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



 
 HOME FORECLOSURES: WILL VOLUNTARY MORTGAGE MODIFICATION HELP FAMILIES 
                       SAVE THEIR HOMES? (PART I)

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



                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 9, 2009

                               __________

                           Serial No. 111-53

                               __________

         Printed for the use of the Committee on the Judiciary


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



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            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
MIKE QUIGLEY, Illinois               JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
BRAD SHERMAN, California             GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
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

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

           Subcommittee on Commercial and Administrative Law

                    STEVE COHEN, Tennessee, Chairman

WILLIAM D. DELAHUNT, Massachusetts   TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina       JIM JORDAN, Ohio
BRAD SHERMAN, California             HOWARD COBLE, North Carolina
DANIEL MAFFEI, New York              DARRELL E. ISSA, California
ZOE LOFGREN, California              J. RANDY FORBES, Virginia
HENRY C. ``HANK'' JOHNSON, Jr.,      STEVE KING, Iowa
  Georgia
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel


                            C O N T E N T S

                              ----------                              

                              JULY 9, 2009

                                                                   Page

                           OPENING STATEMENTS

The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Chairman, Subcommittee on Commercial 
  and Administrative Law.........................................     1
The Honorable Trent Franks, a Representative in Congress from the 
  State of Arizona, and Ranking Member, Subcommittee on 
  Commercial and Administrative Law..............................     2
The Honorable William D. Delahunt, a Representative in Congress 
  from the State of Massachusetts, and Member, Subcommittee on 
  Commercial and Administrative Law..............................     3
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     4
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     5

                               WITNESSES

Mr. Alan M. White, Assistant Professor of Law, Valparaiso 
  University School of Law, Valparaiso, IN
  Oral Testimony.................................................     7
  Prepared Statement.............................................    10
Mr. James H. Carr, Chief Operating Officer, National Community 
  Reinvestment Coalition, Washington, DC
  Oral Testimony.................................................    14
  Prepared Statement.............................................    16
Mr. Mark A. Calabria, Ph.D., Director of Financial Regulation 
  Studies, CATO Institute, Washington, DC
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Mr. Irwin Trauss, Manager, Attorney for the Consumer Housing 
  Unit, Philadelphia Legal Assistance, Philadelphia, PA
  Oral Testimony.................................................    26
  Prepared Statement.............................................    29

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................    49
Response to Post-Hearing Questions from Alan M. White, Assistant 
  Professor of Law, Valparaiso University School of Law, 
  Valparaiso, IN.................................................    51
Response to Post-Hearing Questions from James H. Carr, Chief 
  Operating Officer, National Community Reinvestment Coalition, 
  Washington, DC.................................................    54
Response to Post-Hearing Questions from Irwin Trauss, Manager, 
  Attorney for the Consumer Housing Unit, Philadelphia Legal 
  Assistance, Philadelphia, PA...................................    62


 HOME FORECLOSURES: WILL VOLUNTARY MORTGAGE MODIFICATION HELP FAMILIES 
                       SAVE THEIR HOMES? (PART I)

                              ----------                              


                         THURSDAY, JULY 9, 2009

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

    The Subcommittee met, pursuant to notice, at 1:06 p.m., in 
room 2237, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Lofgren, and Franks.
    Staff Present: James Park, Majority Counsel; Daniel Flores, 
Minority Counsel; and Adam Russell, Majority Professional Staff 
Member.
    Mr. Cohen. This hearing of the Committee on the Judiciary, 
the Subcommittee on Commercial and Administrative Law, will now 
come to order.
    Without objection, the Chair will be authorized to prepare 
a recess to the hearing. I will now recognize myself for a 
short statement.
    Today's hearing gives us an opportunity to revisit the 
roots of the mortgage foreclosure crisis and its continuing 
effects on our economy. We will examine the effectiveness of 
government initiatives, principally the Treasury Department's 
Home Affordable Modification Program, in addressing that 
crisis.
    This Subcommittee and the full Judiciary Committee have 
been examining the foreclosure crisis since 2007, holding four 
hearings on the issue and two markups of legislation to address 
this crisis. The mortgage foreclosure crisis triggered a 
broader economic crisis that the Nation finds itself in today. 
Unfortunately, home foreclosures continue to rise precipitously 
nationwide, notwithstanding the efforts by the Congress and the 
previous Administration and this Administration to stem that 
tide of foreclosures.
    For me, the foreclosure crisis hits home almost literally. 
In a survey of the top 100 metro areas nationwide, my hometown 
of Memphis, Tennessee is ranked 18th in the number of 
foreclosures, according to data collected by Realtytrac.com. In 
a similar comparison of States, the State of Tennessee, my home 
State, ranked 12th in the number of foreclosures. The extent of 
the foreclosure crisis is such that all socioeconomic classes 
are affected by growing foreclosure numbers.
    So far, the government's efforts at helping families avoid 
losing their homes appear not to be working effectively. Some 
of my colleagues and I suspect this is because the government's 
efforts have focused almost exclusively on the voluntary 
modification of the mortgage terms for distressed borrowers. 
The evidence tends to suggest that encouraging voluntary 
modifications alone is, at best, minimally effective in helping 
financially struggling borrowers stay in their homes.
    I recognize that the current Treasury Department program is 
still relatively new, having been instituted only in March. 
Therefore, we have to reserve final judgment on its 
effectiveness. Nonetheless, media reports suggest that this 
current effort may need to be enhanced.
    Earlier this year in the 111th Congress, I cosponsored and 
helped champion Chairman Conyers' bill, H.R. 1106, the Helping 
Families Save Their Homes Act of 2009, which, among other 
things, would have given authority to bankruptcy judges to 
modify debtors' mortgage terms in bankruptcies, including a 
reduction of the mortgage principal amount. In my view, this 
provision would have substantially and effectively reduced the 
number of foreclosures. Unfortunately, this provision was never 
signed into law. Adopting this provision would help strengthen 
any program and would encourage voluntary mortgage 
modifications by loan servicers.
    I thank the witnesses for appearing today, and I look 
forward to their testimony.
    I now recognize my colleague, Mr. Franks, the distinguished 
Ranking Member of the Subcommittee, for his opening remarks.
    Mr. Franks. Well, thank you, Mr. Chairman.
    Mr. Chairman, today, we revisit the important question of 
mortgage foreclosures. Now, probably very few Members know 
better than I do how important this question is to individuals 
in congressional districts across this country, especially 
those that have had high foreclosure rates, as mine has.
    I have to say, however, that I am puzzled by today's 
hearing. The only foreclosure-related measure I know of that is 
within this Subcommittee's jurisdiction is the mortgage 
cramdown legislation we considered earlier this year. That 
proposal was deeply defective. It promised to help virtually no 
one while inflicting unnecessary damage on the home lending 
market and the rule of contract. It was precisely the opposite 
of what we needed to consider. It therefore died a quick and 
deserved death in the Senate. Any attempt to revive it now is a 
pointless distraction from our need to arrive at a genuine 
solution to our constituents' problems.
    But that, Mr. Chairman, is not the only thing that puzzles 
me, troubles me or disturbs me--I do not know which is the best 
term--about today's hearing. I need only to consider the title 
of today's hearing to be concerned, ``Will Voluntary Mortgage 
Modification Help Families Save Their Homes?'' The implications 
of that topic, or that question, cannot really be missed.
    Someone thinks that voluntary modifications will not help 
families stay in their homes. Someone, whether by cramdown or 
otherwise, wants government to mandate mortgage modifications 
to keep families in their homes, and someone must want 
government to inflict that financial sacrifice on lenders and 
not on borrowers. Why? No one mandated borrowers to enter into 
mortgage contracts. The question has to be asked if anyone is 
to be held accountable in America anymore for entering into a 
contract.
    Why are we still trying to get out of the historic credit 
crisis in this country?
    The last I heard, it was still a problem. Confiscating 
contract rights of lenders will freeze credit. It will not free 
it up. If neither borrowers nor lenders are voluntarily 
modifying their contracts, why on Earth should the government 
be forcing them do so?
    Is the era of freedom of contract over in this country? I 
hope it is not. In fact, under both HOPE NOW and the Obama 
administration's voluntary mortgage modification programs, 
freedom of contract is still at work. Many lenders and 
homeowners are voluntarily modifying their mortgages.
    What these programs need is not to be replaced by a 
government program that is mandating modifications. What they 
need is more time to work, Mr. Chairman. The Obama 
administration program is barely a few months old. It has just 
been modified. There has not been enough time for it to produce 
results allowing us to even judge it one way or the other. 
Congress dedicated $75 billion to the Obama administration 
program earlier this year, and I wonder if my colleagues across 
the aisle have already concluded that the money was ill-spent, 
as was the $787 billion they spent in the stimulus bill. 
Speaking, Mr. Chairman, of the stimulus bill, it takes me to my 
last point.
    Evidence shows that an overwhelming number of foreclosures 
we face are due to unemployment and falling home values. How 
many of these foreclosures could have been avoided completely 
if this Congress had just passed a responsible and effective 
stimulus bill? How many real jobs would we have ``saved or 
created''? How many individuals would have been better able to 
bid on homes in the housing market, helping to stabilize 
falling home values? How much good could we truly have done?
    Mr. Chairman, this Congress has already committed too many 
grievous and profoundly dangerous economic mistakes in the long 
run in this term alone. Let us not add fuel to that unfortunate 
fire by reconsidering mortgage cramdown, proposing government-
mandated modifications, or otherwise spending a single minute 
on anything other than considering and passing a genuine job-
producing, growth-creating piece of legislation.
    With that, Mr. Chairman, I appreciate your indulgence, and 
I yield back.
    Mr. Cohen. I thank the gentleman for his statement.
    I will now recognize Members on this side if they would 
like to make opening statements.
    Would the distinguished Vice Chair and the former great 
prosecutor and current great Congressman like to make a 
statement?
    Mr. Delahunt. Do you have any more adjectives?
    Mr. Cohen. Dashing. Handsome.
    Mr. Delahunt. I can stay here all day if you want to just 
keep going.
    Mr. Cohen. No more.
    Mr. Franks. Aging.
    Mr. Cohen. Mr. Franks, the ``aging'' part will not be 
mentioned.
    Mr. Franks. I am sorry.
    Mr. Delahunt. The problem is I had premature white hair, 
but the real problem is that my face is now catching up with my 
hair.
    You know, I will be very brief. I heard the Ranking Member 
speak of the sanctity of contract. I would just, you know, make 
a point that bankruptcy, an opportunity to start afresh, has 
been a concept that has been embraced in American jurisprudence 
for years, as long as the sanctity of contract. So let's not 
pretend that this idea or the concept of cramdown is breaking 
new ground. That is simply inaccurate. It is inaccurate. We 
have crammed down and have provided benefits for those who own 
boats and cars and rental property, so the idea of the cramming 
down principal for people who are about to lose their homes is 
not Earth-shattering. It is not an aberration of American 
jurisprudence by any stretch of the imagination.
    My friend from Arizona then goes on to talk about, you 
know, what this Administration has promised for 5 months. Let 
me respond with a partisan comment. What we have got on our 
plate is the product of 8 years of economic policies that were 
formulated by the previous Administration, along with the 
Republican Congress that held the majority on both sides for 
some 6 years.
    With that, I yield back.
    Mr. Cohen. Thank you, sir.
    Does the distinguished Ranking Member, Mr. Smith, desire to 
make an opening statement?
    Mr. Smith. I do, Mr. Chairman.
    Mr. Cohen. And I should say some nice things about you to 
equal those things I said about the Vice Chairman, but we will 
take judicial notice.
    Mr. Smith. You know, I would not mind hearing those 
adjectives repeated, if you wanted to go that far, but if not--
--
    Mr. Cohen. I will incorporate by reference.
    Mr. Smith. Okay. Thank you, Mr. Chairman.
    As we again consider mortgage foreclosures and mortgage 
modification programs, we should remember two fundamental 
principles.
    First, we in Congress should not take actions that 
undermine personal accountability. In recent years, an unusual 
number of people took on mortgages they could not afford. The 
vast majority of Americans, however, did not. They took on 
loans for which they assumed responsibility, and they continue 
to pay their mortgages on time. I continue to believe that 
Americans do not want so-called ``solutions'' that absolve 
borrowers of personal responsibility.
    Second, we should aim to supplement, not threaten, the loan 
modification programs that lenders and the government are 
implementing. The mortgage bankruptcy legislation we considered 
earlier this year failed to honor both of these principles as 
well as a host of others. As a result, it rightly met its 
demise in the Senate. By all appearances, what lies most behind 
foreclosure rates today, July 2009, are two basic facts:
    First, unemployment is spiraling upward. Second, housing 
prices and the housing market have not stabilized. Rising 
unemployment is due to the failure to adopt economic policies 
that will genuinely stimulate the economy.
    When Congress considered the stimulus bill, Republicans 
proposed an alternative that would have put money into the 
hands of individuals and small businesses. It would have 
promoted real job growth. It would have avoided thousands of 
the unemployment-related foreclosures we are now witnessing.
    The stimulus bill did not give us unemployment rates below 
8 percent as President Obama promised. On the contrary, 
unemployment is approaching 10 percent, and it may rise higher 
still. As a result, we have a whole new wave of unemployment-
related foreclosures. Nothing we can do to revise the 
Bankruptcy Code will help an unemployed person pay off a 
mortgage. Only real jobs and economic growth will do that.
    What about stabilizing home prices in the housing market? 
The Responsible Homeowners Act of 2009, introduced this April, 
would honor personal responsibility in the mortgage market 
while providing home purchase incentives that can actually help 
to stabilize that market.
    The already rejected mortgage bankruptcy ideas would 
destabilize the housing market and housing prices by tightening 
mortgage credit. How do we know that? Because that kind of 
destabilization has happened before. When chapter 12 of the 
Bankruptcy Code was modified to allow cramdowns for family 
farms, interest rates for farm mortgages went up. Rising 
mortgage interest rates under the fundamental laws of economics 
can mean only one thing: fewer buyers able to bid on homes, 
coupled with our continuing excess housing inventory that is 
guaranteed to produce new declines in home prices.
    Under normal conditions, a decline in housing prices could 
stimulate housing sales, but with the continued increase in 
unemployment rates and the sputtering economy, we would not see 
any such increase today. Furthermore, additional declines in 
home prices are likely to push more mortgages under water. That 
will trigger still more foreclosures, deepening the problem, 
not solving it. Our housing markets are beginning to show signs 
of recovery, so we should not now--not ever--enact legislation 
that will be a drag on a housing recovery.
    Thank you, Mr. Chairman. I yield back.
    Mr. Cohen. I thank the Ranking Member of the full 
Committee.
    I now recognize the Chair of the Immigration Subcommittee 
and another cosponsor and true champion of the Helping Families 
Save Their Homes Act of 2009, Ms. Lofgren of California.
    Ms. Lofgren. Thank you, Mr. Chairman. Thank you for 
convening a hearing on this crucial issue because we are in a 
continuing crisis of home foreclosures in this country.
    We saw record number of foreclosures in June, nearly 
300,000 according to the figures I have seen, and it is very 
clear to me that the voluntary modifications are not working. 
Several million homes have been foreclosed on. Several hundred 
thousand new homes are going into foreclosure every month, and 
the total number of voluntary modifications has been very few. 
We will get the exact numbers, but it looks like a few hundred 
thousand at most, in the face of millions in need.
    This mismatch means real trauma for individuals, but it 
also means a disaster for the American economy, not only for 
those going into foreclosure but for their neighbors. As we 
know, for every home in foreclosure, the average decline in 
value for the innocent bystanders, the neighbors, is about 7 
percent. If you go into some towns in California and you see 
the amount of foreclosures, you can see that the value of homes 
is just collapsing, which is feeding into the spiraling down of 
our American economy. The voluntary program is not working.
    Today, in the San Jose Mercury News, there is a headline: 
``Loan Pleas Swamp Banks.'' If you read the article, it talks 
about individuals who have tried in vain over a period of 
months to get information for voluntary modification with their 
banks. I will just mention one individual, my constituent 
Angelo Gallo, 46, of San Jose, who has been working since 
January with his bank. He has sent, numerous times, information 
which is always lost by his bank. Now he has been notified here 
in July that they are going to go into foreclosure except, 
oops, they are eligible for the Obama plan modification. This 
is a disaster.
    I want to note with great disappointment that the Treasury 
Department was too busy to come to this hearing today. I think 
it is shameful that the Treasury Department is too busy to deal 
with the Congress with regard to the collapse of the housing 
market in America. We passed a very good bill in the House that 
allowed for the Obama plan to work, but failing that, made sure 
that the bankruptcy laws are available for those who are 
eligible to readjust the principal or interest of their 
mortgages.
    I note that this is not a new concept. Article I, section 8 
of the Constitution, which has been with us since 1789, 
indicates that the Congress should establish a uniform law on 
the subject of bankruptcies throughout the United States.
    Certainly, as my colleague Mr. Delahunt has mentioned, 
second homes and certain other properties are available for 
modification. We are also, I think, led by the decline in 
individual home mortgages and are about to see an absolute 
avalanche of commercial real estate bankruptcies. Those will 
all be eligible for modification in the Bankruptcy Court, 
unlike the hapless poor individual homeowner.
    I am just tremendously frustrated that we have provided 
funding for banks around the country, and yet they are stiffing 
the homeowners of the United States. The Congress has failed to 
act. The Administration has failed to act. I think it is up to 
us to step forward once again and not to give up on this, Mr. 
Chairman, because I think it is not yet too late to enact this 
reform and to stem this collapse of the housing market in the 
United States.
    I yield back.
    Mr. Cohen. Thank you. I thank the gentlewoman for her 
statement.
    We don't have any other Members here, and I am now pleased 
to introduce our first witness. I want to thank all of the 
witnesses for participating in today's hearing. Without 
objection, your written statements will be placed into the 
record, and we would ask you limit your oral remarks to 5 
minutes. There is a system we have here that shows a green 
light, which shows you have got between 1 and 5 minutes left. 
At the 4-minute time, it turns yellow, or the yellow light 
comes up, and the green light goes off. Then after that minute, 
the red light comes on, and at that time, you should have 
finished or should be prepared to quickly finish your remarks. 
After each witness has presented his or her testimony--``his'' 
in this case--Subcommittee Members will be permitted to ask 
questions, again, subject to the 5-minute rule.
    Our first witness is Alan White, a professor at the 
Valparaiso University School of Law, the former home of Gene 
Bartow. He has been there since 2007, teaching consumer law, 
commercial law and contracts. He is a nationally recognized 
expert on the credit regulation of the mortgage market, and is 
quoted frequently in the national media, including in The Wall 
Street Journal, The Washington Post and The New York Times, in 
connection with his research on this particular issue.
    He has published a number of research papers and articles 
on housing, credit and consumer law issues, and has testified 
before Congress and other agencies on the foreclosure crisis, 
bankruptcy reform and predatory mortgage lending.
    Mr. Cohen. Thank you, Professor White. Will you begin your 
testimony?

    TESTIMONY OF ALAN M. WHITE, ASSISTANT PROFESSOR OF LAW, 
      VALPARAISO UNIVERSITY SCHOOL OF LAW, VALPARAISO, IN

    Mr. White. Thank you.
    Mr. Chairman and Members of the Committee, thank you for 
inviting me to testify about this very important issue. I have 
indeed been following, specifically, mortgage modification and 
foreclosure activity very closely for the last 24 months, and I 
have tried as much as possible to gather the available facts 
and data about what is actually happening in the real world in 
the markets, and it is based on that information and that data 
that I want to offer my remarks today.
    One comment I would like to make about information is that 
we need more of it. I have said this before, but the Treasury 
Department now has access to very detailed information from 
mortgage companies that will tell us how many homes are being 
foreclosed every month, how many mortgages are being 
renegotiated and under what terms. It is really vital that that 
information be made public and be in as much detail and in as 
timely a fashion as possible so that all of the questions that 
are going to be considered today can be evaluated with accurate 
information. The information I rely on is mostly mortgage 
information reported to investors in mortgage-backed 
securities. It is somewhat helpful, but it does not cover the 
entire market. It does tell us, I think, a few important things 
about what is going on out there.
    First, clearly, we have a massive failure of contracts. And 
I certainly would associate myself with a comment that 
adherence to contracts is a very important principle, and I 
teach contract law. We have, in particular, subprime mortgages 
that are failing at a rate of greater than 50 percent, so we 
are looking at a situation where lenders and servicers need to 
administer contracts that are going to default or that are 
already in default. The question is what to do with those 
contracts.
    There are now 2.5 million American homeowners with 
mortgages in foreclosure. There are considerably more than that 
who are delinquent. Every month, another quarter of a million 
is added to that number, so any program which modifies 10,000 
or 20,000 or 50,000 mortgages is only making a very small dent 
in a very large problem.
    I suppose the good news is, currently, about 125,000 
mortgages are being modified every month. That is prior to the 
implementation of the Administration's new program. What is 
disappointing about the Home Affordable program is that the 
announced goals in terms of the number of renegotiations are 
extremely modest, and they are talking about numbers of 
modifications that would not make any significant increase, 
that probably would be less than what the industry has been 
doing voluntarily up until now.
    In addition to the fact that modifications are consistently 
lagging behind foreclosures, the number of foreclosures is 
still increasing. We have not reached the peak of the crisis 
and started to taper off, and that is very troubling.
    The third fact that is very troubling is the levels of 
losses that are being inflicted on investors, banks and 
ultimately, perhaps, on the taxpayers. Each month when a home 
is foreclosed and sold, the investor is losing more money than 
the last month. Of the June data that I have, the loss 
severities are running at about 65 percent, meaning that if a 
$100,000 mortgage is foreclosed, the investor is recovering 
$35,000. That is not a very good return. It also suggests that 
if there is some way to renegotiate the loan and successfully 
get a borrower to pay 70 or 80 percent rather than 35 percent, 
everyone would be better off.
    Now, I want to address briefly a paper that was just 
released earlier this week, written by some economists at the 
Boston Federal Reserve, which kind of takes issue with the 
simple proposition that if we could reduce and renegotiate 
mortgages to a more affordable level, everybody would be better 
off, not only the homeowners and their communities but also the 
investors.
    In this paper--and I have had some correspondence with its 
author--it contends that, really, servicers are acting quite 
rationally because, in fact, they make more money in 
foreclosing than in renegotiating loans. The difficulty with 
this paper--and I make some reference to it in my written 
testimony--is that it makes a bunch of assumptions which, I 
think, are just not based on what is happening out in the real 
world market today.
    They assume, for example, that large numbers of homeowners 
who are behind on their mortgages can get caught up and pay 
their loans in full. So, of course, the investors will lose 
money if we allow bankruptcy courts to voluntarily reduce their 
debts by 10 or 20 percent, because if we just left everything 
alone, they would have paid 100 percent. I looked at the data 
that I am getting from the investor reports. The cure rates for 
defaulted mortgages are less than 10 percent. The chances that 
somebody who is behind now is going to be able to refinance or 
to catch up are slim to none.
    They also talk about the fact that many modifications fail. 
We have this problem of re-defaults, and that is certainly true 
as 30 or 40 percent, maybe 50 percent, of modified loans have 
not succeeded. I think that is partly because the modifications 
have not been very well designed.
    I think it is also important to stress that even with a 50 
percent failure rate, you can develop numbers to show that if 
you succeed with half of your modifications, you are saving 
investors money as well as obviously saving half of the homes 
that otherwise would have been foreclosed.
    So I will stop there since my time is up. I will be happy 
to answer any questions you may have. Thank you.
    Mr. Cohen. Thank you, Professor White. I thank you for your 
testimony and for being cognizant of the lighting system and of 
the time requirements.
    [The prepared statement of Mr. White follows:]
                  Prepared Statement of Alan M. White








                               __________

    Mr. Cohen. Our second witness is Mr. Jim Carr. He is Chief 
Operating Officer for the National Community Reinvestment 
Coalition. He is an associate of 600 local development 
organizations across the Nation that are dedicated to improving 
the flow of capital to communities and to promoting economic 
mobility. He is a visiting professor at Columbia University. 
Prior to his appointment, he served as Senior Vice President 
for Financial Innovation, Planning and Research for the Fannie 
Mae Foundation, and he was Vice President of Housing Research 
at Fannie Mae. He has held posts as Assistant Director for Tax 
Policy for the U.S. Senate Budget Committee and as research 
associate at the Center for Urban Policy research at Rutgers.
    Mr. Carr, you may begin your testimony.

 TESTIMONY OF JAMES H. CARR, CHIEF OPERATING OFFICER, NATIONAL 
        COMMUNITY REINVESTMENT COALITION, WASHINGTON, DC

    Mr. Carr. Good afternoon.
    [Technical difficulties.]
    Mr. Cohen. Who is our expert on this? There you go. We have 
had some bad luck with Rutgers in this hearing and on this 
Committee. Go ahead.
    Mr. Carr. Okay. That seems to have done it. Thank you very 
much.
    Chairman Cohen and other distinguished Members of the 
Committee, on behalf of the National Community Reinvestment 
Coalition, we are honored to have an opportunity to share our 
thoughts with you today. I would like to say that NCRC is also 
pleased to be a member of a new coalition of more than 200 
consumer, civic, labor, and civil rights organizations, called 
Americans for Financial Reform, which is working to cultivate 
integrity and accountability within the financial system.
    Members of the Committee, the U.S. economy is mired in the 
worst economic crisis in more than half a century, and while 
few would conclude the current economic environment is 
comparable to the Great Depression, we could certainly conclude 
it is the Great Recession. Although we have suffered much 
already, the worst remains ahead of us.
    Unlike the foreclosures of 2007 and 2008 that were driven 
by the toxic and unaffordable mortgage products, the current 
wave of foreclosures is largely the result of unemployment and/
or loss of income. The more than 3 million jobs that have been 
lost since the start of this year, for example, translate into 
possibly 1.2 million more foreclosures. In fact, we are now 
experiencing a self-perpetuating cycle whereby foreclosures 
create a drag on the economy that leads to more foreclosures 
and to further economic distress. The bottom line of this is 
that it seems difficult to understand how we will enter a 
meaningful economic recovery as long as the foreclosure crisis 
continues to grow.
    It is important to recognize that this is not an equal 
opportunity recession. Although the national unemployment rate 
is an uncomfortable 9\1/2\ percent as of June, that rate for 
African Americans already exceeds 15 percent, and for Latinos 
it is approaching 13 percent. This is compared to a rate of 
just under 9 percent for non-Hispanic White households. Because 
African Americans and Latinos have comparatively few savings, 
they are poorly positioned to survive a lengthy battle of 
unemployment. As a result, potentially millions of African 
Americans and Latinos stand the prospect of falling out of the 
middle class by the time the economy recovers. Moreover, 
African Americans and Latinos were targeted disproportionately 
for deceptive loan products. As a result, Blacks and Latinos 
are overrepresented in the foreclosure statistics. African 
Americans, for example, have experienced a decline of 3 
percentage points in home ownership rate since the crisis 
began.
    In response to the magnitude and complexity of the current 
crisis, a threefold response is necessary. First, we need to 
stem the tide of foreclosures. The new Home Affordable 
Modification Program is the most comprehensive plan that has 
been put forward to date, but the program is off to a slow 
start for a variety of program design and administrative 
reasons.
    In response, the Administration has been aggressive about 
addressing the weaknesses in the program, but to date they 
estimate that 50,000 loans have been modified since the program 
was launched. This compares to an estimated 7 million 
foreclosures now predicted this year and next by Moodys.com. So 
it appears that there is a mismatch.
    What we believe is needed is a new vintage Great 
Depression-era Homeowners Loan Corporation or type of operation 
within the Federal Government which would effectively reach out 
and purchase toxic assets. This was proposed last year, and we 
believe it should have been done; but they should buy them, 
using exceptional powers of the Federal Government, at a 
discount between the current market and the face value of those 
loans. That discount would be applied to modifying the loans to 
make them long-term affordable.
    We also believe that some type of supernormal entity is 
needed because of the unique nature of the foreclosures now 
which are driven by unemployment. There is no program in place 
right now that currently can deal with homes going into 
foreclosure for which the consumer has no effective income.
    The reform of the Bankruptcy Code is something that we also 
believe is warranted. It was proposed as part of the 
President's Home Affordable Modification Program, and we 
believe it should be reintroduced and passed into law. As has 
been stated already, currently, bankruptcy courts can modify 
repayment terms on outstanding debts of luxury yachts, 
investment properties and other assets, except if it is the 
family home. We believe that there is no public purpose served 
in this treatment.
    Further, expanded bankruptcy protection could address a 
major share of loans going into foreclosure, and it could act 
as an incentive for servicers to be more responsive to the 
Federal Government's public policy goals of loan modifications.
    Second, we believe that certain communities which have 
borne disproportionate shares of the damage should actually 
receive disproportionate shares of assistance to help us out of 
this crisis. We believe that those neighborhoods that have a 
convergence of three factors--significantly high unemployment 
rates, high concentrations of foreclosures and historically 
underfunded or poorly maintained infrastructure--should receive 
priority treatment.
    Channeling dollars to individuals and communities that need 
them the most will actually, most immediately, stimulate the 
economy and will create jobs. The reason for this is that 
families who live on the edge of survival will pour those 
recovery dollars immediately back into the economy, spending it 
on groceries, medicine, clothing, child care, energy, 
transportation, and on other basic necessities.
    In conclusion, let me say that the final piece of what is 
needed is to put into place financial system reforms that make 
sure that the current crisis we are experiencing never happens 
again. That would include addressing unfair and deceptive 
lending practices, expanding laws that improve access to 
capital, such as the Community Reinvestment Act, and also 
enacting, we believe, a consumer financial protection agency 
that can more proactively address fraud, misbehavior and abuse 
before it works its way into the system.
    Thank you very much.
    Mr. Cohen. Thank you, Mr. Carr. I appreciate your testimony 
as well.
    [The prepared statement of Mr. Carr follows:]
                  Prepared Statement of James H. Carr
                              introduction
    Good afternoon Mr. Chairman and other distinguished Members of the 
Committee. My name is James H. Carr and I am the Chief Operating 
Officer for the National Community Reinvestment Coalition. On behalf of 
our coalition, I am honored to speak with you today.
    NCRC is an association of more than 600 community-based 
organizations that promotes access to basic banking services, including 
credit and savings, to create and sustain affordable housing, job 
development, and vibrant communities for America's working families. 
NCRC is also pleased to be a member of a new coalition of more than 200 
consumer, civic, labor, and civil rights organizations--Americans for 
Financial Reform--that is working to cultivate integrity and 
accountability within the US financial system.
                  the foreclosure and economic crises
    Members of the Committee, the U.S. economy is mired in the worst 
economic crisis in more than a half century. And while few would 
conclude the current economic environment is comparable to the Great 
Depression, today's economy has earned its moniker, the Great 
Recession. Although we have suffered much already, the worst remains 
ahead of us.
    The most dispiriting aspect of the current crisis is that we have 
yet to meaningfully address foreclosure crisis, the core problem that 
caused the financial system to implode and drove the economy into a 
ditch.
    The current wave of foreclosures is largely rooted in toxic 
mortgage products originated between 2007 and 2008. This wave is being 
driven by rising unemployment and reduction in workers' hours. The more 
than 3 million jobs that have been lost since the start of this year, 
for example, translate into potentially 1.2 million additional 
foreclosures.
    In fact, we are now experiencing a self-perpetuating cycle wherein 
(1) foreclosures drive down home values; (2) sinking home values erode 
bank assets and household wealth; (3) loss of wealth leads to lower 
consumer spending and less lending activity by banks; (4) this, in 
turn, leads to lower productivity; (5) decreased productivity creates 
more unemployment; and (6) more foreclosures. At this point the cycle 
is complete and self-reinforcing, as newly unemployed and under-
employed homeowners face foreclosure when they cannot make mortgage 
payments.
    The reality of this self-reinforcing and economically destructive 
cycle raises questions about the validity of many recent economic 
projections that suggest the economy is recovering. The financial 
services industry, for example, remains on life support despite recent 
positive earnings news.
    A close look at the fine print and footnotes in the positive 
earnings reports of many large financial firms, for example, reveals 
that creative accounting has replaced innovative finance as a primary 
source of profits within the banking industry. Few of the reported 
earnings are a result of lending for and investments in tangible 
products and services for the American economy.
                    not an equal opportunity crisis
    This is not an equal opportunity recession. Although the national 
unemployment rate is an uncomfortable 9.5 percent as of June, that rate 
for African Americans exceeds 15 percent, and for Latinos unemployment 
is approaching 13 percent. The unemployment rate for non-Hispanic 
whites, by comparison, remains under 9 percent.
    Because African Americans and Latinos comparatively few savings, 
they are poorly positioned to survive a lengthy bout of unemployment. 
As a result, potentially millions of African-Americans and Latino 
households could find themselves falling out of the middle class by the 
time the economy recovers.
    Moreover, African Americans and Latinos were targeted 
disproportionately for deceptive high cost loans. According to a study 
by the U.S. Department of Housing and Urban Development, subprime loans 
are five times more likely in African American communities than in 
white neighborhoods, and homeowners in high-income black areas are 
twice as likely as borrowers in lower-income white communities to have 
subprime loans.
    The result is that blacks and Latinos are over-represented in the 
foreclosure statistics. African Americans, for example, have 
experienced a full three-percentage point drop in their homeownership 
rate since the crisis began.
    Research by the National Community Reinvestment Coalition found 
that predatory lenders aimed their toxic products heavily at women of 
color. Because African-American children are more likely to reside in 
female-headed households, black children are also disproportionately 
harmed as a result of the foreclosure crisis and its attendant 
stresses.
    Finally, in a separate NCRC study (The Broken Credit System, 2004), 
we found that after controlling for risk and housing market conditions, 
the portion of subprime refinance lending increased when the number of 
residents over the age of 65 increased in a neighborhood. If a borrower 
were a person of color, female, and a senior, she was the ``perfect 
catch'' for a predatory lender.
                          fixing the problems
    In response to the magnitude and complexity of the current crisis, 
a three-fold response is essential.

1. Stem the Rising Tide of Foreclosures

    The new ``Home Affordable Modification Program'' (or HAMP) is the 
most comprehensive plan to date to address the foreclosure crisis.
    Features that make the President's plan superior to any similar 
programs to date include:

        (1)  The government shares the cost of writing down loans to be 
        affordable for borrowers;

        (2)  Loan modifications are designed to make loans affordable 
        over the long-term;

        (3)  Borrowers do not have to become delinquent in order to 
        receive assistance;

        (4)  Second liens can also be modified as part of the plan 
        (more than half subprime loans); and

        (5)  Servicers are provided financial incentives to encourage 
        their participation; and (bankruptcy protection is proposed as 
        a stick to encourage participation.

    These are key and critical program elements missing from previous 
efforts. But there remain challenges.
Challenges with the program include:
        (1)  Principal balances on loans that are severely underwater 
        are not bought down or eliminated to improve loan 
        affordability. Forbearance of principal, accompanied with 
        balloon payments due on sale of transfer of property, codifies 
        predatory or discriminatory loan features. This is a critical 
        weakness in HAMP because many loans have experienced negative 
        amortization since they were originated, because they were 
        originated at grossly inflated prices. Loans that are deeply 
        upside down are more at risk of foreclosure even if the 
        payments are made affordable.

        (2)  The program is voluntary for some institutions, and for 
        all, is administratively cumbersome, time-consuming, and 
        inconsistently administered (including failure to fully 
        appraise consumers' financial situations to ensure the 
        modifications is sustainable from borrower's financial 
        perspective; and

        (3)  Unemployment-induced foreclosures are not adequately 
        addressed. Borrowers facing a loss of income before or after a 
        modification are not fully protected and foreclosure needlessly 
        continues to be the trigger for costly evictions. This latter 
        practice of evicting borrowers who have been foreclosed upon 
        further drives down home prices for neighboring homeowners and 
        positions additional properties for foreclosure.

    Finally, the program would benefit greatly from more transparent 
data on loan modification outcomes so as to allow for a more immediate 
analysis of the program's performance and the need for possible further 
refinements.
    The Administration has thus far been aggressive about responding to 
program weaknesses and tightening guidelines to improve performance. 
But as HAMP's performance thus far bears out, the program remains far 
from meeting the foreclosure prevention needs demanded by the magnitude 
of the crisis. The best estimates to date are that 50,000 loans have 
been modified since the program was launched earlier this year. This 
compares with an estimated 7 million foreclosures predicted for this 
year and next by Moody's Economy.com.
    It is clear that a more robust response is needed.
    A ``new'' vintage Great Depression era Homeowners Loan Corporation 
(HOLC) is warranted. The new entity would more aggressively pursue loan 
modifications using exceptional powers, such as eminent domain, to 
secure toxic loan products from investors and modify as many loans as 
possible to make them affordable and sustainable. Loans would be 
purchased at a reasonable discount (between current market value and 
face value). Discounts secured through the purchase process would be 
applied to modify the loans. This process would greatly reduce the cost 
to taxpayers of loan modification.
    The new HOLC could also be useful to address unemployment-driven 
foreclosures. HOLC could take possession of properties and structure 
foreclosure moratoria based on workers' unemployment benefits. During 
that period, mortgage payments could be greatly reduced.
    Under certain circumstances, borrowers might be allowed to remain 
in their homes at no cost (for a limited time. This arrangement in many 
instances would benefit the borrower, their community and investor 
since vacant and abandoned properties harm all parties and do not 
benefit anyone. The foreclosure loss severity rate on homes financed 
with subprime loans is now approaching 65 percent.
    Reform of the bankruptcy code is also warranted. It was proposed as 
part of the President's Home Affordable Modification Program and should 
be reintroduced and passed into law.
    Currently, bankruptcy courts can modify repayment terms on the 
outstanding debt on a luxury yacht or investment property, but not the 
family home. This disparity in treatment is unfair, inequitable, and 
serves no legitimate public policy goal. Furthermore, expanded 
bankruptcy protection could address as much as 30 percent of loans 
heading to foreclosure and at no cost to the American taxpayer.

2. Rebuild Communities Harmed by the Crisis

    Certain communities have borne a disproportionate share of the 
damage and pain wrought by the foreclosure and economic crises, and 
should therefore be targeted for priority allocation of economic 
recovery funding. These acutely suffering communities are characterized 
by a convergence of three factors:

        1.  Significantly higher levels of unemployment;

        2.  Significantly greater concentrations of foreclosures; and

        3.  Historically under-funded, inferior, or poorly maintained 
        infrastructure.

    Channeling dollars to the individuals and communities that need 
them most will immediately stimulate the economy and save and create 
jobs. Families that live on the edge of survival will pour these 
recovery dollars immediately back into the economy through spending on 
groceries, medicine, clothing, child care, energy, transportation, and 
other basic necessities. Prioritizing areas hardest hit by widespread 
unemployment and mounting foreclosures would more directly help 
stabilize the housing market and steady falling home prices that 
continue to undermine the strength of US financial institutions. 
Finally, investing in areas most in need of infrastructure improvements 
would provide a needed enhancement of the quality of life in 
communities long-neglected.

3. Refocus Financial System Regulation on the Interests of Consumers

    Many blame the foreclosure crisis on a claim that financial 
institutions sought to improve homeownership among unqualified low- and 
moderate-income, and minority households. This assertion has no basis 
in fact or logic.
    According to the Federal Reserve Board, only 6 percent of high-cost 
subprime loans to low- and moderate-income households were covered by 
CRA regulation. And, the Center for Responsible Lending finds that less 
than 10 percent of subprime loans were for first-time homeownership.
    In fact, it was failure to regulate adequately the U.S. mortgage 
markets that allowed deceptive, reckless, and irresponsible lending to 
grow unchecked until eventually it overwhelmed the financial system.
    Almost every institutional actor in home mortgage finance process 
played a role. Comprehensive anti-predatory lending legislation should 
be enacted immediately. Such legislation should apply mortgage-related 
consumer protections to all of the institutional players in the 
mortgage market including banks, brokers, mortgage companies, 
appraisers, servicers, investment banks, credit rating agencies, hedge 
funds, and other financial entities.
    Expansion of the Community Reinvestment Act (CRA) is also essential 
to bringing safe and sound lending to struggling families and 
communities.
    Inasmuch as nearly 95 percent of problematic subprime loans were 
originated by non-CRA covered institutions, the time to bring more 
financial firms under the regulatory umbrella of CRA.
    Moreover, today roughly 97 percent of banks pass their CRA exams. 
Yet, more than 40 million households are only marginally connected to 
mainstream financial institutions and more than 9 million are 
completely unbanked. The time has also come to increase enforcement of 
CRA on existing covered institutions, including eliminating the 
loopholes, exceptions, and special preferences that allow banks to 
exclude major shares of their business operations from coverage.
    The CRA ratings system is also in need of refinement to provide 
more meaningful CRA grades, and improve data collection and analysis, 
and inclusion of race as an explicit factor in CRA exams are also long 
overdue.
    A final component of comprehensive financial regulatory reform is 
the establishment of a Consumer Financial Protection Agency. President 
Obama's regulator reform proposal calls for the creation of such an 
agency, and Congress should pass that into law. The imperative is clear 
for a regulatory body that puts consumers ahead of special banking 
interests. The reality of the mortgage market is that as soon as one 
predatory practice is eliminated, another takes its place.
    Today, for example, the Mortgage Asset Research Institute estimates 
that mortgage-related fraud is more prevalent now than it was at the 
height of the lending boom. The proposed Consumer Financial Protection 
Agency would have the authority to investigate and take action against 
existing and future unfair and irresponsible lending practices as they 
evolve. And it would create rules that make financially predatory 
practices harder to introduce in the markets.
                               conclusion
    In the words of Nobel Prize-winning economist Joseph Stiglitz, the 
financial system discovered there was money at the bottom of the wealth 
pyramid and it did everything it could to ensure that it did not remain 
there. Stated otherwise, the business model for many financial 
institutions was to strip consumers of their wealth rather than build 
and improve their financial security.
    Ironically, most solutions to date have focused on rewarding the 
financial firms (and their executives) that created this crisis. But in 
spite of more than $12.8 trillion of financial support in the form of 
loans, investment, and guarantees, this approach is not working because 
consumers continue to struggle in a virtual sea of deceptive mortgage 
debt and a financial system that remains unaccountable to the American 
public.
    Now is the time to shift the focus away from Wall Street and onto 
Main Street by addressing, in a broader manner, the growing foreclosure 
crisis and its contagion effects on national home prices and the 
overall economy. This includes introducing a more robust foreclosure 
mitigation program, focusing recovery dollars on the communities most 
negatively impacted by the crisis, and enacting strong consumer 
protections against deceptive and reckless lending practices.
                               __________

    Mr. Cohen. Our third witness is Mark Calabria. Dr. Calabria 
is the Director of Financial Regulation Studies at the Cato 
Institute. Before joining Cato, he spent 6 years as the senior 
professional staff member for the U.S. Senate Committee on 
Banking, Housing, and Urban Affairs. In that position, he 
handled issues relating to housing and mortgage finance, 
banking and insurance for the Ranking Member, Mr. Shelby of 
Alabama. Prior to his service on Capitol Hill, Dr. Calabria 
served as Deputy Assistant Secretary for Regulatory Affairs at 
the U.S. Department of Housing and Urban Development, and he 
held a variety of positions at Harvard's Joint Center for 
Housing Studies, at the National Association of Home Builders 
and at the National Association of Realtors. He has also been a 
research associate at the U.S. Census Bureau Center for 
Economic Studies.
    Thank you. We welcome your testimony.

  TESTIMONY OF MARK A. CALABRIA, Ph.D., DIRECTOR OF FINANCIAL 
       REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, DC

    Mr. Calabria. Thank you, Chairman.
    My testimony today will address two specific questions. The 
first is: Why have the Obama and Bush administrations' efforts 
along with those of the mortgage industry's to reduce 
foreclosures had so little impact on the overall foreclosure 
numbers?
    The second question is: Given what we know about why 
previous efforts have had such little impact, what are our 
policy options?
    The short answer to why previous Federal efforts to stem 
the current tide of foreclosures have largely failed is that 
such efforts have grossly misdiagnosed the causes of mortgage 
defaults. An implicit assumption behind HOPE NOW--FDIC's 
IndyMac model--and the Obama administration's current 
foreclosure efforts is that the current wave of foreclosures is 
almost exclusively the result of predatory lending practices 
and exploding adjustable rate mortgages where large payment 
shocks upon the rate reset cause mortgage payments to become 
unaffordable.
    The simple truth is that the vast majority of mortgage 
defaults are being driven by the same factors that have always 
driven mortgage defaults: generally, a negative equity position 
on the part of a homeowner, coupled with a life event that 
results in a substantial shock to his income, most often a job 
loss or a reduction in earnings. Until both of these 
components--negative equity and a negative income shock--are 
addressed, foreclosures will remain at highly elevated levels.
    If payment shock alone were the dominant driver of 
defaults, then we would observe most defaults occurring around 
the time of reset, specifically just after the reset. Yet this 
is not what has been observed. Of loans with reset features 
that have defaulted, the vast majority of defaults occurred 
long before the reset.
    Additionally, if payment shock were the driver of default, 
the fixed rate mortgages without any payment shocks would 
display default patterns significantly below that of adjustable 
rate mortgages. When one controls for owner equity and credit 
score, the differences in performance between these different 
mortgage products largely disappear.
    To illustrate, consider that those mortgages generally 
considered among the safest--mortgages insured by the Federal 
Housing Administration, the FHA, which are almost exclusively 
fixed rate with no prepayment penalties and substantial 
borrower protections--perform on an apples-to-apples basis as 
badly as the subprime market in terms of delinquencies.
    The important shared characteristic of FHA and most of the 
subprime market is the widespread presence of zero or very 
little equity in the mortgage at origination. The 
characteristics of zero or negative equity also explain the 
poor performance of most subprime adjustable rate mortgages. 
Many of these loans also had little or no equity upon 
origination, providing the borrower with little equity cushion 
when prices fell.
    Central to the arguments calling for greater government 
intervention in the mortgage market is that many, if not most, 
of the foreclosures being witnessed are unnecessary or 
avoidable. Generally, it is argued that investors and loan 
servicers do not face the same incentives and that, in many 
cases, it would be better for the investor if the loan were 
modified rather than taken to foreclosure, but still the 
servicer takes the loan to foreclosure.
    The principal flaw in this argument is it ignores the costs 
to the lender of modifying loans that would have continued 
paying otherwise. Ex ante, a lender has no way of separating 
the truly troubled borrowers who would default from those who 
would take advantage of the system if they knew they could get 
a modification just by calling. As long as potentially 
defaulting borrowers remain a low percentage of all borrowers, 
as they are today, it is in the interest of the investor to 
reject many modifications that might make sense ex post.
    The high level of foreclosures has left many policymakers 
understandably frustrated and searching for answers. One 
solution that has been regularly presented is to allow 
bankruptcy judges to reduce the principal balance of a mortgage 
loan to reflect the reduced value of the home, the so-called 
``cramdown.'' I believe allowing cramdowns would have adverse 
market consequences while also providing little real relief to 
borrowers.
    Given the unemployment-driven nature of most foreclosures 
and the inability of unemployed individuals to put forth a 
repayment plan under chapter 13 of the Bankruptcy Code, it 
appears that cramdowns would do nothing for those most in 
need--the unemployed.
    As proponents of cramdowns point out, vacation and 
investment properties can currently be subjected to cramdown. 
This raises the question, why aren't the significant numbers of 
foreclosures involving investment properties being resolved via 
bankruptcy rather than by the foreclosure process?
    The most likely reason is that property speculators realize 
that even a reduced mortgage value is likely to exceed the home 
value in the near future. With home prices still declining, a 
crammed-down mortgage would be underwater in a few months. The 
incentive facing most speculators is often to simply walk away 
and to let the home fall into foreclosure. This would not be a 
significant problem if investment properties did not constitute 
approximately 40 percent of current foreclosures.
    At this point, it is worth reflecting on these two points. 
Cramdowns do little or nothing to help the unemployed, and 
speculators can already pursue that route but largely choose 
not to, as it is not in their economic interest. With 
speculators making up about 40 percent of foreclosures and the 
unemployed likely making up to around 50 percent, it becomes 
apparent that, at minimum, cramdowns will do little to help at 
least 90 percent of borrowers currently in foreclosure.
    In concluding my testimony, I again wish to strongly state 
that the current foreclosure relief efforts have largely been 
unsuccessful because they have misidentified the underlying 
causes of mortgage default. It is not exploding ARMs or 
predatory lending that drives the current wave of foreclosures 
but negative equity driven by house prices declines, coupled 
with adverse income shocks, that are the main drivers of 
defaults on primary residences. Defaults on speculative 
properties continue to represent a large share of foreclosures. 
Accordingly, for any plan to be successful, it must address 
both negative equity and reductions in earnings. Cramdown fails 
on both accounts.
    I thank you for your attention and welcome your questions.
    Mr. Cohen. Thank you, sir. I appreciate it, Dr. Calabria.
    [The prepared statement of Mr. Calabria follows:]
                 Prepared Statement of Mark A. Calabria
    Chairman Conyers, Ranking Member Smith, Subcommittee Chairman 
Cohen, Ranking Member Franks, and distinguished members of the 
Subcommittee, I thank you for the invitation to appear at today's 
important hearing. I am Mark Calabria, Director of Financial Regulation 
Studies at the Cato Institute, a nonprofit, non-partisan public policy 
research institute located here in Washington. Before I begin my 
testimony, I would like to make clear that my comments are solely my 
own and do not represent any official policy positions of the Cato 
Institute. In addition, outside of my interest as a citizen and a 
taxpayer, I have no direct financial interest in the subject matter 
before the subcommittee today, nor do I represent any entities that do.
    My testimony today will address two specific questions. The first 
is: why have the Obama and Bush Administration efforts, along with 
those of the mortgage industry, to reduce foreclosures had so little 
impact on the overall foreclosure numbers?
    The second question is: given what we know about why previous 
efforts have had such little impact, what are our policy options?
    In answering both these questions, I rely on an extensive body of 
academic literature, the vast majority of which has been subjected to 
peer review, which has examined the determinates of mortgage 
delinquency and default. Foremost among this literature is a series of 
recent papers written by economists at the Federal Reserve Banks of 
Boston and Atlanta, in particular the work of Paul Willen, Christopher 
Foote and Kristopher Gerardi. My testimony owes a considerable 
intellectual debt to this research.
       why haven't previous efforts stemmed the foreclosure tide?
    The short answer to why previous federal efforts to stem the 
current tide of foreclosures have largely failed is that such efforts 
have grossly misdiagnosed the causes of mortgage defaults. An implicit 
assumption behind former Treasury Secretary Paulson's HOPE NOW, FDIC 
Chair Sheila Bair's IndyMac model, and the Obama Administration's 
current foreclosure efforts is that the current wave of foreclosures is 
almost exclusively the result of predatory lending practices and 
``exploding'' adjustable rate mortgages, where large payment shocks 
upon the rate re-set cause mortgage payment to become ``unaffordable.''
    The simple truth is that the vast majority of mortgage defaults are 
being driven by the same factors that have always driven mortgage 
defaults: generally a negative equity position on the part of the 
homeowner coupled with a life event that results in a substantial shock 
to their income, most often a job loss or reduction in earnings. Until 
both of these components, negative equity and a negative income shock 
are addressed, foreclosures will remain at highly elevated levels.
    Given that I am challenging the dominant narrative of the mortgage 
crisis, it is reasonable to ask for more than mere assertions. First, 
if payment shock alone were the dominate driver of defaults then we 
would observe most defaults occurring around the time of re-set, 
specifically just after the re-set. Yet this is not what has been 
observed. Analysis by several researchers has found that on loans with 
re-set features that have defaulted, the vast majority of defaults 
occurred long before the re-set. Of course some will argue that this is 
due to such loans being ``unaffordable'' from the time of origination. 
Yet according to statistical analysis done at the Boston Federal 
Reserve, the borrower's initial debt-to-income (DTI) had almost no 
predictive power in terms of forecasting subsequent default.
    Additionally if payment shock was the driver of default, the fixed 
rate mortgages without any payment shocks would display default 
patterns significantly below that of adjustable rate mortgages. When 
one controls for owner equity and credit score, the differences in 
performance between these different mortgage products largely 
disappears. To further illustrate this point, consider that those 
mortgages generally considered among the ``safest''--mortgages insured 
by the Federal Housing Administration (FHA), which are almost 
exclusively fixed rate with no-prepayment penalties and substantial 
borrower protections, perform, on an apples to apples basis, as badly 
as the subprime market in terms of delinquencies.
    The important shared characteristic of FHA and most of the subprime 
market is the widespread presence of zero or very little equity in the 
mortgage at origination. The characteristics of zero or negative equity 
also explain the poor performance of most subprime adjustable rate 
mortgages. Many of these loans also had little or no equity upon 
origination, providing the borrower with little equity cushion when 
prices fell. Recognizing the critical role of negative equity of course 
raises the difficult question as to what exactly it is that homeowners 
are losing in the event of a foreclosure.
``Unnecessary'' foreclosures
    Central to the arguments calling for greater government invention 
in the mortgage market is that many, if not most, of the foreclosures 
being witnessed are ``unnecessary'' or avoidable. Generally it is 
argued that investors and loan servicers do not face the same 
incentives and that in many cases in would be better for the investor 
if the loan were modified, rather than taken to foreclosure, but still 
the servicer takes the loan to foreclosure.
    The principal flaw in this argument is it ignores the costs to the 
lender of modifying loans that would have continued paying otherwise. 
Ex Ante, a lender has no way of separating the truly troubled 
borrowers, who would default, from those that would take advantage of 
the system, if they knew they could get a modification just by calling. 
As long as potentially defaulting borrowers remain a low percentage of 
all borrowers, as they are today, it is in the best interest of the 
investor to reject many modifications that might make sense ex post. In 
addition, lenders may institute various mechanisms to help distinguish 
troubled borrowers from those looking to game the system.
    It is also claimed that the process of securization has driven a 
wedge between the interests of investors and servicers, with the 
implication that servicers would be happy to modify, and investors 
would prefer modifications, but that the pooling and servicing 
agreements preclude modifications or that servicers fear being sued by 
investors. The first fact that should question this assumption is the 
finding by Boston Fed researchers that there is little difference in 
modification rates between loans held in portfolio versus those held in 
securitized pools. There is also little evidence that pooling and 
servicing agreements preclude positive value modifications. According 
to recent Credit Suisse report, less than 10 percent of agreements 
disallowed any modifications. While the Congressional Oversight Panel 
for the TARP has been critical of industry efforts, even that Panel has 
found that among the sample of pools it examined with a 5-percent cap 
on the number of modifications, none of the pools examined had actually 
reached that cap. If few pools have reached the cap, it would seem 
obvious that the 5 percent cap is not a binding constraint on 
modifications. In many instances the pooling agreements also require 
the servicer to act as if the servicer held the whole loan in its 
portfolio, raising substantial doubts as the validity of the ``tranche 
warfare'' theory of modifications.
    A careful review of the evidence provides little support for the 
notion that high transaction costs or a misalignment of incentives is 
driving lenders to make foreclosures that are not in their economic 
interest. Since lenders have no way to separate troubled borrowers from 
those gaming the system, some positive level of negative value 
foreclosures will be profit-maximizing in the aggregate.
Is cramdown the answer?
    The high level of foreclosures has left many policymakers and much 
of the public understandably frustrated and searching for answers. One 
``solution'' that has been regularly presented is to allow bankruptcy 
judges to reduce the principle balance of a mortgage loan to reflect 
the reduced value of the home, the so-called ``cramdown.'' For a 
variety of reasons, I believe allowing cramdowns would have adverse 
market consequences while also providing little real relief to 
borrowers.
    Given the unemployment-driven nature of most foreclosures, and the 
inability of unemployed individuals to put forth a repayment plan under 
Chapter 13 of the bankruptcy code, it appears that cramdowns would do 
nothing for those most in need, the unemployed.
    As proponents of cramdowns point out, vacation and investment 
properties can currently be subjected to cramdown. This raises the 
question: why aren't the significant number of foreclosures involving 
investment properties being resolved via bankruptcy rather than the 
foreclosure process? The most likely reason is that property 
speculators realize that even a reduced mortgage value is likely to 
exceed the home value in the near future. With home prices still 
declining, a crammed down mortgage would be underwater in few months. 
The incentive facing most speculators is often to simply walk away and 
let the home fall into foreclosure. This would not be a significant 
problem if investment properties did not constitute approximately 40 
percent of current foreclosures.
    At this point, it is worth reflecting on these two points: 
cramdowns do little or nothing to help the unemployed and speculators 
can already pursue that route, but largely choose not to, as it isn't 
in their economic interest. With speculators making up about 40 percent 
of foreclosures, and the unemployed likely making up to around 50 
percent, it becomes apparent that at minimum cramdowns will do little 
to help at least 90 percent of borrowers currently in foreclosure.
    The main function of a cramdown would be to serve as reduction in 
outstanding principle, thereby lowering the monthly payment. Even 
significant payment reductions may not offer long-term solutions. 
According to the most recent OTS/OCC mortgage metrics report, of those 
delinquent borrowers seeing a payment reduction of 20 percent or more 
37.6 percent were again delinquent twelve months later. Continuingly 
re-modifying the same loan is not a solution for the borrower, 
investor, or lender.
    We often use the term ``speculator'' to refer to purchasers that do 
not intend to live in the home and often quickly ``flip'' the home to 
make a quick profit. That definition is useful, but far too narrow. 
Many borrowers purchasing a home for occupancy did not do so solely for 
the consumption benefits of homeownership, but also for the investment 
returns. They were both consumers and speculators. As these speculators 
were generally not offering to share potential gains with their 
lenders, it is not clear why they should be allowed to share their 
losses.
    Of the remaining borrowers, who were neither pure speculators nor 
unemployed, many of these borrowers invested little of their own cash 
in the home purchase. Once again, the empirical evidence demonstrates 
that minimal or zero downpayments on the part of borrowers are the 
leading mortgage characteristic in terms of predicting default. If 
borrowers, who have placed no money of their own at risk, are allowed 
to reduce their losses via cramdown, while also reaping any future 
appreciation, we are only encouraging future speculation in our housing 
markets. We should not act surprised if the next housing cycle of 
bubble and bust is even worst than the most recent.
    Proponents of cramdown have also misrepresented the treatment of 
vacation homes and investor properties during a Chapter 13 bankruptcy. 
While the current Bankruptcy Code does allows secured debts other than 
those secured by a principal residence to be crammed down; if they are 
crammed down, the debtor is required to pay off the entire amount of 
the secured claim within the three-to-five year duration of the Chapter 
13 plan. The debtor does not have 30 years to pay off a modified 
mortgage as the original loan term may provide. The borrower in these 
instances is required to pay the entire amount of the secured mortgage 
by the end of their payment plan. This is one of the reasons many 
owners of investment choose to walk way rather than seek bankruptcy 
protection.
    Cramdown is often presented as simply a way to put pressure on 
lenders to negotiate, or to ``bring them to the table.'' It is no more 
appropriate, in a free society, to use the coercive stick of the state 
to bring lenders to the table, than it would be to use that stick to 
bring borrowers to the table. A government focused on the common good, 
the general welfare, does not choose sides in private disputes.
    Less tangible, but perhaps more important in the cramdown debate is 
the message it sends to market participants, particularly investors. It 
has long been established in law, and in common sense for that matter, 
that the body of law relevant to and existing at the time of a contract 
enters into and comprises part of that contract. To change by 
legislative fiat the terms of contracts that have already been agreed 
to is to change the contract itself. I fear if the cramdown were to 
become law, we send a signal that any private agreement is subject to 
being re-written depending on which way the political winds are 
blowing. This is a sure recipe to reduce investment and the overall 
reliance of market participants on contract. In order to rebuild public 
trust in both our markets and our government, I believe Congress should 
affirm its own trust in the voluntary decisions of private parties. To 
do otherwise is to weaken the very bonds that make a free and civilized 
society possible.
    In speaking of investors, it is also important to remember that 
cramdown is not simply an issue of taking from lenders and giving to 
borrowers. As bad as that would be, it is made all the worse as the 
ultimate investors in mortgage related assets that will suffer losses 
rather than the largest banks. As the largest banks are mostly just 
servicers and not the ultimate investor, they will pass along any 
losses from cramdown to investors. As we have seen in the recent auto 
restructuring, often these investors are not large corporations or 
wealthy individuals; they are pension funds representing the retirement 
savings of millions, usually retired state and local government 
employees. I have yet to hear a compelling reason why retired teachers 
and firefighters should be forced to bear the burden of irresponsible 
borrowing and lending.
                         non-coercive solutions
    I am concerned that inherent in the title of this afternoon's 
hearing is the assumption that if voluntary modifications are not 
working, we must look to coercive solutions. The force of the State 
must be applied to those unwilling to see the light. This assumption 
should trouble anyone who values a free society. I urge Congress to 
look for only those solutions that are voluntary.
    Some voluntary alternatives to consider: encouraging bank 
regulators to give lenders more flexibility to lease out foreclosed 
homes to the current residents. Typically banks come under considerable 
pressure from their regulators not to engage in long term property 
leasing or management, as that activity is not considered a core 
function of banks. I believe we can avoid the larger debate of banks 
being property managers by giving banks greater flexibility in 
retaining properties with non-performing mortgages as rentals, 
preferably to current residents.
    In order to separate out deserving borrowers, who are trying to get 
back on their feet, from those simply walking away from a bad 
investment, Federal lending entities, such as FHA and the GSEs, should 
engage in aggressive recourse against delinquent borrowers who have the 
ability to pay, but simply choose not too. We should make every effort 
to turn away from becoming a society where legally incurred debts are 
no longer obligations to be honored but simply options to be exercised.
                              conclusions
    In concluding my testimony, I again wish to strongly state: the 
current foreclosure relief efforts have largely been unsuccessful 
because they have misidentified the underlying causes of mortgage 
default. It is not exploding ARMs or predatory lending that drives the 
current wave of foreclosures, but negative equity driven by house 
prices declines coupled with adverse income shocks that are the main 
driver of defaults on primary residences. Defaults on speculative 
properties continue to represent a large share of foreclosures. 
Accordingly for any plan to be successful it must address both negative 
equity and reductions in earnings. Cramdown fails on both accounts. I 
thank you for your attention and welcome your questions.

Primary References:

Foote, Gerardi, Goette and Willen (2009) ``Reducing Foreclosures: No 
    Easy Answers,'' National Bureau of Economic Research working paper 
    15063.

Cordell, L., K. Dynan, A. Lehnert, N. Liang, and E. Mauskopf (2008). 
    The Incentives of Mortgage Servicers: Myths and Realities. Finance 
    and Economics Discussion Series, Federal Reserve Board 46.

Foote, C., K. Gerardi, L. Goette, and P. S. Willen (2008). Just the 
    facts: An initial analysis of subprime's role in the housing 
    crisis. Journal of Housing Economics 17 (4).

Foote, C., K. Gerardi, and P. Willen (2008). Negative equity and 
    foreclosure: Theory and evidence. Journal of Urban Economics 6 (2), 
    234-245.

Gerardi, K., A. Shapiro, and P. Willen (2007). Subprime outcomes: Risky 
    mortgages, homeownership experiences, and foreclosures. Federal 
    Reserve Bank of Boston Working Paper 07-15.

Hunt, J. (2009). What do subprime securitization contracts actually say 
    about loan modification. Berkeley Center for Law, Business and the 
    Economy.

Kau, J. B., D. C. Keenan, and T. Kim (1994). Default probabilities for 
    mortgages. Journal of Urban Economics 35 (3), 278-296.

Sherlund, S. (2008). The past, present, and future of subprime 
    mortgages. Finance and Economics Discussion Series 2008-63, Federal 
    Reserve Board.
                               __________

    Mr. Cohen. Our final witness is Irwin Trauss. For the past 
10 years, he has worked for the Philadelphia Legal Assistance, 
providing free legal services to low-income Philadelphians. As 
supervisor of the Consumer Housing Unit there, he works with 
Community Legal Services to provide legal services to an 
eligible low-income population of approximately 400,000 in 
Philadelphia. For the 20 years preceding his time there, he 
worked for Community Legal Services in Philadelphia where he 
co-managed the law center in the Northeast. For a time, he was 
also chief of the law center's Consumer Housing Unit.
    Thank you, Mr. Trauss, and I appreciate your testimony.

 TESTIMONY OF IRWIN TRAUSS, MANAGER, ATTORNEY FOR THE CONSUMER 
 HOUSING UNIT, PHILADELPHIA LEGAL ASSISTANCE, PHILADELPHIA, PA

    Mr. Trauss. Thank you, Mr. Chairman and Members of the 
Committee for the invitation to appear this afternoon to 
describe our experience with voluntary mortgage modifications, 
particularly since the Making Homes Affordable plan came into 
effect on March 4 of this year.
    In addition to supervising the Consumer Housing Unit of 
Philadelphia Legal Assistance, I also am primarily responsible 
for running the Save Your Home Philly Hotline, which over the 
past 15 months, as part of the Philadelphia Court of Common 
Pleas Mortgage Foreclosure Diversion Pilot Program, has handled 
about 10,000 calls from Philadelphia homeowners facing the loss 
of their homes to foreclosure. Also, for the past 32 years, it 
has been my primary practice, legal practice, to represent low-
income homeowners in bank foreclosures. I have done that by 
litigating in State, Federal and bankruptcy courts.
    Before I go on with some of the comments that I have 
prepared to answer the question that I think I was asked to 
address, I just want to make a comment about Dr. Calabria's 
testimony about cramdowns. I just want to make two quick points 
about that.
    One, in the Third Circuit, except as a result of some 
changes in the law, cramdowns were largely available in the 
Third Circuit--and still are--with respect to mortgages in 
certain circumstances since 1978. They were largely available 
in the Third Circuit due to Vanguard's allowing cramdowns, and 
they had no effect--no effect--either on the pricing or on the 
availability of mortgages.
    Secondly, the notion that comparing the experience of 
speculators, with respect to bankruptcy, to the experience of 
homeowners is completely inappropriate. In my personal 
experience of representing homeowners, as I say, for my long 
career, the availability of cramdowns, particularly for low-
income homeowners with low-value homes, is extremely helpful in 
the ability for them to save their homes.
    At one point in my practice, a large majority of the 
chapter 13 cases that I filed for low-income homeowners in 
Philadelphia involved cramdowns of mortgages, which indeed 
helped them save their homes.
    I think the reason that I was asked to testify was to 
broaden the perspective as somebody who day-to-day represents 
homeowners attempting to save their homes. From that 
perspective, the question that underlies this hearing is that 
voluntary modifications will not help homeowners save their 
homes in the numbers required to significantly stem the tide of 
foreclosures that has been alluded to.
    Substantive changes in the law, such as proposed amendments 
to the Bankruptcy Code, that require loans to be modified to 
make them affordable are needed to prevent foreclosures in the 
numbers necessary to prevent the erosion that is occurring in 
our communities and the erosion of our economy. Unless 
homeowners have leverage to force a favorable result, lenders 
will continue to avoid meaningful modifications.
    While Making Homes Affordable has made a significant 
difference in a small percentage of the cases that we have seen 
in Philadelphia, which is reflective of the nationwide 
percentage, I believe, it has not resulted in a significantly 
greater willingness on the part of the servicers to enter into 
modifications that meaningfully reduce mortgages. It has not 
resulted in the willingness of lenders to reduce principal, and 
it has not even resulted in a willingness of lenders to reduce 
the amount of principal that is subject to interest.
    I say this based not only on my personal experience but 
also on my position as a supervisor of the Hotline and from my 
involvement in the creation and operation of the Diversion 
Program that is being run in the courts in Philadelphia.
    The Diversion Program, which is described at length in my 
written testimony, is a program that requires conciliation 
prior to a loan being foreclosed and prior to a foreclosure 
sale being able to take place. The lender and the borrower are 
required to sit down with a JPT who is available to try to work 
out an alternative resolution. This program is primarily 
voluntary, and it cannot impose a resolution on an unwilling 
mortgagee.
    It has been my experience that, absent some leverage that 
can be applied by the homeowner to the lenders, the lenders are 
ordinarily unwilling to significantly compromise mortgages to 
make them affordable for the long run. They usually do so when 
they are forced to, either by aggressive advocacy, by the 
prospect of litigation, by litigation that actually frustrates 
their ability to foreclosure, or, in some cases, by pressure 
that is applied directly or indirectly by the court through the 
Diversion Program.
    The implementation of the Making Homes Affordable Program 
has resulted in some wholesale delays in foreclosures, which 
has been helpful to homeowners, but it has not meaningfully 
affected this dynamic. It is clear that with or without Making 
Homes Affordable, homeowners represented by knowledgeable 
advocates, and who are backed up by counsel who are prepared to 
litigate, get resolutions that are simply not available to 
homeowners who are not so represented, but resolutions are 
available if pressed.
    The arrival of Making Homes Affordable has not 
significantly affected the way servicers and their counsel 
operate. For example, Bank of America has signed a Servicer 
Participation Agreement, which requires it to make Making Homes 
Affordable available to homeowners in non-GSE circumstances. 
Despite this, they have refused to do so, and they inform 
homeowners that it is only available if they have a GSE loan. 
Thus, properties that should be protected by this program are 
not being. This is not an isolated event and we have lots of 
examples, which are in my testimony, regarding the missed 
application of the program.
    In closing, let me just say that absent significant 
leverage on the part of homeowners to force a change in the 
behavior of the majority of servicers, they will continue to 
avoid meaningful modification, and that contrary to what has 
been expressed here, the existence of the availability of the 
cramdown actually will complement--as the Obama administration, 
I think, has recognized--the voluntary efforts by creating the 
leverage that is necessary to get lenders to modify loans and 
to prevent foreclosures at the rates that we need them 
prevented.
    Mr. Cohen. Thank you, Mr. Trauss.
    [The prepared statement of Mr. Trauss follows:]
                   Prepared Statement of Irwin Trauss
















                               __________

    Mr. Cohen. Now we will begin our series of questioning, and 
I will start the questioning. The first question I have is for 
Dr. Calabria.
    In your testimony, you mentioned that of the vacation and 
investment properties, in grouping them together, 40 percent of 
current foreclosures fall into that class. In your testimony 
you say this would not be a significant problem if investment 
properties did not constitute approximately 40 percent of 
current foreclosures.
    First, I would like to know the source of your numbers and 
also your numbers where you suggest that speculators make up 
about 40 percent of foreclosures and that the unemployed 
likely--likely--make up around 50 percent. Where do you get 
those numbers?
    Mr. Calabria. The 40 percent is from Freddie Mac. The close 
to 50 percent is a variety of sources in the mortgage industry. 
A lot have come from the mortgage and bankruptcy associations. 
Others have come from other sources. I would be happy to kind 
of get you actual citations on that. There have been a variety 
of services that have looked at the causes of mortgage default. 
So the employment part, that is where I have gotten those 
surveys from.
    I also think, if you look at--and I did not bring the data 
with me. If you take a map and look at where initial 
unemployment claims are, and you map that to where initial 
foreclosures are, you will see a huge overlay. So it should not 
be surprising to anybody that where you have had a complete 
jump in unemployment, you also see a very large jump in 
foreclosures. They very much match each other in terms of 
geography.
    Mr. Cohen. Thank you, sir.
    In your written testimony, you say that borrowers 
purchasing a home for occupancy did not do so solely for the 
consumption benefits of home ownership but also for investment 
returns. They were both consumers and speculators.
    Under your definition, what homeowners are not speculators?
    Mr. Calabria. I guess to some extent we all are, but I 
think that is one of the policy changes that I think we need to 
change. I mean, one of the things that has gotten us to where 
we are today is that in the last 10 years, or even further 
back, we had an attitude in this country that the market for 
home ownership was just a casino. You know, get in quick; flip 
it, you know. How many shows did we see come on TV like ``Flip 
This House''?
    I think we really need to turn back in terms of a public 
policy perspective in Washington, where we say home ownership 
is for stable communities where you put a life investment in, 
and this is not something that you get into and flip 6 months 
later. That, to me, has been part of the reason we are where we 
are today, which is that we have treated homes like they were 
casinos. I think we really need to move beyond that and change 
many of the things in our Tax Code, many of the things in our 
financial services policy that encourage that.
    Mr. Cohen. Thank you, sir.
    If the current foreclosure crisis were caused by 
unemployment and other ``traditional'' factors as you describe 
them, why did the number of foreclosures increase so 
dramatically during a good economy?
    Mr. Calabria. First, we have to keep in mind there is 
always a steady level of foreclosures during a good economy. 
The reason that it increased at that time is during a good 
economy, when you have positive house price appreciation, you 
do not have to go to foreclosure. Very few people will actually 
walk away from their homes when there is positive equity. If 
you have lost your job, you are going to do much better in a 
short sale, and you will be able to take some of the equity.
    So when you have a decline in house prices--and really, the 
decline in house prices started before we were in the 
recession. It was 2005-2006 where you had the housing market 
peak in terms of house price appreciation. So the housing 
market turned at least a year before the economy actually 
turned, and it was the negative equity situation. Even in a 
good economy, people lose jobs all the time. But in a good 
economy and in an increasing housing market, you have other 
options to refinance. That went away when the housing market 
turned down.
    Mr. Cohen. Thank you.
    Mr. Carr, do you have any thoughts on Dr. Calabria's theory 
that this was all just normal, like global warming?
    Mr. Carr. I have several comments. I am not exactly sure 
where to start, but I guess I would just say that the truth is, 
between two sides of the table, usually somewhere in between. 
So while I can agree with a number of statements that he has 
made, particularly now about the unemployment-driven aspect of 
the foreclosure crisis and the significance of loans being 
upside down, I would offer a slightly different perspective.
    That is that this foreclosure crisis began many years ago, 
first in Black and Latino communities. It was driven by payment 
shock of the mortgages, combined with things like prepayment 
penalties, second liens, no escrow set aside to protect 
borrowers who were entering the market, excessive broker fees, 
and other predatory features.
    I also agree that there were a lot of consumers, including 
investors and speculators, who were into the market and who did 
turn it into a casino; but I would say that that is one of the 
most profoundly positive reasons for putting forward a consumer 
financial protection agency so as to make sure that consumers 
cannot treat their homes in such a manner and on such a massive 
scale that it actually implodes the credit markets and destroys 
everyone's home ownership values.
    The final argument or point I would make is the idea that 
servicers now are not modifying loans because they cannot 
identify or understand how to modify a loan. It is an odd 
statement because nonprofit counselors do that every single 
day. We at the National Community Reinvestment Coalition engage 
with servicers every single day. It is not a mystery, and it is 
not rocket science. It is standard, old-fashioned, good 
underwriting practices. When you collect the information from 
consumers--their credit scores, their income and other 
financial attributes--you know which borrowers are, in fact, 
solvable in terms of a loan modification and which ones are 
not.
    Then the final point that I would make, even though I have 
already said this is my final point, is as to the notion of 
cramdowns. It is just amazing to me the people who say, if you 
somehow adjust the principal in Bankruptcy Court, you will 
undermine the credit markets. Those people are not paying 
attention to the news. Those credit markets have already been 
destroyed. The most significant thing that we can do for this 
credit market right now is in this foreclosure crisis. The way 
we end that foreclosure crisis is, in one way, putting into 
place a stick.
    I think one of the most significant values of bankruptcy 
reform is not necessarily the people who go through bankruptcy. 
It is servicers now knowing that the American public expects 
them to respond to the crisis we are in and to do something 
about this foreclosure crisis before we see a whole new wave of 
bank losses that ultimately could potentially cripple the U.S. 
economy, the Treasury and other major financial institutions.
    There is a lot of concern out there despite all of the idea 
that the economy is recovering. If anyone looks at the 
footnotes and the small print, you will see that this economy 
is on life support and so is the banking system.
    Mr. Calabria. Can I respond a little bit if you don't mind? 
I know it is your time.
    Mr. Cohen. With those encouraging words, I think we could 
use some response.
    Mr. Calabria. Thank you.
    Let me say I want to clarify, because I think there has 
been a misunderstanding.
    When I am saying lenders do not know, it is they do not 
know who. If you go and say anybody who calls me gets a 10 
percent reduction in their payment, a lot of people are going 
to call who will never default, so it is very difficult for the 
lender ahead of time.
    I do want to emphasize. One of the problems throughout this 
mortgage meltdown has been the capacity of the mitigation 
offices of the lenders. You know, I myself yelled at lenders a 
year and a half ago. ``You guys need to staff up. You are going 
to get phone calls, and you are not going to be able to handle 
them.''
    I actually think one of the problems of the Obama 
foreclosure plan is you have this whole thing where you 
refinance Freddie and Fannie loans for people who are not even 
in any imminent danger of foreclosure, and what that gives the 
incentive for a lender to do is I am going to refinance this 
person because, okay, they have got 100 percent equity; but 
Fannie takes the risk, and I will make origination fees on it, 
and I will spend my time doing that rather than working with 
the hard cases.
    You know, I have described one of my conversations with the 
Administration. Their approach is reverse triage: Let us take 
care of the people who need help the least rather than those 
the most. I do want to make a----
    Mr. Cohen. Let me ask you this, Doctor----
    Mr. Calabria. Sure.
    Mr. Cohen [continuing]. If Mr. Franks will indulge me, 
because you asked us.
    You know, the people who need the help the most seem like 
they would be the people who are going into bankruptcy. They 
are willing to go into bankruptcy, take all of their assets and 
all of their life and throw it up to the court and public eye 
and say, hey, you take over control of my life for a period of 
time and tell me what I can spend and what I cannot spend and 
what I did. And you can only do this every so often.
    Doesn't it seem like those people maybe would be the ones 
that would benefit if they are that much distressed?
    Mr. Calabria. My concern is that--my understanding of 
chapter 13 is you need to come up with a repayment plan. If you 
have lost a job, it is pretty hard to kind of come up with a 
repayment plan because you do not have the income. That is why, 
you know, I keep saying that I think we need to find a way--
and, you know, one of things that I think we need to think 
through----
    Mr. Cohen. Let us assume that this is not a person who has 
lost a job. This is a person who has still got a job. Their 
adjustable rate mortgage went up to a point that they could not 
afford it, or maybe they took a 10 percent cut, like so many 
people have at businesses, to continue.
    What is the situation with them? Would they not benefit?
    Mr. Calabria. Potentially.
    Let me preface with the reason I talk about the employment, 
as long as we are going to hear numbers about 2 million 
foreclosures and such, you know, we need to keep in mind, you 
know, if this could help 5 percent of the people, then maybe 
you need to debate it in those terms, and you might even want 
to do something if it only helps 5 percent of the people; my 
point being is you need to go ahead of time and be honest that 
this is not going to help 80 percent of the people, this is 
going to help 5 percent of the people.
    My concern is I do think--and I think there are two 
different debates between have we learned that this did not 
work and perhaps we should change it going forward between 
going backward, because I do think--to me, I think a 
fundamental principle of law is that--when the law that is 
outstanding at a time of contract incorporates into that 
contract, and for me to go back and change it--I think there is 
a very different argument between saying, okay, we think there 
should be cramdown for principal residences. You do that going 
forward for obligations that have not been entered into.
    I want to comment a little bit on something that Jim has 
said and that a lot of people have said, and I think it is 
important. We quite often have heard sort of we need to put a 
stick behind the lenders. You know, that kind of concerns me. 
My vision of government is you look at the common welfare. You 
do not choose sides. I mean, for instance, we know that a very 
large impetus for higher foreclosures in California is that if 
you walk away from a home in California, they cannot come after 
you for the rest of it. They take the home. They do not become 
a creditor for the rest of it. In other States--there are about 
a dozen States like that where you cannot get a deficiency 
judgment, and that encourages it.
    My perspective would be, while I think that law encourages 
foreclosure, I would not go back and rewrite it. I would not 
take a stick behind the bar in that case. So I think taking a 
stick to anybody, you know, I find problematic. I mean we 
should be trying to come up with consensual, noncoercive 
solutions here rather than trying to force people.
    Mr. Cohen. Thank you, Doctor. I think our time is beyond, 
but I appreciate the information.
    I now would like to recognize for questioning Mr. Franks, 
the Ranking Member.
    Mr. Franks. Well, thank you, Mr. Chairman.
    Dr. Calabria probably left off where I will start, and that 
is this notion of retroactive law.
    You know, sometimes I think that those colleagues on the 
left believe that those of us on the right think that only 
competition is the fundamental drive of economy, and that is 
really not true. I believe that the fundamental drive of a free 
market economy is a thing called trust. I believe that the 
people who have capital trust government to be able to enforce 
their contracts and to be able to act rationally and not to 
come back and change the rules in the middle of the game.
    Mr. Delahunt mentioned bankruptcy, that it has been a part 
of our scheme for a long time, and I completely concede that. 
What is different about this is that it is retroactive. When 
those bankruptcy laws are already in place, lenders take those 
things into consideration. They are able to actuarially or they 
are able to kind of extrapolate what the possible risks are to 
bankruptcy and take that into consideration, and that is the 
big challenge that we have here.
    If we do things that scare those with capital--I know that 
capitalists are bad, but we forget that those are all of the 
people who are the investors in this country. Incidentally, I 
said that tongue in cheek, of course. The reality is that if we 
scare the capitalists away, they will take their capital out of 
the system, and if they do, only government will be left to 
deal with the result.
    I want to thank Mr. Carr for pointing--you know, for 
perhaps being a little bit different from my perspective, but 
he did understand that a lot of the present mortgage problem is 
driven by unemployment, and I appreciate that.
    Dr. Calabria, I have to tell you: Your opening statement, 
rarely have I seen a more out-of-the-park explanation. I think, 
if all of us could carefully analyze what you said, we probably 
would all come out on the same page. And I do not know that you 
and I would have to move at all, but that is just a guess.
    Mr. Chairman, under the Community Reinvestment Act, the 
Clinton administration, Fannie Mae and Freddie Mac leaned on 
lenders to grant more and riskier mortgages to less 
creditworthy borrowers. That is an undeniable reality. Bank 
regulators and HUD even forced banks to meet quotas for these 
riskier loans or jeopardize their ratings as lenders. To meet 
these requirements, banks essentially had little choice but to 
make bad loans.
    For example, no-money-down loans became common under the 
CRA, Community Reinvestment Act, regime because it was often 
the only way they could make those loans to fit that quota. And 
of course, not surprisingly, the result was a train wreck for 
everyone.
    What we had was not so much predatory lenders preying on 
poor borrowers but a predatory government preying on banks to 
force its political ends and, thereby, many times, destroying 
poor borrowers. The mortgage cramdown legislation, I believe, 
threatens the same result.
    Now, Dr. Calabria, let me just ask you--and again, I have 
never seen, since I have been on this Committee, something like 
the cramdown legislation more thoroughly dismantled by an 
opening statement, okay?
    Mr. Calabria. Very kind of you to say.
    Mr. Franks. So, if we simply, sir, let the natural 
foreclosure process work, will the housing market, in your 
opinion, stabilize and the foreclosure wave subside faster than 
if we intervene as a government? In other words, give me your 
juxtaposition here.
    Mr. Calabria. One of the very key factors to keep in mind, 
both in terms of the lender and the borrower, is not as much 
the absolute level of house prices but the direction, the 
incentive. I mean, for instance, one of the incentives for a 
lender would be, okay, you are going--there might be a 
redefault. If I take the home today, it might be worth more if 
I sell it than if I take it 6 months or a year from now.
    So in a declining housing market, the incentive for the 
lender is actually to foreclose as quick as possible; and also 
for the borrower, if your time horizon--depending on your time 
horizon, if you are looking at, well, you know, I can sit in 
this home, but it is going to lose value. That is the one thing 
about the cramdown. If you take it down to where they have zero 
equity, as I said in my opening statement, they could in 6 
months be underwater. Whereas, if you get to a point in the 
housing market where the only direction is up, then the 
incentives of both the lender and the borrower are actually 
greater to stay in the home.
    So my own perspective is that I think we want the housing 
market to actually hit--and people have talked about the 
dangers of overshooting, and those are very real dangers, but I 
actually think the dangers of not overshooting are worse. So 
the quicker we hit bottom, the quicker we can sort of go back 
up, and I think that that is a very important part. So I think 
we need to keep that in mind.
    Mr. Franks. All right. Let me try to--excellent answer. Let 
me try to cram in one more question.
    Many portray the mortgage cramdown proposal as no cost to 
consumers, that it will not cost consumers anything.
    What are the hidden costs of cramdown for regular people, 
you know, due to the impact on mom-and-pop investors and the 
mortgage-backed securities, home mortgage rates, and other 
factors? What are the hidden costs? Is it at no cost to the 
average person?
    Mr. Calabria. Well, let us start with the first direct cost 
to the taxpayer. We now, via Fannie, Freddie and the Federal 
Reserve, are the largest single holders of mortgage-backed 
assets in the world. I have had conversations with folks over 
at the Federal Reserve. They have factored into their portfolio 
cost what they think the cramdown will do to them. So they 
think they are going to lose money.
    Freddie Mac announced that their projections were going to 
be, you know, potentially tens of billions, so all of these--
and we were picking it up. The important thing--it would be one 
thing if Freddie and Fannie were simply private companies. We 
are Freddie and Fannie, and the taxpayer will back that. So 
first of all, there are direct taxpayer costs to this.
    Second, you know, most of it will probably not be the 
increase of rate, but it will be the increase of down payments 
you will see going forward, to sort of modify that effect of 
cramdown. You can forget getting a zero down payment, and that 
may or may not be a good thing, but you will definitely see 
people move toward seeing a 20 percent down payment or 
something like that. And you even are seeing that in many parts 
of the market now, and the reason that that is a huge obstacle 
is we know from a variety of research that the number one 
obstacle to any anybody achieving home ownership, particularly 
in minority communities, is coming up with a down payment.
    So at some point--and I do think it is important for 
borrowers to have skin in the game, but at some point you will 
have such a requirement for down payment that you will have 
adverse impacts upon home ownership rates. So that is something 
to kind of keep in mind.
    I think the broader picture in this that concerns me is 
that, is this the end? What are you going to tell investors? 
Well, we are going to change the terms of the contract because 
we do not like it, because there is overwhelming public policy 
in that.
    I look at it this way: You know, when we want to build a 
road, when we take somebody's land for the public good, we 
compensate them. If you want to take somebody's mortgage rights 
for the public good, you compensate them. It is a very simple 
concept, and I think that that is the approach that needs to be 
taken, if we are going to do that.
    I think, you know, if you look at Professor White's work, 
he makes a lot of strong arguments there. There are 
externalities there, but if you are going to take those 
externalities, you need to compensate for it because those 
costs are going to be shifted to somebody.
    Mr. Franks. Thank you, Mr. Chairman. Let me just say we 
learn something every day, and I have just learned that the 
taxpayers now are the largest mortgage holders in the world. I 
do not know about you, but that does not encourage me.
    Mr. Cohen. Thank you, sir.
    Now I would like to recognize Mr. Delahunt.
    Mr. Delahunt. Thank you, Mr. Chairman.
    I think we have a lot more to learn, and I agree with the 
Ranking Member. I would like to learn about how government 
created this mess.
    Can you help me, Mr. Carr? Particularly CRA. You put some 
statistics in your testimony that seem to contradict what I 
just heard, but maybe government is what caused this problem. 
So maybe you can tell us that your statistics were inaccurate 
and that you unintentionally misrepresented to the Committee 
what the real facts are. I thought your testimony, Mr. Carr, 
was really a home run as well.
    Mr. Carr. Thank you.
    Mr. Delahunt. It was a grand slam. That is what I call it. 
With that, Mr. Carr, can you tell us about the CRA and about 
how that has brought forth this economic tsunami that happened 
to occur during the past 8 years of the Bush administration?
    Mr. Carr. Sure. It is actually the Federal Reserve Board 
statistic that only 6 percent of high-cost loans to low- and 
moderate-income households were covered under CRA, and so it is 
just amazing that CRA continues to be the fault of these loans. 
The reality of it is that consumer groups for years were 
arguing----
    Mr. Delahunt. Can you repeat that for me----
    Mr. Carr. Sure.
    Mr. Delahunt [continuing]. Because I think it is important 
that we all really listen to what the facts are.
    Mr. Carr. Six percent of the high-cost loans to low- and 
moderate-income households were covered under CRA.
    Mr. Delahunt. So there is only 6 percent?
    Mr. Franks. Those are the ones that failed. Just kidding.
    Mr. Delahunt. No. See, but that is his schtick. You know, 
we continue to hear this because some--you know, it is a 
philosophical perspective, and that is really what it comes 
down to.
    Mr. Carr. Right.
    Mr. Delahunt. When you are looking for whipping boys, you 
know, the CRA is just a prime target.
    What you are telling us as to what the facts are, as 
opposed to just the assertion and the allegation, is that only 
6 percent of the--you finish the sentence for me.
    Mr. Carr [continuing]. High-cost loans to low- and 
moderate-income borrowers were covered under CRA.
    Mr. Delahunt. That is kind of reassuring. So the other 94 
percent were not covered by the CRA. Thank you.
    Can you proceed? We will get back to you, Mr. Calabria.
    Mr. Carr. There are other statistics, such as from the 
Center for Responsible Lending, that show that less than 10 
percent of high-cost subprime loans made between 2008--between 
1998 and 2006 were to first-time home buyers. But I think, more 
importantly, it is that there is just a treasure trove full of 
research and papers that track all the way back to the mid-
1990's that point out these unfair and deceptive lending 
practices by nonprofit organizations; and I think it is 
important to remember that the State of North Carolina actually 
put into place a comprehensive predatory lending law back in 
1999, and several other States attempted to protect their 
residents from these obvious unfair and deceptive practices, 
again, going back 10 years.
    So it was not like it was just predictable; it was 
predicted. And the nonprofit and the the development community 
were actively working to strengthen CRA rules specifically so 
that unfair and deceptive lending would not occur under that 
act, and we are still working----
    Mr. Delahunt. Mr. Carr, were they successful in doing that 
to a better degree than the other non-CRA institutions?
    Mr. Carr. Well, most of the lending ultimately went out to 
non-CRA institutions or to affiliates of CRA-covered 
institutions that were not counted for CRA purposes.
    I think that there are also a couple of other things, I 
think, to keep in mind about this.
    Mr. Delahunt. I have got to make--you know, with CRA, we 
have got to put this to bed one way or another, and I think the 
members of the panel have to really come together to agree upon 
what the data shows, whether I am correct or Mr. Franks is 
correct or whomever is correct.
    Compare for us, if you will, the performance of loans that 
are issued under CRA-regulated institutions and those that are 
issued under non-CRA institutions or mortgage lenders.
    Mr. Carr. Right. Well, Dr. White--I do not want to put him 
on the spot. He might have more specific statistics. What we 
know from our research is that, in fact, they perform 
significantly better. Although in this----
    Mr. Delahunt. That is what I want to hear.
    Mr. Carr. In this environment, however, everyone's loans 
are going into foreclosure, and so depending on what year you 
look----
    Mr. Delahunt. I understand that. In this environment, 
everybody is going down. You know, we talk about negative 
equity. Everybody is underwater, it is just not the subprime. 
But the historical data indicates that the CRA-regulated 
institutions did better than the non-CRA.
    I yield to my friend from Arizona.
    Mr. Franks. Keep in mind that the 6 percent of those loans 
that were under CRA, that were extended under CRA, Mr. 
Delahunt, caused the entire system to change. The government 
cannot say this is okay for this group and not for the other 
group, and it became a systemic issue.
    Mr. Delahunt. Reclaiming my time.
    Mr. Franks. I hope you will let Dr. Calabria respond.
    Mr. Cohen. I am going----
    Ms. Lofgren. Mr. Chairman.
    Mr. Cohen [continuing]. To suggest that your time has 
expired.
    I am going to recognize Ms. Lofgren for as much time as she 
may consume before we rush to votes.
    Ms. Lofgren. Thank you, Mr. Chairman. And I will be brief 
because I know that we have a number of votes, and perhaps we 
can finish this and not keep our witnesses here.
    First I would like to say, once again, how disappointed I 
am that the Treasury Department was too busy to participate in 
this hearing, and I would like to suggest, Mr. Chairman, that 
we prepare a written inquiry to the Department with the 
questions that we would have asked, and ask them to respond and 
to get the facts and information to us within the next week, or 
at most two, so that we can take whatever action is necessary.
    Mr. Cohen. I appreciate that. We will do that, and we will 
also look into the Government Accounting Office study.
    Ms. Lofgren. I would be very happy to work with the 
Chairman on that point.
    I would like to ask Professor White, your testimony about 
how many modifications actually involved a reduction, I mean so 
many of the modifications actually involve an increase in the 
monthly payment. Small wonder that they are not working.
    I thought a lot about why is this, why are the banks 
behaving in this way? In The New York Times article, just right 
after the Fourth of July--and this is a quote. It said: But the 
most frightening, fascinating and frightening figures in the 
data that they have looked at from the Wells Fargo Bank detail 
how much money is lost when foreclosed homes are sold.
    In June, the data show almost 32,000 liquidation sales. The 
average loss on those was 64.7 percent of the original loan 
balances. So I guess what I am looking at is if you took a look 
at modifications in Bankruptcy Court, where those are allowable 
for secondary mortgages, commercial real estate and the like, 
generally the reduction in principal is nowhere near what the 
banks are losing in the foreclosure sale. What is motivating, 
what is going on here? Why are they operating in manners that 
seem so adverse to their financial interests?
    Mr. White. Well, one of the important things you have to 
understand is that it is not the investors who are making the 
decisions. The servicers have their own economic calculations 
that they make that have nothing to do with ultimately how much 
is lost on the loan because the servicer, in most cases now, 
has no skin in the game. They are not the investor and they not 
affected by whether the foreclosure loss is 10 percent or 90 
percent. So long as they can recover the servicing advances, 
which might be 5 percent of the total amount, they will be made 
whole in a foreclosure.
    In fact, the servicers have every reason to go ahead with 
foreclosure and every reason not to modify. And some of those 
incentives, I think, the Administration wisely tried to correct 
a little bit in the design of the Home Affordable Program. We 
will see if that works or not. But I think it is also the case 
that investors and the servicers are in denial. In spite of the 
fact that they are losing 60 percent every time they foreclose 
on a home, they believe somehow that if they continue 
foreclosing and refusing to modify, eventually they will 
recover closer to 100 percent of these mortgages that are so 
massively delinquent and in default. And we have right now a 
huge pipeline. There are a lot of foreclosures that have been 
started. Fortunately, the completed liquidation sales have been 
at a fairly--I don't want to say low level, because they are--
--
    Ms. Lofgren. The States have stopped them in some cases. 
Now those laws are running.
    Mr. White. They are having some moratoria, and even just 
looking at the data in general, there are a lot more 
foreclosures coming into the pipeline than are coming out of 
the sales. There a lot of homeowners who are in foreclosure but 
haven't lost their house yet, so there is still time to 
restructure more loans.
    Now I have no illusion that 100 percent or 50 percent or 
any huge percentage of the 2\1/2\ million families in 
foreclosure can successfully renegotiate their loans. But I am 
quite confident that more can be renegotiated than are being 
renegotiated now. I mean, I think there are foreclosures 
happening, there are several data that----
    Ms. Lofgren. Well, clearly, not every person who is in 
trouble is going to be successful in renegotiating their loan. 
I think that is clear. On the other hand, I will close now 
because I know we have a vote outstanding.
    As we were coming up to our vote on the bankruptcy 
provision in the House, I was present at a meeting where 
Chairman Frank was there; and one of the other Members said, 
how are we--you know, what about this new Administration 
program? What do we do with our constituents? And Mr. Frank 
says, tell them to call their lender today because the program 
is in effect. And the Member said, well, the banks won't return 
their calls. I will say the banks won't return my calls on 
behalf of constituents either. So Mr. Frank said, well, tell 
them that your constituent is going to go bankrupt, and then 
they will return the call.
    I think that that is an element to this. It is a motivation 
to actually be accountable and to get serious about this. I 
think it is tragic that we have not adopted the measure, and I 
hope that we will yet do so. And I yield back.
    Mr. Cohen. I want to thank the lady and thank all the 
witnesses for their testimony today.
    Without objection, Members have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask that you answer as promptly as you can 
and they will be made a part of the record.
    Without objection, the record will remain open for 5 
legislative days for submission of any additional materials.
    Again, I thank everybody for their time and patience. The 
hearing of the Subcommittee on Commercial and Administrative 
Law is adjourned.
    [Whereupon, at 2:23 p.m., the Subcommittee 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, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law
    At the heart of our Nation's current economic troubles is the 
endless cycle of home mortgage foreclosures, a cycle that unfortunately 
appears to be gaining momentum rather than drawing to a close.
    In addition to undermining our Nation's economy, these foreclosures 
devastate families, neighborhoods, and local governments.
    In 2008, 1 in 10 American homeowners fell behind in their mortgage 
payments or were in foreclosure. The Federal Reserve estimates that in 
2009, there will be 2.5 million home foreclosures. Others estimate that 
the number could be as high as 3 million.
    Over the next four years, there could be between 8 and 10 million 
foreclosures. In my hometown of Detroit, 1 out of every 275 housing 
units faces foreclosure. There are 138 foreclosures a day in Wayne 
County.
    We have not seen foreclosure numbers like these since the Great 
Depression, and the mortgage foreclosure crisis continues to grow at an 
alarming rate, with devastating consequences for communities across the 
Nation.
    In March of this year, the Treasury Department instituted its Home 
Affordable Modification Program with the laudable goal of addressing 
this crisis by providing financial incentives to servicers to 
voluntarily modify mortgages headed to foreclosure.
    The Program provides servicers economic and other incentives to 
make mortgage payments for troubled borrowers more affordable. Payments 
can be reduced to 31% of the borrower's gross monthly income by a 
reduction in the interest rate or an extension of the mortgage term, or 
both.
    Empirical studies suggest, however, that voluntary modifications 
continue to be ineffective. The Program appears to be hampered by a 
series of administrative issues, including adequate staff to handle 
modification requests, among other deficiencies.
    Although there will be an estimated 2.5 million home foreclosures 
in 2009, there have only been about 240,000 voluntary mortgage 
modifications since the Program's inception.
    Even worse, the number of modifications appears to be decreasing 
rather than increasing. According to Professor Alan White, one of our 
witnesses today, mortgage modifications peaked in February at 23,749 
modified loans. By contrast, there were only 19,041 modified loans in 
May and 18,179 modified loans in June.
    In the meantime, the number of foreclosures continues to rise, 
going from 242,000 foreclosures in January to 277,847 in May and 
281,560 in June.
    And, an analysis of many of these so-called ``modifications'' 
indicates that they actually may worsen a homeowner's financial 
predicament.
    While I appreciate the Program's well-intentioned attempt to entice 
loan servicers to voluntarily modify mortgages of financially troubled 
homeowners, I believe that these efforts do not go far enough to 
address the foreclosure crisis.
    Accordingly, I have three suggestions that may help to enhance any 
voluntary mortgage modification program, which I hope we will address 
today.
    First, bankruptcy judges must be given the authority to modify 
mortgages in bankruptcy.
    The threat of a mandatory principal reduction in bankruptcy will 
serve as a healthy incentive to better ensure that more meaningful 
voluntary modifications will be done outside of court.
    In the absence of judicial mortgage modification authority, or some 
similar threat of mandatory mortgage modification, lenders and 
servicers simply do not have enough of an incentive to modify mortgages 
in a meaningful and substantial way.
    Just this past Monday, the Federal Reserve Bank of Boston released 
a study concluding that only 3 percent of delinquent borrowers who were 
more than 60 days behind in their payments had their loans modified to 
reduce monthly payments. A somewhat greater percentage received 
modifications that did not even result in lower payments.
    According to one of the study's coauthors, lenders will not modify 
loans voluntarily because ``maximizing profits does not mean modifying 
loans.''
    As many of you know, mortgages on second and third homes and 
investment properties (such as multi-family homes) can be judicially 
modified under current law, as can virtually any other secured claim, 
including claims secured by yachts, airplanes, and commercial real 
estate worth many millions of dollars.
    It is unfathomable to me that no such authority exists for a 
working family's principal residence.
    Judicial modification of primary mortgages would help stop the 
endless cycle of foreclosures, by allowing homeowners to avoid 
foreclosure and by keeping more distressed properties from coming into 
the market.
    Second, any mortgage modification program should require--or at 
least provide strong incentives for--servicers to reduce the principal 
balance on a mortgage, as studies have shown that the most successful 
mortgage modifications included principal reductions.
    Many have noted that when a homeowner does not have an equity stake 
in his or her home, he or she is more likely to default on the mortgage 
loan. The best thing for struggling homeowners is to reduce mortgage 
principal.
    But the Home Affordable Modification Program fails to include any 
requirement or incentive for principal reductions.
    As a result, most loan modifications merely postpone or stretch out 
the payments and, thus, merely delay the inevitable default and 
foreclosure. In fact, some studies show that homeowners often wind up 
deeper in debt as a direct result of these modifications. Not 
surprisingly, the re-default rate is nearly 50%.
    Third, any efforts by Congress or the Administration to address the 
foreclosure crisis must put distressed homeowners ahead of the 
interests of financial institutions.
    Giving the mortgage lending industry a free hand to pick and choose 
which mortgages to modify, and under what terms, simply does not work.
    Yet most of the government's efforts have centered on encouraging 
voluntary loan modifications, which unfortunately prioritizes the 
interests of financial institutions at the expense of the interests of 
struggling homeowners.
    For instance, in a belated response to the mortgage foreclosure 
crisis, the Bush Administration issued various incentives, brokered 
with the lending industry, to provide some relief for American 
homeowners facing foreclosure. Over time, it became apparent that these 
initiatives were largely ineffective.
    Unfortunately, the current Home Affordable Modification Program may 
actually have the unintended consequence of discouraging loan servicers 
from helping the borrowers most in financial need.
    Under its system of incentives, participating servicers receive a 
financial reward when borrowers stay current on their payments for 
three years under modified terms. As a result, this incentive system 
may steer servicers away from the most financially troubled borrowers, 
who are most in need of a mortgage modification.
    For more than 2 years, this Committee has carefully considered the 
causes and consequences of the mortgage foreclosure crisis. We offered 
a meaningful yet modest solution to the problem by granting bankruptcy 
judges the authority to modify mortgage terms, including a so-called 
``cramdown'' of mortgage principal to more reasonably reflect actual 
market values.
    Last March, the House passed H.R. 1106, the ``Helping Families Save 
Their Homes Act of 2009,'' which contained a provision authorizing 
judicial mortgage modification.
    The version of the legislation that ultimately was signed into law, 
however, failed to include this critical provision, which was perhaps 
the one provision that would have most effectively helped families save 
their homes from foreclosure.
    I am disappointed not for myself or for the Members of this 
Committee. Rather, my disappointment stems from my deep concern for the 
millions of families now facing the loss of their homes and a life of 
insecurity and desperation.
    If Congress and the Administration fail to respond to the mortgage 
foreclosure crisis in a more assertive and thoughtful manner, I fear 
for our Nation's future.
    I thank the witnesses for being here today, I and eagerly await 
their testimony.

                                

   Response to Post-Hearing Questions from Alan M. White, Assistant 
 Professor of Law, Valparaiso University School of Law, Valparaiso, IN







                                

Response to Post-Hearing Questions from James H. Carr, Chief Operating 
   Officer, National Community Reinvestment Coalition, Washington, DC

















                                

Response to Post-Hearing Questions from Irwin Trauss, Manager, Attorney 
     for the Consumer Housing Unit, Philadelphia Legal Assistance, 
                            Philadelphia, PA






















                                 
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