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




                 ROLE OF THE LENDING INDUSTRY IN THE 
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=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                           SEPTEMBER 9, 2009

                               ----------                              

                           Serial No. 111-50

                               ----------                              

         Printed for the use of the Committee on the Judiciary


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








                  ROLE OF THE LENDING INDUSTRY IN THE 
                        HOME FORECLOSURE CRISIS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 9, 2009

                               __________

                           Serial No. 111-50

                               __________

         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

                              ----------                              

                           SEPTEMBER 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

                               WITNESSES

The Honorable Elizabeth W. Magner, United States Bankruptcy Court 
  for the Eastern District of Louisiana
  Oral Testimony.................................................     7
  Prepared Statement.............................................    10
Ms. Suzanne Sangree, City of Baltimore Law Department
  Oral Testimony.................................................   138
  Prepared Statement.............................................   140
Mr. Joseph R. Mason, Ph.D., Louisiana State University
  Oral Testimony.................................................   267
  Prepared Statement.............................................   270
Mr. Lewis D. Wrobel, Attorney at Law
  Oral Testimony.................................................   304
  Prepared Statement.............................................   307

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

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 the Constitution, Civil Rights, and Civil Liberties.........     5
Material submitted by the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on the Constitution, Civil Rights, and Civil Liberties.........   319
Material submitted by the Honorable Trent Franks, a 
  Representative in Congress from the State of Arizona, and 
  Ranking Member, Subcommittee on Commercial and Administrative 
  Law............................................................   333

                                APPENDIX
               Material Submitted for the Hearing Record

Response to Post-Hearing Questions from the Honorable Elizabeth 
  W. Magner, United States Bankruptcy Court for the Eastern 
  District of Louisiana..........................................   400
Response to Post-Hearing Questions from Suzanne Sangree, City of 
  Baltimore Law Department.......................................   403
Response to Post-Hearing Questions from Joseph R. Mason, Ph.D., 
  Louisiana State University.....................................   405
Response to Post-Hearing Questions from Lewis D. Wrobel, Attorney 
  at Law.........................................................   406
Prepared Statement of the Honorable Cecelia G. Morris, United 
  States Bankruptcy Court for the Southern District of New York--
  Poughkeepsie Division..........................................   407

                        OFFICIAL HEARING RECORD
      Material Submitted for the Hearing Record but not Reprinted

Enclosures to the Response to Post-Hearing Questions from Suzanne 
    Sangree, City of Baltimore Law Department, have been retained in 
    the official Committee hearing record

 
                  ROLE OF THE LENDING INDUSTRY IN THE 
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                      WEDNESDAY, SEPTEMBER 9, 2009

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

    The Subcommittee met, pursuant to notice, at 2:10 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Steve 
Cohen (Chairman of the Subcommittee) presiding.
    Present: Representatives Cohen, Conyers, Johnson, Scott, 
Franks, and King.
    Staff Present: James Park, Majority Counsel; Zachary 
Somers, Minority Counsel; and Adam Russell, Majority 
Professional Staff Member.
    Mr. Cohen. This hearing of the Committee on the Judiciary, 
Subcommittee on Commercial and Administrative Law now comes to 
order. Without objection, the Chair will be authorized to 
declare a recess of this hearing. I now recognize myself for a 
short statement.
    Today the Subcommittee continues its examination of the 
ramifications of the home foreclosure crisis. At this time we 
will focus on the role of the lending industry both in 
contributing to the crisis and in mitigating its effects. This 
hearing is certainly not intended to be an attack on the 
lending industry, but rather is a chance for the Subcommittee 
to offer constructive criticism of some of the industry's past 
and current practices to better serve its customers which are 
our constituents and America's citizens.
    I represent Memphis, Tennessee, which is 60 percent African 
American. Memphis also has one of the highest foreclosure rates 
in the Nation, and African American homeowners have been 
particularly hard hit. Memphis homeowners were targeted with 
aggressive marketing of subprime mortgage loans. According to 
many observers, many such loans were the principal cause not 
only of the home foreclosure crisis but also of the Nation's 
continuing economic troubles.
    Baltimore, Maryland shares many demographic similarities 
with Memphis, including roughly the same percentage African 
American population. Baltimore, like Memphis, is facing a 
particular severe home foreclosure crisis with African American 
homeowners bearing the disproportionate brunt of such 
foreclosures.
    Therefore, I was intrigued when I learned of the lawsuit 
filed by the City of Baltimore against one of the Nation's 
largest mortgage lenders, Wells Fargo. This suit alleges that 
Wells Fargo deliberately steered African Americans to high cost 
subprime mortgage products, even in cases where the borrower 
would have qualified for a traditional prime loan.
    These are very troubling allegations. This phenomenon, 
referred to as reverse redlining, is illegal and a perversion 
of the laudable goal of increasing home ownership among 
traditionally disadvantaged groups. At this point Memphis has 
been considering filing a lawsuit similar to Baltimore's. 
Shelby County, which includes Memphis, and Memphis is the 
county seat thereof, has already authorized the filing of such 
a lawsuit.
    In addition, recent media reports are suggesting a growing 
frustration on the part of judges nationwide with improper 
documentation and poor administrative practices on the part of 
mortgage servicers. This improper documentation or handling of 
records often impedes voluntary loan modification efforts, and 
in some instances ownership of a note on a mortgage and the 
attendant legal right to foreclose on a home have been called 
into question.
    We will examine the experience of financially troubled 
homeowners and their interactions with servicers and their 
attempts to seek a meaningful modification of their mortgage 
terms. The voluntary system apparently has not been working, 
and that is quite unfortunate.
    I welcome our witnesses, look forward to their testimony, 
and I will now recognize my colleague Mr. Franks, the 
distinguished Ranking Member of the Subcommittee, for his 
opening remarks.
    Mr. Franks. Thank you, Mr. Chairman. And welcome back to 
everyone.
    Mr. Chairman, the title of today's hearing is the Role of 
the Lending Industry in the Home Foreclosure Crisis. And I 
think that no one here doubts that the lending industry has had 
a role in that crisis. Lenders made irresponsible underwriting 
decisions for many of the loans that are currently distressed, 
and lenders and servicers probably could have done more at the 
outset of the crisis to modify troubled mortgages to make them 
more affordable.
    However, I am concerned that if we focus only on the role 
of the lending industry we will be missing the major part of 
the problem. We will fail to acknowledge that the lending 
industry is not the only culpable party in this crisis. There 
is certainly plenty of blame to go around, including to the 
Federal Government itself. Through the Community Reinvestment 
Act the quasi-government entities like Fannie Mae and Freddie 
Mac and efforts like that on our part, the Community 
Reinvestment Act and Fannie Mae and Freddie Mac lending 
guidelines actually encouraged and sometimes almost coerced the 
underwriting of questionable loans.
    That said, we need to find solutions, and the lending 
industry unquestionably has a role to play in getting us out of 
our current predicament. But many aspects of this crisis, 
unemployment, falling home values, are simply outside of the 
lending industry's control. So while I look forward to the 
witnesses' testimony regarding what additional steps the 
lending industry can make to help stem foreclosures, we must be 
mindful that not all of the solutions or the blame rests with 
the lenders.
    What is more, as we continue to search for solutions to 
this crisis, there is one so-called solution that I hope we can 
avoid, and that is bankruptcy cramdown. Allowing bankruptcy 
courts to modify home mortgages will have adverse consequences 
for all while providing little real relief to distressed 
borrowers. Bankruptcy cramdown will invariably lead to higher 
interest rates and less generous borrowing terms for all 
borrowers, and I think that will especially hit the very 
hardest those at the lowest income levels.
    Moreover, given that unemployment has been a driving factor 
behind most foreclosures and that those who do not have regular 
income may not file under Chapter 13 bankruptcy, cramdown will 
do nothing for those most in need of relief, those being the 
unemployed. Combine the unemployed with speculators, another 
large segment who would be unhelped by cramdown, and one 
quickly realizes that cramdown will really do nothing to help 
the vast majority of borrowers facing foreclosure. There is no 
reason to enact cramdown legislation with its attendant high 
costs when it will only produce modest results at very best.
    Furthermore, we must not forget that cramdown will not only 
impact lenders but investors as well. These investors include 
in large part pension funds representing the retirement savings 
of millions of Americans. We should not pass the cost of 
irresponsible borrowing and lending off on current and future 
retirees.
    I understand that cramdown is not the focus of this 
hearing, but because of this Subcommittee's jurisdiction I feel 
that every time we examine the foreclosure crisis we are really 
revisiting cramdown. The Senate put cramdown to rest earlier 
this year, and I hope that we can leave it there.
    And I look forward to the witnesses' testimony and hope 
they have some positive suggestions for actions the lending 
industry can take to help alleviate the foreclosure crisis. And 
with that, Mr. Chairman, I yield back.
    Mr. Cohen. Thank you. I appreciate the gentleman for his 
statement. And now recognize Mr. Conyers, the Chairman of this 
Committee, the distinguished Member of this Subcommittee and 
the father of universal coverage and the father of cramdown.
    Mr. Conyers. Thank you, Mr. Chairman. And I want to join 
all of us in welcoming our witnesses. I am glad cramdown was 
mentioned before. I wish I could say I wasn't going to mention 
it until you mentioned it, Mr. Ranking Member, but I probably 
would have anyway.
    Mr. Franks. It is all right. You can blame it on me.
    Mr. Conyers. The House passed our provision. And cramdown 
is such a tacky term, isn't it? I mean what we are talking 
about is giving the bankruptcy judge the same authority to 
review property matters that come before him on everything but 
houses; homeowners. So home, no good. And so all we are asking 
the judge to do, and fortunately we have a very distinguished 
member of the court here, is to look at it and see if the 
people that are the mortgagors are worthy of having the 
mortgage rewritten, the terms extended, the interest rate maybe 
reduced, the note itself lowered.
    And it is not mandatory. It would be discretionary. What is 
wrong with that? Especially when we are having--is it in Wayne 
County? 200,000--what is the number? 200 a day. We are going 
in--and I love the President's diplomacy in saying this is a 
deep recession. We are in a depression. 200 every single day in 
Wayne County. I used to say 127 a day. Now it is 200 enter the 
process of being foreclosed on for failure to--to be delinquent 
in their mortgage payments.
    Now, this Committee has had six hearings on this subject--
six. This is the seventh. I commend all of the Members, 
especially my dear friend from Virginia, Mr. Franks, for his 
participation and making us stick to the proposition and prove 
what it is that we are doing is in the best interest of all the 
people losing their homes in my area and in his and across the 
country. He is concerned about that. He just wants to do it 
right. And so he is making sure that we do it right. And if we 
don't he doesn't hesitate to tell us about it.
    But all of this started with the subprime mortgage 
meltdown. This is what created it. And the meltdown was 
created, from this Member's point of view, because of the fact 
that people were enticed into mortgage contractual agreements 
in which when they said there would be an adjustable rate 
mortgage they didn't know that adjustable meant up, and many 
didn't know how soon up would kick in. Sometimes it was years, 
sometimes it was months, but it was always--and then sometimes 
it was a big increase that everybody knew, including the people 
that gave them the mortgage, that they could never ever sustain 
it.
    But now what about this? What about the people that were 
paying their mortgage and Chrysler Corporation announced that 
they were going to close down the Hamtramck plant in my 
district. And everybody goes; white collar, industrial, the 
janitor. And you lose your income, which leads to you becoming 
delinquent in your mortgage, but you also lose your health care 
benefits and your pension. So to tell people that 200 new 
people, I could see in my county every day new, there will be 
200 more tomorrow, there will be 200 more Friday, that's too 
bad, the bankruptcy court can't do anything about it.
    And so I am just here to start our conversation off with 
the observation that this Administration business about 
voluntary, moderating the problem through volunteerism hasn't 
been working. As a matter of fact, fewer and fewer people each 
month work into any agreement. But worse than that, the people 
that do work into agreement frequently fall off the wagon 
because they don't have the money, so they end up getting 
socked anyway.
    So the servicers aren't bad guys or these are not evil 
people. There was a contract. The first thing somebody says is, 
when you signed it didn't you, buddy, Mr. and Mrs. Jones, you 
didn't know that this was in there. These provisions, we didn't 
make them up. That was the terms of the agreement that we got 
you a mortgage for your dream house. Everybody knows to own a 
home in America is the standard. That is the gold standard. We 
want everybody to be homeowners. At one time Detroit had the 
record of more working people owning homes than any other city 
in the country. That is when the automobile industry was 
booming and people, ordinary working people, were able to do 
that.
    But there has been some negligence in what the servicers 
do. And by the way, after the mortgage is executed the bank, 
Wells Fargo, sells it to somebody else. And guess what, 
somebody else sells it to somebody else. And then they bundle 
them up and they infuse not only the American financial system, 
but these things traveled around the world in every financial 
system; in Europe and the Far East and Latin America. And that 
is what created the problem that brought us to what is now 
called the recession, the deep recession.
    Now I exclude from that the people that were catching hell 
before there was a subprime mortgage. There were some people 
losing their homes and jobs before this thing hit big time. And 
so, no, I don't think anybody is here to criticize unduly the 
servicers, the people who ended up getting all this. But I do 
think they have done some things that they shouldn't have done, 
and I do think they did some things wrong, and I do think that 
the bankruptcy judges are strapped by the regulations that we 
were--we were trying to--we came within--what was it in the 
Senate, 51 to 45? Yeah, we came within six votes, seven votes, 
of getting a bill that would go before the President.
    Now, I am working on Trent Franks because I know of his 
concerns. He is going to be one of those that might reconsider 
his vote if we handle this hearing properly to his satisfaction 
and the Chairman's.
    I yield back.
    [The prepared statement of Mr. Conyers follows:]
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 the Constitution, Civil Rights, 
                          and Civil Liberties
    Central to 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. As of July, in my hometown of Detroit, 1 out of every 275 
housing units faces foreclosure. Also, there were 127 foreclosures a 
day in Wayne County.
    Vanessa G. Fluker, an attorney in Detroit, has shared with me many 
stories of clients who were treated poorly by the lending industry. For 
example, one of her clients requested a mortgage modification from 
Countrywide Financial, now part of Bank of America. Countrywide refused 
and, instead, sold her client's home to a third-part investor for $800. 
The lending industry would rather throw people on the street and sell 
their homes for pennies on the dollar rather than engage in a 
reasonable modification.
    Others of Ms. Fluker's clients who have been refused modification 
by mortgage servicers include a member of our armed forces, whose 
mortgage servicer refused to provide a mortgage modification after he 
fell behind on his payments while he was serving in Iraq and a woman 
and her mother who is dying of cancer.
    Despite the billions of dollars that the Administration has 
provided to lenders and servicers to encourage voluntary mortgage 
modification, we continue to hear stories like those of Ms. Fluker's 
clients. And these are just a sampling of stories from one attorney in 
Detroit.
    I also note that some of Ms. Fluker's clients are senior citizens 
who originally had equity in their homes. Then, they were induced into 
taking on adjustable rate mortgages by aggressive marketing, and now 
they face usurious interest rates and mortgage payments that exceed 
their fixed incomes. We cannot forget how this foreclosure crisis 
began.
    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.
    The Judiciary Committee, including this Subcommittee, has been 
examining the causes and consequences of the home foreclosure crisis 
for more than two years. Between the full Committee and this 
Subcommittee, we have held at least six hearings in that period.
    We have also marked up legislation to help address the foreclosure 
crisis. My bill, H.R. 1106, the ``Helping Families Save Their Homes Act 
of 2009,'' offered a meaningful yet modest solution to the foreclosure 
crisis 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.
    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.
    Today, as part of our continuing oversight of this issue, we look 
at how the lending industry has contributed to the foreclosure crisis. 
There are three issues I want to raise.
    First, anecdotal evidence suggests that mortgage servicers have not 
been cooperative or even communicative with borrowers who have sought 
mortgage modifications.
    Back in July, this Subcommittee held an oversight hearing on the 
Treasury Department's Home Affordable Modification Program. This 
Program is intended to address the home foreclosure crisis by providing 
financial incentives to servicers to voluntarily modify mortgages at 
risk of default.
    Central to the Program's success, however, is that it is voluntary. 
Accordingly, the quality of the participation by lenders and servicers 
is critical.
    It is no secret that I am deeply skeptical of allowing an industry, 
which caused this financial crisis, to be given total control to 
resolve it. I continue to question whether the industry's voluntary 
efforts to modify mortgages--absent the possibility of involuntary 
judicial modification in bankruptcy--will be sufficient.
    At our last hearing in July, it unfortunately became very clear 
that the hoped-for success of these efforts was not materializing. 
Empirical studies suggest that voluntary modifications continue to be 
ineffective. Even worse, the number of modifications appears to be 
decreasing rather than increasing.
    According to Professor Alan White, one of our witnesses from the 
previous hearing, 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.
    Today's hearing will likely help us better understand why these 
efforts are ineffective. In particular, mortgage lenders and their 
servicers appear to be hampered by a series of shortcomings, including 
inadequate staff to handle modification requests, sloppy administrative 
practices, and a lack of responsiveness to borrowers desperate to know 
how they can save their homes from foreclosure.
    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.
    Second, I want to know how our judicial system is currently 
addressing these deficiencies.
    For example, the New York Times reported last week on the rising 
frustration of bankruptcy judges nationwide with mortgage servicers who 
lack necessary documentation for the mortgages that they purportedly 
service. These servicers are often unable to accurately respond to 
borrowers' questions about their mortgages, and they cannot determine 
whether these borrowers, in fact, qualify for requested mortgage 
modifications.
    Additionally, judges are citing lenders and their servicers for 
their improper practices, which include attempts to impose and collect 
unjustified fees, charging homeowners for unnecessary insurance, and 
failing to properly credit homeowners' payments.
    Other judges simply refuse to authorize foreclosure sales, because 
the party seeking relief lacks critical documentation to establish that 
it is entitled to seek foreclosure.
    Given that we are being asked to trust the lending industry to work 
with homeowners to help families keep their homes, I find these reports 
of mortgage companies' administrative incompetence to be deeply 
troubling.
    Third, what more can Congress do to ensure that racially 
discriminatory lending practices do not recur?
    I applaud the City of Baltimore for pursuing fair housing claims 
against lenders suspected of engaging in ``reverse redlining,'' the 
deliberate attempt to steer racial minorities to high-cost, subprime 
mortgages.
    Nevertheless, it is as much, if not more, of a federal obligation 
to ensure that Americans' civil rights are protected, as highlighted at 
an oversight hearing held by our Constitution Subcommittee last year. 
That hearing clearly established that enforcement of the Fair Housing 
Act was severely lax.
    In addition, there have been various studies identifying predatory 
mortgage lending practices as having played a key role in fueling the 
home foreclosure crisis, which has, in turn, devastated communities of 
color across our Nation.
    With the arrival of new management at the Justice Department, which 
has expressed a renewed desire for vigorous civil right enforcement, I 
am hopeful that federal enforcement of our fair housing laws will once 
again be a priority.
    I thank the witnesses for being here today, and I eagerly await 
their testimony.
                               __________

    Mr. Cohen. That puts a high burden on me. Two votes. Thank 
you, Mr. Chairman.
    Without objection, the other Members' opening statements 
will be included in the record. I would like to thank all of 
the witnesses for participating in today's hearing. Without 
objection, your written statement will be placed in the record 
and we would ask you to limit your oral remarks to 5 minutes. 
There is a lighting system that kind of tells you what your 
time is. Green means you are within the first four, yellow you 
are on your last, and by red you should have finished quickly. 
Nobody seems to pay attention to it. I hope you will be the 
first panel that does.
    After you have presented your testimony Subcommittee 
Members will be permitted to ask questions. It is also subject 
to the 5-minute limitation. We might have votes come up, and if 
we do we will recess and will come back.
    Our first witness is Judge Elizabeth Magner. Judge Magner 
was sworn in on September 9, 9/9, of 2005, and prior to that 
was in private practice with Lemle and Kelleher, and then with 
her own firm. During 23 years in private practice Judge Magner 
specialized in bankruptcy foreclosures, seizures, and other 
commercial litigation matters. She has a broad range of 
experience in representing and presiding over matters 
concerning debtors, creditors, trustees and committees.
    Thank you for being here, Judge Magner, and we now ask you 
to begin your 5 minutes of testimony.

 TESTIMONY OF THE HONORABLE ELIZABETH W. MAGNER, UNITED STATES 
     BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF LOUISIANA

    Judge Magner. Thank you, Congressman Cohen, Ranking Member 
Franks, and Congressman Conyers, and the other Members of the 
Subcommittee. I appreciate this opportunity to speak to you 
about the home mortgage crisis. Obviously I am just one of 330 
bankruptcy judges in the United States, but I hope my 
observations may be of some assistance to you.
    The historic model of a lender originating and then holding 
a mortgage loan has been lost, perhaps forever. While the 
change in this practice has created tremendous opportunities 
for consumers, we also know that it had its dark side in the 
form of predatory lending and shoddy underwriting. But more 
devastating to consumers and the economy than either of these 
issues is another largely untold issue, the inaccurate 
accounting of loans.
    The pooling of loans for sale often to special purpose 
trusts with far flung investor owners has resulted in the rapid 
rise of the mortgage servicing industry. More and more the 
owners or the holders of notes are not typical financial 
institutions with the ability to administer a loan. Third-party 
loan servicing companies fill that need. These companies bid 
for the right to service millions of loans. In order to keep 
costs low they rely on sophisticated computer software that 
handles virtually every aspect of a loan's administration. With 
disturbing regularity, however, these programs have improperly 
applied loan payments in derogation of the terms of notes and 
mortgages, failed to recognize and honor the terms of plans of 
reorganizations and court orders, and falsely place consumers 
into foreclosure. The amounts claimed on proofs of claim and in 
motions of relief are very often wrong by more than trifling 
amounts.
    Because there is no standard software platform for managing 
a loan, no industry accepted format for reporting, nor uniform 
set of guidelines for administration, inconsistencies in loan 
administration are rampant and can vary even on one loan from 
year to year as servicers change. In addition to these issues, 
the records of one servicing company probably will not 
interface with those of others. As the note holder changes 
servicers, perhaps as often as every year, the historical 
information on a loan may be lost, become inaccessible or 
unintelligible. This creates an obvious and serious problem 
when a loan balance is questioned or needs to be verified.
    As amazing as this might sound, the fact is that most 
national servicers cannot produce a simple spreadsheet which 
shows a loan's history. Without the ability to examine the 
loan's amortization in a quick and clear format, answering a 
question regarding the amount owed produces an almost 
insurmountable barrier to consumers. When a consumer files for 
bankruptcy relief his home is probably already in foreclosure. 
Determining the amount of the debt due is critical to his 
plan's feasibility, yet mortgage lenders routinely fail to 
produce the most basic of information necessary to validate 
their balances and check the cost and fees assessed. At least 
one study has found that 40 percent of all proofs of claim 
check did not attach a copy of the note or the mortgage even 
though that is required by bankruptcy rule 3001.
    Of greater concern to me is the absence of an accounting 
for the loan. Typically, either before or after a bankruptcy, a 
lender will advise a debtor that a fee or charge has been 
placed on their account. Because of this borrowers can become 
quickly confused when they make a payment and much to their 
surprise the note is still past due. If a loan goes 60 days 
past due, significant charges are usually incurred. Again, this 
is without notice or detail, making it even harder for a 
borrower to cure a default.
    When a borrower files for bankruptcy his home in 
foreclosure has already incurred sizeable fees and costs. If a 
mortgage debt is itemized at all on the proof of claim, broad 
categories of expenses are utilized, such as corporate advances 
or prior servicer fees. Finding out any detail on this is an 
arduous task. In my experience it takes 4 to 6 hearings and 
over 4 months of time for a national servicing company to 
produce a single loan history or the documents to support 
third-party charges on the account. Over 80 percent of the 
lenders who appear before--excuse me, the borrowers who appear 
before me make less than $40,000 per year. They simply don't 
have the financial resources to force through litigation the 
documents they need to assess the accuracy of the loans they 
are being asked to pay. So they tend to accept the proofs of 
claim without any challenge whatsoever.
    But why am I so concerned about the accuracy of the proofs 
of claim; aren't they correct? I am afraid to tell you my 
concern is no. In every trial I have presided over payments 
were applied first to fees and costs--excuse me, fees and 
costs, then principal, interest, and escrow, exactly the 
opposite of what is required by the loan documents.
    Now, why is this important? Because the application of 
payments first to fees and costs will always result in 
additional fees and costs assessed against the borrower as well 
as additional accrued interest. It is simply math. After a 
bankruptcy is filed post petition payments are commonly applied 
against pre-petition costs, installments and undisclosed post-
petition charges contrary to the terms of plans or court 
orders. Escrow amounts are routinely--I am sorry. I have gone 
over my time, Chairman. I will stop now, and if there are any 
further questions I will go forward. I couldn't see the light.
    [Material submitted by Judge Magner follows:]
Material Submitted by the Honorable Elizabeth W. Magner, United States 
         Bankruptcy Court for the Eastern District of Louisiana




                               __________
    Mr. Cohen. Thank you, Judge. It just came on. That was 
great timing. This is the fourth anniversary of your being on 
the bench?
    Judge Magner. Yes, it is.
    Mr. Cohen. Well, do you have a king's pay for something 
like that?
    Judge Magner. I was sworn in a week after Katrina.
    Mr. Cohen. And you sit in New Orleans?
    Judge Magner. In New Orleans.
    Mr. Cohen. Great. Thank you so much. Are you going to get 
back tonight to get a good meal in New Orleans?
    Judge Magner. Tomorrow.
    Mr. Cohen. Tomorrow. Well, you are great to come up here 
with us and give up all that good cuisine.
    Our next witness is Ms. Suzanne Sangree.
    Ms. Sangree. Sangree.
    Mr. Cohen. Ms. Sangree is the Chief Solicitor for the 
Baltimore City Law Department, Baltimore, MD. The city has 
filed a lawsuit against Wells Fargo alleging the bank's lending 
practices discriminated against minority borrowers. It further 
alleges the bank's lending practices led to a wave of 
foreclosures that reduced city tax revenues and increased its 
costs.
    And if you could do your 5 minutes, we can get away and run 
to vote. But we thank you, Ms. Sangree, and we look forward to 
your testimony.

                 TESTIMONY OF SUZANNE SANGREE, 
                CITY OF BALTIMORE LAW DEPARTMENT

    Ms. Sangree. Thank you, Chairman Cohen. Thank you, Chairman 
Conyers, Ranking Member Franks, and the rest of the 
Subcommittee Members. It is my pleasure to testify.
    Baltimore is a case study of the damage that has befallen 
cities in the absence of Federal regulation. In particular, lax 
enforcement of the Fair Housing Act, relaxation of banking 
regulations, and Federal preemption of States' ability to 
regulate has created an environment in which racially 
discriminatory predatory lending has flourished.
    Baltimore, a majority African American city, as Chairman 
Cohen pointed out, much like Memphis, is currently contending 
with the economic fallout. One of the city's strategies for 
staunching the damage that predatory lending has caused is 
litigation against the wrongdoers. And we have sued--under the 
Fair Housing Act, we have sued Wells Fargo for racially 
discriminatory predatory lending, as you mentioned earlier. 
Redlining, we have sued them for reverse redlining, which is 
the flip side of redlining. Redlining is the practice of 
drawing a boundary around a minority neighborhood and saying we 
are not going to lend prime credit inside that boundary. 
Reverse redlining is saying we are going to target that same 
neighborhood for predatory lending, for high cost, high fee, 
high interest rate, unfavorable loans.
    The shapers of the Fair Housing Act smartly designed it so 
that cities could sue directly, would have standing to sue, but 
it was always envisioned that the Federal Government would play 
a leading role in enforcement of the act, and in the recent 
past it has not done that.
    Like other American cities with large non-White 
populations, Baltimore is particularly vulnerable to predatory 
lending, and this vulnerability is caused by two related 
factors. One is a history of redlining, of denying credit to 
certain communities, and the other is racial segregation 
patterns in housing, so that those communities that have been 
denied or those people who have been denied credit in the past 
are geographically concentrated and so very easily targeted by 
abusive lenders.
    As our history of redlining and racial segregation would 
predict, beginning in the late 1990's Baltimore became the 
target of predatory lending, and this fact is reflected in a 
wave of foreclosures. Since the year 2000 we have had over 
33,000 foreclosure filings, homes that are subject to 
foreclosure filings.
    Home Mortgage Disclosure Act data reveals racial 
disparities in Wells Fargo's lending practices, and Wells Fargo 
has been the biggest lender in Baltimore City since 2000. As 
documented in our amended complaint, in 2006 Wells Fargo made 
high cost loans to 65 percent of its African American borrowers 
compared to only 15 percent of White borrowers in the city, and 
Wells Fargo foreclosure rates are four times higher in African 
American neighborhoods than they are in White neighborhoods.
    High level ex-employees of Wells Fargo have come forward to 
testify to the economic incentive structure at Wells Fargo that 
encouraged and rewarded employees handsomely for steering 
African American borrowers into unfavorable loans, and they 
describe practices of steering even borrowers who qualified for 
prime, steering them into subprime, assuring borrowers that 
pre-payment penalties could be waived when they could not be 
waived, assuring them that they were getting a fixed rate loan 
when they were getting a variable rate loan or that they would 
be able to refinance before the adjustment rate would begin to 
kick in. They were also encouraged to take more equity out of 
their homes or not to document their income even though they 
were salaried employees with W-2s of all of their income. And 
the purpose of encouraging borrowers to not do those things was 
that the lenders knew, the brokers knew, the agents knew, that 
this would cause the loan to flip to subprime from prime and 
they would make much higher commissions and the company would 
make much higher profits when that happened.
    When people are locked into mortgages they cannot afford, 
it is very predictable they will fall behind and foreclosure 
will often result. And this has caused Baltimore great damage. 
Goldseker Foundation estimates that in 2006 alone the city lost 
$41.9 million in tax revenue. We have increased code 
enforcement, as well as fire and police, and all of our efforts 
to nurture our neighborhoods and have urban renaissance are 
being washed down the drain.
    The legal claims and the facts and figures concerning the 
city's damages don't capture the devastating impact of 
foreclosure on African American families and neighborhoods. 
Adding injury to insult communities that for generations--and I 
have a red light too. It is hard to watch that light when you 
are reading. So I will stop as well.
    [The prepared statement of Ms. Sangree follows:]
                      Statement of Suzanne Sangree




    Mr. Cohen. Thank you so much. You are the two best 
witnesses we have had during the whole time that I have been 
Chair. But we do only have 4 minutes to run and vote. We have 
got about, I think I have been told, four votes. And so that 
theoretically is give or take 30 minutes. And so in the interim 
you are relieved of any responsibilities to improve the world. 
And we are in recess.
    [Recess.]
    Mr. Cohen. The Committee will now come back into session. I 
want to thank the witnesses for their continued attendance.
    Our third witness is Professor James Mason. Joseph, yes, 
that's right. Somehow it got diverted into acting. Professor 
Mason is Associate Professor of Finance at LSU's Department of 
Finance and a senior fellow at the Wharton School. Dr. Mason's 
research spans the fields of corporate finance, financial 
intermediation, financial history, monetary economics focusing 
on issues related both to theory and public policy. And do you 
know where the deduct box is.
    Mr. Mason. The what box?
    Mr. Cohen. The deduct box.
    Mr. Mason. The beat up box.
    Mr. Cohen. You don't know the deduct box?
    Judge Magner. He hasn't lived in the State long enough.
    Mr. Cohen. One of Huey Long's last requests made of him is, 
Huey, where is the deduct box? That is the D. Would you deduct 
it from your salary, your State job, to give to the political 
organization. They never found the deduct box. Huey would not 
tell them on his death bed. So with that recognized, always 
looking for the deduct box, thank you for being here Professor 
Mason. We now recognize you for your testimony.
    Mr. Mason. Thank you. I will add that to my palette of Huey 
Long stories, of which I have several, but that is a new one.

             TESTIMONY OF JOSEPH R. MASON, Ph.D., 
                   LOUISIANA STATE UNIVERSITY

    Mr. Mason. Thank you, Chairman Cohen, Ranking Member 
Franks, and Members of the Subcommittee, for allowing me to 
testify today.
    The reasons for the limited success of private 
modifications to date lie in the realities of the mortgage 
crisis, the same realities that could hinder the relevance of 
judicial modifications. First, many residents of homes today 
could never afford an amortizing loan and still cannot do so 
today. Second, a significant proportion of Chapter 13 repayment 
plans have historically failed. And third, allowing bankruptcy 
judges to modify mortgage debt may cause other perverse 
incentives among both lenders and borrowers.
    The sad fact is a significant number of borrowers can't 
afford any amortizing mortgage. In the last several years 
substantial numbers of consumers borrowed money they could not 
afford to repay. The extent to which those loans were outside 
any reasonable bounds of affordability, however, is still not 
widely understood. The problem is that while the industry 
created the loans in a process that labeled them, quote, 
unquote, prime or Alt-A, many loans were nothing of the sort. 
Within the industry many of the loans that are distressed today 
were known as, quote, unquote, stealth prime or stealth Alt-A, 
acknowledging that the loans qualified for their monikers only 
on the basis of copious quantities of scissors, Wite-Out, and 
adhesive tape all in the name of the democratization of credit 
and expanding home ownership pursuant to Federal policy.
    The question then becomes what can reasonably be expected 
of modification, judicial or otherwise. Prior to the crisis I 
reported that some 40 to 50 percent of modified loans 
redefaulted within 2 years of modification. And for further 
background on that I urge you to see the accompanying working 
papers that I have included to be entered into the record. Of 
course those results are from the benign economic period prior 
to the crisis. We are already seeing evidence of far worse 
performance in the crisis with 1 year redefaults pushing above 
70 percent.
    A similar dynamic is common in Chapter 13 repayment plans. 
The 2008 report of statistics required by the Bankruptcy Abuse 
Prevention and Consumer Protection Act of 2005, reported that 
of 113,289 Chapter 13 cases dismissed in 2008, 48,081 of those, 
or just over 42 percent, were dismissed for, quote, unquote, 
failure to make repayments under plan.
    Moreover, Chapter 13 plan failures are related to economic 
difficulty just like private modifications. The Ninth Circuit 
of Eastern California Federal Court District experienced a 51 
percent failure rate in making payment under plans in 2008 
while the Eleventh Circuit of Northern Florida experienced a 59 
percent rate, and the Eleventh Circuit of Central Florida 
experienced a 62 percent rate. When economic conditions are 
known to dominate judicial and legal arrangements in 
determining foreclosure outcomes we shouldn't rely centrally 
upon modification policy, judicial or private, to alleviate 
economic difficulties or declining home prices.
    That being said, private modifications are proceeding 
apace. Treasury recently reported that servicers initiated 
230,000 trial modifications in the month of July alone, more 
than the total of 118,000 Chapter 13 bankruptcy cases reported 
for the whole of 2008. Hence, it seems that private 
modifications are extracting the lion's share of policy effects 
from the market already and judicial modification can 
contribute relatively little to the mortgage market and 
economic recoveries.
    Regarding the subject of cramdown, since it was introduced 
in opening remarks, there is a substantial threat that changes 
to the Bankruptcy Code can create perverse incentives. Recent 
bankruptcy reforms produced unanticipated effects that are only 
now being felt in mortgage defaults. It is now widely 
understood that the 2005 bankruptcy reform made escaping debts 
through bankruptcy less attractive by increasing the cost of 
filing and forcing some high income debtors to repay bankruptcy 
income. But because many consumers are hyperbolic discounters, 
making bankruptcy law less debtor friendly did not solve the 
problem of consumers borrowing too much. The reason is that 
when less debt is discharged in bankruptcy lending becomes more 
profitable and lenders increase the supply of credit. Along 
with low interest rates therefore the increased credit supply 
became a powerful incentive to lend and borrow, but one that 
had predictable and predicted results in the credit crisis.
    Now, more perverse incentives can reasonably be expected to 
arise from judicial modification. The reason is that 
bifurcation of debt secured by real assets can be exploited in 
ways that bifurcation of debts secured by other assets cannot. 
If a court bifurcates a claim on an automobile loan, for 
instance, the automobile is not expected to ever be worth more 
than the current market value established by the courts. For 
real estate though, even in today's market conditions, perhaps 
especially in today's market conditions, the value of the 
collateral can be expected to grow in the future. Hence, 
judicial modifications, if allowed, perhaps should be limited 
to a shared appreciation mortgage paradigm that can reduce the 
opportunity for bankrupt borrower arbitrage.
    In summary, from an economic perspective, reducing the 
supply of loans while maintaining consumer demand will lead to 
credit rationing in which lenders refuse to lend to borrowers 
for reasons other than credit quality. Credit supply 
shortfalls, along with an estimated $30 billion price tag of 
additional costs of mortgage lending in the industry from 
cramdown, will then drag out financial sector recovery beyond 
that which can otherwise be reasonably be expected. Major 
changes to property rights, like any changes to legal 
precedent, are inherently economically destabilizing.
    There exists a substantial body of literature on the 
economic inefficiency of discretionary policy relative to well-
designed and well-articulated rules. Hence, without clear 
public policy objectives or compelling economic initiative, I 
find it hard to advocate judicial modification.
    Thank you.
    [The prepared statement of Mr. Mason follows:]
                   Prepared Statement of Joseph Mason





                               __________
    Mr. Cohen. Thank you, sir. How long have you been at LSU?
    Mr. Mason. LSU, now a year and a half.
    Mr. Cohen. Year and a half. Well, that deduct box might 
have been too difficult. Chinese bandits?
    Mr. Mason. No. But the reason for the bank holiday, that 
stems the New Orleans banking panic.
    Mr. Cohen. More relevant.
    Mr. Mason. Well, they needed a holiday, something they 
could point to to close the banking system just for a day to 
alleviate depositor panic. They couldn't think of anything that 
happened on the day, so Huey told them to look back in the 
history books and find something, anything, they could 
commemorate. So they found that this was the day that the U.S. 
broke economic--I am sorry--diplomatic ties with Germany prior 
to World War I. Boom, you had your holiday. It wasn't 
especially attractive from the perspective of the German 
immigrants, but it closed the banking sector and the bank run 
subsided.
    Mr. Cohen. That was good work on Huey's part, wasn't it?
    Mr. Mason. Yes.
    Mr. Cohen. Thank you. The Chinese bandits were back in the 
early 1960's. The go team, the white team, the Chinese bandits, 
Billy Cannon, Halloween, 1959. You need to learn all that. 
Thank you, Professor Mason.
    Our final witness is Mr. Lewis Wrobel. Mr. Wrobel has been 
in practice for 32 years in Poughkeepsie, NY, with a 
concentration of bankruptcy law. He has represented consumers 
and businesses in Chapters 7, 13 and 11 and has also 
represented creditors.
    Mr. Wrobel, thank you, and you are recognized.

         TESTIMONY OF LEWIS D. WROBEL, ATTORNEY AT LAW

    Mr. Wrobel. Thank you. Chairman Conyers, Ranking Member 
Franks, thank you for allowing me to speak with you today about 
this issue which is now affecting so many Americans.
    Although in our area of upstate New York we do not have the 
numbers, thankfully, of Memphis or Detroit, still there are 
record numbers of foreclosures in our area, and I think to look 
at this problem one must take an historical perspective. Prior 
to the 1990's the great majority of loans to purchase homes 
were made by local banks and credit unions. The officers of 
these institutions usually served for many years, were 
knowledgeable about the community and often about the borrower 
who was seeking the home mortgage. If the borrower faced 
financial distress, he could contact that bank officer who 
certainly knew the property and the community and often knew 
the borrower. A workout of the loan may be accomplished by 
deferring payments, lowering the interest rate, or entering 
into a forbearance agreement.
    If that was not feasible, the bank might arrange a deed in 
lieu of foreclosure which would allow the borrower to surrender 
the property in full satisfaction of the debt and not suffer 
the damaging effect of a foreclosure on his credit record.
    Beginning in the 1990's and continuing to the present, the 
mortgage lender and/or mortgage assignees are not the local 
banks or credit unions for the most part but rather large 
commercial institutions such as Wells Fargo, Wachovia, Bank of 
America, GMAC, Citimortgage, et cetera. At these lenders, for 
better or ill, there is often a high turnover of personnel. At 
times no loan officer is present, as the mortgage loan is 
obtained through a broker, and there is no contact with the 
representative of the lender. Usually the lender does not have 
an office in the locality, hence communication is primarily 
over the phone and occasionally over the Internet.
    My clients have often complained that there is no one to 
listen to their problem. It is common for the borrower to 
provide copious financial information to the lender in trying 
to do workout only to wait weeks or months for a response for a 
loan modification request. During this time, however, the 
lender may very well be proceeding with a foreclosure action. A 
responsible person who foresees a job loss or oncoming 
financial crisis and who has never missed a payment will 
receive no response on a loan modification request from a 
lender. It is the policy of nearly every major lender that I 
have been involved with not to discuss loan modification until 
the borrower is at least three payments in arrears.
    I would like to illustrate these frustrations for the 
borrowers with a particular case. A retired woman in her 
seventies with a solid pension from her work in municipal 
government requested a loan modification. The home had been in 
her family for many years, practically her entire life. She 
filed and confirmed a Chapter 13 bankruptcy case but soon 
realized that she would need mortgage relief. To make her 
request for modification, Litton Loan Servicing requested the 
usual, pay stubs, bank statements, a financial statement. After 
reviewing the information an offer was made to reduce the 
interest rate from 7\1/2\ percent to 6\1/2\ with a missed 
payments being added to the principal. The principal therefore 
was increased by $23,000 and the maturity date was extended. 
The monthly payment, including escrow, however, remained 
$2,229.05. Therefore she received no relief. She is a senior 
citizen with a fixed income. She tried to enter into further 
dialogue but her telephone calls are not returned. She enlisted 
the assistance of a local housing agency, Neighborhood Works, 
but the agency has received no response.
    In the district where I do practice we do have a program 
which has been instituted rather recently and it shows some 
signs of success. That is the program instituted in the 
Southern District of New York bankruptcy courts for loss 
mitigation. Judge Cecelia Morris has championed this program, 
and it applies only to individuals, only to their residences. 
It is of a voluntary nature, but it does push both parties to 
sit down and talk. Either the debtor or creditor may make a 
request for loss mitigation. The judge may then enter the order 
for loss mitigation which will then require the parties to 
talk. It would require the debtor to provide the information 
requested by the lender and on the other side of the table it 
would require the lender to announce a contact person, someone 
who the debtor or debtor's attorney can speak with.
    Also the court holds status conferences to see if there is 
going to be some progress in this negotiation. I have seen 
where some of these have succeeded, at least certainly in the 
short term where lenders have agreed to reduce interest rates 
or extend out pay periods, one even reducing to 2 percent. 
Since the program began in February of 2009, there have been 
252 requests for loss mitigation, 192 orders approving the loss 
mitigation. So there appears to be something that this may very 
well work. It is probably a little too early to tell because we 
do not know how it is going to work long-term. But it does 
relieve the frustration of the borrower in that the borrower 
now has somebody to speak with and someone who will respond.
    Thank you.
    [The prepared statement of Mr. Wrobel follows:]
                 Prepared Statement of Lewis D. Wrobel



                               __________

    Mr. Cohen. Thank you, sir. Now we will begin our series of 
questions, and I will start. First, I would like to ask the 
Honorable Judge Magner here on your fourth anniversary, after 4 
years on the Federal bench and a career as a litigator, I guess 
a practicing lawyer and a graduate, do you think you would be 
capable of modifying mortgages to the benefit of society if 
such a bill was passed giving you that authority?
    Judge Magner. Yes. As a litigator before I took the bench, 
I did commercial lending, loans, reorganizations for companies. 
Very typically cramdowns are used for commercial lending 
purposes where often million, even billions of dollars are 
reduced or otherwise reworked in loans. So that is something I 
did on a regular basis in private practice.
    What I suspect would happen in the bankruptcy context if a 
cramdown were allowed to judges is that just as in the 
commercial context the bar would take a view of their judges 
and how they ruled after two or three times and there would be 
a paradigm that would establish what the value of the real 
estate was and what the acceptable terms of the market might 
be. Lawyers tend to look at precedent when making decisions in 
negotiating, so I suspect you would not see wholesale 
litigation on the issue if you really want to know the truth of 
the matter.
    I do, however, agree with Professor Mason and also with 
Congressman Franks that the benefits of cramdown may be fairly 
limited in bankruptcy. I have had the opportunity to view about 
20,000 cases in the last 4 years. I was not a consumer 
practitioner before I got on the bench. In most instances the 
values of the property in Louisiana were not tremendously 
different than they were when the loans were taken out. I know 
there are other parts of the country where that may be the 
case, but Louisiana isn't one of them.
    The interest rates are also not tremendously high, usually 
in the 8 percent range. You might save a percent on a cramdown 
maybe. So I agree with Professor Mason that the reason why for 
example the voluntary reworks or the cramdowns might not work 
are really coming from the same place. The borrower simply 
can't afford the loan. There are people who don't have income 
or have too little income to pay for their debt. I actually 
think that what I chose to talk about and why I chose to talk 
about it, which is the accounting method, would have a greater 
impact on both borrowers in and outside the bankruptcies, 
because it would allow borrowers to quickly determine where 
their default might lie, to give it to either their counsel or 
some other community organization to help them figure out what 
could be done. And that would have a greater impact on more 
loans, reduce cost to lenders and also help borrowers.
    Now I have to tell you, Congressman Cohen, these thoughts 
are coming just from what I see, you know, on the bench. I have 
not statistically studied this particular issue. I certainly 
can do a cramdown, I have no problems with doing cramdowns and 
let me add on the flip side.
    Mr. Cohen. Just call them judicial modifications.
    Judge Magner. All right. I will agree with you as well that 
judicial modifications are generally just good business as well 
from the lender's perspective. When the lender is in a 
situation where they are about to foreclose, all they are going 
to get is the value of the collateral. That is what you are 
doing in a bankruptcy. You are valuing the collateral and you 
are saying that is what you will pay back. And frankly the 
value in a bankruptcy will be higher than in foreclosure 
because with a foreclosure you have considerable fees, 
remarketing expenses and management that occurs before the 
foreclosure. So most lenders would normally rework a loan or 
agree to a reduction through a judicial modification, because 
it makes good economic sense. It is the same paradigm that 
works in commercial lending.
    The problem that I see with the voluntary programs and the 
reason they don't do that in bankruptcy is that most of the 
loans are owned by trusts, and the trusts are held by investors 
that are far flung all over the globe. What happens were when 
the servicers or trustee tries to get permission to modify the 
loan, they can't get it. They cannot get the vote from the 
owners, so they are caught. So the one thing that would help is 
if judges could modify the loans, they could in essence give 
that lender permission, if you will, cover to make the business 
deal that makes sense.
    I have lenders stand in front of me and say, I can't agree 
to it, sort of like, would you make me do it. That happens, I 
mean, it happens. So if you gave judges the right to make it 
happen, I suspect most lenders would be doing it willingly 
anyway, because it doesn't make a lot of sense for them to go 
to foreclosure.
    Mr. Cohen. If they were willing to do it willingly, 
wouldn't the voluntary provisions that we encourage be 
successful and they are not?
    Judge Magner. They are not typically successful, you are 
right. The voluntary modifications are reviewed in my 
experience again based on creditworthiness. Let's face it, 
people in bankruptcy are not creditworthy. It doesn't take a 
rocket scientist to understand that. So they don't meet the 
paradigms of the voluntary reorganization or refinancing.
    Anecdotally, I checked with the lending community before I 
came up here, their counsel as well as the major debtor 
counsel, to see what their experiences were with the voluntary 
program and to a person they said basically they see very few 
loans going through. And they all said it is because the 
borrowers in bankruptcy are not creditworthy. This goes back to 
my statement. They can't afford the loan in the first place. Or 
Chapter 13 affords them the kind of relief that they need.
    As an aside, the reduction of the loan if there is a 
significant value drop or if you can extend the loan's terms, a 
lot of the loans--Congressman Franks, I don't know if you are 
aware of this--some of the loans were made with 5-year 
balloons. And when a debtor is facing a balloon in 5 years and 
they can't refinance, that is a huge problem. If a judge could 
judicially modify a mortgage by extending the term to a normal 
15-year or 20-year loan, that would have a positive impact on 
borrowers. Lenders can't get that permission oftentimes because 
they don't have owners who can give it to them. So that is 
something to consider when you are looking at judicial 
modifications.
    Mr. Cohen. Thank you, the red light is on for me.
    Judge Magner. I am sorry.
    Mr. Cohen. No problem. I now recognize the Ranking Member, 
Mr. Franks.
    Mr. Franks. Thank you, Mr. Chairman. Mr. Chairman, I know 
that these are challenging issues to discuss, because I 
especially wanted to tell the Chairman of this Committee, of 
the full Committee, that I appreciate so many of the remarks 
that he made, because I want him to know, and I think he does, 
I know he is coming from a heart of wanting to do the best that 
he can for those who are having a hard time. And I identify 
with this in every way that I know somehow. I truly believe 
that is the goal here to try to make it work for everyone. The 
challenge that divides us is that I have come to a sincere 
conclusion that to force mortgagors, those who loan money for 
houses to be uncertain as to what will happen to the mortgage 
in the future if there is a foreclosure or if there is, say, a 
breach in the loan agreement, that the overall impact will 
cause many of those who otherwise could get a loan not to be 
able to get one. I think it will hurt the poor in the long run.
    Now I want so say, even though there is some fundamental 
disparity between Judge Magner's position and mine, I was very 
touched by her testimony just now, because she may come to some 
different conclusion, but sincerity just exudes. And she said 
something that I was completely unaware of and that is one of 
the dynamics in all of this, is that sometimes when maybe an 
agreement could be reached between a lender and a borrower they 
can't get ahold the people that, quote, own the loan to be able 
to make that agreement. And that is something this Committee 
ought to be able to address, because that may be one of the 
most effective things that we could do here in the big picture. 
It is something that, you know, I am sure it doesn't shock all 
of you that I didn't know that, but it was something that this 
Committee Member was completely unaware of as it being a major 
dynamic. Because it makes sense, because most banks, as she 
said so eloquently, don't want to go through the expense--even 
if they don't care about the lender at all, they don't want to 
go through the expense of the full foreclosure if they can find 
a viable alternative for both people. It is difficult to weigh 
the best interest of the lender and the borrower. And 
unfortunately sometimes we have to do that based on whether the 
numbers add up for both the lender and the borrower, and there 
is a tremendous incentive in the existing system for them to 
try to reach that. And we need to take out some of those 
roadblocks that the judge told us about here to facilitate that 
more. Because I am convinced the more that government forces a 
change in contract law, and that is what a mortgage is, that in 
the long run it causes people to lose confidence in these 
things and that that has some ramifications that are hard for 
us to really fully appreciate in a setting like this.
    So I am through philosophizing here, but I hope that the 
Committee will take a look at that. I wanted to ask Professor 
Mason, maybe just a general question first, and I am back on my 
original point that I think government is a big culprit in all 
of this. I think that we tried to in a genuine interest of 
trying to promote home ownership, we pressured a lot of the 
lenders to make loans that weren't sound. And I would like 
Professor Mason to give--would you give me some idea of what 
you think in terms of the genesis of this problem, the subprime 
loan, what part is government to blame in that, the beginning 
of all of that. What did we do to help catalyze this?
    Mr. Mason. Well, in my opinion the government expected too 
much out of the home ownership policy. Is it enough to have the 
highest home ownership rates in the world? Possibly. But we 
kept pushing against homeowner rates. We do not know what the 
goal was. Was it 100 percent home ownership rate? Well, we know 
in economics from the 1970's--I don't know how many of you are 
well trained in economics or remember these lessons from macro 
in your undergrad. Before the 1970's we did not teach 
stagflation or the natural rate of unemployment we didn't know 
existed. In the 1970's part of what caused stagflation was 
trying to reduce unemployment for what we thought was a social 
good. But when we pushed unemployment down too far, all we got 
out of it was more inflation, because we had to come to a 
realization that there is a natural rate of unemployment. There 
are some people that just are not working for whatever reason 
and to try to push them into jobs through economic policies 
merely fueled inflation for those who were working because for 
whatever reason these people, whether because of frictions 
between jobs or other reasons, were just unemployed. There 
wasn't a lot we could do about it.
    In the same vein, we are never going to have 100 percent 
home ownership. So what is the natural rate of home ownership? 
Is it 65 percent or 62 percent? I don't know exactly what that 
is, but I would say that we probably shot way above that with 
origination practices and national home ownership policy. There 
is a particular quote I will try to get as accurate as I can 
from the 1996 version of the National Home Ownership 
Initiative. It sticks in my mind, that sought to get people 
into homes by relieving the historical constraints on home 
ownership of having enough money to make a down payment or even 
having enough income to make the monthly payments. To me that 
sounds like that policy is really only going one direction and 
that is the direction it went.
    But there is an important aspect I want to draw out of your 
comments and also Judge Magner's comments about the investors 
who own the loans. And it draws upon something you said, Mr. 
Franks, that incentives are aligned all the way from the owner 
of the loans, who does want to realize value for modification 
and maximize the value of those loans, all the way through to 
the homeowner. But what is missing is actually in the middle of 
that relationship. Between the investor and the homeowner is a 
servicer, and Federal policy to date has embedded a friction in 
the servicer relationship on both sides with respect to the 
investor and the homeowner that is maintaining an inefficiency 
in today's market. The investor has the contractual right to 
replace the servicer with someone who can do a really good job 
at modification, but since modification is new and there is no 
data collected on it and no data given to the investor to see 
if the servicer is doing a good job, the investor can't tell if 
the servicer is actually doing a good job at modifying or if 
they are trying to maximize their own stake in the deal through 
some conflict of interest, and so you have typical terms of 
securitizations that require the servicer to buy the loan back 
from the investor in order to modify.
    It seems to me in this space some simple rules for investor 
reporting can solve a big, big problem and get these loans to 
servicers who can modify in the best interest of the borrowers 
and the best interest of the investors.
    Mr. Franks. Mr. Chairman, the full Chairman of the 
Committee suggested that he might be able to get my vote on a 
bill and I would suggest to you that if a bill that dealt with 
some of the problems of Professor Mason's and also Judge Magner 
said related to making sure that lenders were able to give a 
borrower an immediate accounting and clarify, those are the 
kinds of things that a right wing nut like me can support.
    So I thank you.
    Mr. Cohen. Let me add before I recognize the distinguished 
Chairman, the Ranking Member has hit upon what is probably the 
real issue here on the issue of judicial modifications, that if 
you allow judicial modifications will it hurt the poor in that 
it will take away the incentive for the lending industry to 
make money available to them because their contracts could be 
changed in a bankruptcy court. And so Professor Mason, I would 
like to ask you, since we allow for the courts to modify the 
terms on the purchase of secondary homes, vacation homes, 
yachts, airplanes and things like that, what has happened to 
the lending industry's willingness to loan money to people to 
buy yachts and airplanes and secondary homes since they can be 
modified? Has there been a big change in industry's desire to 
loan money?
    Mr. Mason. Well, there has been but not necessarily 
recently. I have to say I am not an expert in the deeper 
history of bankruptcy reforms and bankruptcy law has changed 
across time and the economic effects of those reforms, although 
there is research into that that could be pointed to. I would 
be happy to look into that later if you would like.
    I would like to correct one possible misconception from 
Judge Magner's perspective just based upon my view of the 
lending space though. She made a point that borrowers in 
bankruptcy are not creditworthy. I think it is very important 
to introduce that from the industry perspective they are very 
creditworthy. In fact this is part of what drove the subprime 
lending revolution because they can't declare bankruptcy again. 
And so if you get a substantial amount of their debt reduced in 
bankruptcy which realigns their finances and then you can give 
them a very high interest rate loan, they are very creditworthy 
and they can't go bankrupt on you again.
    This is an impediment that I urge you to think about from 
the borrower's perspective with respect to judicial 
modification, that judicial modification only gives the 
borrower one shot. And if the borrower has, let's say, 
strategically misjudged and let's say declared bankruptcy when 
home values are down 20 percent and they are now going to drop 
another 30 percent, then they have their judicial modification 
locked in at the 20 percent and they don't have a chance to go 
back.
    Mr. Cohen. I didn't intend to open Pandora's box, but since 
it is open, Judge, would you like 1 minute for rebuttal?
    Judge Magner. Thank you. I guess this is where Professor 
Mason and I are going to disagree. When I say creditworthy, I 
mean worthy of getting a loan, not creditworthy, in other 
words, go out and you don't owe anybody else anything so we can 
charge you more interest. Creditworthy means could you get a 
new loan to me. I don't believe debtors are creditworthy in any 
real sense of the word. I don't think that is a novel or 
radical view. Debtors also don't arbitrage their debts and. 
They come in and bet home prices are going to go up and down 
more or less, so maybe this is the time to file to get the 
better deal. That really is beyond their ability to understand. 
They can't pay their mortgage, they are in foreclosure. That is 
why they file. They do not file before they are in foreclosure 
and after the house is gone they don't file. It is a very--it 
is almost a process that is really in the are lender's hands, 
not theirs.
    I don't think that what the professor is saying about the 
creditworthiness or the effect on the poor is really correct. 
From my perspective, and it is really from my perspective is 
correct. For the most part lenders have to always assume that a 
borrower is going to go into default. There is a certain 
percentage that they count on, and based on a borrower's credit 
scores and their income when they make the loan, they make that 
determination at the time the loan is made. The fact that a 
loan might be crammed down in the future again----
    Mr. Cohen. Judicially modified.
    Judge Magner. Judicially modified. I am sorry, I am a 
bankruptcy practitioner. I do use the terms of art.
    The fact it might be modified by a judge down the road is 
not something that I think would affect the credit markets, 
because what happens is they figure that is all they are going 
to get in foreclosure anyway. If the loan defaults and they 
have to go to foreclosure, they are going to get the value of 
the collateral, and probably a lot less because of the cost of 
the foreclosure and, as we discussed, the administrative 
expenses. So I don't see the fact that there would be a 
judicial modification as something that the lending community 
when it looks at the macro level would say would make credit 
unavailable. They are already experiencing that, they are just 
experiencing it in a different way.
    Mr. Cohen. Thank you.
    Now the distinguished Chairman, Mr. Conyers, is recognized 
for 5 minutes or longer.
    Mr. Conyers. Thanks so much to all the panelists.
    Ms. Sangree, you have listened to the colloquy between the 
judge and the professor. Would you want to make an observation?
    Ms. Sangree. The observation I would like to make is 
actually on a comment that Congressman Franks made earlier that 
he believes or he suspects that the Community Reinvestment Act 
may have been part of the fuel for the subprime meltdown, and I 
would disagree with that thought. I think the Community 
Reinvestment Act did put pressure on lenders to loan in 
underserved communities. And it was in response to this 
practice of redlining that we had been experiencing in this 
country for decades at that point. And the pressure was to 
properly underwrite loans in these communities. And I think it 
is because of the economic incentives, the huge profits to be 
made through these newly available subprime products through 
the new software that was developed in the late 1990's in which 
borrowers without prime credit ratings could now be able to 
assess what their ability to repay loans would be with much 
more accuracy. And that then made it possible for lenders to 
lend to borrowers without perfect credit ratings, without prime 
credit ratings. And so then we saw this profusion of subprime 
products. And that was all good, I think. It made it possible 
for people to own homes who couldn't own homes if loans were 
only available to people with prime credit ratings.
    But where the problem came in was in abuses of those 
products, and that is what we are seeing in the Wells Fargo 
suit. We have two high level ex-employees of Wells Fargo who 
have come forward and said that they worked on commission and 
you made more money putting a borrower into a subprime loan 
than you did putting them into a prime loan and there was no 
oversight on the practice. And so loan officers routinely put 
unsophisticated borrowers into subprime products at much higher 
interest rates and paying initiation fees and points up front 
which were very profitable to the company, but really just 
disadvantageous to the borrower. And yes, there were borrowers 
who never should have been given loans at all and you have the 
underwriting mechanisms to figure that out. But they didn't 
really care whether the borrower could pay or not because they 
would be selling the loans on the secondary market and not face 
the risk.
    I would say the problem was in a failure of oversight, not 
in encouraging or requiring lenders to lend in underserved 
communities.
    Mr. Conyers. Would the judge generally agree with those 
comments?
    Judge Magner. I would, Congressman Conyers. I think that 
the real problem with the subprime industry was what Ms. 
Sangree has indicated, is the disconnects between those that 
originate and those that hold the loans. So you really get 
shoddy underwriting when you don't care what happens to a loan. 
If you put in some sort of mechanism, maybe not necessarily for 
financial institutions that originate but for these other 
lenders who are not financial institutions, many of them were 
not, so that they have to originate and hold for some period of 
time, you might force the type of underwriting that would avoid 
these problems. I really think it is an underwriting issue.
    Mr. Conyers. I thank you. We were all impressed with your 
opening statement because it came out of an experience of being 
a judge and it really gave us a new window on this.
    This is the seventh hearing, and I am pleased with Trent 
Franks' comments about improving communication between the 
borrowers and the lenders and the other subsequent people that 
intervene, all taking profit out of this. And frequently when 
the mortgagor tries to contact somebody, they are closed, they 
are out of business, you can't find them anymore.
    And so I would like to ask unanimous consent to put in the 
New York Times, October 15, 2007, Study Finds Disparities in 
Mortgages By Race; October 17, 2007, Subprime in Black and 
White, New York Times; and then May 16, 2009, Minorities 
Affected Most As New York Foreclosures Rise.
    Mr. Cohen. Without objection, they will be entered into the 
record.
    [The information referred to follows:]
    
    
    
    
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    Mr. Conyers. And if I may be granted just a few more 
minutes, Mr. Chairman.
    I wanted everyone to know that we are going to get copies 
not only to you, Chairman Cohen, but to Trent Franks and Steve 
King, who has a very deep interest in this subject as well. Now 
there is an attorney, Vanessa Flucker, in Detroit that does the 
same work Mr. Wrobel, Attorney Wrobel does. And she was talking 
to one of our staff members about a lady she represented who 
was two payments behind. She got foreclosed on, I don't know if 
she was evicted first and then foreclosed on or what, but the 
house was foreclosed by Countrywide. Countrywide then sold--
this hurts--to Fannie Mae, and Fannie Mae sold the property to 
an investor for $800. We are getting more detail about that and 
there were other cases. And I know that between the judge and 
the counsel there and this Detroit lawyer, we could do case by 
case. I mean, I don't know how and you have a very obvious 
stamina for this sort of thing, but to get up and to go in to 
work every day in either a law office or a courtroom and hear 
these incredible tales of exploitation, frequently minority 
purchasers who of course have read a mortgage contract, is 
really something.
    Now Professor Mason, I am happy to come to agreement with 
you because I was one of the ones who voted against the credit 
card, the Bankruptcy Abuse Prevention and Consumer Protection 
Act of 2005. You know the story I think, that the credit card 
companies for about 10 years had been trying to tighten up 
bankruptcies, make it harder for people to get into 
bankruptcies. Maybe my colleagues on the other side voted in 
the negative on that bill, too. I am not sure. But I did for 
the simple reason that it was adverse to the interest of people 
who were in financial difficulty. It made bankruptcy tougher on 
individuals. And the credit card companies had been lobbying on 
this for years and they finally were able to put together a 
majority. And I remember one part of the hearings, Chairman 
Cohen, when they were talking about single mothers or people 
that had a divorce situation. They were tough on--I mean, you 
couldn't get any relief for the mother and 2 kids, there was 
nothing there for them. It was just a mean-spirited bill all 
the way around. And I had--oh, here it is--I had all these 
reasons that tilted--the bill tilted the playing field in favor 
of credit card companies at the expense of struggling families. 
It was tough on small businesses for sure. Many of us were very 
concerned about that. It increased the cost of bankruptcy, and 
it did nothing to hold irresponsible lenders accountable for 
their actions.
    So in my way of taking hearing number seven is that this 
bankruptcy judge has shown a new light on this unregulated part 
of the financial world that we keep going over. And it is very 
hard, these are exotic instruments and there are some practices 
that there aren't even any laws, were never written for them. 
We hadn't even known about them. And I would invite your 
comments as I conclude, Professor Mason.
    Mr. Mason. Thank you, Chairman Conyers. I agree and I am 
humbled to the magnitude of the task before your Committee in 
dealing with this very difficult set of circumstances and a 
very difficult body of law. My comments are to be taken really 
in the spirit of trying to get to the important aspects or most 
powerful aspects of the law, and I do take into consideration 
Judge Magner's comments about the ability to time bankruptcy, 
and that is just extremely important and that is part of what I 
was alluding to both in terms of what was characterized as the 
ability to arbitrage bankruptcy, choosing your time to file. 
But Judge Magner is correct, you often can't choose. The time 
to file is when you get shocked by divorce or medical debt or 
something like that. But I also don't want people to get hurt 
either, because bankruptcy as currently constructed is 
something you get one shot at. And if things get worse, then 
you could lock yourself out. And so I think both sides deserve 
to be considered here.
    But in the sense of going back to some of the 
securitization arrangements and where the meat is, so to speak, 
it is important for me to point out that it is overly 
simplistic to think of the problem as just one where the 
originator doesn't care so much about the loan or the 
performance of the loan because they will be selling it on. It 
is actually worse than that.
    Think of it this way. Chairman Conyers, you get to sell 
something to me and I promise that I'll pay you--well perhaps I 
should take the other side of this--neither side is very good, 
quite honestly. Perhaps I should take both sides. I agree to 
sell something to my right hand. And my left hand will pay for 
that say $50 a month for the next 30 years. So my right hand 
gets to value that $50 a month for the next 30 years. It 
doesn't obviously have the money yet, but just like we teach in 
Finance 101 it can effect that valuation by choosing a 
different discount rate or really it might not go the whole 30 
years of monthly payments, it may go 20 or 25 or 10 or 5. And 
my right hand gets to choose that time period too, how many 
months I pay $50 a month in order to effect this valuation. 
Worse yet, my right-hand gets to report this as a corporate 
entity as income today. And the CEOs of my right hand get to 
use that calculation in calculating their bonuses this year. 
Again no cash has come here. This is called gain on sale 
accounting. This has been a plague of the securitization 
industry well acknowledged since the mid-1990's. But FASB 
accounting standards won't let the industry get rid of this 
even though certain well-managed companies have wanted to. In 
fact we have gone the other direction with policy, requiring 
other companies to do the same kind of valuation, calling it 
mark-to-market accounting and expanding it across the financial 
marketplace. It is the wrong direction to go. We are adding 
insult to injury here. So not only do you get to sell the loan, 
you get to call it whatever value you want and record that as 
income today. That is really bad. We have a very perverse set 
the incentives in the system that could use some realignment. I 
am convinced that some very targeted legislation can fix many 
of the deep problems that we have today without broad strokes. 
But it does take expertise in the area to get those few touch 
points that can have the most dramatic effect. I think probably 
the same can be said of consideration for judicial abilities to 
modify loans as well.
    Mr. Conyers. Well, I hope we can continue this discussion 
after today. I thank the Chair for his indulgence.
    Mr. Cohen. Thank you, sir. I appreciate your questions. Now 
I recognize the gentleman from Iowa, the State that launched 
the presidential ambitions and successes of our great President 
Barack Obama, State of Iowa, Mr. King.
    Mr. King. I thank the Chairman and I hope he is as 
delighted when we launch the next President as well.
    Mr. Cohen. Mr. Biden is waiting until 2016, and he thanks 
you.
    Mr. King. This testimony has been quite interesting, and 
like many Members we are trying to do a number of things at 
once, but all of it that I have heard has been engaging and I 
appreciate you all coming here to testify. I run some things 
across random thoughts that accumulate as I am listening to the 
testimony. One of them is in some data that has been handed to 
me by staff that says mortgage delinquency rates are at 9.12 
percent, and unemployment now is 9.7 percent. I think if you 
count the real unemployed in America it probably approaches 20 
million. If you add the unemployed along with those who no 
longer qualify as unemployed, it probably actually exceeds 20 
million. Loan modifications are up 172 percent from last year. 
That is an interesting piece of data that doesn't necessarily 
correlate with some of the things we have talked about here. I 
inject that into the dialogue as a level of optimism that the 
lenders really are working I think to try to avoid going before 
the Honorable Judge Magner. And so that would be one of those 
observations.
    Another one as I listen to Ms. Sangree's testimony, 
racially segregated patterns of housing, and I want to come 
back to this, I just lay that out there. Racially predatory 
lending, another phrase, four times higher foreclosure rates in 
minority communities I believe is the phrase compared to White 
communities. That is quite arresting to hear that data.
    Then the testimony that I am convinced does exist among 
probably more lenders than I am aware that there is 
misinformation there, that appears to be a pattern in the 
lending community.
    So I lay this out so you know that at least I was listening 
to parts of this. I would like to go back first to Ms. Sangree, 
I don't know how long you have been involved in this particular 
trade, but do you recall when redlining first became an issue? 
You couldn't be old enough, but I ask if you do recall that.
    Ms. Sangree. I read about it. Yes, I recall reading about 
it.
    Mr. King. And so then when the Community Reinvestment Act 
was passed, it essentially outlawed redlining or at least with 
the language the effect was to try to eliminate redlining, and 
I reject--the idea of drawing lines around neighborhoods, 
declaring them to be minorities and refusing to loan money in 
those neighborhoods. But I reject the concept.
    I am wondering what are the root causes of how we got here 
for this testimony today, how we got here economically. So we 
had the Community Reinvestment Act that was designed to reduce 
or hopefully eliminate redlining, bad loans in neighborhoods 
where the asset value wasn't sustained. Then we had a number of 
other things, but the secondary markets got stronger. Fannie 
Mae and Freddie Mac began taking on these mortgages. And people 
began taking their margins out of these mortgages on the front 
end so they weren't invested in the long-term performance of 
that mortgage loan.
    Then we have the situation that has come up with us within 
the last year this phrase too big to fail, banks that are too 
big to be allowed to fail, to be more precise, and now we have 
boards of directors that are so remote that borrowers can't 
identify who they owe the money to in order to negotiate some 
terms. So it has to happen with blocks of mortgages and large 
boards of directors making huge decisions in places like New 
York, et cetera.
    So then I look back and I think okay, there are other 
subsets of these kind of negotiations that took place. Rewards 
for those who could broker these subprime loans sometimes, but 
the loans that were misrepresented other times. And I am 
thinking in particular of ACORN, and I am wondering, Ms. 
Sangree, do you have an engagement or involvement with ACORN? 
And what would be your view of how ACORN might have been 
involved in these problems that I have strung out? Do they fit 
into that chain somewhere that I need to understand?
    Ms. Sangree. I don't really know that much about ACORN. 
They are real activists, they are sort of plagues at city hall, 
they hold demonstrations there pretty frequently.
    Mr. King. Okay. I am just looking back somebody needed to 
broker these loans going into these neighborhoods that were 
redlined in order for the banks to qualify, and I think we are 
pretty confident here that ACORN was involved in negotiating or 
setting that up. I just remember reading news articles on it. 
So I just take you back to the racially segregated housing, the 
racial predatory lending that is going on. The four times 
higher foreclosure rates. That data, and can you tell me has 
that been adjusted for income and jobs or is race the only 
factor involved here or has it been corrected for the other 
factors?
    Ms. Sangree. There are several studies that have been done 
that had access to FICO scores and credit rating agency data 
that have concluded that correcting for credit risk, race, 
there are racial disparities in who gets prepayment penalties, 
who is put into subprime products, and that they are high and 
extremely high was one of the conclusions. AFT Associates did a 
study for the Casey Foundation, including Baltimore City, I 
think it was 12 cities across the country and Baltimore was one 
of the cities studied. And the conclusion for Baltimore was the 
refinance racially disparities were extremely high and 
origination loans, there were high racial disparities in 
quality of product.
    Mr. King. Okay. Would you want this Committee to accept the 
statement they are four times higher after they are corrected 
for other factors or before?
    Ms. Sangree. Before. We survived the motion to dismiss in 
the Wells Fargo litigation and now we are commencing discovery. 
So we have not had access to the Wells Fargo's loan documents, 
which would include risk credit ratings.
    Mr. King. So we don't know what it would be after it is 
corrected. It is an alarming figure, but it probably isn't that 
stark if one corrected it for the other factors involved.
    Ms. Sangree. That is probably true, we are basing that four 
times rate based on Home Mortgage Disclosure Act data which is 
publicly available and does not include credit risk. That is 
one of the measures that the GAO report that just came out in 
July of this year recommends, is HMDA should require credit 
risk.
    Mr. King. Thank you, Ms. Sangree. I just want to tell you 
why I asked one of these questions and now I will make a 
statement. I know the clock is red but we have been a little 
loose today, and I hope the Chairman indulges me. One of the 
reasons I asked you about ACORN, and I don't ask you to follow 
up on it, I have got an article here in front of me that is a 
press account, it is actually dated June 8, 2006. It says, 
ACORN has been waging a national campaign for more than 3 years 
against Wells Fargo's predatory lending. And that is how they 
have described it.
    There are a number of articles like that that has taken 
place in Des Moines, too. I want to make this point, just 
suppose there had never been a Community Reinvestment Act, just 
suppose we found another way to put competition into those 
cities that needed to have a better practice of mortgage 
lending. What if we had small community banks that were 
investing in those communities, even though the real estate 
wasn't worth as much as the neighboring real estate. What if 
they were loaning a percentage on the asset value, what if they 
were evaluating the ability of people that were getting the 
mortgage to pay back the loan, wouldn't the real estate values 
have dropped down to a point where the people that were ready 
to buy those houses could actually afford them, and then when 
we have got banks that have gotten too big to fail, I mean too 
big to be allowed to fail and they are getting bigger and 
bigger, and we bailed out big banks and we have fewer banks. 
Now we lost 3,000 banks in America in the 80's during what we 
call the farm crisis where I come from. If we lost 3,000 banks 
in America today, it truly would be a financial crisis because 
the banks have gotten so much bigger with all the mergers, they 
have gotten more impersonal, and they are not serving the inner 
city the way they did, and they are not serving the small 
communities as well as they did either. I would suggest that we 
have tried to fix things at the national level and write rules 
because we had a moral abhorrence to redlining. And we want 
everybody to own a home as much as we can but I take the 
testimony of Professor Mason that probably there is a limit to 
the number of people just like there is to unemployment. So I 
am going to suggest that we take a look at how to create 
competition in the free market and how we let these values go 
to where they can actually be sustained by the people that will 
buy the homes and that can, that have the ability to perform on 
those loans and those mortgages. And I will suggest that maybe 
we got our hands in here too much from the Federal level and I 
think it has diminished the free market component of this and I 
think it has hurt a lot of people in the inner city and across 
the country. And if we keep going in the direction we are going 
we will end up with just a few great big banks that are ever 
more personal that we have to give more regulation to. If we 
believe in Adam Smith's invisible hand, we ought to inject more 
free market into this and probably less regulation so that 
lenders can go into those communities and make a profit, but do 
so at a level that is going to be useful for the people that 
are living there and then they can build themselves up on the 
American dream and go out and build a mansion and then I can 
buy the house that they live in.
    Mr. Chairman, I yield back, and I thank you for your 
indulgence.
    Mr. Cohen. Thank you. The gentleman's time has expired.
    I would now like to recognize the Ranking Member for a 
special extraordinary, super owed request.
    Mr. Franks. Thank you, Mr. Chairman. In addition to 
seconding Mr. King's comments, I would like with your 
permission and the committee to place into the record four 
different articles, one being the Housing Policy Council, 
September 9, 2009; one being an article called Spreading the 
Virus, it was in the New York Post on October 13, 2008; and one 
being the Committee on Oversight and Government Reform report 
of July 7, 2009; and one called the Independent Policy Report: 
Causes of the Mortgage Meltdown by Stan Lebowitz October 3, 
2008.
    Mr. Cohen. Without objection, they will be admitted into 
the record.
    Mr. Franks. Thank you, Mr. Chairman.
    [The information referred to follows:]
    
    
    
    
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    Mr. Cohen. Is there any other request for admission of 
extraordinary requests? If not, I would like to thank all the 
legislative days to submit any additional questions to the 
witnesses, which we will forward thereto. Then we would ask the 
witnesses to answer those questions as quickly as possible. The 
record will remain open for 5 legislative days for the 
submission of any other materials that you might have.
    Again, I thank everybody for their time and patience, and I 
declare that the hearing of the Subcommittee on Commercial and 
Administrative Law adjourned.
    [Whereupon, at 5:05 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

  Response to Post-Hearing Questions from the Honorable Elizabeth W. 
  Magner, United States Bankruptcy Court for the Eastern District of 
                               Louisiana




                                

       Response to Post-Hearing Questions from Suzanne Sangree, 
                    City of Baltimore Law Department




                                

    Response to Post-Hearing Questions from Joseph R. Mason, Ph.D., 
                       Louisiana State University




                                

 Response to Post-Hearing Questions from Lewis D. Wrobel, Attorney at 
                                  Law




                                

 Prepared Statement of the Honorable Cecelia G. Morris, United States 
 Bankruptcy Court for the Southern District of New York--Poughkeepsie 
                                Division




                                 
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