future mortgage 
credit is whether loan modification would result in larger 
losses for a lender than foreclosure. It won't.
    There is no evidence that bankruptcy modification losses 
would be larger in foreclosure. I have conducted the only 
research to date that examines the foreclosure modification 
trade off.
    Currently, foreclosure losses for lenders are running at 
around 55 percent of loan value. Bankruptcy modification, even 
in lenders' worst-case scenarios, like Riverside and San 
Bernardino, California, would only result in an average 23 
percent loss of loan value.
    As foreclosure losses are greater than bankruptcy 
modification losses would be, lenders will not price against 
bankruptcy modification.
    Unfortunately, parts of the lending industry, including the 
Mortgage Bankers Association, have been touting some bogus 
claims to Congress and to the public. They have been arguing 
that bankruptcy modification would result in a 150-point 
across-the-board increase in mortgage interest rates.
    Let me be very clear about this: The Mortgage Bankers 
Association's 150-basis-point number is false. It is grossly 
irresponsible. And it is dis-provable.
    It is a number that they, the Mortgage Bankers Association, 
has continually changed its calculation of this number, so it 
is a bit of amoving target, and I am not quite sure which 
calculation I should be taking aim at today.
    And I see that my time is running down. I refer you to my 
written testimony for a detailed refutation of this number.
    So here is the key question. If modification is really a 
better outcome for foreclosure--than foreclosure for lenders, 
why aren't we seeing lots of meaningful, voluntary loan 
modifications?
    The answer lies with securitization and the contractual and 
incentive problems it creates. Securitization separates 
beneficial ownership of mortgage loans from the servicing of 
the loans. This creates several problems for modifications. I 
will mention two of them briefly.
    First, mortgage servicers' contracts frequently limit their 
ability to perform modifications. Servicers are often banned 
from writing down principal, reducing interest rates, so forth. 
This is true for Fannie Mae and Freddie Mac loans as well as 
for private securitizations.
    These contractual obstacles can only be reduced with the 
unanimous consent of the mortgage-backed security holders. That 
would be impossible to get in most cases. The only way to cut 
through these contracts is bankruptcy modification.
    Likewise, securitization also creates economic incentives 
for foreclosure. If you want to understand why we are seeing 
such dismal voluntary efforts at loan modification in the 
private market, you need to follow the money, and that trail 
leads to mortgage servicers.
    Many mortgage servicers are able to make more money in 
foreclosure than they do with a loan modification, even if the 
modification is in the interest of the investors.
    I want to conclude by emphasizing that bankruptcy 
modification is the only guaranteed method for dealing with the 
contractual and incentive problems for loan modification 
created by securitization. It costs taxpayers nothing, and it 
will not create moral hazard.
    Unless the problems created by securitization are 
addressed, we will not be able to abate the flood of 
foreclosures, and we will not be able to stabilize financial 
markets.
    I strongly urge Congress to pass legislation permitting all 
mortgages to be modified in bankruptcy. Thank you, and I look 
forward to your questions.
    [The prepared statement of Mr. Levitin follows:]
                 Prepared Statement of Adam J. Levitin























































                               __________
    Mr. Conyers. Thank you very much.
    Before I bring on Mr. Certner, I want to add that Professor 
Mayer, Christopher Mayer, who is the Paul Milstein professor of 
real estate and senior vice dean at Columbia Business School, 
has joined us, and I welcome him.
    He spent his last 16 years studying housing markets and 
credit while working at the Federal Reserve Bank of Boston and 
serving on the faculties of Columbia Business School, the 
University of Michigan Business School and the Wharton School 
of the University of Pennsylvania. He has received his degrees 
from University of Rochester and from MIT.
    I now turn to Mr. Certner to introduce him at this moment 
and note, of course, that he is the legal counsel and 
legislative policy director at AARP, a nonprofit, nonpartisan 
membership organization for people at the young age of 50 and 
over.
    With 40 million members, AARP is the Nation's largest 
organization dedicated to enhancing quality of life for senior 
citizens by advocating for positive social change. Mr. Certner 
has been with AARP since 1982, serves as counsel for the 
association's legislative, regulatory, and policy efforts at 
the Federal and state levels.
    His degrees come from the National Law Center at George 
Washington University, and I am delighted to invite him to give 
his testimony at this moment.

 TESTIMONY OF DAVID M. CERTNER, LEGAL COUNSEL AND LEGISLATIVE 
             POLICY DIRECTOR, AARP, WASHINGTON, DC

    Mr. Certner. Thank you, Mr. Chairman.
    Chairman Conyers and Members of the Committee, thank you 
for the opportunity to appear before the Committee this 
afternoon on behalf of AARP.
    As Congress begins work this week on broad economic 
recovery legislation, it is critical to remember that the 
underlying cause of our Nation's economic crisis is the huge 
number of mortgage loans currently delinquent or in 
foreclosure.
    Home foreclosures today are at an all-time high, and 
another 2 million households with subprime mortgages are 
currently delinquent and in danger of losing their homes in the 
near future.
    The prospect of widespread foreclosures is particularly 
serious for older Americans, who depend on their homes not only 
for shelter but as their primary asset for retirement.
    For Americans age 50 and over, losing a house represents a 
significant financial loss in which there is limited time to 
recover. And for many, recovery may be impossible.
    AARP analyzed mortgage data covering a 6-month period 
ending in December of 2007.
    And, Mr. Chairman, I ask that a copy of our report be 
included in the record.
    Mr. Conyers. Without objection, so ordered.
    [The information referred to follows:]
    
    
    
    
    
    
    
    
    
    
    
    



                              ----------                              

    Mr. Certner. The report produced a number of important 
findings. Americans age 50 and over hold about 41 percent of 
all first mortgages, and nearly 700,000 homeowners age 50 and 
over were either delinquent or in foreclosure at the end of 
2007, representing 28 percent of delinquencies and 
foreclosures.
    African American and Hispanic homeowners over age 50 
experienced even higher rates of foreclosure. Older African 
American homeowners held 6.8 percent of all first mortgages, 
but represented 14.4 percent of all foreclosures, while 
Hispanic homeowners age 50 and over held 7.5 percent of first 
mortgages but represented 15.9 percent of all foreclosures.
    Also, having a subprime loan was found to be associated 
with higher foreclosure rates for all age groups, but the 
impact was greatest for older homeowners. Homeowners age 50 and 
over with subprime mortgages were nearly 17 times more likely 
to be in foreclosure than those with prime loans.
    And homeowners age 50 and over with loan-to-value ratios of 
100 percent or greater experienced foreclosure rates nearly 
double the national foreclosure rates for all older homeowners.
    This last finding is significant when you consider that 
some additional 2.3 million households age 50 and older have 
less than 20 percent equity in their homes.
    Home prices have been falling dramatically the last 2 
years, meaning that even higher percentages of older homeowners 
face foreclosure and the loss of retirement security in coming 
years.
    To date, it has been noted the only systemic efforts that 
have been made to help individual borrowers avoid foreclosure 
have involved voluntary efforts by lenders and servicers, and 
the available data suggests that these voluntary efforts have 
been inadequate both in the number of mortgages modified and 
the level of relief provided to homeowners.
    These actions often do little to actually improve the 
borrower's financial condition and have resulted in loan 
modifications in which relief for homeowners has been either 
temporary or unsustainable.
    A number of obstacles have tended to limit the willingness 
of loan lenders and servicers to engage voluntarily in loan 
modifications. Most mortgages are combined in mortgage 
securities, making it difficult to obtain investors' consent.
    Loan servicers fear investor lawsuits. Holders of second 
liens can refuse consent. And servicers have little incentive 
to engage in modifications, as was noted, since service 
contracts typically pay forforeclosures, but not the more 
labor-intensive loan modifications.
    These obstacles help explain why the spreading foreclosure 
crisis cannot be resolved through voluntary efforts. A 
mechanism is needed to enable courts to implement economically 
rational loan modifications where mortgage lenders or servicers 
are unwilling to do so.
    Court-supervised loan modification through the bankruptcy 
court offers quick and effective relief for millions of 
homeowners without the added cost to taxpayers.
    AARP supports, and we urge Congress to enact, a broad 
bankruptcy reform provision as part of the economic recovery 
legislation.
    Currently, judicial modification of loans in bankruptcy is 
available, as noted, for owners of commercial properties, 
investment properties, vacation homes, yachts, family farms and 
other securitized property.
    It is denied to struggling homeowners to protect the home 
they live in. Eliminating this exemption to the bankruptcy code 
would create a number of immediate and important benefits. 
First, it would allow bankruptcy judges to cut through the 
various obstacles that have doomed the voluntary loan 
modifications.
    It would provide a process for loan modification that 
recognizes all debts a household is facing and provide sensible 
and affordable loan workouts.
    And it provides a process in which the legitimate interests 
of lenders, servicers and investors are recognized and where 
all parties can realize greater returns.
    And finally, it would create an incentive for servicers and 
lenders to engage voluntarily in loan modifications rather than 
have the bankruptcy judges do it for them.
    Mr. Chairman, AARP strongly believes that judicial 
modification of primary mortgages must be part of any solution 
to the foreclosure crisis. Continued reliance on voluntary 
approaches to loan modification will not adequately address the 
problem.
    Chapter 13 bankruptcy offers an existing structure and an 
impartial process that can help hundreds of thousands of 
families save their homes.
    And as a matter of basic fairness, it is time that Congress 
provided average homeowners with the same rights and 
opportunities to protect their primary assets in bankruptcy 
that corporations, investors, farmers and others have relied on 
for many years.
    Thank you.
    [The prepared statement of Mr. Certner follows:]
                 Prepared Statement of David M. Certner















                               __________
    Mr. Conyers. Thank you very much, Mr. Certner.
    I am now pleased, of course, to recognize Mr. Mason, Matt 
Mason, from UAW-General Motors Legal Services, located in 
Detroit, Michigan.
    We welcome you for your testimony, Mr. Mason.

TESTIMONY OF MATTHEW J. MASON, ASSISTANT DIRECTOR, UAW-GM LEGAL 
                   SERVICES PLAN, DETROIT, MI

    Mr. Mason. Thank you, Mr. Conyers. Now the mike is on.
    My name is Matthew Mason, and I am an assistant director 
with the UAW-General Motors----
    Ms. Lofgren. Would the gentleman pull his microphone a 
little bit closer so we can hear?
    Mr. Mason [continuing]. Located in Detroit, Michigan.
    I wish to thank the Chairman, Mr. Conyers, and the Ranking 
Member, Mr. Smith, and all the Members of this Committee for 
allowing me to testify today on behalf of the UAW-GM Legal 
Services Plan concerning the two bills pending before this 
Committee, H.R. 200 and 225.
    I believe these bills deserve your support. It is critical. 
The bills both allow bankruptcy judges the power to modify 
mortgages on personal residences in Chapter 13.
    From our perspective in the field, this power is necessary 
to break the tide of unabated mortgage foreclosures and to end 
the barriers to meaningful, voluntary modifications both inside 
and, I must say, outside of bankruptcy.
    The voluntary loan programs--we have heard comments. They 
are just not working. From our experience in Detroit and around 
the country--and I have also surveyed the 3,300 members of the 
National Association of Consumer Bankruptcy Attorneys--it is 
very clear to us that the programs in existence now not only 
aren't working but, in fact, are working less well than they 
had previously.
    In early 2008, to me, loan modifications seemed promising. 
I met with Mr. Conyers at a symposium in Detroit on a cold 
winter day, he may remember, and we had some hopes that 
actually the modification programs that were constantly being 
rolled out would actually have some effect.
    Pressure had been mounting on the mortgage companies to 
rewrite the loans voluntarily, not only to reflect the economic 
reality but also to keep from adding to the volume of 
foreclosed homes on the market.
    And our attorneys did have some limited success in 
obtaining some modifications in early 2008. Perhaps an 
adjustable-rate mortgage was converted to a low-rate 30-year 
fixed mortgage. Arrears were either waived or added to the end 
of the mortgage. And a modest reduction was accomplished in the 
principal balance.
    But true, the vast majority of the modifications were no 
modifications whatsoever. Those were clearly the exceptions, 
but they were somewhat encouraging.
    A typical modification was nothing more than a forbearance 
program. You would double up on your payments. Maybe you would 
add a few to the end of the loan. But there would be no 
substantive change to the mortgage terms. If there ever was an 
interest rate offered, it was small, and it was for a very 
short period of time.
    But by the summer of 2008, even our limited success ground 
to a halt. And this fall, in meetings I have had even similar 
experiences reported to me--the modifications we were able to 
obtain even before don't really exist now.
    And just this week, I re-surveyed our staff and the 
bankruptcy attorneys around the country to see if things had 
improved. Not to much surprise, they had either stayed the same 
or gotten worse.
    Attorneys reported that fewer modifications were approved 
inside or outside of bankruptcy, the time to complete 
modifications had increased, more lenders demanded bankruptcy 
petitions be dismissed before considering modification and then 
no guarantee of the modification after the dismissal. And the 
size of the interest rate reductions not only decreased, but 
the length of time that they are allowing to decrease the 
interest rate decreased as well. When working families see 
layoffs, cuts in hours, cuts in benefits, wholesale closings of 
factories for weeks at a time, a small reduction in interest 
rate is simply not enough.
    And finally, there was no consistent pattern to the 
modifications that we saw. There is no way to tell why one 
borrower qualified for a modification and another did not.
    Now locally, in Detroit, turning to 2009, one might have 
thought that all the foreclosures that could have happened had, 
but in fact that is not true at all. There is still over 12,000 
foreclosed homes for sale in Wayne County and the vast majority 
in the city of Detroit. Foreclosures are increasing nationally, 
as we have heard, and in fact they have doubled from 2007 to 
2008.
    Locally, for the week of January 12 through 16, this is 
just last week, there is an average in Wayne County of 126 
homes each day being foreclosed upon.
    If lenders cannot voluntarily address this crisis, then 
borrowers should be given the opportunity to reorganize. Just 
like any other obligation in bankruptcy. The goal is not to 
encourage bankruptcy filings, that is clear, or to reward the 
undeserving. And in fact, by filing bankruptcy, people do just 
the opposite. They have the opportunity now to walk away from 
their homes, but undertaking a modification in bankruptcy, they 
elect to stay in their homes.
    They submit to the court their payments for 3 to 5 years, 
whatever money is left over gets paid to unsecured creditors, 
including mortgage companies, and it is in a process that is 
verifiable, a process that is quick, designed to work and it is 
effective.
    From our perspective, Mr. Conyers, we believe that it 
deserves a chance and deserves a chance that we think will be 
successful. Thank you.
    [The prepared statement of Mr. Mason follows:]
          Prepared Statement of Testimony of Matthew J. Mason
    My name is Matthew J. Mason and I am an Assistant Director of the 
UAW-GM Legal Services Plan located in Detroit, Michigan.
    I wish to thank the Chairman, Mr. Conyers, the ranking member, Mr. 
Smith and all of the members of the Committee for allowing me to 
testify today on behalf of the UAW-GM Legal Services Plan concerning 
the two bills pending before this committee, H.R. 200, ``Helping 
Families Save Their Homes in Bankruptcy Act of 2009'' and H.R. 225, 
``Emergency Homeownership and Equity Protection Act.'' These bills 
address what is one of the most pressing issues of my legal career, the 
unrelenting pace of mortgage foreclosures and the failure of any 
voluntary system of modifications to arrest this crisis which is now in 
its third year nationally and what seems like forever in Michigan. This 
statement reflects my views on this current crisis and does not and is 
not intended in any way to reflect the views of the General Motors 
Corporation or any of its subsidiaries or the International Union, UAW.
    I have been a practicing attorney and administrator for almost 35 
years. I have been active in the practice of bankruptcy law for over 30 
years and previously testified before this Committee in 1998 on what 
became the far reaching amendments to the bankruptcy code that took 
effect in 2005.
    The UAW-GM Legal Services Plan and its sister Plans, provide legal 
services to over 700,000 eligible UAW members on a wide variety of 
subjects. We have 65 offices in 20 states that handle all types of non 
fee generating civil matters. In the housing area, we handle buys and 
sells, loan modifications, work out agreements, deeds in lieu of 
foreclosure as well as provide foreclosure defense for active workers 
and retirees alike. We also provide legal services for bankruptcy, but 
only as a last resort.
    I also currently serve as a member of the Board of Directors of the 
National Association of Consumer Bankruptcy Attorneys (NACBA), an 
organization of over 3300 consumer bankruptcy attorneys located in all 
fifty states and Puerto Rico.
    I believe that these bills deserve your support, if for no other 
reason, than the simple fact that both bills allow bankruptcy judges 
the power in Chapter 13 to modify mortgages on personal residences. 
This power is necessary to break the unabated flood of mortgage 
foreclosures and end the barriers to meaningful, voluntary 
modifications outside of bankruptcy.
      i. the voluntary loan modification programs are not working
    In preparation for NACBA's 16th Annual Conference in May 2008 I 
surveyed both our legal plan attorneys and the members of NACBA to 
determine what was actually happening inside and outside of bankruptcy 
concerning loan modifications.
    In early 2008 pressure had been mounting on mortgage companies to 
rewrite the loans not only to reflect economic reality but also to keep 
from adding to the volumes of foreclosed homes already on the market.
    By May of 2008 our legal plan attorneys reported that in most cases 
lenders were offering forbearance agreements, with no changes in term, 
interest rate, principal reductions or changing the term of the loan. 
The terms of the forbearance agreements also varied greatly, from 
adding a few payments to the end of the loan to allowing an arrears to 
be paid over a period of time, perhaps as much as a year.
    They also reported some very modest success in obtaining a 
meaningful modification, typically where a variable rate mortgage was 
converted to a 30 year fixed, arrears either waived or added to the end 
of the terms and a modest reduction in the principal balance.
    However counterbalancing those cases were modification proposals 
that were unreasonable, such as one where the lender wanted upfront 
money before they would even process a loan modification. ($6000 in 5 
days.)
    I also surveyed the NACBA membership who reported similar results, 
though not even as encouraging. Specifically, they reported in early 
2008 that:

        1.  About 60% of the attorneys assisted with loan modification 
        for clients, whether in or outside of bankruptcy.

        2.  The vast majority of responders (68%) said that they 
        obtained modifications in less than 10% of the cases.

        3.  When they referred clients to mortgage counselors, 
        virtually all of the clients came back. Again the vast majority 
        responded (78%) that less than 10% of those clients received a 
        modification through a mortgage counselor.

        4.  Modifications on average took more than 4 weeks, and many 
        of them took in excess of six weeks.

        5.  In about 30% of the cases where a modification was 
        available, the lender required that the bankruptcy be 
        dismissed.

        6.  In cases where the lender required dismissal of the 
        bankruptcy, it caused almost 75% of those clients to reject the 
        modification.

        7.  Many modifications involved interest rate reductions, 75% 
        of which were reduced by 4% or less.

        8.  Interest rates for ARM's were typically frozen for the life 
        of the loan.

        9.  In the few cases where principal was reduced, in 85% of the 
        cases the reduction was for $30,000 or less.

    By the summer of 2008 even those limited successes seemed to 
evaporate. Our legal plan attorneys reported that meaningful 
modifications seemed to grind to a halt. The initial problem with not 
being able to reach lenders continued. By the end of 2008 our 
bankruptcy filing rate increased and our percentage of Chapter 13 cases 
where we could save the home decreased.
    In the last few days I re-surveyed the NACBA membership and my 
staff to see what experience they were having with loan modifications 
in late 2008 and early 2009.
    The results are unchanged if not worse. My staff reported that 
effective modifications, typically involving a long term rate reduction 
and decrease in principal were nonexistent. In a few instances they 
were able to accomplish those modifications but only after initiating 
some kind of litigation proceeding, such as an objection to a claim, a 
forced modification in bankruptcy or an adversary proceeding alleging 
some kind of fraud in the transaction.
    The survey of NACBA attorneys produced a similar picture of fewer 
modifications being offered with poorer terms. For modifications 
obtained from October 1, 2008 to the present, they reported:

        1.  Less than ten percent (10%) of their clients who need a 
        modification obtained one.

        2.  Even after the clients were referred to loan counselors, 
        still less than ten percent (10%) received loan modifications.

        3.  The approval rates for modification have actually decreased 
        from early 2008. 64.7% of the respondents reported that 
        approval rates for modification dropped since October 1, 2008.

        4.  The time to complete a modification has increased. 56.7% of 
        the respondents reported that it took in excess of six weeks to 
        get a modification approved as compared to 38. 6 % who 
        responded to the same question in April, 2008.

        5.  A higher percentage of lenders are now requiring borrowers 
        to dismiss their bankruptcy petitions before giving a 
        modification. (42.2% in 2009 and 28.4% in 2008) In both cases, 
        the overwhelming majority still reported that the requirement 
        to dismiss the bankruptcy resulted in the client rejecting the 
        modification and surrendering the home. (88.9% in 2009 and 
        73.9% in 2008).

        6.  Most modifications still involved interest rate reductions, 
        but even there, the size of the rate reduction decreased. 
        Relatively few borrowers received a decrease in excess of 2% 
        and almost no borrowers received a rate decrease of 4% or more.

        7.  The length of time interest rates were frozen decreased. 
        Now more attorneys reported that the rate was frozen for three 
        years or less, not the life of the loan. In 2008 the 
        overwhelming majority (87%) reported that the rate was frozen 
        for the term of the loan. In 2009 that decreased to 42%.

        8.  The respondents still reported very few reductions in the 
        principal balance of loans and then only in relatively small 
        amounts, under $30,000.

    In a couple of instances the lenders were taking an even harder 
line. In one case a large lender in the FDIC program offered to reduce 
the borrower's payments for a few years, provided he prove monthly 
income of at least double what he actually has (and which he had on the 
date of loan origination) while proposing to increase his mortgage 
balance by more than $84,000.
 ii. new mortage foreclosures continue to be a serious problem in 2009.
    In his recent article, Rewriting Contracts, Wholesale Data on 
Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, 
(Working Draft), Alan M. White, Assistant Professor Valpariso School of 
Law, Professor White undertook an empirical review of loan modification 
data taken from subprime lender reports to its investors. In the 
article he concluded that the foreclosure crisis continued unabated 
thorough June, 2008.
    Professor White found that the number of mortgage defaults and 
foreclosures increased steadily in the 2007-2008 time frame. In July 
2007 the average delinquency rate in the mortgagte pools he studied was 
19%. In addition 1.4% of all loans entered into foreclosure that month. 
That translated into a 16.8% annual rate of new foreclosures as a 
percentage of that portfolio.
    By June 2008 he found that the delinquency rate had nearly doubled 
to 34% and new foreclosures were occuring at an annual rate of 27%.
    In an article from January 15, 2009 the Associated Press just 
reported that mortgage foreclosure rates doubled in 2008 compared to 
2007
    ``WASHINGTON--More than 2.3 million American homeowners faced 
foreclosure proceedings last year, an 81 percent increase from 2007, 
with the worst yet to come as consumers grapple with layoffs, shrinking 
investment portfolios and falling home prices.
    Nationwide, more than 860,000 properties were actually repossessed 
by lenders, more than double the 2007 level, according to RealtyTrac, a 
foreclosure listing firm based in Irvine, Calif., which compiled the 
figures.''
    Our experience locally supports those findings. For example, for 
the first six months of 2007 there had been 28,075 foreclosures in 
Detroit and Wayne County Michigan, a 26% increase over the last six 
months of 2006, and over 90% of them in the City of Detroit. There were 
over 14,000 properties listed for sale on foreclosure.com just in Wayne 
County Michigan.
    Now in January, 2009 Wayne County still has almost 12,000 homes 
listed on for sale on a single website, foreclosure.com. Nationally 
over 2.2 million homes are listed for sale on this same site as homes 
in some stage of foreclosure.
    In reviewing our local Detroit Legal News we found that on January 
20, 2009 there were 551 homes slated for foreclosure sale, all of them 
in Wayne County. On a daily basis now homes were added to the list at 
an alarming rate.
    In just six days, from January 12, 2009 through January 19, 2009 
there were, on average, 126 homes each day listed for foreclosure sale 
for the first time
    Professor White also sees no bottoming out of the foreclosure 
crisis at least as of June, 2008. As credit for refinancing dried up 
and borrowers have become less credit worthy because of job losses, 
cuts in wages and hours, the mortgage foreclosure rates increased into 
June 2008.
        iii. the modifications offered do not solve the problem
    Professor White also noted that the modifications currently being 
offered do not solve the fundamental problem, that is lower the payment 
to an affordable rate as well as reduce the principal balance to 
reflect the market value of the home.
    Most of the modifications involved recasting arrears, which is 
adding delinquent payments to the balance of the loan or a modest, 
temporary reduction in the interest rate. Very few loans had principal 
balances reduced. Furthermore in 23% of the reported modifications, the 
monthly payment even increased. Page 20-21.
    Professor White concluded that, at best, the current modification 
programs were only putting off the day of reckoning. He stated at page 
27:
    ``More importantly, homeowners have not been relieved of the 
devalued debt, either through completed foreclosures sales or loan 
concessions. Many are still stuck in a ``sweat box'' struggling to pay 
above-market interest rates on above-market loans.''
    Therefore it would not be surprising to see even those borrowers 
who are listed as having ``modified'' their loan, default in the 
future, placing that home in the new foreclosure start category.
    Finally Professor White noted in his research that there was no 
consistency among servicers in their approach to loan modifications. 
Our experience bears that out as well.
    For example, in Saginaw, Michigan a foreclosure case was commenced 
for a client who was behind on their mortgage. We were told by the 
foreclosing attorneys that we had to deal with the servicer directly. 
We called the mortgage company and asked for loss mitigation. They said 
they would send a loan modification application but that it would take 
30 days or more to process. We asked for an adjournment of the mortgage 
sale to allow time to process the modification. Three (3) times we 
called the person with the authority to adjourn and each time we got 
the voice mail message that the voice mail box was full. We faxed a 
request for an adjournment but received no response. We filed the loan 
modification application but have not received a response. In the 
meantime the loan is proceeding through the foreclosure process.
    In Dearborn, Michigan we applied for a modification to stop another 
sale. We were able to reach that company but they only offered to 
suspend payments for three (3) months and then add those three months 
to the existing arrears. The effect would have just been to increase 
the total amount due. There was no offer to reduce the interest rate, 
principal or amount of monthly payments.
    Even when we try loss mitigation such as deeding the property back 
to the lender we have run into great difficulties. In one case out of 
Indiana we initially asked for a loan modification which was denied. We 
then offered to provide the lender with a deed in lieu of foreclosure. 
Now eighteen months later the mortgage company has yet to complete the 
documents to accept the deed in lieu of foreclosure, even though no 
payments are being made.
    Talking with local loan counselors confirmed my view that some 
large lending institutions are actually getting worse in their 
modification practice. They have hired outside firms to do loss 
mitigation and are adding the fees of those firms onto the 
modification. They only offer interest rate reductions and then not 
much. They will still not talk to borrowers who are not yet in default. 
Even if they are in default, the response from the lender typically 
comes within days of the foreclosure sale, if at all.
 iv. modifying mortgage loans on personal residences in bankruptcy is 
    the only proposal that gives homeowners rights they can enforce.
    Currently the various proposals for loan modifications all start 
with an application to the lender. The lender determines who gets the 
modification, what kind it is and for how long it will last. It has 
been our experience that the modification terms vary wildly between 
clients, for no apparent reason. The modification terms also do not 
take into account, in most instances, the value of the property and 
what the borrower can really afford.
    As a consequence borrowers are often encouraged to abandon their 
homes, especially when they can rent or perhaps even buy a new home in 
the same neighborhood for a fraction of the cost of their existing 
home. However that process is slow and has enormous costs. There are 
costs to foreclose, costs to move and costs to maintain abandoned 
properties that will never be recovered. In addition neighborhoods 
continue to deteriorate and house values continue to fall.
    Allowing a borrower to propose their own modification in bankruptcy 
puts a plan on the table that actually assigns a value to the 
collateral, and then proposes to pay the loan based on current market 
interest rates. The plan has to be feasible and is tailored to the 
borrower's income and expenses. That information is subject to 
verification through the six months of pay stubs that are required to 
be filed in every bankruptcy. Tax returns must also be filed. If there 
is a dispute as to the value of the house, appraisals will be typically 
exchanged, with the judge having the final decision.
    Lenders still have the possibility of recovering some of their 
losses. The existing loan is split into two parts, secured and 
unsecured. The creditor always maintains a claim for the unsecured 
balance of the loan. Payments are mandated on the unsecured balance if 
the debtor's income or assets warrant it. Furthermore borrowers and 
lenders could agree to a claw back provision that could return equity 
to the lender if the home appreciated.
v. bankruptcy provides a uniform solution to the foreclosure crisis and 
          cuts through all the problems of lender cooperation
    Bankruptcy also provides a uniform solution to the foreclosure 
crisis. Your loan is not evaluated from the lender's perspective that 
might include the fear of being sued by their investors. Instead it is 
open to any borrower who has income and can qualify. They propose a 
plan, it is confirmed or not and the case moves on. Currently 
bankruptcy courts process hundreds of thousands of Chapter 13 plans 
each year. The issues presented by modifications are quite familiar to 
them.
    A Chapter 13 modification also addresses the issues of lender 
liability. Servicers have already been sued on the basis that their 
voluntary loan modification programs exceed the authority granted to 
them. To the extent that the threat of suit by investors has negatively 
impacted the scope of modification programs, bankruptcy eliminates that 
issue.
    Professor White notes that it could take ten to fifteen years to 
work though the mortgage crisis using the current voluntary methods. It 
could even take longer, especially if the holding pattern of voluntary 
modification only leads to another default, starting the cycle of 
default and foreclosure all over again. Homes remain unsold. The 
economy never recovers.
    However bankruptcy cuts through many of these issues. The plan is 
confirmed or not in a matter of months. The plan lasts from 36-60 
months. The modification is not voluntary so the lender cannot be sued 
for overstepping its discretion. Second liens can be valued and allowed 
or stripped. Since the bankruptcy court is open to everyone, it 
provides a fair, expeditious, tested and familiar structure for 
families to save their homes.
                               conclusion
    The current voluntary programs are a failure. We continue to have 
difficulty, even in reaching some lenders to propose a timely 
modification. For whatever reason lenders are still not capable of 
consistently voluntarily modifying loans in such a way, that would 
grant to borrowers the repayment terms necessary to save their homes. 
Typically that would involve an interest rate reduction, a curing of 
the arrearage, a reduction in the principal balance, whether combined 
with an equity sharing arrangement or not, and moving the loan from a 
variable rate to a fixed rate. H.R. 200 and H.R. 225 both cut through 
the voluntary modification process and provide an effective mechanism 
to modify mortgage loans in Chapter 13 bankruptcy.
                               __________
    Mr. Conyers. Our final witness is Professor Christopher 
Mayer of the Columbia Business School, and we welcome your 
presence here today, sir.

 TESTIMONY OF CHRISTOPHER J. MAYER, PAUL MILSTEIN PROFESSOR OF 
REAL ESTATE AND SENIOR VICE DEAN, COLUMBIA BUSINESS SCHOOL, NEW 
                            YORK, NY

    Mr. Mayer. Thank you, Mr. Conyers, Ranking Member Smith and 
Members of the Committee.
    We are witnessing an unprecedented crisis. House prices are 
in near free fall. More than 2.2 million foreclosures were 
started last year and things are likely to get much worse.
    Over 4 million Americans are at least 60 days late on their 
mortgages. We must act promptly.
    Bankruptcy cram downs may seem appealing, but in fact would 
exacerbate the crisis. If just 1 in 12 existing homeowners 
decided to stop paying and pursue bankruptcy, we would have 
double the current delinquency rate and a larger catastrophe. 
This is not unprecedented, it has happened before with credit 
cards.
    Proponents of bankruptcy reform argue the cram downs will 
not cost taxpayers any money. This claim is simply not true. 
Taxpayers are on the hook for $5.6 trillion in mortgage 
guarantees from Fannie Mae, Freddie Mac and the FHA. Taxpayers 
could lose tens or hundreds of billions with cram downs and 
mortgage losses and money needed to stabilize banks who suffer 
additional losses.
    Yet cram downs are unnecessary. The Government can freely 
modify 35 million of the 55 million outstanding mortgages it 
controls through Fannie, Freddie and the FHA. Another 12 
million mortgages are in the hands of private lenders, not just 
money center banks, but community banks and credit unions. 
These lenders are now undertaking appreciable efforts to modify 
their own loans. And the Obama administration has promised to 
spend $50 to $100 billion to reduce foreclosures.
    Bankruptcy reform would delay the process of restructuring 
mortgages, the same costly mistake that Japan made in the 
1990's--368 bankruptcy judges now handle an average of 2,630 
cases each year. The courts would have difficulty handling a 
dramatically increased caseload with the care necessary to 
successfully modify loans. Even with this case load, it is an 
incredibly important thing to note, more than two-thirds of 
Chapter 13 plans ultimately fail. Bankruptcy reform is just 
simply not a panacea.
    The best private mortgage modification programs have much 
better success rates. Given the choice, servicers might prefer 
bankruptcy to loan modification because a typical 
securitization agreement reimburses servicers for expenses 
incurred in any legal proceeding, including foreclosures as 
well as bankruptcy, but not for modifications.
    Finally, cram downs would truly raise the cost of future 
borrowing and make credit less available to disadvantaged 
borrowers, even results that show up in tables 2 and 4 of 
Professor Levitin's study.
    Instead, I suggest a comprehensive three-pronged solution 
to the crisis. It is not okay to just stand where we are.
    First, Dean Glenn Hubbard and I propose that the Government 
arrange for the GSEs to issue new mortgages at a rate that is 
1.6 percent above the rate of the 10-year treasury, as low as 4 
percent today. Our plan would stimulate as many as 2 million 
new home purchases and really importantly, if we want to stop 
foreclosures, puta floor on house price declines. Lower 
mortgage rates would also allow as many as 34 million Americans 
to refinance their mortgages, saving $424 to $25 per month, per 
year, a total of $174 billion per year of a stimulus every 
year. This is like a large middle class tax cut. Permanent 
reductions in mortgage payments would also stimulate much 
higher consumption growth than temporary tax changes.
    Next, and important for this Committee, Columbia professors 
Edward Morrison, Tomek Piskorski and I have developed a new 
proposal to prevent needless foreclosures. Recent research has 
showed that banks that manage their own mortgages are one-third 
less likely to pursue foreclosure than servicers of securitized 
mortgages. Securitized mortgages represent 15 percent of 
outstanding loans, but half of all foreclosure starts. That is 
where the problem is.
    We propose that servicers be paid an incentive fee equal to 
10 percent of mortgage payments, up to $60 a month. This 
program aligns incentives between servicers and investors and 
makes modification the preferred solution. If a mortgage is 
ongoing, the servicer receives a fee. If it goes to 
foreclosure, the servicer receives nothing.
    Second, the Federal Government should promptly eliminate 
all contractual restrictions on loan modification. Ambiguous 
provisions should be clarified via a safe harbor that insulates 
reasonable good faith modification from litigation.
    Our proposal helps homeowners. A homeowner is a prime 
candidate for loan modification when her income is sufficient 
to make payments that exceed the foreclosure value of her home, 
the same standard as envisioned for cram downs.
    Our third proposal deals with troublesome second mortgages. 
Under this plan, the Government would offer second lien holders 
up to 1,500 to drop their claim if the first mortgage is 
modified, which could facilitate another 1.4 million new 
modifications.
    These proposals are an alternative to cram downs and they 
address the current crisis at a cost of $12.8 billion that 
would be payable through TARP funds. Why risk cram downs when 
more effective, quicker and less costly solutions are 
available?
    [The prepared statement of Mr. Mayer follows:]
               Prepared Statement of Christopher J. Mayer



























                               __________
    Mr. Conyers. This bankruptcy seminar conducted by the 39 
Members of the House Judiciary Committee has had presentations 
by two very distinguished professors. I now invite Professor 
Levitin to make his response, and then I will allow Professor 
Mayer to make yet another presentation.
    Mr. Levitin. Chairman Conyers, I came here today prepared 
to discuss H.R. 200 and H.R. 225, not to get into the merits 
and the problems of Professor Mayer's proposal.
    That said, I think it is important to note this. There is 
some merit to what Professor Mayer says, that he correctly 
notes that there are problems with servicer incentives and that 
there are problems with restrictive contracts. These are things 
that any solution to the foreclosure crisis must deal with. 
However, these are not the only problems. And I do not believe 
that Professor Mayer's plan, which ultimately relies on the 
private market to get this right, will necessarily work.
    I would hope it would, but that is a big gamble to take. 
And in a--if you think how long the legislative process takes, 
it is--if Congress decides that it wants to run with Professor 
Mayer's proposal, that is going to take many months before it 
actually gets--it would become law. Those are months in which 
thousands and thousands of families would lose their homes.
    I don't know that we have the time to find the perfect 
solution. I think we need to find the most immediately workable 
solution. Bankruptcy is immediately available. The bankruptcy 
courts are over-staffed relative to the historical level of 
filings. And what I think is really a major misconception about 
bankruptcy modification is the role of bankruptcy judges.
    Bankruptcy judges do not go and micro-manage each Chapter 
13 case. Most of that other work on a modification is performed 
by the debtors council and by the Chapter 13 trustee. The 
bankruptcy judge does not propose the modification. This is a 
common misconception. Instead, the bankruptcy judge decides 
whether or not to approve the modification proposed by the 
debtor if it conforms with the statutory requirements.
    This is not a proposal that would--the bankruptcy 
modification proposal would not result in a tremendous amount 
of additional work for the courts. The courts are ready, 
willing and able to handle this.
    I urge all of the Members of the Committee to go and speak 
to the bankruptcy judges in your districts. Ask them, can the 
courts handle this? And I tell you, they will almost 
unanimously say yes, we can do this.
    Actually, Chairman Conyers, if I may just add one other 
comment. About the two-thirds failure rate in Chapter 13. That 
is correct. Two-thirds of Chapter 13 plans fail. But that alone 
is a misleading figure.
    First of all, of course, to where we have a high failure 
rate in Chapter 13 plans. If you can--the home mortgage is 
typically consumers' single largest debt. If you can't fix 
that, if you can't restructure that debt, then it is not likely 
that you are going to be able to fix your finances. So it is 
not surprising that currently we see a very high Chapter 13 
failure rate.
    The second thing to note is that just saying that two-
thirds of Chapter 13 plans fail doesn't tell us what failure 
means. That a Chapter 13 plan is going to be between 3 and 5 
years. If the plan failed 4 years and 9 months into the plan, 
that is very different than if the plan fails in the first 
month. And what we don't know is when plans fail.
    Also, a lot of mortgages are simply not dealt with in 
Chapter 13 plans because there is nothing--there is really very 
little one can do with them. Instead, the consumers simply try 
to ride their mortgage through a bankruptcy.
    So I don't know that, that two-thirds statistic, as scary 
as it sounds, actually tells us very much.
    Mr. Conyers. Our other professor, Christopher Mayer.
    Mr. Mayer. So I think the--again, there are parts of what 
Professor Levitin's comments that I agree with. I certainly do 
not think if we went this route we would see the mortgage 
finance system collapse, but I think I would, again, highlight 
that what would happen, and we know this from lots of research, 
not only Professor Levitin, but looking around the world, that 
we would see the cost of borrowing rise moderately for 
mortgages, and we would also see particularly disadvantaged 
borrowers, either ones that are pulled out of the market, they 
are the ones at risk of failing. They are the ones who are 
likely to lose credit. It is not going to be the medium 
borrower, it is going to be disadvantaged borrowers who 
disproportionately lose credit.
    The second thing is that the two-thirds failure rate, I 
think a lot of the comments that I have heard in favor of 
bankruptcy reform really think of it as something that is this 
is going to solve our problem. And I think it is--there is no 
evidence that it will.
    Maybe bankruptcy reform will do better than it has done. 
But so far, it hasn't solved problems. And if we end up a 
couple of years from now with two-thirds of the people failing 
and all the mortgage debt back on our books, we are Japan. And 
that is incredibly costly to all of us, as taxpayers, and it is 
a huge risk to take from the balance sheet.
    The third thing is, there are programs that are successful. 
The statistics that almost everybody quotes about the failure 
of loan modifications really come from observing securitized 
mortgages by servicers who are conflicted, who face 
disincentives to modify. And those are really serious problems. 
So I think when we sort of look at the evidence, and I can 
point to some evidence and point to some studies that show 
there are some very, very successful loan modification programs 
being done privately that have failure rates that are much, 
much less than two-third.
    Mr. Conyers. Robert Goodlatte?
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Mayer, Professor Mayer, is there evidence that the bank 
loan modification programs that are being enacted right now by 
many banks are working?
    Mr. Mayer. Yes. There is a couple of different pieces. A 
colleague of mine, Tomek Diskorsky, along with two other co-
authors, have a recent paper, which compare the performance of 
securitized loans versus portfolio loans. This study, which is 
a unique, and new study only finished in the last several 
weeks, shows there are appreciable differences in foreclosure 
rates, and the banks foreclose on their own loans much less 
frequently than servicers. Third-party servicers are the 
problem, and we should focus our attention on getting that 
problem fixed.
    Mr. Goodlatte. Are there specific things that Congress 
could take in that regard to make it easier for those 
securitized mortgages to be more readily dealt with by somebody 
to help people work through them?
    Mr. Mayer. Yes, I mean I think we need to immediately 
change--I think this is a place that legislation is needed. I 
think we need to immediately get rid of all impediments to 
securitization. This is a constitutional proposal, and it has 
been vetted by leading constitutional scholars. It is perfectly 
legitimate for the Government to do this, so I think we should 
get rid of that.
    And the second is--and this is even where I differ from 
Sheila Bair. Sheila Bair's proposal, which I think is very 
well-intentioned, pays the servicer $1,000 to modify a loan, 
and it could default the next day. Under our proposal, 
servicers only get paid if that loan is performing month by 
month for 3 years. Very strong economic incentives to keep 
loans going, which is what we all really want to accomplish.
    Mr. Goodlatte. And could these bankruptcy proposals that we 
heard about this afternoon undermine the tools the Federal 
Government already has to modify the loans that it control?
    Mr. Mayer. Absolutely. The Federal Government already 
controls the bulk two thirds of the mortgages through the 
conservatorship of Fannie and Freddie and the FHA. We have seen 
them undertake different programs than we see in the cram-down 
legislation. I think this just delays that process.
    Fannie and Freddie could much more quickly--and this is the 
growing part of the problem--our conforming loans. Fannie and 
Freddie, through the Treasury's leadership and conservatorship, 
could much more quickly deal with this problem than pushing it 
into the courts, and I expect the new Administration is going 
to be much more successful in doing this. That is two thirds of 
the loans out there.
    Mr. Goodlatte. You mentioned this in your testimony, but 
let me ask you to elaborate on it. How would current 
legislative proposals to modify bankruptcy laws for those 
facing foreclosure affect prospective homebuyers, people who 
want to get into this market that have the prospect of being 
able to meet the qualifications to buy a home? Are they going 
to be impacted by our changes in the bankruptcy laws here?
    Mr. Mayer. Yes. I mean, I hate to make the slippery slope 
argument because you always hear that argument here, but it 
really is true. The issues about putting first liens into 
bankruptcy predate this hearing and predate this crisis, and 
there is a large constituency of people who believe that should 
have been true and will be true now, so there is going to be an 
enormous political pressure. Once we go down the route and 
allow this to happen, there is going to be enormous political 
pressure to do this.
    And I think that that is just going to be really costly to 
our efforts not to subsidize the heck out of home ownership but 
to allow fair and equal credit to disadvantaged borrowers. They 
are the ones from lots of evidence who lose when you end up 
with a process that creditors lose track of. And you don't have 
to look at the United States. You can just go to other 
countries. Look at Spain. Look at Latin America and see places 
that don't give lenders any rights. And when you take away 
lenders' rights, you reduce the availability of credit, and 
that effect is a directly proportional effect.
    Mr. Goodlatte. I have in front of me a Bloomberg.com 
article by Jody Shenn dated yesterday, which I would ask Mr. 
Chairman to submit for the record.
    Mr. Conyers. Without objection, so ordered.
    [The information referred to follows:]
    
    
    
    
    
    



                              ----------                              

    Mr. Goodlatte. Thank you, Mr. Chairman.
    But I would also like each of the panelists to comment 
briefly on this. It suggests that the change we are examining 
here today would allow--allowing judges to reduce homeowners' 
mortgages may boost the capital needs of banks and insurers by 
hundreds of billions of dollars, costing both the taxpayers 
through the guarantees they already have and the ability of 
banks to continue to function, and let me just go right down 
the line here.
    Professor Levitin, have you seen this article and are you 
familiar with this issue?
    Mr. Levitin. I have not seen that particular article. I am 
familiar with the issue, and I think it is important to compare 
what the impact would be with foreclosure, that if we continue 
as we are today, we are going to see lots of undercapitalized 
financial institutions because they are going to lose money in 
foreclosure. That, as long as they lose less money in 
bankruptcy modification than foreclosure, bankruptcy 
modification is a really good deal.
    Mr. Goodlatte. Mr. Certner.
    Mr. Certner. I would agree with that notion exactly, and we 
are talking about here, while there are a large number of 
families who could potentially benefit from the bankruptcy 
legislation, we are probably talking somewhere in the range of 
less than 2 percent of all outstanding mortgages, so the impact 
will not be as dramatic.
    Mr. Mayer. I think it is an unfortunate view that this 
doesn't cost taxpayers any money. It costs--bankruptcy cram 
downs would cost taxpayers an enormous amount of money and 
would severely hamper the existing banks that are still around, 
and that hammers all of us through the credit crisis.
    I also think it is important to note, to respond to 
Professor Levitin's comment, that banks already understand this 
process. It is servicers who don't, and it is really important 
to make the distinction because banks are modifying loans, and 
there is evidence they are successful at it. It is servicers 
who aren't, and that is where we have to focus.
    Mr. Goodlatte. I am not sure that Professor Levitin and Mr. 
Certner really addressed the issue that is raised here. Let me 
read a portion. It says, ``The issue identified by investors 
stems from language buried in more than 100 pages of 
prospectuses of many prime, jumbo and ALT-A home loan 
securities. Some of the contracts state that bankruptcy-related 
losses greater than amounts sometimes as little as $100,000 get 
allocated equally among all investors in bonds backed by the 
loan pools rather than lower-ranked debt first. Holders, such 
as banks and insurers of senior classes may see their payments 
cut or interrupted, potentially forcing write-downs and rating 
downgrades that, in turn, could raise their capital needs.''
    And it is those capital needs that these banks are 
concerned about being raised dramatically that could put them 
out of business or require merger or takeover by the FDIC that 
we are talking about here, not just whether they save more 
money or lose more money by being able to reorganize a debt, 
which bankruptcy certainly under certain circumstances can 
allow them to do.
    Mr. Levitin. I have looked at dozens of securitization 
agreements. I have never seen that particular language, so that 
is new to me. But I think it is important to keep a focus on 
there being two risks for investors. There is a risk caused by 
actual defaults when homeowners don't pay, and therefore, the 
securitization trusts don't have the money to pay the coupons 
to their investors.
    But there is also, and maybe much more importantly, there 
is a market risk that even if you are holding AAA paper and it 
has been paying the coupon timely every time, you may not be 
able to sell that paper for anything close to its face value, 
and that is because nobody knows how high these default rates 
are going to go. There is too much uncertainty in the market.
    What bankruptcy modification does is it cuts through that 
uncertainty, that right now we actually, I think, are in the 
situation that looks like Japan in the 1990's where financial 
institutions are unwilling to take the write-downs necessary, 
and they keep holding non-performing loans on their books. What 
bankruptcy modification does is it forces those write-downs. It 
forces a housecleaning, and then that lets us have really a 
financial fresh start, not just for homeowners but for the 
whole system, that when one financial institution wants to deal 
with----
    Mr. Goodlatte. When those financial write-downs occur, the 
banks are required to change their entire lending practice 
because they are then required by the bank examiners to have 
more assets on hand that they don't have that are performing 
that could simply put them out of business. We may 
inadvertently force action that would ultimately lead to what 
you are talking about but in the meantime cause major 
disruptions in our banking industry. That is what I think is 
expressed by this article.
    Mr. Levitin. We are already there, unfortunately, and I 
think that the mistake would be to try to sweep the problems in 
the banking system under the rug rather than deal with them up 
front. Bankruptcy modification will cause some upfront dealing 
with the financial problems. We are going to have to bite this 
bullet sooner or later, and the danger is that we wait too long 
to do this, and we lose the decade.
    Mr. Goodlatte. Well, thank you, Mr. Chairman. You have been 
very kind with the time you have allotted to me.
    Mr. Conyers. Bobby Scott?
    Mr. Scott. Thank you, Mr. Chairman.
    Let me, Professor Levitin, let me follow through on that. 
How is the bank any worse off with cram down under bankruptcy--
the fact is that the security they have is the cram-down 
amount--the value of the house is the security for the loan, 
and if it is now down, whether it is crammed down or not, they 
don't have any more security than anything actually there?
    Mr. Levitin. You hit the nail on the head there, that if 
the bank's choice is between having a modified loan in 
bankruptcy, where it gets a secured claim for the value of the 
property and an unsecured claim for the deficiency, that is 
exactly what they get in foreclosure. And frankly, unless you 
think bankruptcy judges are systematically going to do worse 
jobs than foreclosure sales in valuing property, it is going to 
be a lot better for the bank.
    I don't know how many of you have been to a foreclosure 
sale, but most foreclosure sales, the only one who shows up to 
bid is the foreclosing creditor. In New Jersey, for example, 
foreclosure sales, the bidding starts at $100 by the 
foreclosing creditor. Most sales, that is the only bid there 
is. The property goes for $100.
    Now, that foreclosing creditor might try and resell the 
property later, but they are carrying a property on their books 
for a while that is not performing, not producing any income. 
And in this market, good luck selling it at anything close to 
what the price was when they made the loan.
    Mr. Scott. Professor Mayer, why is the bank worse off under 
a cram down, since that is all the security they have anyway?
    Mr. Mayer. I think it is important to recognize that there 
is lots of evidence about why people miss mortgage payments. It 
isn't because their loan-to-value is above 100 percent. It is 
because they have trouble making their payments. So the right 
solution to dealing with this is really making sure people can 
make their payments on their homes.
    The cram-down portion actually erases the possibility that 
the lender can ever be made whole when there is temporary 
reductions in income. So if we look at previous cycles, many, 
many homeowners sat with the loan-to-value above one and made 
their payments. So if we want to keep people in their homes, we 
really have to worry about the payment issue.
    The difference for the lender and the reason that lenders--
you know, lenders aren't stupid. It is not as if they think 
this is in their interest, you know, that this is in their 
interest, and somehow they are all saying it is not. We have to 
sort of take them at their word if they think it is not.
    The difference--and this is where the huge write-downs 
come--is by cramming down the loan amount and giving the lender 
no chance of ever getting it back instead of reducing payments 
so people can stay in the house, and as the market recovers, 
lenders get some of that additional money back, you are 
immediately forcing a bigger loss on lenders than they would 
otherwise get. And that is a really important distinction, and 
there is lots of evidence in the academic literature to support 
that.
    Mr. Scott. But if they found that from the bankruptcy the 
bank would be in exactly the same situation they would be with 
the cram down.
    Mr. Mayer. No because the mortgage amount is crammed down. 
What you are doing is you are taking away a secured claim and 
giving them--taking away their secured claim, which forces a 
much bigger write-down----
    Mr. Scott. Yes, but you have a secured claim on the value--
the value of the property is all the security you have. Under 
bankruptcy, that is all the creditor is going to get at most.
    Mr. Mayer. But I made, you know, as a bank, I made a loan 
that is a secured loan, and I thought I had collateral to 
protect that, and I am willing to make a secured loan very 
differently. And we all understand a secured loan is a much 
lower cost loan than an unsecured loan. It is because the 
losses on unsecured loans----
    Mr. Scott. Yes, but the only security you have is the 
house, and the value of the house is the extent of the 
security.
    Mr. Mayer. No, that is not true.
    Mr. Scott. And the cram down is to the true value of the 
house.
    Mr. Mayer. I have two things when I have a mortgage. I have 
a promise to pay from a borrower, and then I have a security as 
a fallback. If I can keep that borrower paying, then I actually 
have something that is worth more than just the value of the 
house, and that is why the cram downs kill lenders.
    With all due respect, I apologize. I am used to an 
academic-style discussion. I apologize.
    Mr. Scott. Well, I mean, what you have is the homeowner 
over a barrel, didn't want to have to leave the house and be 
homeless, and you are gouging them for more than you could get 
under the legal process because you have that leverage over 
them. It is not legal. It is leverage because they don't want 
to be homeless. I am sorry?
    Mr. Mayer. I am sorry.
    Mr. Scott. No, go ahead.
    Is that not the leverage you have, the fact that they would 
be homeless and you can get more--you can gouge them now that 
you have got them over a barrel? And that is the security that 
you are talking about.
    Legally in bankruptcy you can get the cram down costs? That 
is all you ever get. And you won't even get that because you 
have got more expenses in foreclosure.
    Mr. Mayer. I wouldn't characterize in my own view of 
lenders as trying to gouge. What a lender is trying to do is to 
get the most payments they can with at the same time keeping 
someone in their house. The fundamental idea of my proposal is 
to have the lender receive as much payments as they can, the 
servicer, but if the payments stop, the servicer gets nothing.
    And so the idea is to keep people in their house, but I do 
think when you take out a loan, you have a responsibility to 
pay as much as you can back of that loan as possible, and I 
think that is an important responsibility.
    Mr. Scott. Mr. Chairman, if I could add.
    Professor Levitin, a quick question. Is there any point in 
making, if we pass the bill, to effect only present loans and 
not future loans?
    Mr. Levitin. I think it actually would be a good thing if 
it affected all loans. But, you know, I am willing--I would 
rather see a half loaf than nothing at all here.
    Mr. Scott. Five years, 10 years from now, we are not going 
to be right back where we are--the argument that when you made 
the loan, you knew who you were lending and what the rules 
where and, if we went down the road a little bit, we would be 
changing the rules retroactively? Wouldn't it make more sense, 
in fact, to file a future loan rather than past loans?
    Mr. Levitin. Well, there is no--on past loans, there was 
reliance that there wouldn't be bankruptcy modification. In the 
future, we have a lot of certainty about this. And I think that 
would actually be a very good thing because the possibility of 
loan modification in bankruptcy actually instills some 
discipline in the lending process.
    We would not have had the craziness of the last 6 years or 
so in the lending market had bankruptcy modification been 
possible. Bankruptcy modification is really a defense against 
systemic risk caused by out-of-control consumer lending.
    Mr. Scott. Thank you.
    Mr. Conyers. Judge Louie Gohmert?
    Mr. Gohmert. Thank you, Mr. Chairman. And I appreciate the 
members of the panel. Of course, I have to comment on a few 
things, one earlier in the panel--in the first panel had 
comment the bailout bill vote we just showed--just took showed 
how people feel in the House about the bailout.
    I would only submit that had the Senate disapproved the 
bailout money, then the vote would have been substantially 
different. This, in the House, was a free vote so people could 
go back and tell their constituents we voted against the 
bailout knowing there had to be a vote of disapproval in both 
houses in order to keep the next $350 billion from being 
squandered as the first was. My opinion.
    As far as the banking business, I am not a big fan of what 
has been going on by the investment banks. I think they are 
terribly at fault in much of our crisis these days. But I am 
very concerned about the community banks who have had very good 
lending practices and have been caught in the cross-fire 
between the loose standards of investment banks with the 
regulators who are now requiring more in reserve.
    I met with regulators, and they are saying, well, they are 
more nervous since--so they are requiring banks to hold more in 
reserves because of the situation and the chance that more may 
have to file bankruptcy.
    Now, Professor Levitin, I notice in your article--and I 
want to be fair. But when you say in the your article courts 
have interpreted the bankruptcy codes mortgage anti-
modification provisions to apply only to single-family 
principle residence mortgages, that is correct. Thus, you 
surmise from that single-family principle residence mortgages 
may not be modified in bankruptcy.
    All other mortgages may be modified in bankruptcy. 
Therefore, you draw the hypothesis that, therefore, one would 
expect that if the market were sensitive to bankruptcy 
modification, there would be a risk premium for mortgages of 
the type properly currently modified.
    Isn't the truth of the matter that those second home 
mortgages, in order to be modified, still must require that the 
principle that is reduced--that difference in the reduction--
has to be paid within 5 years? Isn't that correct?
    Mr. Levitin. That depends on the court. And I think it is 
important to note that the second homes are really a red 
herring. The second homes are not the right comparison. It is 
the two-family homes that are really the good comparison, where 
you rent out the basement----
    Mr. Gohmert. Yes, but I am talking about this part and why 
so many deal with courts who say if you are going to lower the 
principle in these second home mortgages, you have to pay the 
principle within 5 years. Most people who are in bankruptcy 
cannot pay that difference in principle within 5 years. 
Therefore, it really has not had much effect on those 
situations because they know they are not going to be able to 
go in and ask for a reduction in principle on the second home 
because they can't pay that other principle in 5 years.
    And I would submit to you that, that is really more the 
reason that, that has not had much effect. Whereas, what we are 
talking about in this bankruptcy change would not have that 
requirement that the difference in principle be paid within 5 
years. So I am very concerned about the lending drying up even 
further. We were told by King Paulson that if we gave all this 
money to these banks, that credit would just be enhanced, 
lending would flow. It hasn't.
    Banks have done different things with it, of course, as I 
am sure you well know. Some have bought up competition. Some 
have used it for bonuses, but they won't come out and say 
because they say well, it went into the general banking 
revenue, therefore, we can't say exactly what happened with it.
    But most of them have made lending more difficult. We are 
bailing out the car dealers and yet lending for the--I mean, we 
are bailing out the car manufacturers, but lending for the 
dealers is drying up. Lending for car buyers is drying up.
    The banks are telling me the regulators are getting tougher 
because of the economic conditions. We have got to have more in 
reserve. And all I can see is that if we approve this 
bankruptcy change where a bankruptcy judge--and there are a 
lot--and you know what will happen--they will flood into the--
you know, of course, you are talking about local bankruptcy 
judges. But they will find the best judges, because usually 
there is more than one, and they will push to get the right 
judge so that they can avoid paying all of the principle that 
they contracted to pay.
    And once banks have no reliance on the principle that they 
contract for, then the lending is going to dry up even further. 
And I can guarantee you, just from my 4 years in Congress, we 
are going to see another big bailout proposal--let us bail them 
out again. And it will come back to the fact that we dried up 
more lending by what we are doing today.
    And I realize my time has expired. And I am sorry. I 
appreciate the indulgence. Thank you, Mr. Chairman.
    Mr. Conyers. Does any Member wish to respond? All right. 
Two responses.
    Mr. Mason. If I could just--we talk a lot about the banks 
and the liquidity issues of the banks and the amounts of money 
that they might be required to have on hand in terms of dealing 
with the restructured loan situation.
    But I would like to bring the Committee back to the real 
fundamental problem, which is people are losing their homes. We 
really want to encourage people to stay in their homes. We 
don't want to have more homes foreclosed on the market, further 
depressing the market. We would like people to stay in their 
homes who can continue to maintain a stream of payments that 
has been discussed so much here.
    And the fear of people somehow manipulating the system 
really, to me, is not justified. You have to commit your full 
amount of your income. And, therefore, if you come in with 
$2,000 of income over and above expenses mandated by the 
Internal Revenue Service for food and clothing, you have to pay 
all of that to your creditors.
    So even if the principle amount of the loan is reduced, 
reducing that payment, you still have to pay your excess income 
to the very same creditor who maintains an unsecured claim. So 
I think--over 5 years in most of these cases.
    And with the frequency of which mortgages turn over now, my 
guess is that it would be a pretty good deal for lenders if 
they could have a guaranteed stream of payments for 5 years in 
bankruptcy compared to a foreclosure situation where a house 
sits on the market.
    Mr. Levitin. Well, Congressman Gohmert, I certainly hope 
you won't crucify me for Hank Paulson's since I want to disavow 
any responsibility for his decisions.
    But I want to address three things that you raised that I 
think are very important. First, whether mortgages do have to 
be paid off in the 3 to 5 years of a plan. Secondly, I think 
the community banks are something that are an issue that 
deserves some attention. And, thirdly, the questions about how 
many more filings we will see as a result of passing bankruptcy 
modification legislation.
    So first, the uncertainty. I am sorry. First, the 3 to 5 
years repayment. There is actually a lot of disagreement among 
courts. Most courts that have reported decisions about whether 
a modified loan has to be repaid within the 3 to 5 years of 
plan have said, yes, it has to be repaid within those 3 to 5 
years. But it is not unanimous. There is only one circuit court 
of appeals that has touched on the issue. That is the 9th 
Circuit where panels frequently overrule each other.
    This is something that law professors argue about and can 
reach no agreement. I can give you a very good statutory 
reading that says that, certainly, that is not the case; that 
what has to be paid is value, not cash, over those 3 to 5 
years. And value can be in the form of a new 30-year note or 
something. That is what we do in Chapter 11.
    But the point is not whether it actually has to be paid in 
those 3 to 5 years or not. The point is that there is 
uncertainty that no lender actually knows what a bankruptcy 
court is going to doa bout that. And I can tell you, 
underwriting models just aren't this sensitive. They don't--
when a financial institution is figuring out what is going to 
happen in bankruptcy, it assumes that, that modification can 
and will happen on a two-family property, on a three-family 
property, even on an investment property.
    So I think that it is actually a real thing that we--that 
we are not seeing the differences. I accept your point that 
there are some courts that say it has to be paid off in those 5 
years. And this legislation would change that. This legislation 
that is proposed would allow, I believe, up to 40 years. I 
don't think that we should, therefore, expect that bankruptcy 
judges would say a loan that has 3 years left on it will become 
a 40--will get amortized over 40 years. I think, more likely, 
if it has 3 years left on it, maybe it turns into 4 years.
    But the uncertainty is an important point here.
    Secondly, about community banks. Community banks really 
have gotten kind of the short end of the stick in what is going 
on here. And that is unfortunate because community banks were 
not the reckless lenders, by and large. They were careful. They 
knew their borrowers. They did traditional, prudent 
underwriting. And here they are seeing their large competitors 
getting bailed out when they are not. That is a very concerning 
issue.
    What is important to note, though, is that community banks, 
first of all, they have lower default rates, I believe, because 
they made more prudent loans. And, secondly, they know how to 
do loan workouts that, as Professor Mayer mentioned, are for 
portfolio loans. And most community banks don't securitize 
their loans or portfolio loans. We see a lot more loan 
modifications working.
    So we don't have community banks where--faced with a 
massive problem of borrowers who can't afford their loans and 
can't get a workout. Borrowers don't want--homeowners don't 
want to file for bankruptcy. This is just such a horrible 
misconception. Bankruptcy is not a drive-by process. This is 
not fun. This is living for 3 to 5 years on a court-supervised 
budget. If you want to get braces for your kid, you are going 
to have to go and bargain about that with the trustee and with 
the creditors.
    Mr. Gohmert. In your statement----
    Mr. Levitin. So I don't think--I think people file for 
bankruptcy because they need to and they have to. They don't do 
this because they are being strategic. They do it with a great 
sense of shame, most of them. And it you are concerned about 
protecting principle, which is something else you raised, you 
are going have to keep asking yourself how well does 
foreclosure--that is the alternative that is on the table right 
now. How will this foreclosure protect principle? It really 
doesn't.
    Mr. Conyers. Zoe Lofgren?
    Mr. Gohmert. Mr. Chairman, since all of them were allowed 
to respond to me, might I have a response to----
    Mr. Conyers. You have never been denied in the 111th 
Congress, but you have come very close to it already. Yes.
    Mr. Gohmert. I will be very brief.
    Regarding the comment we want people to stay in their 
homes. You are right. We want to afford more people the 
opportunity to stay in their homes. But in Congress, we are 
supposed to look at the big picture. And what I saw when 
Speaker Pelosi had all those children up there around the--I 
was about to tears. It was really a beautiful moment.
    But then what hits me was these are the kids that we are 
saddling with so much debt from what we are spending from this 
Congress. And now here, we could--if we do the wrong thing 
through this Committee--keep many of them from ever being able 
to get a loan to buy a home.
    So I want to keep people in their homes, but I do want 
those loans to be available. And I am hearing from community 
banks who have, up to now, had good lending practices, we are 
not going to be able to lend like this any more. We are going 
to have to cut out so many that we are currently lending to 
because they won't qualify in the future when we know that a 
bankruptcy judge can cram down a lower principle.
    Thank you.
    Mr. Conyers. Zoe Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman. I will be brief. This 
is a very important hearing.
    And I have a question for you, Professor Mayer, and I 
wonder if you could just say yes or no because it is a yes or 
no question.
    You have indicated in your testimony that the Government--
Federal Government--is in the position to control the bulk of 
the workouts without bankruptcy. Is it your contention that in 
all cases involving Freddie Mac, Fannie Mae, or FHA where we 
have control that we have the ability to do a modification even 
where the mortgage has been securitized?
    Mr. Mayer. With the safe harbor provision that I put into 
place, that would absolutely be true.
    Ms. Lofgren. Let me ask you about the pooling service 
agreement issue that you mention in your proposal. Do we know 
what percentage of PSAs contain a provision which limits--or 
prohibit modification?
    Mr. Mayer. Approximately a third of pooling and servicing 
agreements--we have law students in the process of looking at 
this--we think have explicit limits, but most other--most of 
the remaining ones have implicit----
    Ms. Lofgren. Okay.
    Mr. Mayer [continuing]. Rules which are very hard to 
determine and are generally viewed as also restricting 
modifications.
    Ms. Lofgren. And do we know what percentage have been 
securitized?
    Mr. Mayer. Of mortgages?
    Ms. Lofgren. Yes.
    Mr. Mayer. It is about standing mortgages today, it is 
somewhere between 7.5 and 8 million as of October of this year, 
of the roughly 55 million that are outstanding.
    I have my written testimony has documentation for all those 
numbers.
    Ms. Lofgren. All right.
    I am wondering, Mr. Certner, if you know--it was kind of a 
parade of horribles that have been pulled out in the concept of 
changing this bankruptcy law, but we have maybe an opportunity 
to look at a real-life implication.
    We changed bankruptcy law relative to farms and also, in 
the consequence, houses on farms. When we did that, do you know 
what the impact was in terms of lending for farm housing? And 
did it have the kind of adverse impact that is being fussed 
about here today?
    Mr. Certner. I think the studies that look at that have no 
way of validly making that assessment, and I can talk about the 
details of that, but I think I would speak for most sort of 
academic economists that you can't look at changes over time 
when lots of things are happening at the same time.
    Ms. Lofgren. Well, that is always true, but one of the 
things we know is that the economists today also look at real-
life examples to sample some----
    Mr. Certner. Right.
    Ms. Lofgren. I wonder if either Mr. Certner or the other 
professor has an opinion.
    Mr. Mayer. Yes, I think the--and I don't know that I have 
seen any of the studies or details on that, but I--I think what 
we can say is it did help the--the family farmers when the act 
was done back in 1986, the Family Farmer Bankruptcy Act.
    And I assume that Congress deemed it to be fairly 
successful, because we basically ended up after using that 
provision in the crisis for farmers ended up making that a 
permanent part of the bankruptcy code.
    Ms. Lofgren. Right.
    Mr. Mayer. In 2005, 20 years later.
    My assumption from that is that this was a very successful 
program, and it has not adversely impacted the market but 
helped people.
    Ms. Lofgren. Professor Levitin?
    Mr. Levitin. That is correct. I agree with Professor Mayer 
that it is hard to pinpoint a result, but I think we can say 
this very clearly.
    The sky didn't fall after Chapter 12 was enacted--that 
farmers are still able to get credit, and the--you know, we are 
growing crops, and they are getting credit for it--that the--
the parade of horribles that was trotted out just didn't 
materialize.
    Ms. Lofgren. I would just like to make a couple of comments 
and then let my colleagues ask their questions.
    Much has been said in the Congress about this Hope for 
Homeowners program, and we had hope for the Hope for Homeowners 
program.
    But I asked my staff to take a look at the FHA reports, and 
the FHA tells us that in the United States of America to date, 
only 370 applications have actually been accepted under that 
program, and zero mortgages have been modified. So I think it 
is important as we discuss what to do next that, that be 
remembered.
    And just a little bit about the need--where we are with the 
banks needing to have their capital in place. It is important 
to think about what is really happening in the real world.
    And in California, I will just give you an example that 
came in to my district office recently, of someone who bought 
their house for $700,000. They put up equity. It wasn't just, 
you know, that they didn't put--have a stake in it.
    You know, there has been a lot of unemployment now coming 
in. And there was also cancer in the family. So they are having 
a problem meeting their mortgage. Their monthly payment is over 
$4,000 a month.
    They paid $700,000. The house is probably now worth 
$200,000, maybe. They could pay probably $2,000 or $2,500 a 
month if they could restructure in some way.
    They couldn't get an answer from the loan servicer, so the 
house was foreclosed. They are out of luck, and the bank is 
getting nothing, and the bank has gotten nothing for 6 months.
    So to say that the bank isn't going to have a capital 
problem through foreclosure is simply not the case. If you 
extrapolate that out across the country, the banks are going to 
lose a lot of money.
    And I personally think the sooner we wash those losses 
through the system, and understand how much has been lost, and 
put a floor under it, the better off we are going to be, where 
we can move forward.
    We are not going to have the same kind of mortgage market 
in the future that we have had in the past. And that is just a 
fact. It is going to be harder to get credit. And families are 
going to struggle more to become homeowners. And I say that 
with some regret, but that is obviously the case.
    So it is important that we move forward. I personally think 
that some kind of bankruptcy provision must be a part of this 
answer. I was very interested in Congressman Marshall's 
comments.
    The idea of having some kind of equity sharing if there 
were a cram down, at least during the life of the plan, so if 
an asset appreciates that the lender could also benefit from 
that--I think that has--at least should be considered.
    I am also interested--and you don't need to answer now, but 
we have FHA and VA guaranteed lending. I am wondering whether 
those guarantees ought not to also travel into the bankruptcy 
court.
    And I am also very interested in Congressman Marshall's 
comment about eligibility if we were to do something here. You 
know, I will be honest. I really think if it were up to me, I 
would just remove the whole thing.
    But I think we might be able to come to some point of 
compromise here, where we talk about existing mortgages and 
move forward. So those are my thoughts.
    And I would ask unanimous consent, Mr. Chairman, to put 
this FHA report into the record.
    Mr. Conyers. Without objection.
    [The information referred to follows:]
    
    
    
    

                              ----------                              

    Ms. Lofgren. Thank you for this----
    Mr. Conyers [continuing]. So ordered.
    Ms. Lofgren [continuing]. This hearing.
    Mr. Conyers. Gregg Harper?
    Mr. Harper. Thank you, Mr. Chairman.
    I have a question, Professor Mayer. Professor Levitin 
argued that the bankruptcy process will actually reduce 
uncertainty. Do you have any position on that argument or 
position?
    Mr. Mayer. Yes, and I agree to some extent it will reduce 
uncertainty, but it will do it in a way that is extraordinarily 
costly, which is it will ensure that lenders bear much bigger 
losses than they would others.
    Mr. Harper. Okay.
    Mr. Mayer. And that is not exactly the way of uncertainty 
we would like to--the way we want to reduce uncertainty.
    The second thing is it puts a floor--sorry, puts a ceiling 
on the lenders' recoveries, but one of the things we know about 
bankruptcy--all of the comments here keep talking about 
bankruptcy as this process that reduces uncertainty and 
everything works out fine.
    All the evidence we have suggests that is just simply not 
the truth. So what we are doing is putting things into a 
process where most things fail. That is the track record. And 
we are hoping that somehow it is going to get better.
    What it may well do is continue to push the problem in the 
future. And as these loans re-default and run into trouble 
again, it actually is going to put a ceiling on our recoveries 
and lead uncertainty to be even lower than before.
    And I would just sort of highlight again, if one wants to 
just do--evidence, what happened to the financial institutions 
the morning after Citigroup's agreement--this legislation was 
made public. The stocks of all the financial institutions fell 
appreciably.
    And I think to say that something is in their interest--the 
institutions--I think these are sophisticated enough 
institutions to understand what is in their interest.
    I don't want to subsidize them, but I don't want to dump on 
them losses that they, you know--that will hammer all of us in 
the process.
    Mr. Harper. And I certainly want to thank each one of your 
time and your presentation, and certainly your expertise. It 
has been very helpful. And if you have addressed this, I 
apologize.
    But what happens in the event you go through this process, 
you do a cram down, they get--they go through it successfully, 
then 4 years later, let us say, they sell the property for a 
significant profit? What happens to that gain?
    Mr. Levitin. If it is during the course of a plan?
    Mr. Harper. After the plan.
    Mr. Levitin. Okay, because this is actually an important 
distinction, and I am sorry that Congresswoman Lofgren isn't 
here to hear my answer on this, because during a plan, any 
income, including from a sale of a property, is going to go to 
creditors.
    So if it is a 5-year plan, if there is an appreciation in 
those 5 years, that appreciation goes to the unsecured 
creditors, which include the deficiency claim on a cram-down 
mortgage.
    Mr. Harper. Certainly. But after that is completed.
    Mr. Levitin. Afterwards, any appreciation is going to be 
kept by the debtor. And I think it is important to note, 
though, that if there was a foreclosure, the creditor doesn't 
get any appreciation.
    Once that property is sold, there is no appreciation on it 
in a--in the foreclosure sale. So whether it is better for the 
debtor to get the appreciation or have some sort of a shared 
appreciation or a clawback--I think there are some good 
arguments to have about that.
    But I am not sure that the creditor necessarily has the 
better claim to that appreciation, given that their--it is just 
crucial that the--you understand the framing here was not no 
loss versus bankruptcy-modification loss. It is foreclosure 
versus bankruptcy-modification loss.
    In that case, you know, it is looking like--it is looking a 
lot--the creditor doesn't have any real expectation of 
getting--of getting appreciation.
    I also just want to note--this is important--that Professor 
Mayer noted that the next morning after the Citigroup deal was 
announced that financial institution stocks fell.
    But if you go back to when the announcement actually 
happened that day, if you look at like the next half hour after 
the announcement--and we assume that we have pretty efficient 
markets that trade on information pretty rapidly--Citigroup's 
stock went up about somewhere between 1 and 2 percent. So did 
its competitors'. So did Bank of America, J.P. Morgan.
    To look at the next morning--there is all kinds of other 
stuff happening. If you look right after the announcement, once 
it went--was made public about the Citigroup deal, bank stocks 
went up.
    Mr. Conyers. Sheila Jackson Lee?
    Mr. Mayer. May I also answer that question? Thankyou. I do 
think that equity sharing is an important thing to think about 
in the process, although I--you know, continue to think that 
the sort of question of who is to gain--if I made you a loan on 
a house, and you haven't made all the payments on the mortgage, 
and the house goes up in value subsequently, I don't understand 
the argument that given that I made you the loan that, that 
moneywould be due the borrower and not due the lender.
    It is the fundamental basis of secured lending that if you 
lend on an asset and you haven't made your points in full and 
paid off your asset that the value and any gains of that before 
the lender takes any losses are clearly due the lender, not the 
borrower, so I don't understand the basis to which we would say 
that the homeowner should get the appreciation after a cram 
down, not the lender who has just had their interest destroyed 
in the process.
    So I think if I am not going to pay my mortgage in full--
and I completely agree with the idea of reducing payments and 
keeping people in their houses. I couldn't agree more with that 
principle.
    But the idea that what happens afterwards is that windfalls 
from that don't go to the lender with the losses--that is 
exactly the reason that lenders are facing big hits on this.
    And by the way, I would say that Citi's stock isn't 
relevant. It is the stock of the other lenders who aren't 
reliant on the Government, and the private market lenders got 
hammered that day by middle of the morning.
    Mr. Conyers. Sheila Jackson Lee?
    Ms. Jackson Lee. Let me, first of all, thank all of the 
witnesses, for their presence here today, late on a Thursday 
afternoon, speaks to the crisis and the pending necessity to 
move quickly.
    I think this should be the theme of this particular 
hearing, although we respect the disparate viewpoints.
    And, gentlemen, I enjoy an academic discussion. In fact, I 
miss my days in law school. But I would suggest that we have 
gone beyond an academic discussion.
    Let me just put on the record something that has already 
probably been put on the record, but let me just read it to 
you. During 2007 through 2008, mortgage foreclosures were 
estimated to result in a whopping $400 billion worth of 
defaults and $100 billion in losses to investors in mortgage 
securities--my sympathies don't fall too much in that 
direction, but let me just add that--translating into roughly 
one per 62 American households.
    The current foreclosure rate is approaching heights not 
seen since the Great Depression. I think that sometimes we 
don't reinforce that, because there was a period of time in the 
last couple of months in the previous Administration where 
there was a hesitancy to use the word recession, and certainly 
no one wanted to use the word depression.
    All of us can't count much of our time having spent--being 
spent during the Depression, but the stories we read about it--
we know that, that was a horrific time in American history.
    The glut of foreclosures has adversely affected new home 
sales and depressed home values generally.
    And, Mr. Levitin, that is where I want to go with my 
questioning, because I think there is a lot of caution and 
doubt. And if we go on the words of our President, one of the 
things that we know is that the Federal Government is the last 
resort, the last big spender, and of course a lot of people run 
out of the room when they hear that.
    But we also know that we are at a point where the Federal 
Government has to be the one that either frames or infuses 
capital into the market. We did that with the TARP. We have 
some guidelines on this second point, second portion that I 
think--hope you will go back and study--$100 billion for 
mortgage workouts is sort of instructing the Administration and 
banks that that is what Congress wants to have happen. To get 
servicers to service those mortgages.
    So my question is, most of the victims, or many of the 
victims, and I am sympathetic to California and other places, 
very much so, but what I like about the two bills before us, 
and I would like your comment on it, is that it is not limiting 
to where you can say that you have concensus that have enormous 
amounts of foreclosure. Because there are other states where 
the foreclosures are there and there are families that need it, 
but they might not meet, say, a threshold that might be made by 
legislation.
    In the bankruptcy bills, it allows, if I am--as you have 
read these two bills, individuals to go to the courts and be 
addressed on their merits, which I think the banks should 
appreciate. I assume the bankruptcy courts will use the 
standards that they have typically used, fraudulent persons, 
others who are glaringly abusing the system will be noted in a 
bankruptcy proceeding.
    And so I want to have you comment on that part. That there 
is a fairness because you have the courts actually assessing an 
individual's plight. For example, I had--there is a story about 
a $700,000 homeowner. I have got a person making $18,000 a year 
living in an apartment as an able apartment owner--or not 
owner, a renter for eons of years, 20 years, and finally was 
pulled out of it, of course, during the period when they were 
giving mortgages, but they sign an adjustable rate mortgage. 
They might have survived on just a regular mortgage over 40 
years. But they signed an adjustable rate mortgage.
    They are in the crux of a foreclosure--a potential 
foreclosure proceeding. They would benefit. Keeping their 
little bungalow, keeping the $18,000 a year job, hoping that 
they can and not being laid off. Microsoft laid off 5,000 
people. And not making that block or that neighborhood get any 
worse.
    Would you comment on that individual aspect and the 
fairness of it for a bankruptcy proceeding? And would you add 
to that how we can make sure how this bankruptcy proceeding 
might be helpful to the low-income homeowners and others who 
are probably going to get lost in the crunch?
    Mr. Levitin. Bankruptcy empowers debtors to take control of 
their own fate. Right now, when homeowners are dealing with 
mortgage servicers, they are really at the servicer's mercy 
that it can be everything from just if you are working two 
jobs, trying to get to a mortgage servicer, when you are just 
waiting on the phone for hours, you can't do that. There is--
you have no control over it. And even if you get through to the 
servicer, you don't know if they are going to offer you any 
kind of reasonable deal.
    They might say, ``Sorry, my hands are tied by a contract to 
which you aren't a party.'' The bankruptcy cuts through that, 
it empowers homeowners to save themselves. And that is very 
important.
    It also is very good at screening out abusive debtors. That 
there are some good, there are some people who take advantage 
of the bankruptcy system and act strategically. By all 
accounts, it seems like they are very few, but unfortunately 
they often become political poster children. But most debtors 
are not abusing the system and we, especially after 2005, after 
the bankruptcy abuse prevention in--I can't remember if it is 
Consumer Protection Act or Creditor Protection Act, that we 
have even stronger statutory provisions to weed out abusive 
debtors.
    Bankruptcy really is not going to result in wealthy debtors 
getting a free ride. Instead, most debtors are really pretty 
low income, that your average bankruptcy filer in 2007 had an 
income of something like $35,000. That is not a wealthy person.
    Ms. Jackson Lee. May I just finish, and I thank you for you 
that, by asking this question for all of the panelists? When 
you look at the two bills that we have, what would each of you 
add that would refine the process and add to the fairness 
quotient of each of those bills, across the board? Let me start 
with Mr. Mason?
    Mr. Mason. It seems to me that one of the issues raised 
here today is the issue about appreciation. While I think it is 
somewhat of a red herring kind of an issue, I guess there is 
some merit to some sort of voluntary agreement between the 
lender and the borrower for some future appreciation. I could 
see that as a possibility. I don't think that would affect the 
ability of the borrower to reorganize their debts, and I think 
that is certainly one possibility that could be done.
    I would also like to go back to your point, however, about 
the $18,000 income kind of a person. Before I came here, I 
spoke with someone from the Southwest Detroit Housing 
Coalition, and she was saying that she is now starting to get 
debtors from outside the county, who used to work for auto 
suppliers, who have lost their jobs. And these are people 
with--making $10 an hour.
    And I asked, ``Well, what about the modifications we are 
offering?'' She said, ``Well, a point or two in the interest 
rate won't keep them in their homes.''
    And I said, ``Well, what if they were able to reduce the 
principal balance on the mortgage and rewrite the mortgage to a 
fixed term at a competitive interest rate? Would that allow 
them to stay in their homes?'' She said, ``Absolutely, yes.''
    Ms. Jackson Lee. Thank you very much. Mr. Mayer? It is a 
provocative point, Mr. Mayer.
    Mr. Mayer. Thank you.
    Ms. Jackson Lee. I am sorry. Did I pronounce it right? Or 
is it Mayer?
    Mr. Mayer. Mayer.
    Ms. Jackson Lee. Mayer. Excuse me. I am sorry.
    Mr. Mayer. That is okay.
    Thank you.
    The first thing I would do is put in a safe harbor and 
eliminate all restrictions on modifications in all pooling and 
servicing agreements to allow servicers to do as much 
modification as possible.
    The second thing I would do, and I know this isn't an 
appropriations bill, but I would try and find some economic 
incentive to deal with the servicers, to get them to modify 
loans. That is where half the foreclosures are.
    And the third thing is, if we are going down this route, I 
really feel as if we should deal with the payments, but not get 
rid of the secured claim by the lenders. So if one wants to 
write down the payments for some period of time for somebody to 
get into the mortgage, I think it is really important not to 
cram down the balance on the owner of the property.
    Ms. Jackson Lee. Thank you. Mr. Certner?
    Mr. Certner. Ms. Jackson, we think both bills would be 
helpful that are before the Committee today. Of course we 
support the bill that provides a broader relief right now.
    To consumer fees, I appreciated your comment about 
listening to this academic argument. And we are here today to 
have an academic argument. We are here because we are hearing 
from hundreds of thousands, maybe millions, of our members who 
are facing foreclosure. And as you know, this is devastating to 
them personally. This is devastating to them not just in their 
current economic security, but for their future retirement 
security. It is devastating to their communities. It is often 
devastating for the families who have to come in and pick up 
the pieces.
    Our members are looking around at the hundreds of billions 
of dollars that are being given out in TARP and in other parts 
of the efforts of Congress to get toward economic recovery, and 
many of these people who are facing devastating foreclosures, 
sometimes over predatory mortgage lending practices that you 
well know should not have been committed over these many years 
and wondering when the relief is going to get to them.
    And this is maybe not the only kind of relief that I can 
get them, but this certainly should be one component of the 
relief. And we urge you very strongly to move forward in 
getting this relief to the individuals who really want to see 
relief at the local level.
    Ms. Jackson Lee. Mr. Levitin, thank you.
    Mr. Levitin. Certainly. As between the two bills, I 
personally prefer Chairman Conyers's bill, that would offer a 
lot of relief.
    Ms. Jackson Lee. What would you add if you could?
    Mr. Levitin. Well, what I would add, if you were truly 
concerned about shared appreciation, you could lengthen the 
period under which--of a bankruptcy plan, make it, say, 7 years 
rather than a maximum 5 years. Most mortgages are typically 
refinanced within a 7-year period anyhow, so looking at 
appreciation over a 30-year period is not what creditors are 
assuming in the first place.
    But for shared appreciation, it is important to realize 
that with securitized loans, who gets that shared appreciation? 
Typically, that goes at--any shared appreciation would go back, 
not to the investors, there might be pension plans and mutual 
funds, but it goes back to the originating lender. Now that is 
the bad actor that may have fraudulently underwritten a lot of 
these loans in the first place.
    So if we have shared appreciation, we need to be very 
careful that we don't reward bad actors with it. That is a real 
danger.
    But in terms of overall improvements though, I think that 
there is something to what Professor Mayer says, about thinking 
about this, about how bankruptcy fits in a larger picture. 
Professor Mayer's proposed a bunch of carrots to try and create 
incentives for lenders--for servicers to act. Bankruptcy, as 
Representative Miller described it, is a stick.
    There is no reason we have to have carrots and sticks 
separately. We can use both of these. And actually they might 
be more effective combined. You can imagine a plan that both 
offers--sort of has a clean-up period of, say, 3 months under 
which servicers have to get their act together and do 
modifications voluntarily. And if they don't, then the stick 
comes out. And the stick doesn't need to be limited to 
bankruptcy modification. It could also be prohibiting the 
Fannie Mae and Freddie Mac from doing future business with 
servicers that don't don't comply.
    There are lot of tools in the toolbox. Bankruptcy is an 
important one, but it is not the only one, though.
    Ms. Jackson Lee. Thank you, Mr. Chairman. I think the point 
is well taken that the house is on fire and this bill is a hose 
that is probably long overdue, but we have got to get the water 
where it needs to be. And I want to move this as quickly as 
possible. And I think, Chairman, our people are suffering out 
there. Thank you very much, I yield back.
    Mr. Conyers. Maxine Waters.
    Ms. Waters. Mr. Chairman, I want to thank you very much, 
again, for making this issue your number one priority and 
holding this hearing today. And I would like to thank all of 
our witnesses who are here today for taking time from your work 
to be with us.
    Let us be clear, I support loan modifications and 
bankruptcy, period. Period. And I will tell you why. Because I 
know about everything else that has been done and is being done 
now.
    How many of you know about the Hope Now Program? Do you 
understand what that is?
    How many of you think it is working?
    I am glad none of you think it is working. You didn't raise 
your hand because the Hope Now Program is the volunteer program 
that was put together by the Bush administration, and it had 
all of the financial institutions at the table, and they are 
using the hired, certified counselors to go out and help people 
and they hold town hall meetings, they will come to us if we 
request them to come. And at town hall meetings they claim to 
be able to help people do loan modifications.
    When we went on break, I had about 12 of them in my office, 
certified loan counselors, and I asked them, ``Are you really 
helping people do loan modifications? Because I do this work, I 
understand how it is done. And I want to know if you can sit 
here and tell me that you have been successful,'' I said to 
them.
    And they all admitted, for the most part, no. We are not.
    And I knew why they were not successful.
    Number one, they were not trained to do and understand how 
loan modifications really get done and what real loan 
modifications are. And the servicers don't have to talk to 
them. The servicers have a completely unregulated industry. And 
they don't have to do anything.
    And in addition to that, not only do they not respond to 
these counselors, you can hardly get them on the phone.
    Now, Mr. Mayer, you seem to believe and have come to the 
conclusion that there is some difference between the 
independent servicers and their willingness and their ability 
to do loan modifications and the big banks, or banks who do 
their own servicing of their loans. Now the difference in all 
of this is, and the difference is between the small independent 
banks, and you are absolutely correct, they don't have much in 
their portfolios. They didn't really do this kind of lending 
that has created this crisis. And, yes, if we had the kind of 
community banking where they held the loans, Ms. Jones could go 
in and talk to her banker, who knows something about her. They 
could do the loan modifications a lot better.
    But have you ever tried to talk with the servicers of Bank 
of America? Of Wells Fargo? Of Countrywide? Have you ever done 
that? Anybody?
    No because most of this is academic. If you watched 
Nightline last night, you saw that they covered what I do in my 
office. They stayed in my office for a day and a half. For a 
full day, they watched me work on three cases. I am working on 
about 30 of them now.
    I have been advised by the Ethics Committee not to do this 
work. But I have said to anybody who would listen, I don't care 
what the Ethics Committee is saying. I am going to do this 
work. I am going to do this work because people are losing 
their homes. Their families are being destroyed. And 
communities are being destroyed. So I have one person in my 
office dedicated in Los Angeles, and whether I am in LA or 
there, I continue to work on loan modifications. So I dial, and 
I dial Bank of America.
    First of all, they are understaffed. You stay on the phone 
for hours. As a matter of fact, I called the CEO of Wells Fargo 
after I stayed on the phone 1 hour with his servicing company, 
a separate entity, awaiting for them to come. They play music 
and the recordings go over and over again to tell you to wait. 
That is number one.
    The average homeowner cannot negotiate with this mess. 
Waiting on the phone while some people are at work every day 
and they are trying to call a servicer on their lunch hour or 
steal some time from their employer to try and get it 
straightened out.
    They are understaffed. And guess what? The servicers are 
undertrained. You could not, for life of me, tell me what the 
definition of a loan modification is because there is none. And 
we have servicers at some of these companies, first of all, 
they try to have a cookie-cutter thing for them to follow.
    They can't tell you what to do, how they would do it if you 
throw a little something extra in there, extra problem in 
there. They are not trained. You cannot get to them easily. And 
they can't really do great loan modifications. Do you know what 
I have run into? I have run into people who have mortgage 
interest rates at 10.5 that they got in 2006 and 2007 when the 
market was at about 6 percent or 6.5 percent.
    So there are predatory loans, and they should be written 
down immediately to 4 or 5 percent. They don't do that. They 
don't reduce that for the most part. We know that Hope Now does 
not work. Hope for Homeowners, that is the Chairman's bill of 
the Financial Services Committee says to the banks and the 
financial institutions if you write these loans down, I think, 
at about 10 percent, we will help you to get FHA financing. We 
restructured and strengthened FHA to be able to do this.
    The banks are not taking advantage of this at all. And 
guess what? If this written-down loan refinanced by FHA is 
defaulted upon, we pick it up. The Government will pay for it. 
Now, I want you to tell me why the financial institutions are 
not taking advantage of that.
    Finally, let me say this. We know that Sheila Bair has hit 
upon something with the IndyMac portfolio. We know that she is 
paying the servicers a thousand dollars. We know that she has 
done about 6,000 modifications, more than anybody, really. And 
able to talk about what she has done.
    When she sent the letters out to the homeowners, she didn't 
say, just come in and talk to us as Countrywide did. And that 
is why Countrywide got no responses. As a matter of fact, they 
shouldn't even be working on the loan modifications because 
they were the biggest predatory lenders in the country. Now, 
they are working on their own loans, for the most part.
    But Sheila Bair's letter said, come in; this is what we can 
do for you. You have an interest rate of 9 percent. We can 
reduce that. Come in; you have an adjustable-rate mortgage. And 
I want to tell you, Mr. Mayer, you talk about people not being 
able to pay their mortgages. The average person with a 30- to 
40-year loan with a reasonable interest rate can pay for their 
mortgage. And that is what they thought they bargained for.
    Unfortunately, there are those who didn't understand 
adjustable-rate mortgages. They didn't know about these exotic 
products. There were those who were offered Alt-A mortgages. 
They didn't know before they talked with the loan initiator 
that there was such a thing as getting a mortgage without 
having to verify your income.
    You may say it is the people's fault, but I don't think so. 
These are predatory loans. These are fraudulent loans where 
Countrywide and others put initiators out in the street without 
license. And California was a problem in this because we didn't 
require licenses of all these people on the street.
    And so they are in trouble mostly on Alt-A and adjustable 
rates. Exotic products that should never have been in the 
marketplace in the way that they were. You take Ms. Jones or 
Mr. Jones who works everyday, who makes a decent salary working 
over there at GM or someplace, they can pay for their loan. But 
when you gave them an adjustable-rate loan where you suckered 
them into for little or nothing down and it resets in 6 months, 
1 year, 2 years, and it doubled, quadruples, those margins that 
they put on top, you are right. They will not be able to afford 
them.
    But because Wall Street was greedy and they securitized all 
this junk and they put it in these traunches and they allowed 
them to invest in it, then I tell you, Mr. and Mrs. Jones got 
tricked. They got hoodwinked. They got misled.
    So I am not here today to try to convince anybody of 
anything except we should all get on the same track with the 
correct information. And to say that people who work every day, 
who got into this mortgage because they believed in the 
American dream of homeownership are not able to pay for that 
home is not a correct statement. They are able to pay for it if 
they had a decent and reasonable mortgage that they contracted 
with.
    What I would like to hear is when you talk about whether or 
not you are concerned about whether their lenders share in the 
appreciation, well, we are in a crisis and we--I don't even 
know how to talk about appreciation when 50 percent of these 
loans are under water now. We should be doing mark to market. 
We should be writing down all this mess, all of this crap.
    But let me just say this that we should be talking about 
what we do with regulatory agencies to keep exotic products off 
the market that is going to get people into trouble. There are 
some folks who would say we have no right to examine the 
products before they go on the market. We should have been all 
over adjustable-rate mortgages.
    We should be all over what the margin is when that margin 
readjusts. We are way behind, and it is shameful. And I am very 
ashamed of the fact that we have not been able to do what we 
should have done almost a year ago in getting on top of this. 
And we watch the defaults and the foreclosures continue to 
multiply, destroying whole communities.
    And the banks are not keeping up the property. The roofs 
are falling in. Gang bangers are taking over houses. The weeds 
are growing up. The waters--the basements have water and the 
mold is setting in. And we are worried about whether or not 
they are going to share in the appreciation?
    If it was left up to me--and let FOX News get this right--I 
would nationalize the whole industry.
    I yield back the balance of my time. You don't have to say 
anything if you don't want to.
    Mr. Conyers. Well, maybe you should say just a little 
something.
    Mr. Mayer. Ms. Waters, first, I would say I appreciate all 
your passion for this and also that you really are doing 
something that is important to help homeowners. And I have 
written substantially on the impact of subprime, on where it 
was located, and to whom it is coming. And you will see more 
research very soon that looks at that question. And it is 
depressing.
    But this is about getting out of the crisis. In many cases, 
the servicers were contractually prohibited from modifying a 
loan until it defaulted. There are terrible provisions in these 
pooling and servicing contracts. It has nothing to do with 
whether the servicers were good people or bad people. Their 
contract said this is what you have to do. And they were 
following the contracts. And they are bad contracts.
    And I have proposed that we get rid of these restrictions 
that are stopping us from modifying loans. So this is--I think, 
this is sort of a significant problem, and this is not an 
academic exercise. There is real evidence that people lending 
their own money have behaved differently, work out loans more 
frequently, and stop foreclosures more. Real evidence from what 
is happening that suggests that that is true.
    So I do think that this is a serious problem, but I also 
think that, you know, much as I would like to wipe out 
everything, if we were to wipe out all the negative equity in 
this country in housing, we would be looking at $2 trillion to 
$3 trillion--actually, probably more than that.
    That $2 trillion to $3 trillion, the Federal Government 
can't even run Fannie and Freddie right at the moment. 
Hopefully, the new Treasury will be able to be effective at 
this. But how are we going to run Citi? How are we going to get 
them to make sensible decisions? We are just incapable as a 
Government of running the financial system nationalized.
    And the idea that we would just take losses of $2 trillion 
to $3 trillion is just simply an extraordinary thing. I think 
we have to get out of this crisis. We have to stop 
foreclosures. But I think there is a way--there are ways to do 
it without completely bankrupting our financial system and 
taxpayers.
    And I think----
    Ms. Waters. No. I think you go too far when you assume that 
we can't do loan modifications and the banks still make money.
    If you take a look at what the market interest rates are 
now and you take a look at the interest rates that many of our 
homeowners are saddled with, and the take a look at how much 
money has been made on these extraordinary interest rates by a 
whole lot of people up the line, the reduction to 4 percentage 
points now would not be sacrifice at all.
    And I do believe that we could do more wholesale reduction 
of interest rates similar to where Sheila Bair is going with 
some of this and still they will not lose money.
    Mr. Mayer. Sheila Bair, even with her own performance at 
IndyMac, was unable to modify loans that IndyMac had as a 
third-party servicer when she could do them as her own loans.
    These contractual restrictions are really serious, and 
Sheila Bair said so as running the FDIC. So the kinds of things 
she was doing were things that she did with IndyMac's own 
portfolio. But the securitization portfolio, she couldn't do 
it.
    Ms. Waters. Well, what we are finding is, first of all, 
they are not any contracts that say you may not modify loans. 
They are just a very few of those. I have done a lot of them. 
And it has only come up, you know, very seldom that they are 
written in the contract.
    What you are referring to is the ability of the investor to 
sue the servicer because the servicer did not make every effort 
to collect the money in the way that they thought they had 
contracted for it to do. And we are willing to limit liability 
in these cases. We are willing to do some of that.
    And that is really what I want to hear from people as we 
get on the same track about how to deal with this problem. I am 
not interested for 1 minute in crying tears of some of these 
predatory lenders who knew exactly what they were doing. And, 
as a matter of fact, when you talk about Fannie and Freddie, 
not many people will say it, but it has been documented that 
Mozilo over at Countrywide said you will take our crap or we 
will stop doing business with you.
    And in a highly competitive market where they were--they 
were writing so many mortgages, to talk about squeezing out 
both Fannie and Freddie, who once had good underwriting 
standards and fair play, then that is what caused the problem.
    Mr. Mayer. Right. I would just make one other comment, 
which is that they are all--some versions of this bill in the 
Senate, anyway, restricted the bill solely to so-called 
subprime and Alt-A loans which are loans which had these 
adjustable rate provisions in them or negative amortization. 
Such a provision would deal with them is leading loans and 
leave away from it the bulk of fixed-rate or much more standard 
kinds of loan contracts.
    So this bill goes well beyond, what I agree with you, were 
horrible practices by the industry. And somehow, if we could go 
back and grab all those bonuses and all the other stuff from 
people who made money, I think we would all agree that they 
should have to pay a price for having done this. It is just not 
feasible to do it.
    We can't get that money back, but we do have to make the 
best of the circumstances that we are in and try and help 
homeowners and protect taxpayers and, as well, not destroy the 
financial system which is our----
    Ms. Waters. Well, I know that you have been very generous, 
and I thank you. And we could do that by writing down interest 
and writing down the principle.
    Mr. Conyers. Trent Franks?
    Mr. Franks. Well, thank you, Mr. Chairman. Mr. Chairman, 
first, I would like to ask unanimous consent to place a 
previously-written statement that I have for the record because 
I was in another Committee. You and, I think, the Armed Service 
Committee deliberately try to schedule your Committees all at 
the same time. This has been my experience.
    And so I would like to do that without objection.
    Mr. Conyers. Without objection, so ordered.
    [The prepared statement of Mr. Franks follows:]
 Prepared Statement of the Honorable Trent Franks, a Representative in 
   Congress from the State of Arizona, and Member, Committee on the 
                               Judiciary
    Mr. Chairman, I know that everyone here would agree that we are 
facing a foreclosure crisis and that this crisis continues to 
negatively impact the broader economy.
    As we search for solutions, I believe we should be extremely wary 
of the one we are considering today. In the last Congress, we held 
three hearings in the Commercial and Administrative Law Subcommittee on 
amending the Bankruptcy Code to allow for modification of home mortgage 
loans. Throughout those hearings and our consideration of this 
legislation in the last Congress, I was unconvinced that mortgage 
bankruptcy legislation was in the nation's best interest. I remain 
unconvinced today.
    In the last Congress, proponents of this legislation continually 
asserted that bankruptcy relief was the way to go because taxpayers 
wouldn't have to bear any cost. Bankruptcy relief, proponents asserted, 
is ``costless.''
    I suspect that same argument will be made today. Yet, no matter how 
many times the argument is repeated, the fact of the matter is that 
allowing mortgages to be modified in bankruptcy will impose real costs 
not only on first-time homebuyers, but ultimately on the U.S. taxpayer.
    Through Freddie Mac, Fannie Mae, the Federal Housing 
Administration, the FDIC's takeovers of Washington Mutual, Indy Mac and 
other failed institutions, and government guarantees for debt from 
loans to AIG, Citigroup, and Bank of America, the taxpayer will be on 
the hook if mortgage cramdown during bankruptcy is enacted. Taxpayers 
will bear the risks as borrowers move to cram-down the principal on 
their home mortgages.
    This legislation will also impose costs on future borrowers when 
they look to purchase a new home or refinance. In order to account for 
the increased risk that mortgage loans will present if they can be 
modified in bankruptcy, lenders will be forced to alter their lending 
terms. Lenders will make smaller loans and impose higher costs on 
borrowers. This will lead to fewer Americans being able to afford to 
purchase homes in the future.
    While some may find this result acceptable, we do not want to limit 
Americans' ability to purchase housing based on artificial costs 
imposed by mortgage cramdowns. This is especially the case when we 
consider that 52 million borrowers are current on their mortgages, 
while 5 million are delinquent. Mr. Chairman, the vast majority of 
borrowers are able to make their scheduled payments. Why would we do 
this knowing that we will put all future borrowers at risk?
    Mr. Chairman, this legislation is problematic. It will impose costs 
on taxpayers, on future borrowers, and I believe will negatively impact 
other efforts at stemming the foreclosure crisis.
    There are many more targeted efforts underway aimed at keeping 
people in their homes. And we should give those programs a chance to 
work and allow the housing market to re-adjust rather than turning to 
unwise legislation that penalizes even those who made economically 
sound decisions.
    I look forward to the witnesses' testimony and yield back the 
balance of my time.
                               __________
    Mr. Franks. And then I would also, if it is without 
objection, like to insert three documents into the record. The 
first document is the written testimony of Todd Zywicki. 
Professor Zywicki teaches bankruptcy law at the George Mason 
School of Law and has testified several times before the 
Committee.
    The second is the Joint Statement of several leading 
financial institutions including--including associations--
including the American Banker's Association, Independent 
Community Bankers of America, and the Financial Services Round 
Table.
    And the final one is a letter from the Department of 
Housing and Urban Development regarding these bankruptcies 
proposals. In the letter HUD states that these bills will lead 
to higher mortgage costs for most borrowers.
    Mr. Conyers. There are no objections. So ordered.
    [The information referred to follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

                              ----------                              

    Mr. Franks. Mr. Chairman, I know that the challenges that 
we face are pretty complex. So I guess I will just--before I 
direct a couple questions to Professor Mayer--just to point out 
that the primary difference between our economy and the 
socialist economies of the world--our economy and the Soviet 
economy at one time--is essentially what Professor Mayer's 
central point was and that is when people loan their own money, 
when they do things that will affect them dramatically one way 
or the other, they have an entirely different view of how they 
do it. They still want to make money. They still want to loan 
money to--if that is their business.
    If their business is selling money--which that is what 
bankers do is sell money--they want to sell it, but they want 
to sell it in ways they think that are prudent. And when the 
Government came in and began to back all of these loans, a lot 
of the private sector simply said ``Oh, great. The Government 
is going to back these loans. That is great. Well we will 
invest.'' And it just created a runaway train, and I am 
convinced that we don't seem to realize that when we try to do 
cram-down legislation--these kinds of things that change the 
fundamental structure of loans.
    What we do is we tell the private sector that they don't 
have anything to--to have any predictability on and one of two 
things is going to happen. Either the private sector is going 
to come to the rescue of this economy and they are going to 
come and say ``Well, are we going to try and buy these 
securities--make the best of it we can?'' Or it is all going to 
fall on the shoulders of Government, and if we create--cram 
down the loans, the private sector is going to say ``Okay. You 
guys take it.'' And we are going to have more to do with than 
we possibly know what happened.
    Now as to Ms. Waters, I wish you were still here because I 
will try to temper my remarks--more since she is not here, but 
the notion that we should nationalize housing--I cannot think 
of a better way to bankrupt this economy completely than that. 
And I can't think of a better way you know--Soviet Union had 
nationalized housing.
    I was there a few times, and it wasn't the best plan, and I 
would just suggest that if we don't step back as a Congress and 
as a people and recognize that free markets gave us the most 
productive economy and the most powerful Nation that history-
humanity--and still has the hope of bringing us out of this 
thing, and if we think that just nationalizing everything and 
telling what--we will just blow ourselves up--sooner or later 
we are going to be trying to--to repeal the laws of mathematics 
and thermodynamics economically and we are going to be in a 
situation where nothing can fix this but a complete depression, 
and us having to relearn the fundamental laws of economics. And 
there are a lot of economists that can ``prefatorymonatomic 
polysyllabic obfuscations math gymnastics and verbal 
circumlapution'' on us to the extent we don't know they are 
talking about, but there still remains that there is a 
fundamental reality here.
    Productivity is the only way we do it. If we simply cut a 
hole in taxpayer's pocket to fill this hole we still have a 
hole and the only thing that can make this economy survive and 
get stronger is to incent private sector involvement and 
productivity. And I suggest to you that the cram-down 
legislation here is a way to de-emphasize that and cause the 
private sector to step back even further than they already are. 
And so with that I would like to just ask Professor Mayer to 
tell us what do you think cram-down legislation will ultimately 
say to the private market to those that might be there with 
some capital other than taxpayer's capital.
    Mr. Mayer. I mean I think it is clear and you know I, as 
Professor Levitin has, you know some points of agreement that 
you know one thing that I think is clear is that the intention 
of the--of many proponents including I think explicitly 
Professor Levitin are that this--that the idea cram down be 
made permanently into legislation and go beyond this, and I 
think the evidence is abundantly clear that such a permanent 
change in the law or even a temporary one is going to raise the 
cost of credit.
    You don't need an economic model for this. It is really 
common sense. If you lend somebody money on something and you 
take away their rights to collect on that they are going to 
lend less money and they are going to charge more for that 
money. It is pretty simple intuition. The evidence for this 
globally couldn't be more clear.
    Having spent some time recently in South America with my 
students in countries like Argentina and Brazil where the 
governments there do restrict--severely restrict the rights of 
creditors to collect on their debts. We understand that home 
mortgages are not freely available and very expensive. So 
whether this is 25 basis points--it is not 200. I completely 
agree with Professor Levitin on this. Whether it is the 5 
percent of the population that can't get a loan who would have 
otherwise--we don't know. It really will affect the cost of 
credit.
    Mr. Franks. Yes. Well, Mr. Sherman, I am just closing here. 
I am going to suggest to you that the highway of history is 
littered with the wreckages of governments that thought that 
they could incent and produce--create productivity and maintain 
productivity better than the private sector, and I hope we 
don't join that litany because I will tell you nothing has 
dragged more poor people out of poverty more than the free 
markets of the United States of America. And it is always true 
that free enterprise is often the unequal distribution of 
wealth, and that is too bad, but socialism is the equal 
distribution of poverty. Thank you, Mr. Chairman.
    Mr. Conyers. Brad Sherman.
    Mr. Sherman. Chairman, I see myself sitting between Mr. 
Franks and where Ms. Waters was sitting--slightly closer to Ms. 
Waters. I think divine providence may have sat me in exactly 
the right chair. The private sector has much to be said for 
it--it is now providing loans at 4.5 percent rate to those with 
great equity and great credit. To think that still today even 
in the worst of times ordinary working people can buy--borrow 3 
or 4 hundred thousand dollars is amazing and it is not 
available in an awful lot of other countries.
    Mr. Mayer. Mr. Sherman, I would comment that those 
mortgages are all being underwritten predominately by the 
Federal Government through Fannie and Freddie.
    Mr. Sherman. That is true and so it is not entirely a 
factor of the private sector, but then Fannie and Freddie are 
then selling those in the capital markets, which are private, 
but then there is an implicit Federal guarantee, which is 
public and scrambling this egg would be particularly difficult. 
Whatever we do to help today's homeowners we should try to have 
the least adverse affect on tomorrow's homebuyers, and let us 
try to come up with something that raises the cost of future 
mortgages by 2 or 3 basis points and not 200 or even 25.
    The Professor Mayer said--estimated at 2 to 3 trillion 
dollars would be what would be written off if we lowered every 
home mortgage to no more than the fair market value of the 
home. My staff has done some research on this. They tell me it 
is 4 trillion dollars. We as a society cannot afford 4 trillion 
dollars. The financial sector can't do it. The Government can't 
do it. We got the $700 billion dollars to bail out the 
financial sector in a bill that was discussed on the floor 
today and passed last October. Last thing I want to see is $4--
7 trillion dollars.
    My hope is that there would be only a slight increase or 
perhaps a negligible increase in future home mortgage cost if 
we convince the private sector that what we are doing today is 
a one time response to a 100-year event.
    That we have done--that we have taken the actions to make 
sure that it is not just a 100-year event, it is a never-to-be-
repeated event because future interest rates will not reflect--
what happened to mortgages today will be based on expectations 
of what will happen in the bankruptcy courts 20 years from now. 
And so I hope that the legislation we pass is temporary and, we 
will rely on the Financial Services Committee to make sure that 
the--Ms. Waters chairs the relevant Subcommittee on Financial 
Services--to make sure that we don't see this happening again.
    So we could limit it to mortgages during a certain time. We 
could limit it to certain types of loans--the subprime loans, 
the teaser rate loans. We face a particular problem with regard 
to the stated income loans where first I got to dis' the bond 
rating agencies because if anyone caused today's crisis it is 
those who gave triple A to Alt-A.
    But with the teaser--with the state of income loans there 
are many people perhaps persuaded by a mortgage broker or 
mortgage officer of some sort who signed papers claiming they 
make a lot more money than they did and whether we provide them 
with the same relief--usually in bankruptcy courts you don't 
get relief if you lied on the loan application. Here you have 
people who may have lied--may have said ``Look, this is what 
you have got to do, everybody is doing it.'' And I think that 
is an issue we have to look at carefully.
    As to the servicing contracts, Professor Mayer, I think you 
make a very strong case. We have got to rewrite those contracts 
in this Committee. We got to tell the servicers do what is 
smart, which also by the way happens to be what is in the 
interest of communities and what is in the interest of 
homeowners. We have got to give these servicers the right to 
renegotiate where it is in the interest to do so--it is in the 
interest of their own beneficiaries to do so, and we have to at 
least fully insulate them from any lawsuit from anyone of the 
many possible owners of that mortgage. Oh, but you should have 
done it differently.
    So I hope that this Committee and the Financial Services 
Committee will give servicers the right and the mandate to do 
what is in the interest of everyone concerned. With that, I 
think the problem we are going to have with this bill is you 
got $4 trillion dollars, that mortgages are underwater, and we 
as a society are not going to provide $4 trillion dollars of 
relief. We have to ration that relief to those who really need 
it.
    The first thing we ought to do is provide appreciation--
goes either to the U.S. government or lender depending on who 
is suffering from this write down because first--you know 
taxpayers deserve to get something, but second if you are--I 
have got people in my district--last I know the first question 
was why should I pay my mortgage.
    And I would like to be able to answer because you don't 
want to give the Government 100 percent of the profit that you 
still hope to get when you sell that home 10 or 20 years from 
now so that those people who aren't getting relief don't feel 
like suckers. And I hope that we limit the mortgage relief to 
mortgages at a particular time and of a particular type.
    I think I have gone over my time and I thank you for your 
indulgence, Mr. Chairman.
    Mr. Conyers. Dan Maffei?
    Mr. Maffei. Yes. Thank you, Mr. Chairman. I want to pick up 
a little bit on what Mr. Sherman was saying about--by actually 
asking a specific question about whether these contracts--
restricted contracts--could be at least addressed by this 
Congress. In the Citi Group compromise and that was a few weeks 
ago--that would require the homeowner to certify that he or she 
tried to contact the mortgage owner or servicer requesting a 
modification before filing bankruptcy.
    I am concerned that the servicers of these mortgages 
reportedly are constrained from reaching an agreement with 
homeowners on an appropriate loan modification because they 
necessarily had the court authority to do so--to modify these 
mortgages under existing legal documents. So this would end up 
driving more homeowners into bankruptcy when an agreement 
between the mortgage company and the servicers would have 
otherwise been reached.
    Yesterday, we passed in the house the ``Top Reform and 
Accountability Act of 2009'' sponsored by Chairman Barney 
Frank. I, too, serve also on the Financial Services Committee. 
In searching through our files, that bell would provide a safe 
harbor to servicers who work with the struggling homeowners to 
agree to a reasonable modification.
    So it seems to me that if such a provision law is 
considered part of these bills--the ultimate goal of the bills 
would encourage reasonable modification so that people can stay 
in their homes would be met. So I do want to ask the panel 
just--and I will have a follow-up question if--depending on our 
time left, but if this legislation is included--does this bill 
include a provision like this section 205? Would there be more 
of these modifications before we even need to do bankruptcy?
    Mr. Conyers. I guess I will start. We will just start on 
the left. Yes.
    Mr. Levitin. I think we will see some more modifications. I 
would not expect to see a sea of change. It is important to 
understand that there are problems that are not just 
contractual for servicers restricted in what they can do, and 
it is not just that they don't have the proper incentives to do 
it. It is also that the business model just is not--they are 
not in the loan modification business.
    Mortgage servicers are in a transaction processing 
business. Their basic business is they collect--they send out 
bills, they collect payments, they remit them to the trust. 
This is a highly automated business. It involves no discretion. 
It involves very, very little manpower.
    Trying to do loan workouts involves tremendous manpower, 
involves a lot of discretion, and it actually involves a fair 
amount of experience. We don't have the people out there with 
the experience--we don't have that labor force out there.
    It takes about a year to train someone to really be good at 
this, and unfortunately, they--when you have people working in 
these call centers doing loan modifications, there is an 
amazing burnout rate.
    This is kind of--this is sort of like debt collection work. 
There is something like a 100 percent burnout rate every year 
on these people. We just don't have the staffing to do this, 
even if we get rid of the contractual problems, and even if we 
try and change the incentives, as Professor Mayer suggests.
    Mr. Maffei. Mr. Certner, do you have a----
    Mr. Certner. I think you need the--essentially to hammer 
the bankruptcy provisions to give people an area for relief. 
And I think by having these bankruptcy provisions in place--
will also give a greater incentive for these loans to be worked 
out in advance of bankruptcy.
    Mr. Maffei. You know, I am not necessarily saying that I 
don't--disagree with that. What I am saying is is that--is 
there a chance that we--that even with--that we could prevent 
bankruptcies even with this legislation if we had this sort of 
safe harbor provision?
    Okay, yes, Professor Mayer?
    Mr. Mayer. Yes. I think that the section 205, which I think 
came from part of this proposal at one point, is--you know, is 
a very valuable step. Unfortunately, I think it is not enough.
    I agree with Professor Levitin that servicers--just giving 
them legal protection is necessary but is not sufficient to 
solve the problem. I disagree that incentives are an issue, but 
I think it is really clear--a couple other things.
    One of them is that loan modification just doesn't pay for 
a servicer to do it. So even if you get indemnity, you are 
going to spend upwards of $750 to $1,000 or more to modify a 
loan, and you just don't get paid to do it.
    If you put the safe harbor provision into this law, 
unfortunately what you get is servicers who will say, ``I 
haven't got enough money. My business model doesn't allow me to 
do this.'' What they will choose is just let the trustees 
handle it, so essentially all loan modification will go into 
bankruptcy.
    That is the financial incentive the servicers have, because 
their pooling and servicing agreements tell them that they can 
get reimbursed within judicial hearings. I am not--may not be 
legally saying this right. They can be reimbursed for the fees 
inside a judicial process. They cannot be reimbursed for the 
fees outside a judicial process.
    So what we do by doing that, without some additional piece 
of sort of payments to servicers to modify outside, all their 
incentives are still going to be to do it inside the bankruptcy 
process.
    If we want good modifications, we have to change what the 
servicers are doing, and I think if you offer somebody the 
payment--in my proposal, it would be as much as $2,500--if you 
keep a loan going for 3 years--I may be a little bit, you know, 
optimistic, but I think if you take a for-profit person, there 
are businesses out there who will do this for much less than 
that who you can contract out and do the servicing.
    I think we will very quickly see people like the idea of 
collecting that money. A financial incentive is just crucial to 
getting the servicers to do this out of bankruptcy. It is not 
a--205--the provision is wonderful, but we still have to change 
the economics of what we are doing if we don't want to see many 
millions of bankruptcy filings.
    Mr. Maffei. Okay, Mr. Mason. I am a freshman, so I don't 
want to go over time too much.
    Mr. Mason. Yes. Just briefly, I would be very leery of 
increasing incentives to servicing groups. I just talked with a 
mortgage counselor in southwest Detroit, and she said the most 
recent thing is that the servicing groups are outsourcing their 
modification work and paying them $800, which they are then 
charging back to the borrower.
    Now, if you are going to create an incentive where they are 
going to pay them $2,500, I ask you, is that also then going to 
end up back on the borrower, added to the mortgage and 
increasing the whole cost of the transaction?
    It seems to me the bankruptcy modification process is 
really simple. It cuts through the stuff. It cuts through 
lender liability. It gives them insulation because the loans 
are modified involuntarily.
    It can deal with second mortgages, which none of these 
proposals have really addressed, but bankruptcy can do. And it 
seems to me it is a much cleaner and efficient method than 
trying to create these other incentives, which at this moment 
we know don't work.
    Mr. Maffei. Well, would you have a problem with the safe 
harbor that Section 205--Mr. Mason?
    Mr. Mason. I really don't have an opinion on that.
    Mr. Maffei. Okay. Well, thank you very much.
    You know, Mr. Chairman, looking at this, I think obviously, 
I would like to see the TARP Reform and Accountability Act 
become law. But at this point, it is a little unclear what the 
Senate's going to do with that.
    And I would urge the Committee to--the one thing I did get 
from all the panelists, I think, is that it wouldn't harm--you 
know, maybe it wouldn't solve the problem, maybe it is--for 
some, it is not enough, for others, it is--it, you know, 
doesn't maybe solve the problem totally.
    But I would urge the Committee to look at that in the 
markup to include a similar provision in our legislation. Thank 
you very much.
    Mr. Conyers. Thank you.
    To the witnesses and all of the Members of the Committee, 
we are going to leave the record open because many of you have 
additional submissions you would like to have added into the 
record.
    We thank you so much for your time.
    The Committee stands adjourned.
    [Whereupon, at 5:36 p.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

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







                                 
