[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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20402-0001







                       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

                              ----------                              

                    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?

                              ----------                              


                        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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