[Senate Hearing 111-328]
[From the U.S. Government Publishing Office]
S. Hrg. 111-328
THE WORSENING FORECLOSURE CRISIS: IS IT TIME TO RECONSIDER BANKRUPTCY
REFORM?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 23, 2009
__________
Serial No. J-111-39
__________
Printed for the use of the Committee on the Judiciary
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55-519 PDF WASHINGTON : 2010
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York JON KYL, Arizona
RICHARD J. DURBIN, Illinois LINDSEY O. GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Bruce A. Cohen, Chief Counsel and Staff Director
Matt Miner, Republican Chief Counsel
------
Subcommittee on Administrative Oversight and the Courts
SHELDON WHITEHOUSE, Rhode Island Chairman
DIANNE FEINSTEIN, California JEFF SESSIONS, Alabama
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York JON KYL, Arizona
BENJAMIN L. CARDIN, Maryland LINDSEY O. GRAHAM, South Carolina
EDWARD E. KAUFMAN, Delaware
Sam Goodstein, Democratic Chief Counsel
Matt Miner, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois....................................................... 4
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 122
Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama.... 3
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode
Island......................................................... 1
prepared statement........................................... 147
WITNESSES
Calabria, Mark A., Ph.D., Director, Financial Regulation Studies,
Cato Institute, Washington, D.C................................ 14
Cohen, Alys, Staff Attorney, National Consumer Law Center,
Washington, D.C................................................ 9
Genirberg, Richard, Attorney, Genirberg Law Office, Jonesboro,
Georgia........................................................ 17
Levitin, Adam J., Professor, Georgetown University Law Center,
Washington, D.C................................................ 11
Verdelotti, Joseph, Jr., Homeowner, West Warwick, Rhode Island... 7
QUESTIONS AND ANSWERS
Responses of Mark Calabria to questions submitted by Senator
Whitehouse..................................................... 34
Responses of Richard Genirberg to questions submitted by Senator
Sessions....................................................... 35
SUBMISSIONS FOR THE RECORD
Calabria, Mark A., Ph.D., Director, Financial Regulation Studies,
Cato Institute, Washington, D.C., statement.................... 43
Cohen, Alys, Staff Attorney, National Consumer Law Center, and on
behalf of National Association of Consumer Advocates and
National Association of Consumer Bankruptcy Attorneys,
Washington, D.C., statement.................................... 50
Genirberg, Richard, Attorney, Genirberg Law Office, Jonesboro,
Georgia, statement............................................. 127
Levitin, Adam J., Professor, Georgetown University Law Center,
Washington, D.C., statement.................................... 131
Verdelotti, Joseph, Jr., Homeowner, West Warwick, Rhode Island,
statement...................................................... 144
THE WORSENING FORECLOSURE CRISIS: IS IT TIME TO RECONSIDER BANKRUPTCY
REFORM?
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THURSDAY, JULY 23, 2009
U.S. Senate,
Subcommittee on Administrative Oversight and the Courts,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 10:01 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Sheldon
Whitehouse, Chairman of the Subcommittee, presiding.
Present: Senators Whitehouse, Feingold, Durbin, and
Sessions.
OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
FROM THE STATE OF RHODE ISLAND
Chairman Whitehouse. The hearing will come to order. This
is a hearing of the Senate Committee on the Judiciary's
Subcommittee on Administrative Oversight and the Courts on the
topic of ``The Worsening Foreclosure Crisis: Is It Time to
Reconsider Bankruptcy Reform? '' I welcome the witnesses.
As many of you are probably very well aware, the Senate is
extremely busy right now, and I expect that my colleagues will
be in and out during the course of the hearing. No meaning is
intended by either their arrivals or their departures, so take
no offense if they get up and leave while you are speaking. It
is a matter of schedule entirely and the many conflicting
demands on Senate schedules.
Nearly 10 months ago, we enacted a $700 billion bailout
package to rescue the economy from the subprime mortgage
meltdown. This hearing will look at whether the foreclosure
situation is worsening and what can be done for the millions of
families in Rhode Island and across the Nation at risk of
losing their homes.
We tried in October to include in the Troubled Asset Relief
Program measures that would help homeowners on Main Street, in
addition to the banks on Wall Street. Unfortunately, these
efforts then proved fruitless. We included in the bailout
legislation a requirement that the Treasury work to modify the
mortgages that it purchased as part of the TARP. That
requirement, too, was rendered meaningless by the outgoing Bush
administration's decision not to purchase ``toxic assets'' as
had originally been proposed. The money instead went directly
to banks, and the Treasury held no mortgage-related assets to
modify. So with nothing to modify, there were no modifications.
Wall Street benefited, and Main Street was left in the cold.
I am delighted to welcome the Ranking Member, Senator
Sessions.
Senator Sessions. Thank you.
Chairman Whitehouse. Many of us in Congress, led by Senator
Durbin, tried to include in the TARP legislation a provision
that could have kept millions of families in their homes at
zero cost--zero cost--to the taxpayers. This proposal would
have corrected an anomaly in the Bankruptcy Code that prohibits
judges from modifying primary residence mortgages the way they
can modify every other type of contract from mortgages on
vacation homes to car and jewelry and corporate loans. Despite
the fact that a bankruptcy modification would spare the
community the terrible costs of foreclosure, the mortgage
banking industry has invested millions of dollars to lobby
against this reform and has so far been able to prevent its
passage.
As subprime mortgage teaser periods began to expire last
year, and with the credit market dried up so they could not
refinance, millions of homeowners faced higher monthly payments
that they could not afford. In the final quarter of 2008, there
were over 200,000 family home foreclosures. These homeowners
faced this foreclosure wave with minimal assistance from their
Government.
The new administration tried to address the foreclosure
crisis. Through the Treasury's Making Home Affordable programs,
President Obama encouraged loan servicers to start modifying
mortgages. While these programs so far have kept 160,000
families in their homes through trial modifications, it is
becoming increasingly clear that Congress must do more--much
more--to address the worsening crisis.
As you will hear from one of the witnesses today, there is
evidence that the worst of the foreclosure crisis is not behind
us. Just as the wave of potential foreclosures from subprime
mortgages begins to subside, a new wave of potential
foreclosures tied to other mortgage instruments is just around
the corner. The Center for Responsible Lending estimates that 9
million homes may be lost to foreclosure from 2009 through
2012. At their current rates of modification, the Treasury's
voluntary programs would only assist 2 million or fewer
families during that same period.
It is clear to me that Congress must do more to help
struggling American homeowners, and specifically, that we need
to take another serious look at the proposal to allow
bankruptcy judges the same authority to modify the terms of
mortgages on principal residences that they have for other
loans. If we fail to act, I fear that we put ourselves at risk:
that a vicious cycle of foreclosures, falling home values, and
declining tax revenues will keep us in recession for years to
come.
I look forward to hearing the views of today's panel on
this proposal and others. I think what I will do now is
introduce the Ranking Member to make any opening statement that
he cares to. I will then recognize the distinguished Majority
Whip, Senator Durbin, to make any opening statement that he
cares to. And then I will introduce the witnesses, and we will
proceed with the hearing.
Senator Sessions.
STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM THE STATE
OF ALABAMA
Senator Sessions. Thank you, Senator Whitehouse.
This is an issue that we have discussed for a number of
years, and Senator Durbin has been an articulate leader on the
question. I would just say that when people borrow $200,000 to
buy a house, somebody gave them that money. It did not come
from nowhere. It came from somebody's pocket. It is money that
has been lent to them at a certain interest rate.
As I have traveled the world, I am absolutely so saddened
in many ways to see other countries not have a financial
market. And the reason is, if you give someone $200,000 to buy
a house or build a house, you have got to know you are going to
be repaid. And if you are not going to be repaid, you have got
a big problem here, and it drives up costs. And in the future,
people may not be willing to loan money, because this is a 30-
year loan. And when you go around the world and you see people
with houses, as I have done, half-built--and I used to wonder
why, and it has been explained to me. They did not have the
money to put the windows in. They have the windows on the first
floor and the doors, but the upstairs window would be open,
just have a roof and inside. They are just trying to save a
little more money so they can put up the next part of the
house. We borrow the money up front and build the house, buy
the house, and it is a fabulous thing. An average American can
pay it back over 30 years at a reasonable interest rate.
And so I would just say that that is the fundamental thing
that is concerning me about the whole deal. If we now say after
someone has loaned a person money for 30 years that the
Government is not going to come in and authorize the alteration
of that contract, fewer people may be willing to loan in the
future, and more people would have to pay a higher interest
rate. That is what the bankers have produced information that
shows this will result in a significant increase in the
interest rate. And you know that if you are paying 5-percent
interest and now you pay 6-percent interest, that is a 20-
percent increase in your payment basically every month. So if
you are paying $1,000 a month, now you are paying $1,200 a
month for the same loan, essentially.
So there is just no free lunch here. We can maneuver with
this, and I know we will. But I am worried about it.
What we do know is that loans do need to be renegotiated,
and I have just seen a Forbes.com article where Wells Fargo
announced that they have refinanced 750,000 mortgages already.
Because they have an interest in doing this, it is their
decision, and it makes sense. And it is not totally unrealistic
to say a bankruptcy judge could do this.
Senator Durbin and I have worked on the cramdown on
automobiles. We know it is done on automobiles. But I am
dubious about it, because it is so much money, it is such a
long loan. Houses do not normally decline over decades. They
may go down for a while, but except in certain small, extreme
areas of the country, I expect housing will, before too many
years, get back to a normal level. So I am concerned about
that, and I would hope that we can move forward.
I also am hopeful that there would be no effort to alter
the credit counseling. I see Eileen Connelly with the
Associated Press, and this is in the Washington Times headline:
``People drowning in debt gain by consulting credit
counselors.'' I do not know that that is a bad thing.
So, Mr. Chairman, this is important. One thing I would like
to ask is: I have heard it said from my bankruptcy lawyers and
judges that I have talked to in Alabama that there are
occasions when nobody seems to be able to speak for the
mortgage holder to negotiate a deal. And if nobody can, you
know, maybe that is the kind of justification we might think
about. But normally I would think a bank that has loaned
somebody money under a law that says that they have the
authority to negotiate if any negotiation is done would kind of
be subjected to almost an ex post facto law to say you cannot--
now the court can renegotiate your mortgage.
Thank you.
Chairman Whitehouse. I think the distinguished Ranking
Member has made a very good point. I think that there is a
significant distinction between a homeowner in a community who
has a mortgage loan from the community bank and they know each
other and the homeowner can go into that community bank and can
speak to somebody at the bank and can have an understanding
about what their financial situation is, and together they can
reach a meeting of the minds, if one is possible, about how to
renegotiate and restructure that loan for both parties' mutual
convenience.
That I think goes out the window when that loan has been
carved up into dozens or even hundreds of strips and sold
across the country and around the world, and now that poor
homeowner is trying to find somebody who has some authority to
negotiate with them, and they find that there is nobody to talk
to. And that I think is a very frustrating and difficult
situation.
Senator Durbin.
STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR FROM THE
STATE OF ILLINOIS
Senator Durbin. Senator Whitehouse, thank you for doing
this, and, Senator Sessions, I am glad you are here, and I know
that we all share an interest in this.
I started on this trek more than 2 years ago, and I gave a
very ominous forecast that if we did not do something quickly
in 2007, we could face up to 2 million Americans losing their
homes. It turns out that that was painfully naive on my part.
As the banks and their disciples have told us over and over
again that everything will work itself out, unfortunately the
foreclosure rate in this country has skyrocketed. Let me show
you a chart which illustrates it.
This is an indication of what is happening. It is pretty
clear. And now over 9 million families are expected to lose
their homes to foreclosure between now and the end of 2012.
That is about one out of every five mortgages in America. That
is a conservative estimate. So when I said 2 million in 2007,
people scoffed, and now we are dealing with 9 million, headed
up.
Let me show the second chart there, if you will, Brad,
because this chart says that when it comes to resets, the red
line is where we are at the moment. That is the past. This is
the future. The resets are going to continue to grow, and we
are going to see this crisis continue to grow.
I learned a valuable political lesson when I offered this
amendment a second time, because the banking industry mobilized
as one voice against this notion of dealing with the bankruptcy
court. I expected it from the biggest banks. They have been
opposed to this notion from the beginning. But the so-called
independent community banks joined ranks with them. And then
the credit unions joined ranks with them in opposing cramdown.
We even reached the point, after this went to conference,
where we offered to the independent community banks and credit
unions exemption from this so that they would not be covered.
Their opposition was no longer needed because they would not be
covered by this cramdown. They still joined at the American
Banking Association and said, ``We oppose it anyway.'' I think
they have to take the word ``independent'' out of ``independent
community banks'' after that. They are not independent anymore.
They are part of the same operation.
And we know, because an e-mail--e-mails just float around
the world now. An e-mail from the Arizona Banking Association,
which I would be happy to share with the Committee, the head of
the Arizona Banking Association sent an e-mail to all of the
major bankers and their associations across America and said,
``Be careful. Durbin is compromising. He really wants to get
this out. We cannot compromise with him. There is no compromise
acceptable.''
So it is not as if we did not make a good-faith effort to
do this. We did it over and over and over again. They just
would not even consider it.
I am glad you did this hearing. I think we have to revisit
this issue. This issue still remains, I think, at the core of
the weakness of our economy. This great recession we are in has
a lot to do with foreclosures and the housing market.
Professor Levitin, who is here, suggests we are about to
enter a new phase of the crisis. Just as the subprime mortgage
tsunami is beginning to recede, a new wave is coming. This time
it is the option ARMs that are beginning to reset late this
year. And at the same time, with high unemployment, with house
prices depressing and falling, these resets will usually
include a large payment shock that will cause an enormous
number of these so-called pick-and-pay mortgages to fail. All
the while, more fixed-rate borrowers will also lose their homes
as job losses continue.
Second, after 2 years of effort that relies on banks to
volunteer--that is what this has been about up until this
point, waiting for the banks to step up and volunteer to solve
the problem--it is time to admit that is not working. The banks
have long said, ``We are just going to ride this out.'' But as
you can tell, it is not as if this is going to get bumpier. We
are going to face a cliff at some point here. And we have to be
honest about it, and I hope we are honest about it in enough
time.
This is what David Kittle, who was then Chairman of the
Mortgage Bankers Association, said in front of this Committee
last November, and I quote: ``The industry has been engaged in
historic efforts to assist distressed homeowners, and we
believe these have proven successful in stemming
foreclosures.''
Really? According to the Mortgage Bankers Association's own
survey, foreclosures are skyrocketing. While the Obama
administration's Home Affordable Modification Program has been
in operation for only a few months, the initial results are not
that encouraging. One hundred sixty thousand trial
modifications were offered in the first 4 months. That
translates to fewer than half of the administration's goal for
this program. And the number of mortgages modified represents
less than one-quarter of the foreclosures initiated. We are not
keeping up with this. The foreclosures are growing far faster
than our voluntary programs. We are falling further and further
behind.
We cannot ignore this, and I thank you for calling this
hearing. This economic crisis that began with the popping of a
bubble in the housing market cannot be tamed until we stabilize
the housing market. Toxic assets based on mortgages will remain
toxic until the underlying mortgages are addressed. Regardless
of how many billions of taxpayers' dollars are pumped into bank
balance sheets with few strings attached, we have got to
address the root cause of the illness, because when you lose
your home, you are far less likely to buy anything, and that
means companies that are trying to sell things need fewer
workers to produce the things that folks would otherwise buy.
In 2009, the Center for Responsible Lending estimates
foreclosures will cause nearly 70 million nearby homes to
suffer price declines averaging $7,200. Folks, it is not just
your neighbor. It is you. We are all in this together. Over
$500 billion in home equity will be lost for families that have
done absolutely nothing wrong and are faithfully making their
mortgage payments. During the period 2009 to 2012, CRL projects
that foreclosures will cost 92 million U.S. families $1.9
trillion in lower home values. Just what America needed while
it watched its savings accounts diminish, now the home values
are diminishing through no fault of the homeowners, because we
are not addressing that foreclosed home right next door.
So thank you for this hearing. I will not go into this
other than to say, Senator Sessions, we have really reached a
point we cannot bring these folks to the table, and they are
not going to do it on their own. That is clear. The bankruptcy
court, at least as a possibility out there, is a motivator to
get these folks to finally sit down, the lenders to finally sit
down and try to work things out. They cannot save every soul,
but we have got to put more effort in it.
Thank you.
Chairman Whitehouse. Thank you, Senator Durbin. Thank you
for your years of leadership on this issue; in addition, on the
point that Senator Sessions raised about the poor homeowner who
has got nobody to talk to because nobody on the other side can
negotiate for the mortgage holder's interest because they have
sold it in strips around the world and around the country, and
there is just nobody to find or talk to. One solution to that
problem is that a bankruptcy judge can make, ``thunk,'' a final
decision, and then people have to live with it, and I think
that will also help get through that deadlock.
Senator Durbin. Was that ``thunk''?
Chairman Whitehouse. That is the sound of the gavel coming
down. I should have probably done it live. But I did not want
to confuse anybody that the hearing was coming to an end.
The witnesses that we will hear from now are:
Joseph Verdelotti, Jr., a constituent of mine from West
Warwick, Rhode Island, who will share his experience struggling
with two mortgages during a period of rising costs and falling
home prices. Mr. Verdelotti, a licensed electrician, and his
wife, April, a hospital worker, have been unable to obtain
mortgage modifications and may soon be forced to lose their
home.
Alys Cohen is a staff attorney at the National Consumer Law
Center's Washington office, where she advocates on predatory
lending and sustainable homeownership issues. Ms. Cohen leads
NCLC's mortgage policy. Ms. Cohen is a graduate of the
University of Pennsylvania Law School.
Professor Adam Levitin of the Georgetown University Law
Center is a nationally regarded expert in bankruptcy and
consumer law. He serves as Special Counsel for Mortgage Affairs
for the Congressional Oversight Panel. Professor Levitin is a
graduate of Harvard, Columbia, and Harvard Law School.
Dr. Mark Calabria is Director of Financial Regulation
Studies at the Cato Institute. Prior to joining the Cato
Institute, Dr. Calabria was a senior professional staffer on
the Senate Banking, Housing, and Urban Affairs Committee. He
holds a doctorate in economics from George Mason University.
Richard Genirberg is a practicing attorney from Jonesboro,
Georgia. He specializes in bankruptcy, collections, and
criminal law. He earned his law degree from Georgia State
University College of Law and his B.A. at Michigan State
University. He also has an MBA from Georgia State University.
Prior to owning his own firm, Mr. Genirberg was general counsel
for the minority party at the Georgia House of Representatives.
We welcome the witnesses, and we will begin with the
testimony of my constituent, Mr. Verdelotti. Please proceed.
STATEMENT OF JOSEPH VERDELOTTI, JR., HOMEOWNER, WEST WARWICK,
RHODE ISLAND
Mr. Verdelotti. Chairman Whitehouse, Ranking Member
Sessions, members of the Subcommittee, thank you for the
opportunity to speak at today's hearing on this very important
matter.
My name is Joe Verdelotti, Jr., and I am a licensed
electrician from West Warwick, Rhode Island. My wife, April,
works in the emergency room registering patients at the Roger
Williams Medical Center in Providence, Rhode Island. We have
been married for 9\1/2\ years and have known each other for
nearly 20 years. We have one daughter, Brooke, who is 9, and
two sons, Lorenzo who is 6, and Gianni who just celebrated his
1st birthday a few months ago. Needless to say, we have quite
an active household. On January 26, 2006, we purchased a 1,100-
square-foot home in West Warwick, Rhode Island, for $225,000.
Since we, like many other homeowners, did not have savings
for a down payment, we took out two mortgages. The first
mortgage, which covered 80 percent of the purchase price, is an
adjustable rate mortgage that is currently at 6.5 percent but
will adjust in the fifth year. The second mortgage, which
covered the other 20 percent of the purchase price, has a fixed
interest rate of 9.25 percent. Both mortgages were originally
through Aurora Loan Services, but CitiMortgage subsequently
purchased the second mortgage.
At the time we purchased our home, I was a fourth-year
electrician's apprentice making $18 an hour. The construction
industry was booming and times were good in Rhode Island. The
good times did not last, however. Not long after we purchased
our home, the recession began and work became scarce.
My company has had to lay off workers and make cutbacks
just to stay afloat. As of today, we still have a wage freeze
in effect, and our health care premiums have increased. My
wife, too, has felt the effects of the recession at work and is
also under a pay freeze. Despite our income freeze, the cost of
living has not slowed and we are feeling the squeeze. Our
utility bills, such as electric and water, have increased, as
have our property taxes, and we may see further increases in
the future. Our budget is stretched as tight as we can get it.
Like many of our neighbors, our home is ``underwater.'' It
just is not worth what we paid for it at the height of the
housing bubble in 2006. We received a glimmer of hope last fall
when the Help for Homeowners program took effect, but that
proved to be a disappointment. The day the program started, my
wife called the number listed on HUD's website and spent hours
waiting and talking to someone at debt service about our
situation. In the end, their only advice to her was to consider
a roommate, get a part-time job, contact the United Way to
locate food banks in our area, reduce spending, and contact
legal aid for a consultation with a bankruptcy attorney. The
person on the phone even recommended we consider walking away
and letting the bank foreclose.
We called for help in saving our home, and we were told to
consider food banks and foreclosure.
I later contacted Aurora Loan Service directly and spoke
with a customer agent to see if they would be willing to work
with us under the Help for Homeowners program. After giving the
necessary information to the agent over the phone, I was met
with another disappointing blow: the agent informed me that I
did not make enough money for them to help us and that we
should consider a short sale.
Next, we decided to apply for a financial hardship package
through CitiMortgage. On February 26, 2009, we sent
CitiMortgage the necessary documents through certified mail.
The documents were received on March 2nd. On March 20th, my
wife contacted CitiMortgage at approximately 1 p.m. to try to
find out to the status of our hardship application, but all she
got was the runaround. Each person she spoke to said she had
the wrong department and that they would transfer her to the
right one, but this never happened. This went on until I came
home from work and I took over. Each person was clearly reading
the same talking points: we always had the wrong department,
and they would transfer us to the correct department. After
listening to elevator music on hold for over an hour, I, too,
gave up. We had been on the phone with CitiMortgage for over 5
hours and accomplished nothing.
On April 8, 2009, my wife contacted CitiMortgage again, and
after several attempts to get a straight answer, she was
informed that our case was closed since they never received our
package. She informed them that that it was sent on February
26th and that we had delivery confirmation that they received
it on March 2nd. After hearing this, they changed their story
to, ``It must have gotten lost,'' and that we would need to
resubmit the application. This was quite unsettling to hear
because that package contained all of our personal and
financial information.
Since we have two mortgages, we also sent a hardship
package to our first lien holder, Aurora Loan Service. In a
letter dated March 11, 2009, just 2 days after receiving the
package, Aurora denied our request.
In May, I once again requested a mortgage modification from
CitiMortgage. This time we were rejected because, according to
them, we make sufficient income to support our current mortgage
payment. They also suggested that we consider a short sale.
CitiMortgage apparently believes that we make enough to cover
our mortgage, but that we should consider a short sale? This
seems pretty contradictory to me.
Now, even though we are current on our financial
obligations, we are hardly living comfortably. We have had to
make even more adjustments in order to make ends meet, and it
gets increasingly difficult. We are not sure how much longer we
can survive like this. My health care premiums rose at the same
time the Making Work Pay tax credit took effect, so I now take
home $2 less a week than I used to. How can my family and
others help stimulate the economy if Congress doesn't do
something fast to help curb this foreclosure problem?
All we are asking for is a little help, a little
consideration, and a little professionalism on the part of our
mortgage holders. If we are able to negotiate a more manageable
payment plan and keep our home, it becomes a win-win solution
for everyone: We keep our home, the banks avoid the costs of
foreclosure, and the community avoids a hit to property values
and tax collections.
Senators, please do something to help struggling homeowners
like my wife and me. Thank you again for the opportunity to
tell my story.
[The prepared statement of Mr. Verdelotti appears as a
submission for the record.]
Chairman Whitehouse. Thank you, Mr. Verdelotti. I think you
have very well captured and very well expressed the predicament
of people across this country who are hard-working, who are
honest and honorable, who have worked hard to make their
financial obligations and have indeed kept them current through
considerable stress, who do not want any special deals from
anybody, but who simply cannot get even a straight answer from
the industry. I appreciate it.
Ms. Cohen.
STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER, WASHINGTON, D.C.
Ms. Cohen. Chairman Whitehouse, Ranking Member Sessions,
Senator Durbin, thank you for inviting me to testify today. I
testify here today on behalf of the National Consumer Law
Center's low-income clients and on behalf of the National
Association of Consumer Advocates and the National Association
of Consumer Bankruptcy Attorneys.
For the last few months, I have been working with
colleagues at NCLC and other organizations to promote large-
scale solutions to the foreclosure crisis. During that time,
the pleas for help from advocates on the front lines of saving
homes have escalated in both number and in urgency. When the
Home Affordable Modification Program, HAMP, was announced by
the administration on March 4th, hopes were high that
homeowners would finally have a means to prevent foreclosures.
Unfortunately, that reality has not materialized. In fact, what
we increasingly hear is that HAMP is not the essential tool it
is intended to be.
It is not just that we get calls about the instances in
which the program has had a blip of failure. It is that, in
general, advocates find that HAMP loan modifications are hard
to get at all and, when obtained, often are not compliant with
program rules. Mr. Verdelotti's concerns, including the
horrific consumer service he and his wife experienced, are
typical of what we are hearing about participating servicers.
He appears to have been denied HAMP processing by two
participating servicers, but the lack of transparency in the
system and the lack of accountability make it hard to know what
happened. He and borrowers like him need to be given a clear
opportunity to show that they are at risk of imminent default
or in default and need help.
Moreover, even if HAMP operated at its full capacity as
envisioned by Treasury officials, HAMP's loan modifications
still would be substantially outpaced by foreclosures, and the
modifications themselves lack the mandated principal reductions
that many believe are necessary to stem the foreclosure tide.
While Treasury officials have been actively receptive to
our operational concerns, progress is slow and core problems
with HAMP's design have not been addressed. Even if
implementation problems were fixed, the design of the program
precludes transparency and, thus, accountability, and it also
lacks mechanisms to assure long-term sustainability of the
program.
The net present value test, which is the primary basis upon
which a loan modification is granted or denied, is not
available to the public, and thus homeowners have no ability to
question whether a servicer's analysis is based on accurate
information. Moreover, the lack of a mandate on principal
reductions undermines the long-term effectiveness of the
program.
Homeowners who could normally refinance their way out of a
lost job or sell their home in the face of foreclosure are
denied both options when they owe more on their home than it is
worth. Without principal reductions, homeowners who lose their
jobs, have a death in the family, or otherwise experience a
drop in income are more likely to experience redefault and
foreclosure.
Goldman Sachs estimates that starting at the end of the
last quarter of 2008 through 2014, 13 million foreclosures will
be started. Last week, Assistant Treasury Secretary Herbert
Allison, in responding to questioning from the Senate Banking
Committee, agreed that in order to meet Treasury's goals of
doing 3 to 4 million modifications by 2012, they would need to
do 1 million per year. Even if the administration reaches those
numbers, that will address no more than one-third of all
foreclosures. Using current figures, the program is on pace to
modify only 480,000 mortgages a year, not even half of its
annual goal, assuming that every trial modification, in fact,
leads to a permanent modification.
Creating affordable and sustainable loan modifications for
distressed homeowners is labor intensive. It is no surprise
then that servicers continue to push homeowners away from HAMP
loan modifications or delay the process substantially. In
addition, servicers' profit is directly linked to the principal
of mortgages they service and the timing for writing down
loans. Also, servicers who hold second liens, many of whom
service large portions of the first lien market, may prefer to
gamble on a market recovery rather than accept the incentive
payments under HAMP and recognize their losses now.
A time line should be set to evaluate HAMP and other
existing programs. If the data confirm the experience of
advocates nationwide, more stringent measures should be
adopted. Congress should pass legislation to allow bankruptcy
judges to modify appropriate mortgage loans and also should
consider further servicing reform. Adoption of court-supervised
mortgage loan modifications would sidestep many of the
structural barriers in the servicing industry that today are
preventing mass loan modifications from occurring.
Congress soon should recognize that voluntary measures,
even with incentives, by entities that profit from homeowner
default and unsustainable loan principals cannot lead us out of
this crisis.
Thank you for the opportunity to testify before the
Subcommittee today. We look forward to working with you to
address the challenges that face our Nation's communities.
[The prepared statement of Ms. Cohen appears as a
submission for the record.]
Chairman Whitehouse. Thank you very much, Ms. Cohen.
Professor Levitin.
STATEMENT OF ADAM J. LEVITIN, PROFESSOR, GEORGETOWN UNIVERSITY
LAW CENTER, WASHINGTON, D.C.
Mr. Levitin. Good morning, Mr. Chairman. My name is Adam
Levitin. I am an Associate Professor of Law at the Georgetown
University Law Center. I am also the Robert Zinman Resident
Scholar at the American Bankruptcy Institute. I am not
currently serving as Special Counsel for Mortgage Affairs for
the Congressional Oversight Panel, however, and I want to make
clear that I am not speaking in any context for the panel, nor
do I speak on behalf of the American Bankruptcy Institute.
We are now in the second year of the foreclosure crisis--or
really into the third now, and there is no light at the end of
the tunnel. That is what is scary about this. There are plenty
of foreclosures yet to come, and these are not just going to be
subprime mortgages that are in foreclosure. These are going to
be prime mortgages. This is going to be the mortgages held by
families that have had good credit, that have taken out
traditional, safe mortgage products.
I have some slides here that I would like to show the
Committee, and this first one you have actually seen from
Senator Durbin. This is the percentage of homes that are in
foreclosure currently. As you can see it spiked to something
almost four times the historical average.
The next slide shows that this is also happening in prime
mortgages, that delinquencies are up and foreclosures are way
up in prime mortgages. This is no longer a subprime crisis.
This is a national foreclosure crisis.
Chairman Whitehouse. Those are all prime mortgage----
Mr. Levitin. Those are three different measures for prime
mortgages, and as you can see, they are all rising sharply
currently.
This is not just my opinion based on current market
measures. It is also what the market believes will happen. If
you show the next slide, please--I am sorry. Go back one,
please. The pink line in this slide shows sort of an index of
national housing prices, and as you can see, there is a bubble
that goes up, and it falls, and then the little blue triangles
that more or less flatten off at the end, that is what housing
market futures are predicting; that we are going to have
housing prices go down for a while, still for maybe another
year, and then a very slow recovery; that it is basically going
to be flat until 2013. That means that families that purchased
their homes between, say, 2003 and 2008, many of them will be
trapped with negative equity, with very deep negative equity.
Even if the monthly payments are affordable, negative
equity creates a long-term foreclosure problem. Families have
to move from time to time. There are life events that happen--
that you lose your job working at General Motors and you have
to find a new job; that you get divorced; that you have a child
and you need more space; or your kids move out of the house and
there is no reason you should have a large house if you are an
empty-nester; that a family member gets sick and needs special
assistance; that a spouse dies.
These are events that are inevitable, and when families are
trapped with negative equity in their home, they have a choice.
If they have to move, they can either somehow find money to pay
a large balloon payment in effect, or they can give up the
house in foreclosure. Those are their choices. And that means
that for the foreseeable future, for the next 5, maybe 10
years, we are going to have thousands, hundreds of thousands of
families that are trapped in their home. This means labor
market disruptions. This means continuing foreclosures that
will continue at an elevated level. Even if not an acute
crisis, it will create tremendous instability for housing
markets because foreclosure rates will not be predictable.
Unfortunately, all the foreclosure mitigation efforts to
date have not worked. I believe Ms. Cohen went into that in
some detail, and I believe there is also broad agreement on
that, that our efforts at foreclosure mitigation have not been
working and are not likely to start working.
There is much less agreement as to why that is the case. I
believe that Dr. Calabria and I have some disagreements as to
the reasons these programs are not working, but I think we can
agree that they are not working.
So where does that leave us? I believe that means that we
only have one tool left in the box, and that tool is
bankruptcy. Bankruptcy modification of mortgages can not only
incentivize voluntary renegotiation, as Senator Durbin pointed
out, but in the event that voluntary renegotiations do not
happen, for whatever reason, bankruptcy modification is a route
that will let families that are able to make reasonable
payments save their houses. It is a method that will not cost
the taxpayers anything.
Senator Sessions, I want to address something that you said
in your statement. You asked the very important question about
what cost bankruptcy modification will have to future
borrowers, and we should be very concerned about that. We do
not want to hurt the future economy at the cost of, say,
helping people--we do not want to help people now at the cost
of the future economy. But I think it is important to recognize
that bankruptcy modification, it is not a choice for a lender
between getting paid back in full and not getting paid back
because of bankruptcy. That is not the choice a lender has. A
lender's choice is taking a loss in foreclosure or taking a
loss in bankruptcy, and the question is going to be: Which will
be the greater loss? As long as the loss in bankruptcy will be
smaller than the loss in foreclosure, it is not a problem for a
lender in terms of their future rates, that the bankruptcy
actually will be saving them money.
The best evidence on this is that bankruptcy will not cause
greater losses than foreclosure. The structure of bankruptcy
law basically guarantees that. It says that a secured creditor
has to receive the value of their property as part of a Chapter
13 plan--the collateral, as part of their Chapter 13 plan. That
is a floor that says you have to do at least as well as in
foreclosure.
And with due respect, I think it is very important to note
that the banking industry has not produced any evidence to the
contrary. They have made assertions about this, and Mr. Kittle
in particular, whom Senator Durbin referenced, from the
Mortgage Bankers Association, has testified before saying rates
will go up 2 percent or 1.5 percent--it is a changing number--
but there is no evidence of that. It is just an assertion. So
if the best evidence is that bankruptcy modification will not
affect future mortgage costs and that it will help thousands of
families, this is something we really should do. It is the only
tool we have left in the box, and it is time we use it.
Thank you.
[The prepared statement of Mr. Levitin appears as a
submission for the record.]
Chairman Whitehouse. There was one slide that you showed
and then have not discussed. You have a minute or so--actually,
you are a little bit over, but with the Ranking Member's
indulgence, would you explain this slide? It appears to show
the first wave, which was the subprime mortgages, and then
where we are now is the valley in the middle, and then there
appears to be a just as steep, if not in some places steeper,
second wave bearing down on us. Could you tell us what that is?
Mr. Levitin. That is correct. The foreclosure crisis has
been happening in waves, and the first wave of defaults was
primarily speculators, people who were buying houses as
investment properties and looking to flip them.
The second wave, which you can see was peaking in 2007-
2008, those were primarily subprime mortgages, and what this
chart is showing is on adjustable rate mortgages when the
interest rate will reset or, if it is pick-or-pay mortgage, a
pay option ARM, when there will be a recast, because the pay
option ARM, if there is too much negative equity, if you are
not making amortizing payments----
Chairman Whitehouse. And that is closely associated with
foreclosure.
Mr. Levitin. That is right. And that is going to be a
tremendous payment shock when it resets in a pay option ARM.
Chairman Whitehouse. And so the second wave that we are
looking at coming in, in your testimony, is not subprime
families; it is families with traditional mortgages, with jumbo
mortgages, with prime mortgages, with Alt-A mortgages.
Mr. Levitin. That is correct. For example, Countrywide
Financial, the largest mortgage company in the country, most of
the products that they underwrote were Alt-A pay option ARMs,
heavily concentrated in California, which has already been just
taking a beating in the foreclosure market, and it is going to
get worse.
Chairman Whitehouse. Thank you.
Dr. Calabria.
STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR, FINANCIAL
REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, D.C.
Mr. Calabria. Subcommittee Chairman Whitehouse, Ranking
Member Sessions, Senator Durbin, I appreciate the invitation. I
do want to say before my testimony, my primary duties when I
was up here at the Banking Committee were mortgage finance and
housing, and in addition to my legislative duties, because I
very much remember the 5 weeks we spent total on the Housing
Recovery Act--because I spent that 5 weeks on the floor and I
still have the scars to remember it--I also spent a
considerable amount of time answering constituent calls,
helping people. I actually literally helped dozens, many of
which were from the State of Alabama, and I am very proud to be
able to have helped people stay in their homes and negotiated
with lenders. So I want to be very clear that none of my
comments are meant to dismiss that. My comments are all meant
to help us focus on what is driving it. But I have very much
been in the shoes of you and your staff in terms of having
heard from homeowners and having heard from your constituents
about these problems.
That said, my testimony is going to address two very
specific questions. The first is: Why have the Obama
administration, the Bush administration, and the mortgage
industry efforts to reduce foreclosures had so very little
impact? And the second is: Given the reasons for that question,
what should we do in terms of policy?
The short answer to why previous efforts to stem the
current tide of foreclosures have largely failed is that such
efforts, in my opinion, have grossly misdiagnosed the causes.
An implicit assumption behind HOPE NOW, run by former Secretary
Paulson, the FDIC's IndyMac model, and the Obama
administration's current efforts is that foreclosures are being
driven almost exclusively as the result of predatory lending or
exploding adjustable ARM rates--we just saw Adam's chart on the
ARMs--and that you had these payment shocks that caused
mortgages to be unaffordable. The simple truth, if you look at
the data very carefully, is that the vast majority of mortgage
defaults are being driven by the very same factors that have
always driven mortgage defaults: a combination of negative
equity position on the part of a homeowner coupled with a life
event that often results in a substantial shock to their
income, most often a job loss or reduction in earnings. Until
both of these components--negative equity and a negative income
shock--are addressed, I believe foreclosures will remain at
highly elevated levels.
To address some of the points that ere made by others, if
payment shock were the dominant driver of defaults, then we
would observe most defaults occurring around the time of reset,
specifically just after reset as that burden hits. Yet this is
not what has been observed in the data. Of the loans that have
reset features that have defaulted, the vast majority have
defaulted long before the reset. Additionally, if payment shock
were the driver of default, the fixed-rate mortgages without
any payment shock would display default patterns significantly
below those of adjustable-rate mortgages. We just saw from
Adam's chart that prime mortgages are starting to increase. If
you actually do some econometric statistical work and you
control for the differences in credit, you will see that for
the vast majority of differences in prime and subprime, those
things almost always go away. I will give the example of we
have what are called FHA loans in this country that are fixed-
rate, no prepayment penalties, extensive borrower protections
on an apples-to-apples basis looking at homeowner loans under
the limit, the loan limit for FHA, FHA performs just as badly
as subprime. So the argument that these are bad products
driving it, well, the good products are performing terribly,
too.
So the important shared characteristic of FHA and most of
the subprime market is the widespread presence of zero or very
little equity at the time of origination or near the time of
the default. The characteristics of zero or negative equity
explain almost all of defaults in this situation.
I share your frustration. I share the frustration of
everyone at the table, and I recognize that that is leading us
to push for solutions. One of the solutions that has been
talked about is to allow bankruptcy judges to reduce the
principal balance of a mortgage to reflect the reduced value of
the home. Many have called this ``cramdown.'' I believe
cramdown would have adverse consequences in the marketplace and
actually provide very little real value.
I think the primary differences in opinion between Adam and
myself is probably the extent of how much of this is employment
driven. In Adam's testimony, and I believe in Richard's
testimony, it is very clearly spelled out that if you have
unemployment, you cannot put together a repayment plan, Chapter
13 is not going to work for you.
So given that we know that Chapter 13 is not going to work
for you if you are unemployed, given we also know that about 40
percent of foreclosures today are second or vacation homes and
you consider that--take your 50 percent unemployment, 40
percent from vacation and second homes, you get to 90 percent
right off the bat. We will not be able to help 90 percent of
foreclosures with cramdown. That is not to mean we should not
help them. That means we need to find a solution that actually
does help them, in cramdown or not.
I want to mention a couple other things. It has often been
presented that cramdown is without cost. I want to note a
couple of things. First of all, it is not the lenders who will
bear the burden. The investors in mortgage-backed securities
will bear almost all the burden. As we have seen in the recent
auto restructuring, these investors are often pension funds of
retired State and local employees. It is not clear to me why
retired teachers, firefighters, and other public servants
should actually bear the cost of mortgage foreclosures.
I also want to note that with the Government takeover of
Fannie Mae and Freddie Mac, along with the Federal Reserve's
holding of almost half a trillion in mortgage-backed
securities, we, the American taxpayer, are the largest single
investor in mortgage-backed securities. Any losses from
cramdown will accrue to us, the taxpayer. So this is not simply
a matter of we are taking from banks and giving to homeowners.
I also want to note, many people have talked about the CRL
numbers. I have a tremendous amount of respect for Martin Eakes
and Michael Calhoun there. I think they do good work. But I
also think some of their forecasts have been wildly off. If you
go look at what the Census Bureau numbers have actually said,
between 2007 and 2009 a little more than a million households--
and let me emphasize, this is from the Census Bureau. Not my
numbers. This is independent estimates from the Census Bureau
from 2007 to 2009, a little bit more than a million, 1 million,
homeowners have transitioned to being renters. Not 2 million,
not 4 million, not 9 million. One million. That clearly can be
1 million----
Chairman Whitehouse. Mr. Calabria, I allowed Mr. Levitin go
over his time a little bit, so I will extend you the same
courtesy, but if you could begin to wrap up.
Mr. Calabria. With that I will wrap up and say that I just
want to reiterate that the primary driver is negative income
coupled with job loss. We need to focus almost all of our
efforts on job loss----
Chairman Whitehouse. Negative income or negative equity.
Mr. Calabria. Both. You have a negative income shock
coupled with negative equity. And why that is important is if
you lose your job and you have got equity, you can borrow
against it. You can try to make that through. If you do not
have negative equity--it is both, the combination of shocks,
and it is very important that we address both, not just the
negative equity, not just the negative income, but the
combination of the two is the primary driver.
With that, I will wrap up.
[The prepared statement of Mr. Calabria appears as a
submission for the record.]
Chairman Whitehouse. Thanks, Mr. Calabria.
Mr. Genirberg.
STATEMENT OF RICHARD GENIRBERG, ATTORNEY, GENIRBERG LAW OFFICE,
JONESBORO, GEORGIA
Mr. Genirberg. Chairman Whitehouse, Ranking Member
Sessions, distinguished members of the Subcommittee, thank you
kindly for inviting me to address bankruptcy reform in light of
the worsening foreclosure crisis. I will share with you my
experience of foreclosure in bankruptcy from the perspective
not of an academician, but of a ``country-lawyer'' practitioner
in the trenches. In my general trial and transaction practice,
I represent consumers and creditors in Chapter 7 and Chapter 13
bankruptcy cases.
Before 2006, it was common in Chapter 7 and 13 cases to
advise financially overwhelmed debtor clients to surrender
late-model cars and trucks. Since 2006, it has become common
for debtors instead to surrender the house. What is different
now?
Since the bursting of the residential real estate asset
bubble, my debtor clients owe more on their mortgages than
their home is worth on the open market. Many of my clients are
unaware that their home is financially ``underwater.'' They
have sought the protection of the bankruptcy court to avoid
repossession of a car or because they are behind on their
mortgage payments. My clients usually express their wish to
retain their home. I find myself explaining that their home is
a financial albatross around their necks, that it is a
liability, not an asset. I inform Chapter 7 clients that I will
not sign a reaffirmation agreement to ratify a debt on under-
valued collateral. Such conversations usually are long, tense,
and uncomfortable for all involved. It is not uncommon to
repeat such a conversation two, three, or four times in office
visits or over the phone before reality sets in that the
debtors cannot keep house and hearth together. What brings my
consumer clients to such a financially uncomfortable impasse?
It has almost never been because of the interest rate on their
home loan.
I see individuals compelled to file bankruptcy petitions
because of medical catastrophe or because one or both spouses
is laid off from a job or has become employed with reduced
compensation after having lost a job. Upon further scrutiny of
my clients' financial organization, I typically have found that
individuals spent way too much and saved way too little. They
bought houses, timeshares, and cars they could not afford. It
is not uncommon to see my bankruptcy clients drive up to my
building in a newer vehicle than I own. I see consumers having
adopted a self-defeating, self-perpetuating mind-set of viewing
spending through the lens of the monthly payment rather than
with an eye to the long term. I pray that the Congress will not
be so short-sighted. My clients often wish to retain all their
collateralized purchases despite their inability to pay for all
of them and to service their credit card debt as well.
My observation is that consumers have gone way overboard in
borrowing for consumption. Americans would benefit from viewing
borrowing money as a financial vehicle for businesses that plan
to make a profit on the borrowed money. Americans would be wise
to save more, to spend less, to establish a reserve of 6 months
of income, and to buy cars for cash.
Would cramdown of residential real estate loans benefit my
debtor clients? Of course it would. Any reduction of the cost
of any collateralized debt would benefit my debtor clients. Not
only would cramdown be beneficial, it would create a cottage
industry within consumer bankruptcy practice of encouraging
everyone earning under their median state income with an
``underwater'' residential loan to file bankruptcy expressly
for the purpose of cramming down the loan. If cramming down a
car loan older than 200 days would be moderately beneficial to
a consumer debtor, cramming down a residential real estate loan
would be so greatly beneficial to debtors that any residential
loan underwater by more than $5,000 would benefit from a
Chapter 13 bankruptcy. Under such a law, I imagine that
consumer bankruptcy practice would thrive like never before.
Legislating cramdown of residential real estate would create a
veritable ``license to steal'' from mortgagees. The question
this raises for the Congress is whether or not this would be
beneficial for the American economy.
Finally, which consumer debtors would benefit from
residential real estate loan cramdown? Ironically, the higher
the income of the debtor, the more able would be the debtor to
benefit from cramdown. Again, I return to my observation that
debtors become unable to pay their mortgages primarily because
of job loss, sometimes due to medical catastrophe. Chapter 13
plans seem to benefit those mainly who have experienced a
temporary setback in income due to job loss or medical
catastrophe, not those who have been laid off permanently.
Those consumers with residential mortgages and steady
employment whose only financial weakness is the loss in value
of the market value of their home would be the cohort who I
believe would benefit the most from mortgage cramdown.
Thank you very much for listening.
[The prepared statement of Mr. Genirberg appears as a
submission for the record.]
Chairman Whitehouse. Thank you for your testimony.
With the very courteous agreement of Ranking Member, we
will ask Senator Durbin to lead with the questioning. He is the
Deputy Majority Leader and has many demands on his time,
whereas I have to and, frankly, will actually love to be here
until the end of the hearing. But I do not have the same
demands on my time that the distinguished Senator from Illinois
does. So, again, with the courteous agreement of the Ranking
Member, Senator Durbin, please proceed.
Senator Durbin. Senator Whitehouse, if you are trying to
get on my good side, it is working.
[Laughter.]
Senator Durbin. Thank you. Thank you, Senator Sessions.
Mr. Verdelotti, what is your current value of your home?
Mr. Verdelotti. At this point I could not tell you, but we
went to go refinance back in the beginning of this year, and it
is under the $234,000 that I needed just to refinance, just to
a lower mortgage rate of 5 percent with an FHA loan. So it is
under what I owe.
Senator Durbin. And that was the original purchase price?
Mr. Verdelotti. It was $225,000.
Senator Durbin. So your current mortgage payments on the
two mortgages that you talked about?
Mr. Verdelotti. $1,852.
Senator Durbin. It is interesting. I may be off here, but
usually a rule of thumb on principal and interest is about $600
for each $100,000 of value of the home. So you are hitting a
pretty heavy payment there based on your second mortgage, I
imagine, which probably runs it up into such a high category.
Maybe I am off, but that is usually my rule of thumb trying to
figure out what a mortgage principal and interest payment would
look like.
Your runaround, for instance, Citigroup was not the group
that you initially did business with. You did not have your
original mortgage with them, did you?
Mr. Verdelotti. No. Aurora Loan, they had both my mortgages
when we signed the agreement. They turned around and sold the
second, the 20-percent loan at 9.25 to CitiMortgage.
Senator Durbin. I see. So you did not have anything to say
about it. None of us do. It just kind of moved through the
chain into the hands of another mortgage holder.
Mr. Calabria, Dr. Calabria, could you tell me the source of
your statement?
Mr. Calabria. The 40 percent, that is from Freddie Mac.
Senator Durbin. Freddie Mac?
Mr. Calabria. And that is also consistent with a variety of
surveys that have been done by the National Association of
Realtors on who----
Senator Durbin. How did you know I was going to ask you
about that?
Mr. Calabria. I have been following you for years,
listening to you on the floor.
[Laughter.]
Mr. Calabria. It sort of just soaks in after a while.
Senator Durbin. You have got to find a much more
interesting hobby than following me.
And ``license to steal,'' Mr. Genirberg? I guess you just
characterized bankruptcy court as a license to steal, because
right now you can go ahead and get cramdown on a farm, on a
ranch, on a second home. You think that is a license to steal?
Mr. Genirberg. No, sir.
Senator Durbin. Why? What is the difference?
Mr. Genirberg. I am trying to make a different point. The
point I am making is that with cramdown of residential real
estate, the amount that one could glean, the benefit that a
debtor could glean from a bankruptcy would be so great that it
would be worth it to file a Chapter 13 expressly for the
purpose of the cramdown, even without any other factor that
often forces people into Chapter 13s--or Chapter 7s--such as a
temporary loss of job or medical catastrophe.
Senator Durbin. You are familiar with the Bankruptcy Code
reform that we passed a few years ago and the new standards of
qualifying for bankruptcy and credit counseling requirements
and all the things that are part of it? It is not an easy
process. You have to qualify for it on the front end to be able
to go into it.
Mr. Genirberg. I am very familiar with it, Senator.
Senator Durbin. Yes, I am, too.
Let me ask you this, Ms. Cohen. It seems to me that our
best efforts at voluntary renegotiation have really failed, and
the numbers you gave us about the numbers of potentially
voluntarily renegotiated mortgages says that this wave is just
going to grow rather than diminish with that approach.
Ms. Cohen. So I think Professor Levitin's numbers also show
and your numbers show that the foreclosure crisis is growing
and that the modifications are not keeping up. We trace it
primarily to the structure of the servicing industry, and for
many, many years now, and for many different rounds of efforts,
we keep hearing the servicers will do better.
Senator Dodd had a pow-wow with the servicers. We had Hope
for Homeowners. We have HOPE Now. There is a long, long list,
as everybody knows, of the voluntary measures. But as long as
servicers profit because homeowners are in default, they are
not going to voluntarily take a hit, and the investors are
taking the hit at the same time that the homeowners are taking
the hit. And so what we really need is a stick and not a
carrot.
Senator Durbin. And let me ask you, Professor Levitin, you
have heard the point--and I am sure you have debated Dr.
Calabria before on this issue. He talks about negative equity
and negative income. It would seem the only place that you can
address negative equity and negative income is in a bankruptcy
court.
Mr. Levitin. That is correct. I agree with Dr. Calabria
that negative equity and payment shocks together, whether it is
from unemployment or a mortgage rate reset, whatever the cause,
you need those two things together. Those are the two key
ingredients. But the only place we can address those is
bankruptcy. Bankruptcy addresses payments, and it addresses
negative equity. I do not know of any other solution that does.
Senator Durbin. And Mr. Genirberg's suggestion that these
people going to bankruptcy court into Chapter 13 actually have
an income is really stating the obvious. You could not go to
Chapter 13 unless you had an income.
Mr. Calabria. That is correct.
Senator Durbin. The question is whether you have an
adequate income to even pay the restructured loans based on the
assets you would bring into bankruptcy. That is just the nature
of it. There is nothing sinister about this. I think that that
is what Chapter 13 is there for, isn't it?
Mr. Levitin. That is right, and I think it is also really
important to emphasize that Chapter 13 is not a fun process for
a debtor. You talked about the difficulty of getting into
Chapter 13. The real problem is once you are in Chapter 13, it
is not fun. You are living on a court-supervised budget for the
next 3 to 5 years. If you want your daughter to get braces, you
are going to have to go and wrangle with the trustee and the
judge about that. That is not something that people do for fun
just to get rid of a little bit of mortgage debt.
Senator Durbin. Thank you.
Thank you, Mr. Chairman.
Chairman Whitehouse. Thank you, Senator Durbin.
The distinguished Ranking Member, Senator Sessions.
Senator Sessions. Mr. Calabria, do you want to respond to
that?
Mr. Calabria. I actually wanted to draw some distinction
between these two points because I think that they are
incredibly important, and Adam is right, you need to have the
combination of the two. But I would stress if it is solely a
case of where you have a negative equity and, you know, your
income stayed the same, your mortgage payment stayed the same,
all it is is that the value of your house has declined, there
is nothing physically stopping you from making your mortgage.
And in those cases, there is nothing at all that we should be
doing to encourage you not to pay your mortgage. You knew what
the house price was. You knew what the value was. You have not
lost your job. So for that category of people--and I think it
is very interesting that Adam talks about in his testimony what
he calls ``strategic defaulters,'' and he is very clear about
it. These are people who can pay their mortgage and who choose
not to. And I think we need to be concerned about not
encouraging voluntary defaults that would not happen otherwise.
Senator Sessions. Well, the question I was going to ask
was: If you cramdown the principal--and we are talking about
cramming down the principal, not stretching out payments--which
a judge can do now. Can't they, Mr. Genirberg, in bankruptcy?
Or can they? Can they----
Mr. Genirberg. On long-term loans, the payments generally
stay the same. The altering of monthly payments or the altering
of the payback on collateral really happens with short-term
loans such as auto loans, those that can be paid back within 5
years. Long-term loans are just paid back as originally
contracted.
Senator Sessions. The problem with principal, it seems to
me, on an underwater loan is that we, in effect, would have
altered the historic concept that it is the homeowner that
takes the risk of a depressed housing price and not the person
who lends them the money, that the homeowner has got to be
careful when they buy a house to make sure they have a
reasonable expectation that it will hold its value.
Mr. Calabria, do you have any thought about that?
Mr. Calabria. I do, and I think this is an incredibly
important point. You know, when I got my mortgage, I certainly
did not intend to share any of the appreciation with the
lender, nor did I intend to expect the lender to share any of
the loss. And I think you do need to parse out these separate
things. You know, people who have lost their job, particularly
if it is a mass layoff a company shuts down, they deserve our
help, they deserve our sympathy. People who invested in a house
solely as--you know, not just in the consumption aspect but
because they wanted to, you know, share in the casino that our
housing market had become, they took a gamble, they took a
loss, and they should be expected to live up to that loss, if
they can.
I think it sends the absolutely wrong message. In my mind,
I am very concerned that as a society we are moving from
thinking of a debt as an obligation to thinking of a debt as an
option. You know, once that happens, we can just sort of forget
about actually expecting to have that.
So I want to go back and say my continued focus on the
employment side of that is, one, this is the primary driver
and, two, this is something that we can directly address; and
if we do not address it--because you can go into bankruptcy,
and if your house has declined by 20 percent and they cram it
down 20 percent but you are not working, that does not solve
your problem.
So my point is that we need to be honest about--you know,
my back-of-the-envelope is that, realistically, cramdown would
maybe help 50,000, 60,000 people, not millions, not hundreds of
thousands. And if Congress decides that to help 50,000 people
this is worth it, that is fine. Congress can--you know, you
weigh the balances; you do the cost/benefit, you decide that
that is it. But I do not think we should fool ourselves in
thinking that this is a solution that is going to keep millions
of people in their houses. If you do not get at the core of
this, none of the rest of it matters.
Senator Sessions. There is no doubt about that. We have
seen that a lot of refinanced mortgages, even then they have
not been able to keep the payments up. Is it, what, 40 percent
default after----
Mr. Calabria. It is close--from the OTS, OCC data that they
do on, where they have looked at--where they have done the
reductions of 20 percent or more, you have about 38, 39 percent
that re-default, you know, within the next year.
And I want to make another important point about cramdown,
and I think Adam's projections of the housing market are about
right. And the importance part of that is we could cram
somebody down today--and as Adam points out in his testimony,
he makes a very good point--they are not going to have positive
equity. At best, they are going to have zero equity. But in 6
months, they are going to be underwater again.
So what is the solution? We re-cramdown everybody every 6
months? You know, we need to come up with a long-term solution.
Senator Sessions. We have a national interest in and the
banks have an interest in not having too many houses fall on
the market and collapse the price even further. And that is why
they are voluntarily willing to renegotiate.
Mr. Genirberg, do you think that in your experience and,
Ms. Cohen, in yours that it is often--or how often is it that
there is no one to negotiate for the lender in lieu of
bankruptcy? How often is it that these mortgage tranches with
nobody who has the authority to negotiate an extended payment
or reduced payment or reduced interest rate for a period of
time?
Mr. Genirberg. Well, the fact that the mortgages are carved
up into strips and tranches does not really make a difference
because there is always one servicer that----
Senator Sessions. Is that servicer--some have told me that
that servicer does not have the authority, because of
contractual circumstances with the lenders who gave them the
money, that they do not have the authority to negotiate a
reduction.
Mr. Genirberg. I have had that experience. I have to agree
with Ms. Cohen that my clients have uniformly found that it has
been ineffective to try to negotiate with mortgagees because
the mortgagee that does not have the authority or my clients
often do not have the sophistication to have an ongoing
conversation about these issues, and they just somehow do not
get a very good response. They often get a response like Mr.
Verdelotti talked about where it is just bureaucratic and
frustrating.
So the experience that my clients have related to me 100
percent is that it has never worked to try to do a negotiation
yet.
Senator Sessions. But apparently it is working. Wells Fargo
says, what, 700,000 they have renegotiated. But----
Ms. Cohen. Senator Sessions, could I----
Senator Sessions. But I have no doubt it is not easy, and I
take very seriously your experience as a practicing attorney.
And that is what I am hearing from lawyers and bankruptcy
judges, that this is a problem.
What would you say, Ms. Cohen?
Ms. Cohen. Thank you for your question, Senator Sessions.
The way the agreements work between the servicers and the
holders of the loans, a study from Credit Suisse has found
that, in general, servicers have authority without very many
limitations on their authority to negotiate with the homeowner,
which is a separate question from whether Mr. Verdelotti can
get somebody on the phone who will then do the right thing, and
that is about the incentives of the servicer separate from what
the holder is trying to accomplish.
With regard to certain servicers and their numbers, I would
like to make a couple of points. One----
Senator Sessions. I am over, but it is okay to----
Ms. Cohen. I apologize.
Senator Sessions. That is all right.
Ms. Cohen. One is, like with Mr. Verdelotti's situation, we
do not know why he was told no because there is no transparency
in the system. And so a number of the big servicers have said X
number of people do not quality for HAMP loan mods, for
example, and Y number of people have received HAMP loan mods. I
can tell you from talking to attorneys around the country who
are very familiar with the HAMP guidelines that many people who
purportedly are receiving HAMP loan mods are receiving loan
modifications that do not comply with the requirements, and
that when people are turned down for HAMP loan mods, we do not
know whether that is justified or not.
I had one attorney in upstate New York tell me a story
where her client was turned down for a HAMP loan mod, and she
called the servicer and said, ``You do not even have my
client's income information yet. How can you turn my client
down for a HAMP loan mod? ''
I hear stories like that every day, and so we need a little
more transparency before we know whether the numbers are real.
Senator Sessions. Well, that is what I am hearing, talking
to real practitioners and judges. I think that is a recognition
that there is no free lunch. Somebody will pay for when
principal is crammed down. It is just--it will show up
somewhere in the system in the future against somebody that is
likely to be a good payer. But how we could improve the ability
to get a clear answer--because it does advantage the lender if,
for example, they could reduce the payment 40 percent because
one of the family members is unemployed, and that person
becomes employed 2 years from now, and they do not have to go
through foreclosure, real estate commissions, and all the
expense of foreclosing on a loan. So that is why they are
willing, apparently, to renegotiate and try to keep things that
realistically have a chance to succeed--they have an interest
in it. But it may be that there is not enough people at the
front line----
Chairman Whitehouse. Although I think that Ms. Cohen's
testimony is that the person who is making that decision is the
servicer, and that at the servicer's point of decision, they
actually make more money and do better letting the property go
into foreclosure than they do with a renegotiation. And so at
the point of decision, the incentives are all in the wrong
place, so that decision happens the wrong way.
Senator Sessions. If they do not agree with that, the free
market guides. But I think that makes some sense.
Mr. Calabria. Senator Sessions, if I could----
Senator Sessions. I should not----
Chairman Whitehouse. No, please. Go ahead, Mr. Calabria.
Mr. Calabria. If I could make two points, two comments on
this, the first of which is there are very serious capacity
constraints within the servicing industry. When I was Banking
Committee staff 2 years ago, I sat across from a bunch of
bankers and said, ``You guys need to go out and staff up your
loss mitigation, and you need to do it today because you are
going to get hit with a wave of foreclosures.'' And, of course,
they all nodded and said, ``Yes, we are going to do that.'' And
I do not think many of them have.
I do think it is important to keep in mind, you just cannot
go down to McDonald's and grab somebody off the drive-thru and
put them working phones in loss mitigation and expect that to
work. So there are very serious training capacity response
issues there.
You know, I will note that Congress up to this point has
appropriated close to $300 million for nonprofits to service as
those intermediaries. I do think we need to look at it and see
if that is working, because one of the things that these
intermediaries are supposed to do is get people prepped.
You know, I will also note--and Senator Whitehouse and
Senator Durbin and everybody talked about the TARP money--
Congress allocated $50 billion in the TARP to go to foreclosure
mitigation. Not a dime of it has actually gone out the door.
And one of the things that actually can be done with that money
is to try to help build the infrastructure so that you have
people there working the phones and the call centers, that you
have training, that you have best practices around the
industry. And none of that has been done, and I think that that
is a real loss.
Senator Sessions. Where is it? Is it in GM or something?
Mr. Calabria. Actually, it is Treasury. Treasury still has
the money. Treasury has $50 billion that they have allocated
$15 billion of it, which has not been awarded and spent, so not
a dime of that has actually been spent on building the
infrastructure.
And I want to make a final point near Ms. Cohen's
testimony. Given the incentives that lenders and servicers face
because the problem facing the lender ex ante ahead of time is
they do not know who actually is going to go into default. If
they offer a mitigation, they do not know who is going to cure.
So the situation facing the lender ahead of time is it is
actually profit-maximizing for them to have a positive number
of foreclosures that are individually negative value in which
the homeowner and the lender would actually make out ahead of
time. But the very real problem with that is the lender does
not know that. They do not have that information. It is very
easy to ex post say, ``Well, if you had modified this, then
everybody would have been better off.''
I guess, you know, I would put it this way: I would not
have to have bars on my windows at home if I knew exactly who
was going to try to break into my house. But I do not. And you
do not have that knowledge, and the lender does not have that
knowledge.
Chairman Whitehouse. But to play the devil's advocate,
isn't that exactly the sort of question that bankruptcy courts
sort out every day by looking at individual circumstances?
Mr. Calabria. To the extent that you would either have a
court or I think a lot of the intermediaries, the nonprofits,
one of the valuable things that they can actually provide is
that sort of screening. I mean, this might sound sort of
uncaring, but it is not. This is actually to help people. But
you need to have a minor obstacle to weed out people who are
not in trouble because of the capacity constraints. And one of
the concerns I have greatly had with Obama's refinance plan in
terms of Freddie and Fannie is they are focusing on people who
are not even late yet. It is fine to try to help everybody, but
to me it is a sort of reverse triage. You know, we are helping
the guy who sprained his knee before we are helping the guy
with the gunshot wound. It is the absolutely wrong way, I
think, we should be going about it.
We should be focusing on--you know, all of our resources
should be on those who look like they might be in the street
basically in the next couple of weeks, not those who are going
to be fine for 6 months. We have got it in reverse order in
that way.
Chairman Whitehouse. Let me jump in and ask some questions
myself at this point. My first is Mr. Verdelotti is here. He
has worked very hard to keep current on his payments, despite
the financial difficulties that have been caused. He got a
massive runaround from CitiMortgage and from Aurora both. I
would--well, I will just ask you directly. Mr. Verdelotti, are
you here seeking a license to steal from anyone?
Mr. Verdelotti. Absolutely not. I have a credit score right
now in the 700s, and I am not looking to lose that. This world
is built on credit, and I need it just as much as GM needs it.
If I do not have credit, then I cannot buy a car. My purchases
stop. That only hurts the economy in my eyes as well. If I ruin
my credit, then where do I go? I will lose my house, I will
lose my car. I cannot get to work without that. If I do not
have credit, I cannot get an apartment. Everybody does credit
checks.
So, no, I am not looking for a license to steal. I am just
looking for help.
Chairman Whitehouse. The point that you made so
articulately about your experience, 5 hours on the phone, never
getting anybody who could give you an answer, hours of elevator
music, I mean, for a family where both parents are working that
have three busy kids, an afternoon is a precious thing, you
know? If you had a spare afternoon, you could go to the park.
You could go to the beach. You could make a family memory.
Instead, you burned that whole afternoon because you could not
find one person on the phone in that whole company to give you
the time of day and even be able to answer your questions.
Mr. Verdelotti. That is correct. Unfortunately, I do not
have any time. My wife works nights. I work days. So we pass in
the wind.
Chairman Whitehouse. So that afternoon is a big, big cost
on you and on your family.
Mr. Verdelotti. Time together is important, yes.
Chairman Whitehouse. We would not ask you to burn that up
for nothing. And we have heard Mr. Genirberg say that his
clients do not get a very good response 100 percent of the time
when they try to deal with the banks. We have heard Mr.
Calabria in a much more professional way say there are very
serious capacity restraints, which I would say is, you know, a
little bit jargon for people are not being treated fairly.
People are not being served.
And we heard Ms. Cohen's testimony about the endless
runaround that she has heard about experiencing from her
network of attorneys, but she has also said in her testimony
that the servicing effort is, at best, erratic--that is one of
the pieces of testimony from your long testimony--and that
files are routinely lost. They claimed that they had lost your
file.
There is an enormous lack of transparency. There is a
whiff, at least, coming off some of this testimony that the
servicing banks, in fact, have some pretty nasty strategies
about blowing people off, not being available, losing their
documents on purpose, and all that kind of stuff. I mean, we
have just come through dealing with the credit card industry
that declared the day over at 10:00 or 11:00 in the morning so
that they could whack people whose mail came in that day on
time that afternoon with increased penalties for failing to pay
on time. Who would have thought a credit card company could
declare a day over earlier than the day is actually over? But
they did that, and they did it, and it was a really dirty trick
against the American public.
So the notion that this is an industry that is incapable of
really dirty tricks against the American public is one that has
already been--you know, we have been disabused of that notion.
They are clearly capable of it. They did it with that stunt in
the credit card business.
Do you have the sense that there is more to look at here in
terms of whether they are deliberately keeping families on hold
so they cannot get through and ask for these modifications,
whether they are deliberately losing the mail? I mean, at some
point incompetence becomes strategic in terms of innocent
incompetence, strategic incompetence, and a nefarious plan.
Where do you think the servicers range?
Ms. Cohen. Senator, I can give you some hints about why I
think it is more than just incompetence. I cannot answer the
question of whether files are lost on purpose. There do seem to
be some servicers who--most servicers--completely lack
commitment to making this work.
For example, there is some information in my testimony----
Chairman Whitehouse. Federal Express does not lose packages
hardly ever, and they deal with a lot more packages than these
servicers do.
Ms. Cohen. I am interested to know on the origination side
whether they lose the documents when they are trying to make a
loan or not. So that is sort of one question.
One servicer in my testimony is cited as having information
on their answering machine that says, ``If you call more than
once, you will be put to the bottom of the queue. And so that
is one way that they are dealing with it.
But the bigger issue really is what is happening beyond
staff-level incompetence on the front lines. We are seeing on
the websites of participating servicers inaccurate information
about who qualifies: You can only get a HAMP modification if
you have a GSE loan, a Fannie or Freddie invested loan. That is
not true.
We are seeing waivers of people's legal rights in loan
modification offers that directly violate Treasury's
guidelines. Those are not mistakes by a random untrained person
on the front lines. Those are systemic problems that can be
found by management. If I can find them, they can find them.
Chairman Whitehouse. And these are not little, bitty
corporations that have, you know, Mom-and-Pop businesses that
might be expected to get lost in this stuff. These are big
corporations with billions of dollars in business, with lawyers
and staff and all that, right?
Ms. Cohen. Without question----
Chairman Whitehouse. This is CitiMortage, for God's sake.
Ms. Cohen. For example, Ocwen's 10-K recently identified
that their income from servicing improved from 52 present--from
42 percent in 2008 as compared to 2007. So they are making a
lot of money. I know that the servicers have some financial
challenges and that they have a lot of paperwork they have to
do. But we are really talking about a power differential
between corporations that profit off of people's disadvantage
and individuals like Mr. Verdelotti who are just trying to get
a decent answer.
One other reminder about bankruptcy, you take a huge credit
hit on your credit score for many, many years if you file for
bankruptcy. And so people do not do that lightly. People like
Mr. Verdelotti all over the country are foregoing medicine and
food and utilities so that they can pay their bills.
Chairman Whitehouse. And still not get a straight answer.
The other question, I think we really have very strong
agreement on the panel from the point of view of treating
consumers in anything resembling a humane or civilized fashion.
There is a catastrophic failure on the part of the industry
here, and perhaps the bankruptcy stick would get their
attention a little better.
The other place we seem to have a lot of agreement is
between Professor Levitin and Dr. Calabria that there is a
pairing of circumstances that leads to the foreclosure problem,
and that is, on the one hand--I think you both used almost
identical words--negative equity in the home and some adverse
life event, whether it is the loss of a job, a reset, or a
health care disaster or something else in the family. And when
those two things converge, that is when you get a real problem.
And as I understand it, as a lawyer, as somebody who has
been a receiver companies, the only place you can adjust the
negative equity part of something is a bankruptcy court--or a
court. It has to be a court in America, because due process of
law does not allow somebody's equity to be taken away without a
judge signing off on it. You would agree with that, both of
you, that it has to be a judge who makes an equity adjustment
and takes away equity so that negative equity becomes on the
bubble?
Mr. Levitin. Unless it is a voluntary agreement, yes.
Chairman Whitehouse. Yes.
Mr. Levitin. And I think it is very important to emphasize
that the modifications that have happened, almost none of them
have involved principal reductions. So the modifications that
have been happening have dealt with the affordability of the
loan--or sometimes actually they have not. In many cases, many
modifications actually increase monthly payments rather than
decrease them, even now. But almost none of them have dealt
with problems of negative equity.
There is another slide I would like to show. This comes
from the Office of the Comptroller of the Currency and the
Office of Thrift Supervision, their most recent data from the
first quarter of 2009, the percentage of loan modifications
involving principal reduction by the type of ownership. So
Fannie Mae, Freddie Mac, and private label securitizations,
there were all of four loan modifications listed that involved
a reduction in principal. My guess is that those four were
actually data errors.
For portfolio loans, it was some 3,000 that had principal
reductions.
Senator Sessions. What is a portfolio loan?
Mr. Levitin. I am sorry?
Senator Sessions. What is a portfolio loan?
Mr. Levitin. A portfolio--the lender owns--the servicer
actually owns the loan itself, rather than servicing for
someone else.
Chairman Whitehouse. So this goes back to the point we
talked about earlier about the person who is going into the
community bank and is talking to somebody, and it actually
happens there.
Senator Sessions. Look, I can see this is a huge thing for
the Government to somehow force a person who has loaned
somebody a bunch of money, given it to them, on a promise it
will be paid back. It is one thing to delay the payments,
reduce the payments, extend them over a period of time. It is
another thing to say, ``I am voluntarily going to give you part
of that money, and you do not have to pay it back.''
So I think that is a pretty big issue, but I would think,
however, that the portfolio loans, the people who know what is
happening out there, probably made good decisions, because at
some point you need not to be--you need to count the cost of
foreclosure, the bank taking over property, and all the
headaches that go with that. And it might just be better if you
could have some reasonable expectation that with some
modification the lender may be able to work its way through
that.
I wanted to ask Mr. Genirberg one more--well, I will not.
Go ahead, Mr. Calabria.
Mr. Calabria. I was going to make a couple comments in
response, and since you brought up that point, you know, I
think my approach to this is, second, that without addressing
the income element of it--for starters, if it is just purely a
case of you have lost value in the home and nothing else
happened, I do not think that is a public policy rationale to
intervene, you have lost on an investment. And if cramdown does
not deal with the job loss, then you are not exactly dealing
with the underlying cause. But I do want to get at a point that
you made and sort of a counterpoint that Alys made, which is a
lot of people have talked about this as a stick, and that
fundamentally is something I have a problem with. I think it is
more than fine to try to cajole lenders. I think it is very
different to try to coerce lenders.
It is a very different debate if we have decided----
Senator Sessions. Let me just ask you this: In the future,
if a person is thinking about investing in providing money to
be loaned out to home buyers in hopes of a return, I do not
think there is any doubt that they could become skittish in the
future if they do not know what Congress next will invalidate,
the written contract they had when they loaned the money. So
this is not a little, bitty matter.
Let us go back to the one thing that we might could make
some progress with. Apparently we have some TARP money that is
designed to help avoid some of these problems. You have raised
that, Dr. Calabria. Mr. Levitin, would you like to comment on
it. Is there a way that we could somehow incentivize these loan
servicers to take the time to actually meet with the borrowers
and invest some effort in that and to maybe negotiate a loan
that would enable them to get back on a legitimate payment rate
and avoid foreclosure, avoid losses for the bank, and help our
economy by not dumping too many houses on the market all at
once?
Mr. Levitin. I wish that there were. I do not think anyone
wants to encourage more bankruptcy filings. Unfortunately, the
Obama administration's HAMP program offers incredibly generous
incentives, or one might even call them bribes, to servicers to
engage in loan modifications. This has not been working.
Senator Sessions. Why?
Mr. Levitin. Maybe it is not a--well, part of it may be is
just is not a big enough bribe, but part of it also, I think,
is the capacity issue, that servicers--one reason, I think, why
we do not--you know, to modify a loan is like doing an
underwriting afresh, and when you are doing it on a distressed
underwriting, that is very difficult. That takes some
experience. You cannot do it from an automated desktop
underwriting model. It is very individualized. Servicers do not
have the personnel that are trained in that, and we cannot
create them overnight.
Senator Sessions. I am not sure they cannot. Bankers are
being laid off all over the country. They are not making the
new-home loans. There is some expertise out there.
Mr. Levitin. I am not sure you want the people who
underwrote these loans in the first place doing the
modifications.
Senator Sessions. Well, branch managers or people who have
dealt with customers, they know people who are phony and who
are not.
Mr. Levitin. I do not think we have the trained resources--
--
Senator Sessions. I just think there are personnel out
there.
Mr. Levitin. Most servicers outsource a tremendous amount
of their operations to India. For example, Ocwen's or Ocwen
Financial, which is one of the best servicers out there,
actually, has about two-thirds of its employees based in India.
I do not believe that an India-based employee is capable of
doing a U.S. loan mod, that there are too many factors that you
would have to know that are culturally contingent in order to
do it. You cannot just do it on the numbers. If you see that
the homeowner works at a Chrysler dealership, you are going to
view that differently than if they are employed by the U.S.
Government, let us say. These are culturally contingent
factors.
The capacity problem, I think there is broad agreement that
there is a capacity problem, and it is something that we cannot
fix immediately. Even if we have a legion of unemployed former
community bankers out there, which I do not believe we do, we
cannot just plug them in the system tomorrow and have loan
modifications turned out.
Bankruptcy is different. Bankruptcy is immediately
available. The capacity is there. We have bankruptcy judges who
are trained in doing this. They can handle the cases, and when
you file for bankruptcy, there is an automatic stay. It stops
the foreclosure process so that even if capacity ramps up,
there is some time to sort this through.
Even with the $50 billion sitting in Treasury, there are
ways maybe Treasury could improve things on the margins, but it
is not going to change--there is not another--there really is
no other option than bankruptcies, either muddling through this
and seeing millions of houses lost in foreclosure or trying the
bankruptcy option. And maybe Dr. Calabria is right and
bankruptcy will not help very many people in the end. And if it
does not, I do not think we should be particularly worried
about its effect on the economy. But maybe he is wrong and
bankruptcy actually can help a lot of people. And that is a
chance that I think is well worth taking.
Ms. Cohen. Senator Sessions, I have a couple of things to
add to what Professor Levitin said.
First, your concern about the cost of credit increasing,
you were talking before about your work with Senator Durbin
about auto lending, and so in the 1970s, the FTC passed a rule
that affected the liability of assignees, the holders of the
loans, who we were just talking about, for cars, and there was
a huge outcry that the cost of lending, auto lending, was going
to go up significantly because of the increased burden and
uncertainty in the assignee liability market. And the answer is
that there was really no significant change in the cost of
lending. My understanding is there is also similar research
about bankruptcy, but I wanted to provide that historical
example.
Further, you asked about how can we get the servicers
incentivized to do the loan modifications. It appears that the
large payoffs or payouts that the Treasury Department is
willing to give for the loan modifications cannot compete with
the monthly payment stream and the residuals, which are sort of
interests in a level of the tranche that the servicers have.
And as soon as they do the loan modification, their income
directly goes down. And so it is very hard to bring them to the
table with that dynamic.
We have seen some mediation programs in Philadelphia and
elsewhere, where if you get a human to the table with another
human, they can work it out. But when I talked to people in
Chicago and they told me how many foreclosures they have there,
the question really is: What do we need to do on a national
basis? And on the national basis, we need something that is a
little stronger and provides greater leverage to homeowners.
Senator Sessions. Mr. Genirberg, you have heard the
discussion. You are in the real world dealing with real
borrowers who are in trouble. Many of them, it is so sad. I
mean, there are people losing their jobs. We have got a lot of
people that are not working today that had decent incomes just
a few years ago. A lot of them are bankers, because they have
all slashed their employment, too. So there are a lot of
higher-income people, lower-income people, middle-income people
that are losing jobs.
How do you see this discussion about the ability of the
lender to effectively renegotiate a loan to their own advantage
if they were able to do so?
Mr. Genirberg. In the bankruptcy context, it is not so much
a negotiation as a litigation. So, for example, with car loans,
when someone--when I file a bankruptcy, a Chapter 13 for an
individual and there is a car loan, I write a plan based on
income and based on expenses, and I set terms. There is not a
negotiation. I do not call up a car lender, the financier of a
car, and say, ``Well, here is what I propose that we do.'' I
simply write a plan. If there is an objection, then we go into
litigation in the bankruptcy court.
So within the bankruptcy context, there is not a real
negotiation with the servicer. There is simply an assertion.
They file a claim, and if they do not like the plan that I have
set up, then they are going to litigate it. And then there will
be a negotiation of sorts to see if we can settle, just like
with any lawsuit.
So once it gets into the bankruptcy context, there is not
really a conversation with the lender, and right now there is
no way to have a conversation with the lender before we get
into the bankruptcy context because it just does not really
work despite there having been 750,000, apparently. I just have
not seen it.
Chairman Whitehouse. And in terms of the plan that you
would file on behalf of your client, you would not be making
that plan up out of whole cloth. You would be making it up
based on your experience of having done plans like these over
and over, knowing what elements in the plan would cause a
lender to object and to interrupt and to cause this to go to
litigation rather than continue to go smoothly for your client.
So there is an element of learned behavior on the system's part
in the efficiency that you see of being able to file a plan and
put it through and file a plan and put it through, without
litigation or negotiation. Correct?
Mr. Genirberg. Yes, Senator. Over time, we sort of come to
a subliminal agreement. If you go this far, I will not object,
and----
Chairman Whitehouse. Sort of a meta-negotiation.
Mr. Genirberg. It is a meta-negotiation. You know, the
saying in bankruptcy always is that pigs get fat and hogs get
slaughtered. If you seek too much----
Chairman Whitehouse. Yes. That is true in politics, also.
Mr. Genirberg. Yes, sir.
Chairman Whitehouse. Let me wrap up, if I may, with one
additional point, and if the distinguished Ranking Member would
care to respond, I would, of course, give him whatever time he
needed. But it strikes me that based on the testimony that we
have heard, which actually shows a very surprising degree of
agreement among all the witness, a welcome degree of agreement
to me, that we have almost a kind of mechanical problem here,
which is that we have the wave of first subprime resets, and
then option adjustable, Alt-A, prime, and jumbo resets that
Professor Levitin has chronicled, this slide right here. And
that is coming at us, and those resets are one of the life
events that, combined with negative equity, provoke the
foreclosure problem. And so we can see from this that there is
very likely to be a very significant second wave of
foreclosures.
That then precipitates into the problem of once you
foreclose, you drive down values, particularly in neighborhoods
where these foreclosures are happening. There is a lot of
evidence that a foreclosure down the block hurts the values up
the street. You get two of them, the effect is compounded. So
now the person up the street who was doing Okay has an even
bigger negative equity problem, and the thing begins to be a
vicious cycle.
One of the ways that you can get out of the vicious cycle
is that really forever, whenever there is an inability-to-pay
problem, you go to an organized place like bankruptcy court,
and you work out who gets what, and that way you maximize the
return to everybody, and you can bring an end to the sort of
death spiral.
But as Ms. Cohen has testified, the safety valve of
modification is not working both because the HAMP program is
not adequate to the scale of the problem and because the
servicers are not complying with the terms of the HAMP program
and because their incentives are all in the wrong place in
terms of actually making those adjustments. And so the natural
outlet that would defuse that potential vicious cycle has been
jammed up. And my worry in all of this is that when you saw
what this country had to go through with the subprime mortgages
and the cost of the TARP and the political rows that the whole
TARP caused, if we have another one of those coming up, and
this time it is not going to be just subprime folks, it is
going to be the folks who live down the street from us who have
jumbo mortgages, the folks who have good credit and have good
jobs, and it is, you know, a bunch of people who thought that
hey kind of go through this all right, and now suddenly it is
not, we are going to be facing a great deal of trouble. And we
need to make sure that that vicious cycle--that there are
mechanisms for interrupting it.
I see most heads nodding, and I want to take this moment to
thank the witnesses. We have a statement from Senator Feingold,
who was here earlier but could not stay, unfortunately. Without
objection, I would like to put that into the record. His final
page makes the point I just did: Foreclosures lead to falling
real estate prices, which lead to more foreclosures. Local
businesses are deeply affected as well, and empty houses lead
to crime and greater costs for social services offered by local
governments, as well as lower property taxes to offset that.
After all the money that we have spent to save the banks, it is
irresponsible for Congress to let this vicious cycle continue
while an obvious and cost-free solution is starting us in the
face. So I thank Senator Feingold for his statement, and
without objection, it will be in the record.
[The prepared statement of Senator Feingold appears as a
submission for the record.]
Chairman Whitehouse. The record will remain open for a week
for anything that any witness wishes to add or that anybody
else wishes to add. I thank the very distinguished Ranking
Member for his courtesy throughout this hearing, and I look
forward to working with him to see if there is a way that we
can address this in a helpful, thoughtful, bipartisan way.
With that, the hearing is adjourned.
[Whereupon, at 11:42 a.m., the Subcommittee was adjourned.]
[Submissions for the record follow.]
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