[Senate Hearing 112-45]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-45
 
 FORECLOSURE MEDIATION PROGRAMS: CAN BANKRUPTCY COURTS LIMIT HOMEOWNER 
                          AND INVESTOR LOSSES?

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

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 1, 2011

                               __________

                           Serial No. J-112-2

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
CHARLES E. SCHUMER, New York         JON KYL, Arizona
RICHARD J. DURBIN, Illinois          JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
            Bruce A. Cohen, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................     5
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....     6
    prepared statement...........................................    98
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     3
    prepared statement and attachment............................    99
Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota..     6
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   119
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island.........................................................     1
    prepared statement...........................................   152

                               WITNESSES

Britt, Larry, Homeowner, Riverside, Rhode Island.................     7
Drain, Robert, U.S. Bankruptcy Judge, Southern District of New 
  York...........................................................    10
Grossman, Andrew M., Visiting Legal Fellow, The Heritage 
  Foundation, Washington, DC.....................................    18
Rao, John, Attorney, National Consumer Law Center, Boston, 
  Massachusetts..................................................    14
Sanders, Anthony B., Professor and Senior Scholar, The Mercatus 
  Center, George Mason University, Fairfax, Virginia.............    16

                         QUESTIONS AND ANSWERS

Responses of Andrew M. Grossman to questions submitted by 
  Senators Grassley and Sessions.................................    34
Responses of Anthony B. Sanders to questions submitted by 
  Senators Sessions and Grassley.................................    47

                       SUBMISSIONS FOR THE RECORD

Alabama Bankers Association (ABA), Robert W. Dumas, President, 
  and Dan Bailey, Cheif Executive Officer, Montgomery, Alabama, 
  November 30, 2010, letter......................................    56
American Alliance of Home Modification Professionals (AAHMP), Sol 
  Klein, Suprise, Arizona, statement and attachments.............    57
American Bankers Association; Consumer Bankers Association; 
  Financial Services Roundtable Housing Policy Council; 
  Independent Community Bankers of America; and Mortgage Bankers 
  Association, joint statement...................................    67
Association of Mortgage Investors (AMI), Washington, DC, 
  statement......................................................    72
Britt, Larry, Homeowner, Riverside, Rhode Island, statement......    81
Calabria, Mark A., Director of Financial Regulation Studies, CATO 
  Institute, Washington, DC, statement...........................    85
Drain, Robert, U.S. Bankruptcy Judge, Southern District of New 
  York, statement................................................    89
Forbes.com ``Obama Mortgage Effort May Need Modification'', 
  August 26, 2009, article.......................................    96
Grossman, Andrew M., Visiting Legal Fellow, The Heritage 
  Foundation, Washington, DC.....................................   103
Homeownership Preservation Foundation (HPF), Colleen Hernandez, 
  President and Chief Executive Officer, Washington, DC, February 
  4, 2011, letter................................................   114
Huffington Post.com, February 1, 2011, article...................   115
Iowa Bankers Association, John K. Sorensen, President and Chief 
  Executive Officer, Johnston, Iowa, January 31, 2011, letter....   117
Rao, John, Attorney, National Consumer Law Center, Boston, 
  Massachusetts..................................................   121
Sanders, Anthony B., Professor and Senior Scholar, The Mercatus 
  Center, George Mason University, Fairfax, Virginia.............   142
Wall Street Journal (WSJ.com), February 1, 2011, article.........   149


 FORECLOSURE MEDIATION PROGRAMS: CAN BANKRUPTCY COURTS LIMIT HOMEOWNER 
                          AND INVESTOR LOSSES?

                              ----------                              


                       TUESDAY, FEBRUARY 1, 2011

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 10:01 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Sheldon 
Whitehouse, presiding.
    Present: Senators Whitehouse, Klobuchar, Franken, 
Blumenthal, and Grassley.

 OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR 
                 FROM THE STATE OF RHODE ISLAND

    Senator Whitehouse. The hearing will come to order. I am 
delighted to be joined by the Judiciary Committee's Ranking 
Member, Hon. Chuck Grassley, who I am very much looking forward 
to working with on these issues as we go forward.
    I want to welcome all of the witnesses who are here today: 
Mr. Britt, Judge Drain, Mr. Rao, Dr. Sanders, Dr. Grossman.
    What we will do is do some opening statements. Welcome, 
Senator Blumenthal. I know that it is not official yet that you 
are on this Committee, but for purposes of this hearing, I 
intend to treat you and our new Republican member, Senator Lee, 
should he come, as if they were because I think it is a fait 
accompli, and we might as well yield to common sense. So 
welcome, Senator Blumenthal.
    Last October, I convened a Subcommittee hearing in 
Providence to examine a sensible approach to reducing 
foreclosures that has been adopted by the bankruptcy court for 
the District of Rhode Island, as well as a number of other 
districts. Under the foreclosure loss mitigation program, the 
court, at the request either of the homeowner or the servicer, 
will order the parties to sit down with each other and see if a 
settlement would be mutually beneficial. The settlement must be 
consensual and none is required, but the mere act of sitting 
the homeowner down with someone who has the authority to modify 
the mortgage or agree to another common-sense settlement often 
is enough to avoid a costly and painful foreclosure. It is 
often the first time that the homeowner has had that 
opportunity. The Rhode Island program is modest, but I believe 
that it has the potential to help many thousands of homeowners, 
and help is definitely needed.
    As the foreclosure crisis continues in Rhode Island and 
across the Nation, the administration's Home Affordable 
Modification Program, while well intentioned, has not succeeded 
in producing anywhere near enough modifications to stem the 
tide of foreclosures. The Congressional Oversight Panel 
recently estimated that the HAMP is on pace to modify 700,000 
to 800,000 mortgages--far short of the 3 to 4 million that was 
the original goal of the program and nowhere near the 8 to 13 
million foreclosures expected through 2012. Even the relatively 
few homeowners that manage to get HAMP modifications must 
endure a disorganized and often harrowing process.
    Members of Congress hear frequently from our constituents 
being ignored and abused throughout the modification process: 
documents repeatedly lost over and over again, inconsistent 
advice from one person and then another, hours trapped on the 
phone waiting to find someone to talk to, and common sense 
frequently turned on its head to reject fair modifications or 
even short-sale requests in favor of foreclosure. Too often the 
left hand does not seem to know what the right hand is doing, 
and the homeowner is caught in the middle.
    We have likely all heard from our mayors about the terrible 
collateral cost to communities from foreclosure. We have seen 
the big loan servicers drag their feet in the HAMP. And we have 
learned that these companies were playing fast and loose in the 
foreclosure process, carrying out foreclosures in the cheapest 
manner possible, often outsourcing the process to ``foreclosure 
mill'' document-processing companies. Tragically, these 
foreclosures are often unnecessary, indeed often not even in 
the mortgage holder's best interests, but they are driven 
forward by conflict-ridden bureaucratic machinery that lacks 
the most basic American failsafe: the chance to talk to a 
responsible human being who can make an actual decision in your 
case.
    The bankruptcy court loss mitigation programs will not save 
every home, but they can help countless frustrated homeowners 
cut through that bureaucratic nightmare and get answers to 
their modification requests. Because foreclosures can trash the 
value of a house, loss mitigation programs can save investors 
money, too. Servicers too often act in their own fee-driven 
interests and not in the interests of the investors who 
actually hold the mortgages. A court-supervised negotiation can 
ensure that servicers do not reject reasonable settlements that 
would benefit the investors. And that is one reason that the 
National Association of Mortgage Investors is supporting our 
efforts here.
    Loss mitigation programs have important benefits even for 
servicers. Bankruptcy courts have the power to clear title 
questions that have been raised by faulty paperwork with 
respect to mortgages. Court-approved settlements can protect 
servicers against future investor litigation. Pooling and 
servicing agreements often leave servicers unsure if they 
should modify mortgages or foreclose. A court can help to 
alleviate this uncertainty by signing off on the reasonableness 
of a settlement.
    Ultimately, I believe that giving bankruptcy court judges 
the power to reduce the principal on primary residence 
mortgages would be the most efficient and least costly way to 
keep families in their homes, but that is not the topic of 
today's hearing. This morning we are focusing on far more 
modest loss mitigation programs, which, without conferring any 
new substantive powers on bankruptcy courts, have proven 
effective in avoiding unnecessary foreclosures, mostly because 
it is the first time the homeowner has actually had a chance to 
talk with a human being from the bank who has the authority to 
make a decision in his case and to look at the file.
    Thank you very much. I look forward to hearing the 
witnesses. We will hear from Senator Grassley, and then we 
will--I do not know if Senator Blumenthal cares to make an 
opening statement. If he does, we will do that. And then I will 
swear in the witnesses, and we will proceed with the hearing.
    Senator Grassley.

STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM THE STATE 
                            OF IOWA

    Senator Grassley. Obviously, I thank you for holding this 
hearing. It is important to study the relationship between 
bankruptcies and foreclosures and whether there is, in fact, a 
need for change in the Bankruptcy Code.
    The Committee also needs to study how the President and 
administration is responding to foreclosures, whether that 
response is working, whether the $75 million that the 
administration is spending is a proper use of the taxpayers' 
money; and if so, whether that money is being used in the most 
effective manner.
    This hearing has a chance to have some of the facts come 
out and to have the issue fully and fairly examined, and I am 
open to listening to proposals that can make a difference. And 
I had an opportunity before the holidays to have such a 
discussion in my office with Senator Whitehouse, and I 
appreciate very much your coming to discuss your legislation.
    The Nation is experiencing some difficult times. Our fellow 
citizens are hurting, and we must get the economy moving in the 
right direction. That means helping spur job creation and 
wisely spending taxpayers' money. But our effort must be fully 
thought out. As part of our responsibilities to our fellow 
citizens, we must carefully examine how relief proposals will 
impact the whole economy and how the money spent will impact 
future generations.
    The issue of mortgage modification is not a simple one. 
There are significant and real concerns about the mortgage loan 
modification program being run by bankruptcy courts. There are 
questions about how these programs are being administered and 
their impact on the economy.
    For example, the concerns also include questions about 
whether judges will use these programs to mandate cramdown, 
which obviously, you know, is a reduction in the principal 
amount of a loan, something that even the Obama administration 
program does not condone.
    I also know that there are questions about whether the 
discussion on loan modification programs being run by 
bankruptcy courts is just ignoring the real problem. If you 
review the written materials and procedures for programs run by 
the bankruptcy court in Rhode Island, you see multiple 
references to the Home Affordable Modification Program. The 
Treasury Department currently operates a number of foreclosure 
mitigation programs. The Home Affordable Modification Program 
is a $75 million program which began 2 years ago. However, the 
Home Affordable Modification Program has come under severe 
criticism even from Obama administration officials.
    Although homeowners have applied to the program and 
received trial modifications, the number of modifications that 
are converted to permanent agreements that enable homeowners to 
permanently avoid foreclosure is, in fact, low. Particularly 
disturbing is the fact that Treasury still has not established 
performance goals or benchmarks for the Home Affordable 
Modification Program, meaning that there is no effective way 
for us to know whether the $75 million program has accomplished 
its intended purpose. That is not accountability. It is not 
transparency. That is just more taxpayer money going out the 
window.
    In July of last year, as Ranking Member of the Finance 
Committee, I participated in a hearing examining the failures 
of the Home Affordable Modification Program. A few days after 
the hearing, I sent a letter to Treasury Secretary Geithner 
urging him and his Department to establish specific goals and 
benchmarks. Remarkably, the letter I received back from the 
Treasury defended the program as a success and confirmed that 
the Department does not and apparently refuses to set permanent 
goals for the program.
    My concern is shared by the Special Inspector General for 
TARP. Just 6 days ago, the Special Inspector General issued a 
report that continues to confirm the failures of the Home 
Affordable Modification Program. That report also continues to 
call for the Treasury Department to establish specific goals 
and benchmarks just as I asked the Treasury Secretary to do.
    As the Special Inspector General's report reveals, the 
numbers for the programs are ``remarkably discouraging.'' The 
number of permanent mortgage modifications under the Home 
Affordable Modification Program remain anemic. There were just 
under 522,000 ongoing permanent modifications as of December 
31st. A combined total of more than 792,000 trial and permanent 
modifications have been canceled, with more than 152,000 trial 
modifications still in limbo.
    These permanent modification numbers pale in comparison not 
only to foreclosure filings but also to the Treasury's initial 
prediction that the Home Affordable Modification Program would 
``help up to 3 to 4 million at-risk homeowners avoid 
foreclosure by reducing monthly payments to sustainable 
levels.''
    In particular, the Special Inspector General's report 
confirms my concerns by describing Treasury's steadfast refusal 
to adopt meaningful goals and benchmarks as perhaps the most 
fundamental of the causes of the program's failure to have 
material impact on preventing foreclosures. And the report also 
outlines disturbing conduct of the Treasury Department: 
``Rather than develop meaningful goals and metrics for the 
program which would allow meaningful oversight, program 
accountability, and provide guidance for useful change, 
Treasury instead has regularly changed its criteria for 
success, citing at different times a total number of trial 
modifications, offers extended to borrowers, regardless of 
whether they were accepted, and then the total number of trial 
modifications, regardless of whether or not they became 
permanent, which far fewer than half already have done.''
    I agree with the Special Inspector General's conclusions 
that, ``Given the current pace of foreclosures, achievements of 
the program look remarkably modest, and hope that this program 
can ever meet its original expectation is slipping away.''
    Now, in light of the documented problems with the program 
and its continued failure to provide real relief, the question 
becomes why are taxpayers paying $75 million for a program that 
does not work. The next question then, and appropriate here, 
is: Will another Government program, this time in the 
bankruptcy courts and this time without any Congressional 
oversight, really work to turn things around?
    We also must be mindful that there will be limited 
Congressional oversight over judges within the bankruptcy court 
program. Accordingly, we must always be very careful before we 
grant judges who are not elected, and in the case of bankruptcy 
judges not subject to Senate review through the confirmation 
process, new powers without a thoughtful approach to it. I look 
forward to that thoughtful approach, as was evidenced by the 
Chairman's discussion with me back before Christmas.
    Senator Whitehouse. Thank you very much, Senator Grassley. 
And for opening statements in order of arrival, I would begin 
with Senator Blumenthal.

 STATEMENT OF HON. RICHARD BLUMENTHAL, A U.S. SENATOR FROM THE 
                      STATE OF CONNECTICUT

    Senator Blumenthal. Thank you, Senator Whitehouse, and 
thank you for organizing and holding this hearing on a subject 
that I know is of huge importance to a lot of homeowners as 
well as to the industry. Having come from an office where we 
have seen daily and weekly and year after year the heart-
wrenching consequences of homeowners being given the runaround, 
confronting this problem of red tape and the mortgage servicers 
and often losing their homes as a result, we know from our 
experience that mediation and intervention of this kind really 
works, and the numbers show it.
    In Connecticut, we have had a program that actually has 
saved thousands of homeowners in this situation, a State-run, 
judicially operated mediation program that has stopped 
foreclosures, modified loans, to the benefit of the lenders as 
well as the homeowners. And the numbers in the Rhode Island 
program within the bankruptcy court I think further add 
evidence to the importance and potential practical consequences 
beneficial to all sides of this kind of mediation program.
    We are here for the very limited purpose, as Senator 
Whitehouse pointed out, of clarifying the law to enable these 
mediation programs to take place under the auspices and 
authority of the bankruptcy court. But I think that in their 
potential for encouraging State-operated programs, they also 
have great significance.
    So I want to thank you for being here. Thank you for your 
innovative work. I know Judge Drain, for example, has been very 
important in encouraging innovative solutions to these kinds of 
needs and challenges, and they are very definite challenges. 
But I am looking forward to your testimony and learning more 
about what needs to be done and how these programs can be 
expanded.
    Thank you.
    Senator Whitehouse. Thank you.
    For an opening statement, Senator Klobuchar.

STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM THE STATE 
                          OF MINNESOTA

    Senator Klobuchar. Well, Senator Whitehouse, I just want to 
thank you for your early and clear leadership on this issue. 
From the very beginning, you have identified the foreclosure 
issue and have worked in many, many different areas. So I want 
to thank you for that. I am looking forward to hearing from the 
witnesses.
    Senator Whitehouse. And also of Minnesota, the junior 
Senator, Senator Franken.

STATEMENT OF HON. AL FRANKEN, A U.S. SENATOR FROM THE STATE OF 
                           MINNESOTA

    Senator Franken. Thank you, Mr. Chairman, for leading on 
this issue so steadfastly, and for so long, and for holding 
this important hearing on foreclosure mediation programs in 
bankruptcy courts to better protect consumers. You just have 
been a real leader on bankruptcy issues, and I applaud you for 
your work in this area.
    I want everyone to forgive me. I am bouncing between here 
and the Energy Committee hearing, so I will be back and forth.
    Many problems have come to light since the beginning of the 
foreclosure crisis. Most recently we have seen mortgage 
servicers fraudulently signing affidavits to execute 
foreclosures when they have zero personal knowledge of the 
individual borrower's situation. This problem, known as ``robo-
signing,'' is particularly troubling to me.
    Last year, I wrote letters to Ally Financial and JP Morgan 
Chase calling for a suspension of all foreclosure proceedings 
until this issue had been resolved. I got a form letter from 
Ally touting their efforts to complete HAMP and non-HAMP loan 
modifications, and it is nice to see that they do not treat the 
homeowners they are servicing any worse than they treat a 
Senator.
    I also joined with Senator Menendez in asking GAO to 
investigate the role of Federal regulators in overseeing 
foreclosure proceedings. While some mortgage servicers have 
taken action on this issue, I worry that it is a day late and a 
dollar short.
    Borrowers are at such an extreme disadvantage in these 
foreclosure proceedings that I fear robo-signing is only one of 
many ways that servicers have been able to take advantage of 
vulnerable families and homeowners. And because most homeowners 
do not have access to legal advice or even basic counseling, 
most of these abuses never come to light.
    Some of you may have heard me tell the story of Tecora, a 
Minneapolis homeowner who fell behind on her mortgage when her 
payments went up. She entered the Home Affordable Modification 
Program, or HAMP, but was told by her mortgage servicer that 
her file was closed because she had ``declined a final 
modification of her mortgage.'' The problem was that she 
actually had not done that. Tecora is working with the Twin 
Cities' Habitat for Humanity, a wonderful nonprofit that is 
helping her fight this mistake and stay in her home. Every 
homeowner deserves this type of assistance. Unfortunately, not 
everybody gets it.
    Minnesota has taken important first steps to address this 
matter by requiring mortgage service providers to provide 
homeowners with pre-foreclosure notices that include 
foreclosure prevention counseling resources. Every state needs 
to adopt this and other services to help give homeowners a 
fighting chance.
    I am pleased that Judge Drain could join us today to tell 
us about the innovative foreclosure mediation program that was 
developed in the Southern District of New York. In Minnesota, 
more than 22,000 people filed for bankruptcy this year. This is 
a record number, and it is more than 87 percent higher than the 
bankruptcy rate in 2007 before the recession occurred. Although 
I realize bankruptcy reforms will not help all families going 
through devastating foreclosures, these types of mediation 
programs are one important way we can help families in 
Minnesota and elsewhere to stay in their homes.
    Thank you, Mr. Chairman. I look forward to hearing the 
witnesses' testimony.
    Senator Whitehouse. Thank you, Senator Franken.
    I will now ask all of the witnesses to please stand and be 
sworn. Do each of you affirm that the testimony you are about 
to give before the Committee constitutes the truth, the whole 
truth, and nothing but the truth, so help you God?
    Mr. Britt. I do.
    Judge Drain. I do.
    Mr. Rao. I do.
    Mr. Sanders. I do.
    Mr. Grossman. I do.
    Senator Whitehouse. Please be seated.
    I think I will ask for each--I will introduce each witness 
and ask them to make their statement. I will remind them that 
that little red light that comes on means your time is up and 
you need to wrap so that there is time for questioning by the 
Senators. And at the end of the testimony of the entire panel, 
we will then do questions.
    Let me begin with Larry Britt, who is a homeowner from 
Riverside, Rhode Island, who will discuss his struggles over 
the past 2 years in getting a mortgage modification from his 
loan servicer. Mr. Britt teaches English as a second language 
to adults for the Rhode Island Family Literacy Initiative and 
holds a B.A. from the Harvard Extension School, and I am 
delighted that he has come down from Rhode Island to share his 
experience with us today.
    Mr. Britt, please proceed.

  STATEMENT OF LARRY BRITT, HOMEOWNER, RIVERSIDE, RHODE ISLAND

    Mr. Britt. Thank you, Senator Whitehouse and Committee 
members, for taking part in this important hearing.
    My name is Larry Britt, and I have owned my home in 
Riverside, Rhode Island, since 2003. I bought my home as a 
permanent residence in which to spend my final working and 
future retirement years. My home purchase was not an attempt to 
get in on the crazy real estate boom of the times. I work in 
metro Providence and, as the Senator said, I am an adult 
educator teaching workplace readiness, English proficiency, and 
U.S. citizenship preparation skills.
    One month from now, I will be entering my third year of the 
mortgage modification process.
    When I started the process in March of 2009, I had never 
been late paying any bills to any creditors, and my credit 
score was near perfect. Since entering into a modification 
process with Bank of America, the bank has ruined my credit 
rating and has been the major contributor of uncertainty about 
my future. As of November 2010, my credit score had dropped 160 
points as a consequence of improper credit reporting by Bank of 
America. During the process I subscribed to a credit report 
service, and I received weekly e-mail notifications of 
continuing negative impacts to my credit score. Also during 
that time, two creditors closed my accounts, and three 
radically lowered my available credit limits. Equally, I am 
concerned about rescinded and denied credit that my elderly 
mother and other family members have suffered as a consequence 
of their financial relationships with me.
    Bank of America told me that I was told my credit score 
would be adversely impacted but could not provide documentation 
that proves I was told of this consequence when I started the 
modification process. I received documentation from the bank 
that contradicts what I assert after I contacted Senator 
Whitehouse as well as the Office of the Comptroller of 
Currency.
    Because of legitimate financial hardships that I have 
documented, I entered into Bank of America's mortgage 
modification program hoping I could avoid prospective financial 
problems. In the past 24 months, I have immediately replied to 
all Bank of America inquires and requests for documentation. If 
we have the time, I could read through a chronology of my 
interactions with Bank of America from March 2009 to May 2010. 
But it sounds like I have a time limit, so, in short, I will 
say the chronology lays out a repeated cycle of applications, 
providing documentation, approvals, denials, mixed messages, 
and multiple departments and customer service representatives 
that left me unsure about my modification status. I am going to 
skip the details of that period of time, Senator.
    Kind of at the end of that time period, in May 2010, I 
received a letter from Bank of America stating that I had been 
denied a mortgage modification because all requested 
documentation had not been received by the bank.
    In May of 2010, I called Bank of America and was told to 
disregard the letter dated May 7th. The customer service 
representative stated that, according to Bank of America 
records, ``all documentation was complete and received as of 
March 29, 2010.''
    At that time, I became truly frightened at the prospect of 
losing my home. I had mailings from Bank of America stating 
that I was about to go into foreclosure and that I was not 
eligible for mortgage modification. Two Bank of America 
customer service representatives had told me to ignore the 
letters, yet I had nothing in writing from them that assured my 
case was still under review.
    That is when I contacted the Senator Whitehouse's office, 
and gratefully, I got an immediate response from Karen 
Bradbury, a case worker in the Senator's Providence office.
    Karen's efforts resulted in a connection for me with the 
Department of Treasury's HAMP Solution Center. At first, my 
HAMP case worker sounded like the answer to my ongoing 
problems. The HAMP representative told me that he would be an 
advocate for me with Bank of America. At that time, the HAMP 
representative told me that he had learned from Bank of America 
that I was ``under review for the Making Home Affordable Second 
Look'' program. Throughout July and August of 2010, I contacted 
the HAMP Solution Center seven times. Each time, the HAMP 
Solution representative told me that his updates directly from 
Bank of America said that my modification was still under 
review and that I had complied with all requests for 
documentation as well as honored my agreement to make on-time 
modified monthly payments.
    Honestly, after a few months with HAMP, I felt like they 
were reading from the same script as the banks. When I checked 
in with them, there was never any update; there were never any 
outstanding bank requests for documentation from me. Yet once a 
month or so over this same period, I received additional 
requests from the bank for repeat documentation.
    I continued to make on-time mortgage modification payments, 
and the bank continued to report me as delinquent on payments. 
Consequently, my credit score and available credit continued to 
go down.
    Last September, I started to work on filing forms with all 
three credit reporting agencies in an attempt to get BofA 
modified payments reclassified as modified payments rather than 
delinquencies. The credit reporting forms strongly encouraged 
trying to get the creditor in question to correct the problem. 
So I called Bank of America on October 4th of last year. I 
asked the Bank of America representative to review my account 
and confirm that I had made my modified payments that I had 
agreed to.
    The customer service representative told me that my 
mortgage was in default as of May 7, 2010, and that I had been 
sent a letter saying I was not eligible for the Making Home 
Affordable Modification program because I did not provide Bank 
of America with requested documents. The representative also 
said that I had been sent a letter requesting the 
documentation. I never received this letter, and I explained 
the following to the representative.
    This next testimony is just a rehash of what I have already 
said.
    Senator Whitehouse. Why don't you go ahead and summarize 
then. The time has expired.
    Mr. Britt. OK. Finally, I talked to that representative's 
supervisor. She would not give me her name. She told me she had 
no time for me and hung up on me.
    So, to wrap up, I would say that since my first 
modification agency with the bank in October of 2009, I have 
been paying my modified monthly payment on time. However, since 
the bank considered my payments to be incomplete, the most 
recent modification agreement states that my modified principal 
balance has been increased by over $11,000. As the bank told me 
in a prior mailing, the modification agreement states that this 
amount includes unpaid and deferred interest, fees, escrow 
advances, and other costs. The agreement also states that 
interest will now accrue on the unpaid interest that is added 
to the outstanding principal balance, which would not happen 
without this agreement.
    Had the bank honored its terms of the October 2009 
modification agreement with me and permanently modified my loan 
after I had made the agreed-upon trial modification payments, 
my principal loan balance would include 3 months of deferred 
interest and fees rather than the 16-month total of $11,000.
    As with past modification agreements, I have once again 
provided all of the same paperwork and once again made three 
on-time trial modification payments. Unlike past modification 
agreements with Bank of America, I now have a customer advocate 
from the bank's Office of the CEO and President. She has a 
first name and a last name, and I can talk to her when needed. 
But, sadly, I believe it took the advocacy of my Senator to 
receive the level of customer service that all consumers 
deserve.
    So I should be happy and I am truly grateful to the 
Senator's office and Rhode Island housing for what I hope is a 
final resolution. However, given the past 24 months of 
misinformation, can I be sure that Bank of America's 
``approval'' is for real? Does another Bank of America division 
have me slated for foreclosure? I just cannot be sure, and the 
24-month process has forced me into deeper financial trouble 
and emotional distress.
    I know this story is hard to follow. It has taken me untold 
hours to keep track of and compile the scores of interactions I 
have had with the bank and HAMP Solutions Center.
    If needed, I can document all of my activities, phone 
calls, documents sent, and the names of customer service 
representatives.
    I want to thank you again for your time and consideration, 
and I would be happy to answer any questions or elaborate on 
any points that I have made.
    [The prepared statement of Mr. Britt appears as a 
submission for the record.]
    Senator Whitehouse. Thank you very much, Mr. Britt. Your 
story provides an important backdrop against which the 
testimony of our next witness I think it is important to be 
seen.
    Judge Robert Drain has been a bankruptcy judge in the 
Southern District of New York since 2002. Prior to his 
appointment to the bench, Judge Drain practiced bankruptcy law 
at the renowned New York law firm of Paul, Weiss, Rifkind, 
Wharton & Garrison. He is a fellow of the American College of 
Bankruptcy and a member of the American Bankruptcy Institute, 
the International Insolvency Institute, and the National 
Conference of Bankruptcy Judges. Judge Drain holds a B.A. from 
Yale University and a J.D. from Columbia University, and we are 
delighted that he has taken the trouble to join us today and 
share his experience.
    Judge Drain.

STATEMENT OF HON. ROBERT DRAIN, UNITED STATES BANKRUPTCY JUDGE, 
                 SOUTHERN DISTRICT OF NEW YORK

    Judge Drain. Thank you, Senator Whitehouse, Senator 
Grassley, Senator Blumenthal. Thank you for inviting me to 
testify on the loss mitigation program implemented on January 
1, 2009, by the United States Bankruptcy Court for the Southern 
District of New York.
    Senator Whitehouse briefly summarized my biography. I 
should note that since I started practicing bankruptcy law in 
1984, I dealt exclusively with large corporate bankruptcies and 
reorganizations, the types of cases for which the Bankruptcy 
Court for the Southern District of New York is well known.
    However, like our colleagues around the country, we also 
preside over thousands of consumer bankruptcy cases, where the 
fate of the home is of central importance.
    When confronted in late 2008 with the mortgage foreclosure 
crisis, my colleagues and I saw a set of problems that cried 
out for a formal mediation structure. And I would like to 
believe that our experience led us to see the issues as much 
from the lenders' perspective as from the homeowners'. In fact, 
it was creditors' lawyers--I want to emphasize that, creditors' 
lawyers--representing mortgage lenders and servicers who first 
asked the court to consider such a mediation program.
    The problem was, and is, I think, basic. Increased defaults 
and the drop in home prices rendered the ``autopilot'' 
servicing model applied to the vast majority of home mortgage 
loans inadequate. A model premised on collecting payments in 
the ordinary course for all but a tiny percentage of mortgages 
and foreclosing on the few defaulted ones in the context of a 
rising market all too often simply did not work anymore. In the 
present market, to maximize their recovery, lenders actually 
would have to decide between adding to their stock of 
foreclosed homes or, alternatively, engaging in a workout with 
their borrower; either course could be preferable in the right 
circumstances.
    However, this process simply was not happening with loan 
after loan after loan. Instead, loan servicers were leaving 
enormous amounts of money on the table simply because they 
continued to press the foreclosure button rather than respond 
to their borrowers' calls to renegotiate defaulted loans. The 
lenders' lawyers saw this, as did we. Moreover, whether because 
of fears about breaching the automatic stay under the 
Bankruptcy Code, constraints in their governing documents, or 
perceptions about the risk of liability to their beneficiaries 
if they negotiated with their borrowers, servicers wanted a 
court order setting a framework for such negotiations. Finally, 
and importantly, the lenders wanted structure imposed on the 
negotiations to make sure that the homeowners would not simply 
waste the lenders' time.
    Of course, these lender goals almost completely overlapped 
with the borrowers'. Nothing, I believe, has been more 
frustrating to homeowners than loan servicers' refusal or 
inability to address their defaulted loans directly, banker to 
borrower, on a businesslike basis. Mr. Britt has just testified 
to this at today's hearing. From my experience, such testimony 
does not describe merely isolated instances of lender deafness 
but a widespread and pervasive problem.
    To develop the mediation guidelines that eventually became 
the loss mitigation program in our district, we opened the 
discussion from the creditors' lawyers to consumer lawyers, and 
then to a wider group of creditor and consumer lawyers, and 
finally put the proposal out for public comment. We reached out 
to the creditor and consumer bar again after the program had 
been operating for about a year and a half and have modified it 
somewhat in the light of their comments. However, remarkable 
consensus continues in its support. We did not, frankly, have 
anyone object to it.
    The loss mitigation program is embodied in two general 
orders of the court, as well as model forms of commonly used 
documents that can be found on our website.
    In summary, it applies in all cases under the Bankruptcy 
Code to loans secured by an individual debtor's primary 
residence. It may be invoked, on notice and with an opportunity 
to object, by either the homeowner or the lender. If there is 
no objection, the court enters an order establishing deadlines 
for the exchange of contact information for representatives 
with authority to negotiate; requests for and exchange of 
relevant information, such as the debtor's financial 
information and appraisals of the house; and the filing of 
affidavits disclosing the information that has been submitted, 
which, after about a year and a half, we found to be necessary 
to obviate disputes over whether information was, in fact, 
provided to the lender, since a frequent homeowner complaint is 
that the lenders often ask for the same information after it 
has already been sent. The guidelines also provide for a 
conference between the parties, a conference, if necessary, 
with the court, as well as an outside date to conclude the 
mediation. While the parties are negotiating, all litigation 
between them is put on hold, although either party can request 
that negotiations be terminated and litigation resume.
    Lender objections to the invocation of loss mitigation--and 
requests to terminate it--are granted if, taking into account 
the homeowner's financial circumstances and the value of the 
house, it is not reasonable to expect that the parties, 
negotiating in their own self-interest, will reach an 
agreement. As best we can tell--and we are trying to improve 
our statistics--there have been over 2,000 requests for loss 
mitigation, only 90 of which drew an objection by the lender. 
We have entered 75 orders granting such objections. Of the 
remaining 15, based on my experience, most of the creditors 
actually, once they met with the lender--I am sorry, with the 
debtor--agreed to have the mitigation continue in their own 
interests. With the experience under the program, it became 
clear that it would not be invoked simply as a delaying tactic 
but actually to get something done, and objections to loss 
mitigation have almost ceased.
    The program facilitates consideration of a homeowner's 
eligibility for the Government-sponsored HAMP program, but it 
is not limited to HAMP modifications. Indeed, although the 
program most often results in some form of loan modification, 
it is expressly not limited to loan modification. The parties 
may consider, for example, negotiating a ``graceful exit'' in 
which the homeowner has a specified time to leave the house--
perhaps coinciding with the end of the school year--parameters 
for a short sale, or a deed in lieu of foreclosure.
    The loss mitigation program has two primary benefits. It 
ensures, first, that there is a responsible lender 
representative with whom to discuss the loan. I cannot 
emphasize this enough: without the structure imposed by the 
program, most of the time this simply would not happen. Second, 
the program's structure, under the ultimate supervision of the 
court, ensures that the parties deal with each other in good 
faith.
    Most of the program's corollary benefits relate to its 
bankruptcy context. In a bankruptcy case, the lender can see 
how the homeowner is resolving his or her entire financial 
predicament, often freeing up income to pay the mortgage. For 
example, the Bankruptcy Code lets a debtor resolve wholly 
underwater junior mortgages and judgment liens that have been 
placed on the home and otherwise clear title, and the 
bankruptcy case provides a forum for dealing with tax liens and 
claims. Moreover, lenders with document problems--which today 
is not a negligible concern--can settle these issues on notice 
to interested parties and with the approval of the bankruptcy 
court.
    The court's supervision is critical but limited. Our role 
is to ensure that the parties deal with each other in good 
faith. We may not impose an outcome on the parties, either 
directly or by, for example, refusing to relieve them of the 
loss mitigation procedures until they reach an agreement. We 
are there to enforce the deadlines imposed by the order and to 
resolve complaints that a party is acting arbitrarily, 
capriciously, or otherwise to the detriment of good-faith 
negotiations.
    For example, we might ask a lender representative if the 
lender has considered whether the debtor is offering to pay 
more, on a present value basis, than the value of the house in 
foreclosure, but it would be inappropriate to insist that the 
lender reconsider a valuation that was done in good faith. At 
times we may make a suggestion about how to cross an impasse, 
but only on a basis to which the parties are prepared to agree.
    About one-half of the loss mitigations that have concluded 
have resulted in some form of an agreement--usually a loan 
modification reducing the interest rate and stretching out 
payments.
    We often hear that the loss mitigation mediations that did 
not result in an agreement also had a good effect: the 
homeowners saw, after actually engaging with their lender, the 
dollars and cents reasons why they could not keep their house. 
At a time when many homeowners cannot even get their letters 
and phone calls returned--often by banks that homeowners are 
acutely aware have themselves been rescued by the Federal 
Government--this is no small achievement.
    Obviously, before we implemented the loss mitigation 
program, we assured ourselves of our legal authority to do so. 
The program is consistent with Congress and the Federal courts' 
general encouragement of mediation, as well as specifically 
with section 105(d) of the Bankruptcy Code, Bankruptcy Rules 
7016 and 9014, and the courts' inherent power to manage their 
own docket. The legal basis for our loss mitigation program has 
never been challenged, although I am aware of such a challenge 
to a similar program in the Bankruptcy Court for the District 
of Rhode Island that has recently been denied by that court.
    One reason for legislation in this area would be to make 
the courts' authority absolutely clear. There is another reason 
as well, however. By passing legislation expressly recognizing 
the benefits of home mortgage mediation programs, Congress 
would endorse a solution to one of the most vexing problems of 
the financial crisis by encouraging bankers to return to being 
bankers.
    Since I am not testifying today on behalf of any group, I 
can tell you that my personal view of legislation is that less 
is best. Even if you share that view, however, and perhaps 
especially if you share it, facilitating homeowners and lenders 
to negotiate the resolution of their loans is a good idea.
    Thank you again for inviting me to testify on this 
important topic, and I am happy to try to answer any questions 
that you have about it.
    [The prepared statement of Judge Drain appears as a 
submission for the record.]
    Senator Whitehouse. Thank you, Your Honor. I am very 
grateful to you for coming here and sharing your experience.
    Our next witness is John Rao. He is an attorney with the 
National Consumer Law Center, focusing on consumer credit and 
bankruptcy issues. He has served as a panelist and instructor 
at numerous bankruptcy and consumer law trainings and 
conferences. He has served as an expert witness in court cases 
and has testified in Congress on consumer matters. He is a 
contributing author and editor of NCLC's Consumer Bankruptcy 
Law and Practice, co-author of NCLC's Bankruptcy Basics; 
Foreclosures; and Guide to Surviving Debt; and contributing 
author to NCLC's Student Loan Law; Stop Predatory Lending; and 
NCLC Reports: Bankruptcy and Foreclosures Edition. He is also a 
contributing author to Collier on Bankruptcy and the Collier 
Bankruptcy Practice Guide. Mr. Rao serves as a member of the 
Federal Judicial Conference Advisory Committee on Bankruptcy 
Rules, appointed by Chief Justice John Roberts in 2006. He is a 
conferee of the National Bankruptcy Conference, a Fellow of the 
American College of Bankruptcy, Vice President for the National 
Association of Consumer Bankruptcy Attorneys, and former board 
member for the American Bankruptcy Institute. He is an adjunct 
faculty member at Boston College School of Law. Before coming 
to NCLC, Mr. Rao served as a managing attorney of Rhode Island 
Legal Services and headed the programs Consumer Unit. His 
practice included a broad range of cases dealing with consumer, 
bankruptcy, and utility issues, requiring representation of 
low-income clients before Federal, State and bankruptcy courts, 
and before administrative agencies. And I can assure everyone 
listening that both from being with him and against him on some 
of those cases, he was an excellent advocate. Mr. Rao is a 
graduate of Boston University and received his J.D. in 1982 
from the University of California-Hastings.
    Mr. Rao, thank you.

STATEMENT OF JOHN RAO, ATTORNEY, NATIONAL CONSUMER LAW CENTER, 
                     BOSTON, MASSACHUSETTS

    Mr. Rao. Senator Whitehouse, Senator Grassley, Senator 
Blumenthal, thank you for holding this hearing----
    Senator Whitehouse. May I just note you have done this 
before and you know the rules, and I know you have got a lot of 
testimony that is in the record, and I hope you will confine 
yourself, as best you can, to the times that are scheduled. As 
a former practicing attorney, I am still sufficiently 
intimidated of judges that I did not gavel Judge Drain. But I 
would urge the other witnesses to try to make it within the 
time frame if they can.
    Mr. Rao. Thank you, Senator. I testify today on behalf of 
the low-income clients of the National Consumer Law Center, as 
well as on behalf of the National Association of Consumer 
Bankruptcy Attorneys.
    The Treasury Department's HAMP program will not reach its 
goal of 3 to 4 million permanent loan modifications because it 
has relied upon the voluntary efforts of servicers, and no 
effective method of enforcement was incorporated into the 
program's design. Treasury has used various incentives to 
encourage servicer participation, but these carrots have not 
resulted in servicer compliance.
    In response to the very basic problem of homeowners who 
cannot get servicers to promptly consider their requests for 
loan modifications in a timely manner or, for that matter, to 
even get a simple yes or no answer, numerous foreclosure 
mediation programs have been adopted nationwide by State and 
local courts.
    At their core, these programs are a procedural device to 
bring homeowners and mortgage servicers together to consider 
alternatives to foreclosure. They do not compel a particular 
outcome, as Judge Drain mentioned. They do not force a servicer 
or investor to modify their contracts or to cram down a loan. 
All they compel is that the parties designate someone with 
settlement authority to participate and that the parties 
negotiate in good faith. In that respect, these programs are 
consistent with the many court-annexed alternative dispute 
resolution and mediation programs that have become commonplace 
in both Federal and State courts.
    I would like to outline the reasons why bankruptcy courts, 
too, can play an important role in avoiding unnecessary 
foreclosures. As was mentioned, homeowners routinely encounter 
numerous bureaucratic barriers. Mr. Britt mentioned he was 
required to submit the same documentation over and over again. 
The New York and Rhode Island loss mitigation programs attempt 
to break this logjam by requiring the homeowner and servicer to 
designate contact persons for the exchange of information. 
Importantly, the loss mitigation programs provide for the entry 
of an order which specifies time deadlines for those requests 
for information to be exchanged.
    Also, too often homeowners wait under the HAMP program for 
over a year for a decision to get a modification request. These 
delays occur despite the fact that HAMP guidelines require a 
decision within 30 days after an application has been 
submitted.
    Contrary to Mr. Grossman's statement in his testimony, the 
reality is that HOPE NOW does not help homeowners get through 
to a decisionmaker. The advantage of mediation programs is that 
they require each of the parties to designate a person having 
authority to resolve the matter.
    A major failing of HAMP is also that homeowners are often 
never told the reason why their modification request has been 
denied, even though Treasury requires them to provide those 
reasons. Under the Rhode Island and New York loss mitigation 
programs, the servicer who wishes to terminate the program must 
state those reasons clearly in a request to the court, and the 
information about denials can be obtained.
    HAMP-participating servicers are under contractual 
obligations to consider homeowners for loan modifications 
before they foreclose. If a homeowner is found eligible, they 
are supposed to stop the foreclosure. However, the HAMP 
guidelines do not provide the same protection for homeowners 
while their application is under consideration. In a bankruptcy 
loss mitigation program, that protection to avoid the 
foreclosure from proceeding while the application is considered 
would be available because of the automatic stay.
    More troubling than servicers not making decisions is that 
they are often providing proprietary workout agreements on less 
favorable terms. Recently, the Congressional Oversight Panel 
reported that almost 70 percent of loan modifications have not 
been under HAMP and that these proprietary modifications have a 
much higher re-default rate.
    In a loss mitigation program in a bankruptcy court, all the 
parties can look and see what was done and make sure that the 
homeowners was properly evaluated for HAMP.
    The loss mitigation programs in bankruptcy also deal with 
the Second Mortgage Program. Many homeowners have other second 
mortgages which prevent the first mortgage holders from 
modifying the loans. The laws of bankruptcy allow for that to 
be dealt with.
    Finally, a modification in a bankruptcy proceeding also 
permits the court and the homeowner to address all of the 
debt--the consumer's entire debt load, all of the other debts 
they are dealing with--car loans and credit card debts--and 
that, too, has a way of increasing the possibility of avoiding 
re-default on these modifications.
    Thank you again for holding this hearing, and I am happy to 
answer any questions that you may have.
    [The prepared statement of Mr. Rao appears as a submission 
for the record.]
    Senator Whitehouse. Thank you very much, Mr. Rao. I 
appreciate you being here.
    Our next witness is Dr. Anthony B. Sanders. He is a 
distinguished professor of finance in the School of Management 
at George Mason University. His research in teaching focuses on 
housing, financial institutions, and real estate finance and 
investments. Professor Sanders earned his Ph.D. and M.A. from 
the University of Georgia, and we welcome him here today.

STATEMENT OF ANTHONY B. SANDERS, PROFESSOR AND SENIOR SCHOLAR, 
THE MERCATUS CENTER, GEORGE MASON UNIVERSITY, FAIRFAX, VIRGINIA

    Mr. Sanders. Mr. Chairman and members of the Committee, my 
name is Anthony Sanders, and my research focuses on real estate 
finance, securitization, and housing economics. Thank you for 
the invitation to testify before you today.
    When President Obama was elected in November 2008, the Case 
and Shiller Composite-10 housing index was 165.95, down from 
its peak in June of 2006 of 226.29. The unemployment rate in 
November of that same year was 6.5 percent, up from 4.8 percent 
at the peak of the housing bubble in June 2006. According to 
the most recent releases, the Case-Shiller index has declined 
further to 157.28 while unemployment has risen now to 9.1 
percent.
    While housing and unemployment numbers are disturbing at a 
national level, they are far worse in many States. House prices 
haven fallen substantially in the ``sand States'' of Florida, 
Arizona, Nevada, and California--each over 40 percent from peak 
to recent. Other States such as Rhode Island, Maryland, and 
Michigan have experienced a decline of over 20 percent in 
housing prices. And in terms of unemployment, Nevada, 
California, and Florida have unemployment rates far higher than 
the national average of 9.1 percent.
    Thus, until unemployment starts to shrink dramatically and 
housing prices began a serious recovery, successful loan 
modifications will be very difficult to achieve. The forecast 
for unemployment is not positive, so difficulties in loan 
modifications are likely to continue.
    A number of alternative proposals to HAMP and voluntary, 
privately initiated current servicer programs for loan 
modifications have been proposed. They range from the dramatic 
principal reductions--the Hubbard-Mayer proposal--to loan 
modifications for the unemployed.
    Whatever proposal Congress pursues, it will be a steep hill 
to climb. Lenders filed 3.8 million foreclosures in 2010, and 
even more are expected to be filed in 2011. It is projected 
that the foreclosure wave will subside in 2012, but not before 
several million foreclosures have been filed. And we can only 
hope that housing prices have started to rise again in 2012 and 
unemployment begins to decrease.
    The Hubbard-Mayer proposal highlights the difficulty of a 
Government solution to the problem. Essentially, Hubbard and 
Mayer advocate having Freddie and Fannie reduce borrower loan 
principal through refinancing on mortgages they insure or hold. 
The borrower's principal would be reduced to local house price 
levels, thus negating the negative equity problem and partial 
income curtailment problems.
    While it is true that their plan would lower mortgage 
payments and may reduce future foreclosures, the costs are 
staggering. Hence, the difficulty with trying to implement a 
Government solution trying to fix the negative equity problem.
    One of the objectives of the Government loan modification 
program is home preservation. Home preservation is achieved 
when loan modifications are used to keep borrowers in their 
home. The desire to keep borrowers in their home must make 
economic sense to both the investor and the servicer.
    What do I suggest? Well, first, having a mandatory 
mediation assumes that a borrower would be better off in their 
home as an owner rather than as a renter. Given the prevalence 
of negative equity and the large supply of vacant and rental 
property--a story today said 11 percent nationwide--it is 
likely that many borrowers would actually be better off 
renting.
    Second, a mandatory mediation adds additional costs and 
delays to the process, a process that is already severely 
strained. The average time to liquidation of a house averages 
17 months already--costing the investor/lender lost interest 
and asset value declines. If bankruptcy becomes more appealing 
to borrowers because of the mandatory mediation, we would 
expect rather onerous delays in moving borrowers to 
foreclosure. Furthermore, the mandatory modification may result 
in borrowers bypassing HAMP.
    Third, Fannie and Freddie, the mortgage giants, have 
expansive databases and models regarding the likelihood of a 
borrower surviving with a loan modification. If Fannie and 
Freddie are having trouble with serious delinquencies and 
foreclosures, what are the odds that a bankruptcy court can 
intervene with a sensible loan modification solution that 
Fannie and Freddie could not direct its servicers to 
accomplish?
    Fourth, any requirement of mediation between a borrower and 
a servicer must be made explicit when the mortgage loan is 
originated and the securities are created. As of now, there is 
no understanding by borrowers or investors that mandatory 
mediation in bankruptcy is required or that it is even 
possible. This represents another surprise to investors and 
other market participants which are in all cases viewed 
negatively. Creating more surprises may further decrease the 
interest in mortgage market investment, resulting in less 
available mortgage credit and funds.
    Finally, while mediation may result in more loan 
modifications being made, we know that the failure rate on loan 
modifications is about 50 percent and could be higher if house 
prices continue to be soft and unemployment does not improve. 
Stated differently, if the standards for getting a loan 
modification are lowered, the more likely it is that the 
failure rate for modifications would increase.
    In summary, the housing market needs to recover, and 
persistent attempts at delaying foreclosure--whether through 
mediation or moratorium--only adds additional uncertainty to 
the housing market and slows any recovery.
    Thank you for your willingness to let me share my thoughts 
with you.
    [The prepared statement of Mr. Sanders appears as a 
submission for the record.]
    Senator Whitehouse. Thank you, Professor Sanders.
    Our last witness is Andrew Grossman, who is a visiting 
legal fellow in the Center for Legal and Judicial Studies at 
the Heritage Foundation. His research focuses on law and 
finance, bankruptcy, and the constitutional separation of 
powers. Mr. Grossman is also a litigator at the law firm of 
Baker & Hostetler in Washington, DC. He received his J.D. from 
the George Mason University School of Law, a master's degree in 
government from the University of Pennsylvania, and a B.A. from 
Dartmouth College.
    Welcome, Mr. Grossman.

  STATEMENT OF ANDREW M. GROSSMAN, VISITING LEGAL FELLOW, THE 
              HERITAGE FOUNDATION, WASHINGTON, DC

    Mr. Grossman. Mr. Chairman and members of the Committee, 
the Committee is to be commended for holding this hearing today 
to consider the promises and pitfalls of bankruptcy courts' 
loss mitigation programs. These programs are a recent 
innovation, and while there is some anecdotal evidence on their 
operations, there has yet to be the kind of formal study or 
statistical evidence that could drive sound policymaking with 
respect to them.
    As to whether these loss mitigation programs are, in the 
broadest possible sense, successful, I can offer no firm 
opinion today because I do not believe that anyone at this time 
could say with any degree of certainty that these programs are 
having a positive impact on our housing market or on homeowners 
in distress overall.
    There are, however, good reasons to doubt that loss 
mitigation programs stand to make a positive net contribution. 
I will discuss three.
    First, it seems unlikely that, absent some form of 
coercion, these programs will provide a significant marginal 
benefit over the myriad of programs that already exist to aid 
responsible homeowners who find themselves in financial 
distress. Bankruptcy should be an option of absolute last 
resort, not a front-line tool to achieve broad policy results. 
It is unlikely to succeed in achieving such results when pre-
bankruptcy interventions have proven unsuccessful. That is 
probably the case here.
    As you know, home mortgage modification programs to date 
have had mixed records of success. HAMP, for example, will 
never achieve the 3 to 4 million permanent modifications that 
its backers promised, and indeed it has a record of failed 
modifications that should be troubling to any observe and give 
pause.
    The mortgage industry's proprietary modification efforts, 
which they have organized under the acronym HOPE NOW, have a 
better record, with over 1.5 million modifications completed in 
2010. These efforts are not a panacea by any means. Foreclosure 
rates remain high and foreclosure starts are growing in many 
areas of the country. The primary reason for this is a stubborn 
reality, one that has taken policymakers and Government actors 
some time to grasp. Many individuals have little equity in and 
are unable to afford the payments for the homes in which they 
are currently living. Because prices collapsed, refinancing is 
not available in many of these cases. Solving this problem 
takes money--lots of it--not legal tweaks.
    This explains in large part the failure of HAMP. To alter 
the incentives of servicers and convince mortgage investors to 
write down in part bad loans, HAMP offers subsidies to 
servicers and lenders to undertake the modification process and 
reduce monthly payments. Nonetheless, tens of billions of 
dollars remain on the table.
    The avowed premise underlying bankruptcy courts' loss 
mitigation programs is that there are informational barriers 
between borrowers and servicers and lenders that hamper 
mutually beneficial loan modifications. This ignores the 
enormous progress that it has made in getting reliable 
information to at-risk homeowners and the many avenues of 
contact that now exist. Not all homeowners may take advantage 
of these resources, but they do indicate that the time when 
information on modification was hard to come by and 
modification decisions were made slowly through opaque 
processes has long passed.
    Loss mitigation also assumes that in a large number of 
cases it is possible to reach a mutually beneficial negotiated 
settlement, especially a mortgage modification. The debtor and 
the lender are merely made to confer. This is a questionable 
premise. As experience with HAMP has shown, the low-hanging 
fruit is gone. Most modifications that are obviously win-win 
have been done, or could be done, without any intervention by a 
bankruptcy court. They are off the table. Modifications that 
fall slightly outside the band of mutual benefit either have 
been evaluated for HAMP eligibility, or could be at any time, 
again without action by the bankruptcy court. And modifications 
that fall outside of that band--that is, where even the HAMP 
subsidies are insufficient to enable the parties to make a 
deal--are likely to be unworkable. Payment that is acceptable 
to the lender is likely to be more than the borrower can afford 
to pay. So there is no good reason to believe that, absent 
coercion, loss mitigation during the bankruptcy process will 
cause deals to emerge that were previously impossible or 
unavailable. To believe otherwise would be to expect a free 
lunch: Without putting any additional money on the table, 
bankruptcy courts can somehow bridge the gap between a 
borrower's ability to pay and what the lender is willing to 
accept.
    There are, however, situations in which that might 
superficially be the case, and that is my second point. There 
is a real risk that these programs, as legally structured, 
could function in a manner that is coercive, that places undue 
burdens upon mortgage investors, and that upsets legitimate 
investment-backed expectations.
    The loss mitigation programs differ in their terms. They 
share several features intended to push the parties toward 
settlement. First, a party objecting to the loss mitigation 
process or seeking to terminate it must usually provide the 
court with specific reasons why loss mitigation would not be 
successful. Second, the creditor must be represented by an 
individual with full decisionmaking authority to enter into a 
loan modification or take other action. This is in itself a 
burden. Third, the parties must negotiate in good faith and are 
subject to sanctions for failure to do so and to follow this 
amorphous requirement. Fourth, when the period allotted for 
negotiation has run its course without any agreement, any 
party--usually the debtor--may seek an extension to continue 
negotiations, and a party--usually the creditor--opposing the 
extension must, again, show cause as to why an extension would 
be inappropriate. Taken together, these features effectively 
place the burden on the lender to demonstrate why the debtor is 
not eligible for relief. This represents a reversal of the 
normal bankruptcy practice. Instead, the creditor must make a 
separate and additional showing to enforce what is on paper 
itself a legally enforceable right. This tilts what had been a 
level playing field in bankruptcy practice.
    It is troubling in this context that several bankruptcy 
courts have candidly discussed their loss mitigation programs 
in the absence of their--in the context of the absence of their 
authority to order changes to the terms of loan agreements 
securing debtors' primary residences. The implication is that 
although bankruptcy judges are without power to cram down a 
mortgage securing a debtor's principal residence, they may 
through requiring the direct participation of high-ranking 
officials heavy-handedly enforcing the good-faith requirement 
and placing the burden on servicers and lenders to show cause 
why a modification could not be reached, effectively achieve 
the same result. In these ways, loss mitigation programs can 
coerce creditors--repeat players who recognize the necessity of 
remaining on good terms with bankruptcy courts--to make 
concessions that compromise their rights.
    Third, and finally, there is a real risk that loss 
mitigation programs will in some instances cause harm to those 
they are meant to aid. As with HAMP, homeowners may enter into 
modifications that ultimately prove unworkable and result in 
additional financial distress without preserving their home. 
This is, if anything, a greater risk in loss mitigation 
programs because of their ad hoc approach to making 
modifications without any of the safeguards and strict 
eligibility criteria that are embedded into HAMP and 
proprietary programs or the generous subsidies in HAMP that may 
serve to reduce payments.
    Unfortunately, the bankruptcy courts lack the facilities to 
undertake the kind of data collection that would be necessary 
to chart the subsequent performance of mortgages modified in 
this manner. Not only do we not know whether these 
modifications are injuring a substantial proportion of those 
whom they are intended to benefit--which has been the case with 
HAMP--but we will have no way of knowing that even in the 
future.
    The fact that loss mitigation may drive some homeowners to 
file for bankruptcy who would otherwise have not done so is 
also harmful. Bankruptcy is an expensive, disruptive, and 
potentially damaging process. One-third of all Chapter 13 
filers complete the process successfully and get a fresh start. 
The rest, two-thirds, pay court fees, pay attorneys' fees, pay 
fees to the bankruptcy trustee, invest time and money to 
restructure their financial affairs, and then wind up with 
nothing more than temporary relief.
    These statistics suggest that holding out the promise of 
significant relief from mortgage debt to encourage more 
individuals to file for bankruptcy is bad policy. At best, 
bankruptcy would serve only to delay foreclosures in most 
cases, while imposing enormous costs and harmful delay on those 
who are already financially vulnerable and limiting their 
future access to credit.
    I thank you again for the opportunity to testify and look 
forward to answering your questions.
    [The prepared statement of Mr. Grossman appears as a 
submission for the record.]
    Senator Whitehouse. Thank you, Mr. Grossman.
    Judge Drain, let me ask you, you have done, according to 
your testimony, 2,000 of these--more than 2,000 of these loss 
mitigation mediations in your courtroom. Only 90 of them drew 
an objection. The original process was one that was first 
requested by creditors' lawyers, correct? And the backdrop to 
it, as I understand it, is loan servicers' refusal or inability 
to address their defaulted loans directly, banker to borrower, 
on a businesslike basis.
    In your experience of the 2,000 loss mitigations that you 
have been through, in how many of those, approximately, would 
it have been the first time that the homeowner, the debtor, 
actually had a face-to-face conversation with somebody who had 
full settlement authority and that they were able to negotiate 
with in good faith?
    Judge Drain. Well, first let me be clear. The 2,000 
requests for loss mitigation are court-wide. I myself have 
probably presided over, oh, I would say, about 400. But you 
have accurately summarized my testimony. This program was 
developed first at the request of creditors' lawyers who were 
appearing in court and not having the data really to get the 
relief that their client wanted, and also in addition were 
telling their clients that they were leaving a lot of money on 
the table by foreclosing.
    Second, it was developed with creditor and consumer lawyer 
support, posted for public comment, and did not receive 
negative comments as some sort of coercive program.
    But as far as how many people had not spoken with a 
businessperson, my belief is that the distinct majority had not 
gotten a response.
    Senator Whitehouse. Ever.
    Judge Drain. Ever.
    Senator Whitehouse. Do you have any guesstimate on how long 
these negotiations between the homeowner and the servicer or 
the bank customarily have gone before it comes to your court?
    Judge Drain. Well, they are not really negotiations. One of 
the issues with HAMP----
    Senator Whitehouse. Participation in the program. Let us 
put it that way.
    Judge Drain. One of the issues with HAMP is that there are 
not people there to implement it. It is a very haphazard 
process of taking information, often losing it, passing it on 
to someone else, and it is not really premised ultimately on a 
business assessment of what is good for the lender in the first 
place.
    So I mentioned this. Of the 15 objections by lenders to the 
invocation of loss mitigation, the ones that I have dealt with, 
except with one expectation, the lenders, when they actually 
come to court and see the facts, say, ``Well, you know, this 
actually makes sense. We will talk with this person. He or she 
has been basically getting the runaround.''
    So I think that the main benefit of any formal mediation 
program is to put decisionmakers together.
    Senator Whitehouse. So to the extent that Professor Sanders 
believes that this is another surprise to investors and other 
market participants which is almost always viewed negatively, 
your answer would be actually this is a surprise that they 
sought, welcome, and are happy to work with?
    Judge Drain. I think that is right. What is not in the 
record, frankly, is opposition by lenders, and particularly 
those whose real money is at stake. A servicer may find it 
inconvenient, and servicers sometimes do have different 
incentives. But if your money is really at stake as a lender 
and your borrower can pay you more than the house is worth, 
clearly more, it is really kind of a no-brainer.
    Senator Whitehouse. And that may explain why the 
Association of Mortgage Investors is working with me on this 
and seems excited about it. So I think that is a good thing.
    My time has expired. Our Ranking Member, Senator Grassley.
    Senator Grassley. Thank you.
    I think it is legitimate, as we have done already, to raise 
the question--we have HAMP--whether or not that should not be 
fixed before we look at something else, or do we need to do 
both. And I said in my opening statement how the Special 
Inspector General raised questions about not having meaningful 
goals and then not having transparency and accountability that 
comes from transparency. And he repeated that to our Committee 
last July and now again 6 days ago. So I am going to direct 
some questions to Mr. Sanders and Mr. Grossman, but I have got 
two questions that are about HAMP, but I want to get to a 
couple questions about the bankruptcy process, so just a short 
answer.
    Mr. Sanders and Mr. Grossman, do you agree with the Special 
Inspector General's assessment? And, more importantly, do you 
have any insights into why the Treasury Department's refusal to 
set goals for the HAMP program? Mr. Sanders, then Mr. Grossman.
    Mr. Sanders. I am sorry. I did not hear the last part of 
your question.
    Senator Grassley. Why the Treasury Department might be 
refusing to set goals, as I have asked them to do and as the 
Special Inspector General said they should do.
    Mr. Sanders. Well, I have some light I can shine on that. 
When President Obama first came into office, I met with 
Treasury and gave them a presentation, which I will be glad to 
share with everybody, pointing out, saying in the next few 
years you are going to have horrendous problems in terms of 
loan modifications because I know what you are thinking of, you 
are thinking of doing means-testing for loan modifications, 
which means we are going to pick an income group and give them 
loan modifications, but if you are in too high of an income 
group or you suffered property loss, we are not going to do 
anything about it.
    And I said, OK, those are policy decisions based on 
economics and other things, but your program is not going to 
work. It is not going to target enough people, and it will not 
be effective enough. That is all the servicing issues aside.
    I think what Secretary Geithner in terms of that response 
is saying is that, you know, the problem is that any target we 
set, we do not know what we can meet. I think literally it is 
because, as I said, housing prices are still falling; 
unemployment is not getting any better. How do you set targets 
for successful loan modifications when the economy is still in 
complete disarray? That is a tough one. So on that one I kind 
of--I wish you would set targets. You can still do it. But, 
again, what targets would they set to make any sense?
    Senator Grassley. Mr. Grossman, and only if you have got 
another point of view on that.
    Mr. Grossman. I would just say the entire policymaking 
community on every possible side of this issue shares your 
frustration with the lack of transparency that has accompanied 
these efforts. It has made it very difficult for many people to 
make positive contributions.
    Senator Grassley. Mr. Sanders, Mr. Grossman, one of the 
concerns with the loan modification program being run by 
bankruptcy courts is that judges, directly or indirectly, might 
force lenders to cram down home mortgages. Cramdown is a 
reduction of principal, as everybody knows. A further concern 
is that because most mortgages are held by the Federal 
Government, taxpayers will ultimately be left holding the bag, 
and the national debt and economy would be further damaged.
    Could you elaborate further on the potential damages that 
cramdown might have on the economy? Mr. Grossman and then Mr. 
Sanders.
    Mr. Grossman. Well, I think a lot of people have come to 
realize over the past 2 years that the largest problem we have 
is the fundamental disconnect in many instances between a 
debtor's ability to pay and the amount of money that would need 
to be paid to rescue that person's home. It is a financial 
question. It is an economics question.
    To the extent that it is possible in a large number of 
circumstances to bring those two numbers together, it is going 
to have to be through some type of coercion. That is the way 
that a modification will have to be achieved.
    To the extent that that happens, that upsets legitimate 
investment-backed expectations, and one would reasonably expect 
that that would stifle investment in the mortgage sector.
    One also expects that it would upset the contractual 
agreements between mortgage investors and servicers, and that 
would have a similar effect.
    Senator Grassley. Mr. Sanders.
    Mr. Sanders. Again, in my testimony I mentioned Fannie Mae 
and Freddie Mac, the mortgage giants. They are not disposed 
toward cramdowns. In fact, they are very much scared of them, 
for the following reasons: No. 1, it would be very harmful 
toward taxpayers; it would be very harmful toward investors in 
mortgage-backed securities, because, again, it is the moral 
hazard problem. Once somebody realizes there is a potential for 
a cramdown, writing off some principal--maybe not all the 
principal but some principal--they are worried about the fact 
that that would open Pandora's Box and you could actually have 
a flood of people rushing into bankruptcy just to try to get a 
massive principal writedown.
    Now, again, I realize there would be safeguards in place 
for that not to happen. I just do not know what those 
safeguards are. But, again, it terrifies Fannie and Freddie and 
it terrifies other investors out there.
    Now, there are investors in the market--that one trade 
organization you are talking about wants to see principal 
writedown, so not everyone is against them. But Fannie and 
Freddie clearly are.
    Senator Grassley. At 11:30 I have got to go, and I would 
submit some questions to be answered in writing. And I would 
also like to have some testimony from trade associations put in 
the record.
    Senator Whitehouse. Without objection, the trade 
association's testimony, timely received, will be put in the 
record. Your questions will be put in the record as questions 
for the record.
    [The testimony appears as a submission for the record.]
    Senator Whitehouse. While we are doing this, I have a 
statement from Chairman Leahy that will also be made a part of 
the record.
    [The prepared statement of Chairman Leahy appears as a 
submission for the record.]
    Senator Whitehouse. I will turn to Senator Blumenthal, but 
before I do, I want to exercise the prerogative of the Chair to 
ask Judge Drain one question.
    Judge Drain, is cramdown a part of your program?
    Judge Drain. Absolutely not.
    Senator Whitehouse. OK.
    Senator Blumenthal.
    Senator Blumenthal. Thank you, Mr. Chairman. You have just 
asked and elicited an answer to my first question.
    Clearly, this entire program is voluntary, is it not, Judge 
Drain?
    Judge Drain. Yes.
    Senator Blumenthal. Let me address the two objections or 
concerns that I think have been very thoughtfully raised by 
Professor Sanders and Mr. Grossman: first, that the unintended 
consequences of this kind of program can enable or encourage 
people to stay in homes they really cannot afford and thereby 
just delay a day of reckoning and maybe even hurt people as a 
result. I think that concern is belied by the experience in 
Connecticut where we have a mandatory mediation program, not a 
voluntary one, and out of 7,700 cases in foreclosure, some 
4,400 families have been enabled to stay in their homes and are 
in their homes.
    So I would like to ask you, Judge Drain, and perhaps Mr. 
Rao, whether you have any practical experience or statistical 
evidence--Mr. Grossman has said that the evidence is only 
anecdotal so far--that would address that concern?
    Judge Drain. Well, I think that one of the benefits that 
the lenders saw in our program is that the court would 
supervise it and cut it off if the debtor's expectations were 
unrealistic, and that happens. Most people in our district are 
represented by counsel, and so they are advised by counsel in 
advance what they can achieve and what they cannot achieve. But 
there are times with pro se's and also sometimes with 
individual debtors, their expectations are just not realistic. 
This resolves that promptly. It does it in an objective way so 
that they can at least get the sense that they were not getting 
a runaround. So my belief is that at least once they are in the 
loss mitigation program, the ability to succeed or not gets 
flagged pretty quickly.
    Mr. Rao. Senator, there are obviously concerns about the 
lack of transparency with HAMP, but one thing we do know and we 
have seen from the reports that have been coming out of 
Treasury is that it proves the point that if you do actually 
modify the mortgage and give the homeowner an affordable 
payment, they will pay. The statistics are showing that 1 year 
after the program with homeowners who have been on permanent 
modifications, 85 percent of those homeowners are staying on 
the program. The re-default rates on HAMP modifications are 
considerably lower than any other modifications that have been 
attempted, and I specifically refer to the proprietary 
mortgages that servicers are doing outside of the HAMP program 
which have re-default rates which are twice as high as HAMP 
modifications.
    The final point is even within that category of homeowners 
who are staying on the program, the re-default rate, when you 
lower their monthly payment more, often more than 30 percent, 
the re-default rates are even lower. So the more you reduce the 
monthly payment, the more the homeowner will continue to make 
ongoing payments which will contribute to investor gains.
    Senator Blumenthal. I thank you for those answers, and 
perhaps I can ask Mr. Grossman and Professor Sanders, the 
reference to this program as ``coercive''--and I respect your 
point that very often the mere request by a judge to reach a 
settlement can impose some degree of pressure as someone who 
has been in that position as a practicing attorney. Is there 
something special about this program that is more coercive, 
exerts more pressure? Because in the course of almost any 
litigation, a judge will say at some point, ``Can't you folks 
reach an agreement? '' And those lawyers very often appear 
frequently before that judge and so may feel some pressure. But 
is there something about this program that is different from 
the ordinary litigation, Mr. Grossman?
    Mr. Grossman. With respect to the normal bankruptcy 
process, I think the primary difference is that in some cases 
this would serve to effectively shift the burden from the 
debtor to the creditor to justify why it is in a particular 
instance that a modification or some other type of settlement 
could not be reached.
    Now, it depends entirely on the courts and it depends 
entirely on the judge. In some cases, these are going to go 
forward, and it is not going to be done in a coercive manner, 
and I think that in many cases has been the experience. And 
from what Judge Drain has described, I think his court has done 
an exemplary job of implementing this program and working 
through what is a very difficult situation.
    That said, by shifting the legal burdens and putting on a 
party a burden to enforce a property right that they otherwise 
would be able to enforce free and clear, that is necessarily in 
some instances going to have an effect on the out; otherwise, 
you would not do it. I think that stands the potential of being 
coercive in some instances.
    Senator Blumenthal. I realize my time has expired, but if 
it were made clear that there is no shift in legal burden, I 
gather that concern would be addressed.
    Mr. Grossman. I fear that that would really cut to the 
heart of these programs, because the way to effect that would 
be necessarily to remove from them the mandatory nature of the 
mediation, to remove the mandatory nature of the negotiation. 
It would require a significant change. I think voluntary 
mediation programs are wonderful, and I think that is something 
that judges should move forward on. I think that this creates a 
very good template for that sort of model.
    Senator Blumenthal. So if it were made clear that this 
program is completely voluntary, that objection, again, would 
be addressed.
    Mr. Grossman. If the participation in the program itself 
were entirely voluntary and it did not abrogate any other 
rights or responsibilities that are specified in the Bankruptcy 
Code, that would be a very different beast.
    Senator Blumenthal. Thank you.
    Thank you, Mr. Chairman.
    Senator Whitehouse. Save that question, Judge Drain. We 
will be back to it, but I do not want to interrupt Senator 
Franken.
    Senator Franken. Well, I want to continue with this 
because, Mr. Grossman, I am a little confused because in your 
previous answer you had said it would require coercion for this 
to be done. That this kind of settlement would require coercion 
is what you said. And so now it seems like your answer is very 
different when confronted with the reality--when taken out of 
your theoretical framework, in answering the Ranking Member, 
you said it would require coercion. But now what I see from 
Judge Drain's court, as you just acknowledged, is that there is 
no coercion there.
    Let us get to the reality of this and what has really 
happened as opposed to some theory. We have heard, Judge Drain, 
the concerns raised by the other witnesses that lenders are 
coerced to negotiate better terms for the loan. Can you tell me 
what percentage of loan modifications in your program involve 
reduction in principal of the loan?
    Judge Drain. Not that many. Most of them involve 
significant reductions in interest rate, 12 percent down to 3, 
4, 2, percent; waiver of fees; waiver of default interest; and 
rolling defaulted principal payments into the back end of the 
loan.
    Where there has been a principal reduction, it is usually 
on a second mortgage where the second mortgage holder realizes 
that in a foreclosure they would get nothing, so they are 
getting a better deal by having a principal reduction. Or where 
the mortgage holder has significant document problems and might 
not ever succeed in foreclosing. In that case, I have approved 
very significant settlements where the principal was reduced a 
lot, but that was really a different--that was a legal issue as 
opposed to an economic issue.
    Senator Franken. All this is to me pieces of a whole. 
During Mr. Grossman's testimony, he talked about all the 
opportunities that people have on the way there and why we 
shouldn't need this in addition. But in your testimony and in 
response to questions, you said this is very often the first 
time that the homeowners have gotten this information.
    Mr. Rao, Senator Grassley very rightly said we need to fix 
HAMP as part of this.
    Now, I proposed legislation that actually passed the Senate 
last year--in fact, Senator Grassley voted for it, along with 
quite a few Republicans--to create an office within HAMP to 
provide assistance to homeowners navigating the system, the 
Homeowner Advocate Office. And, unfortunately, it did not get 
passed by the House. My experience with people in Minnesota is 
the servicers do not provide them with information, and the 
servicers either are incompetent or lie to them. The idea of a 
Homeowner Advocate Office is that there is some place in the 
Treasury to have a Homeowner Advocate. And we paid for this 
with Treasury funds; it did not cost a thing.
    So given your experiences working with homeowners in 
foreclosure proceedings, would you see the value of having a 
homeowner advocate involved in the proceeding?
    Mr. Rao. Well, Senator, I think something obviously is 
required. A homeowner advocate could potentially fill that role 
of providing the impetus for servicers to be accountable for 
their actions and, most importantly, as we keep saying over and 
over again today, for them to simply make decisions, which they 
are required to do under the HAMP guidelines.
    Mr. Grossman referred to these loss mitigation programs as 
imposing a burden on servicers to have a decisionmaker. That is 
their requirement under--as a participating servicer, they are 
required to make decisions and to do it within 30 days.
    So, yes, I believe a Homeowners Advocate Office could help 
enforce, for example, that requirement. I think the other 
legislation passed by Congress as part of the Dodd-Frank bill 
requiring disclosure of information such as the results of the 
net present value test will also be helpful for achieving 
accountability with the HAMP program, so that the parties, 
especially the homeowners and their advocates, can know whether 
there has been a proper denial of their application.
    Senator Franken. Thank you, Mr. Chairman.
    Senator Whitehouse. Thank you.
    Mr. Britt, you said at the end of your testimony that you 
now have a customer advocate from the bank's Office of the CEO 
and President. She has a first and last name, unlike a lot of 
the names on the phone that you had to deal with beforehand, 
and you can talk to her when needed rather than just calling an 
800 number and getting whatever first name picked up the phone.
    Mr. Britt. Yes.
    Senator Whitehouse. You believe that it took the advocacy 
of a Senator's office to get you that. My specific question is: 
In the 2 years that you have been wrestling your way through 
this program and with this bureaucracy, how long was it before 
that connection with the CEO's office, customer advocate, 
existed? For how long were you on your own fighting against 
this bureaucracy?
    Mr. Britt. Twenty months.
    Senator Whitehouse. Twenty months. And Judge Drain has 
testified that that is the--20 months might not be the exact 
number, but it is a commonplace for the people who are coming 
into the loan mitigation program to have never yet had a chance 
to talk to a human being who has authority to make a decision 
in their case. So the context in which I see this, Mr. 
Grossman, is a little bit different than yours. The context in 
which I see this is that we have a highly imperfect, 
bureaucratic system that is grinding away and never taking a 
good, hard look at these cases because you are always dealing 
with somebody who is hired to answer the phone and who is hired 
to move paper, but has no decisionmaking capacity. And you can 
imagine the frustration of an ordinary American like Mr. Britt 
whose home is at stake and for 20 months cannot find something 
as simple and American and basic as a human being to talk to on 
the other end. And you see the same thing work out--this 
judgment is confirmed, in my opinion, by what you see working 
out with local banks, community banks, banks who hold their 
mortgages.
    I can assure you--and I bet you that Senator Franken and 
Senator Blumenthal can do the same--that the foreclosure 
problem does not exist in anywhere near the dimensions that it 
does in the general market when the bank is still there. And it 
is for that simple, American reason that you have the chance to 
go into your bank and talk to a human being, and if there is a 
solution to be found that is in everybody's best interests, you 
get it.
    I really believe that you should reconsider whether or not 
you want to put your credibility behind the notion that the 
system that led to the loss mitigation program deserves the 
credit that you give it at having sorted out those problems 
beforehand, and that the only residual value that the loss 
mitigation program can present is coercion. It is inconsistent 
with the judge's experience. It is inconsistent with our 
experience, with our case in Rhode Island. And I think what is 
really happening here is that people who have never had 
somebody to talk to--it is always ``John,'' and he is always 
giving you information; then somebody else writes a letter, and 
it is terrifying because your home is at stake, and the 
paperwork has to be filed over and over again to the point 
where you feel you are being harassed because you are being 
asked for the fifth or sixth time to file the same damned 
paperwork that you have already filed, that you have the 
Federal Express certificate that you filed, you have the fax 
receipt that you filed, and they still make you do it again 
because they have got the whip hand to take your home away if 
you do not go ahead and file it again.
    After 19 or 20 months of that, it is pretty frustrating, 
and when that can be broken by simply getting two people in a 
room--you are a litigator, are you not?
    Mr. Grossman. Yes.
    Senator Whitehouse. You have seen situations in which in 
front of a judge the two parties come together, and suddenly 
they are willing to be a lot more reasonable, and suddenly a 
deal is worked out. And judges do that all the time, do they 
not? Yes, you are saying. They do that all the time.
    Let me ask you specifically: Of the three elements of this 
proposal, one is that somebody has to show up in the court with 
full settlement authority for the bank. That is one. Two is 
that they have got to show up during the loss mitigation 
program. And three is that they have to negotiate in good 
faith. Which one of those three specifically do you object to? 
Do you object to them having to show up with full settlement 
authority? Do you object to them having to show up during the 
loss mitigation process? Or do you object to them having to 
negotiate in good faith?
    Mr. Grossman. It is my concern that if--the problem at root 
here that you are discussing, the ability to sit down in a room 
and hash things out person to person, to the extent that that 
is what is lacking, an individual should not need----
    Senator Whitehouse. Let us assume that that is what is 
lacking----
    Mr. Grossman.--should not be forced to file for 
bankruptcy----
    Senator Whitehouse. No, no----
    Mr. Grossman.--to achieve that result.
    Senator Whitehouse. I agree with you. But here we are 
dealing with people who are required to file for bankruptcy. 
They are at that stage. Nobody does it because they love it. 
They are at that stage. Why in that forum, once they are there, 
should a rule that somebody has to show up with full settlement 
authority, that person has to be present during the loss 
mitigation program, and they have to negotiate in good faith, 
which one of those three is objectionable to you in that 
circumstance that you are now in bankruptcy court with a 
foreclosure in the offing?
    Mr. Grossman. Again, the problem--and I think I stated this 
previously--is the mandatory nature of this program. It 
effectively rewrites the contractual obligations of either the 
creditor and/or the servicing agent.
    Senator Whitehouse. That is what bankruptcy courts do. 
Right? That is where you go to get contracts renegotiated, and 
it is the American way that it is in everybody's best interests 
to get that done. And how mandatory is it when you have done 
2,000 and there have been--Judge Drain, do you want to respond 
to that?
    Judge Drain. Well, I would respond in two ways. First, 
again, the vast majority do not view it as being coerced into 
doing it. We have had 15 people who objected whose objections 
either were retracted or denied out of 2000.
    Second, you cannot just walk into bankruptcy court as a 
lender and snap your fingers and say, ``I want the house 
back.'' It does not happen that way. That is not the law. The 
lender has to make a motion for relief from the automatic stay, 
and the response often to that motion is, ``We have sought out 
the HAMP program.'' And courts, as recently described in Judge 
Votolato's decision from Rhode Island, are faced with a lawyer 
standing up in court and you ask that lawyer for the bank, 
``Well, did they invoke the HAMP program? '' And the lawyer 
says, ``I do not know,'' because they do not know. It is on 
autopilot.
    And so then you say, ``Well, you better find out, and we 
are going to adjourn the hearing until you do,'' because 
obviously the HAMP program puts you on one path and foreclosure 
puts you on another. So it is just a fallacy to say that the 
law gives a lender the ability to snap its fingers and get stay 
relief.
    But, more importantly, economically, the lenders want court 
supervision of this process because that is how it works. It 
keeps the debtors in line, and it forces them the lenders to 
have a client. There is nothing worse than not having a client, 
appearing before a judge and not really having a client. And, 
unfortunately, the way the large securitized or packaged loans 
operate, they do not have clients.
    Senator Whitehouse. In the same way that homeowner----
    Judge Drain. That the local bank----
    Senator Whitehouse. --has nobody to talk to.
    Judge Drain. Right.
    Senator Whitehouse. The lawyer for the organization----
    Judge Drain. Or the local bank. You know, if you represent 
a local bank, you know who your client is, and you get 
directions from him or her.
    Senator Whitehouse. Senator Blumenthal, second round, if 
you wish.
    Senator Blumenthal. Thank you, Mr. Chairman. Again, I must 
say, as an Attorney General recently in this business, so to 
speak, one of my frustrations has been, in fact, for our 
attorneys and personally that finding someone who was the real 
party and was in a position to negotiate and modify a mortgage 
was one of the real travails, most frustrating aspects, often 
to the detriment of, in fact, the real party in interest whose 
real concern or interest would have been well served by being 
present and being involved in the process.
    But since it is, in essence, consensual in my view, not 
coercive, and since everyone the program itself would be 
optional for the bankruptcy court, I would like to ask perhaps, 
Judge Drain, whether you have an indication that more 
bankruptcy courts would, in fact, engage in this kind of 
program if their authority were clarified under section 105.
    Judge Drain. I think that is the case. Since we enacted it, 
half of the court in the Eastern District of New York said they 
would do it. I am told by one of my colleagues there that one 
of the judges who did not do it was somewhat concerned that he 
would be overreaching his authority.
    As I think you said, Senator, in your opening remarks, by 
enacting legislation in this area, the Congress would also be 
telling courts, not just Federal courts but State courts, that 
you should think about this. And, you know, we are public 
servants, and I think that is an important message.
    Senator Blumenthal. Thank you.
    Thank you, Mr. Chairman.
    Senator Whitehouse. Senator Franken.
    Senator Franken. I really have enjoyed listening to the 
Chairman, who really has bored into this subject and has been 
on this for so long, and I have enjoyed listening to the former 
Attorney General of Connecticut for--what was it? About 50 
years?
    [Laughter.]
    Senator Franken. I would actually like an answer to the 
Chairman's question from Mr. Grossman. Which of the three 
requirements do you object to: that someone with the fully 
authority for the lender in the loss mitigation program be 
there; that they show up during the loss mitigation program, 
two; and that they act in good faith? Which if those three do 
you object to?
    Mr. Grossman. Senator, as I stated, my objection is with 
the mandatory nature of the program. I suppose you could take 
that as being all three, although I do not think that would be 
strictly an accurate way of describing it. But it is the 
mandatory nature of the program.
    Senator Franken. OK. The mandatory nature in a bankruptcy 
court where--as a bankruptcy judge, Judge Drain, do you--you 
have the authority--your job is to resolve all these claims on 
someone when they go bankrupt, right?
    Judge Drain. Yes.
    Senator Franken. And you have authority to do these things, 
right?
    Judge Drain. Yes--well, I will give you the--I have forced 
one lender to continue loss mitigation. One. That was as lender 
that has a $200,000 equity cushion, so they would not have 
gotten relief from the automatic stay, and they simply were not 
paying any attention to the borrower. I said, ``I am not going 
to terminate loss mitigation until you look at this borrower's 
financial information.'' I think I have the authority to do 
that because they were not going to get relief from the stay 
anyway for months because they had an equity cushion, $200,000.
    But that was an exception. I mean, most of the time--and by 
``most of the time,'' like 99 percent of the time, they want 
the structure because that is why you do mediation. You want 
someone there to keep the parties focused and to not let them 
throw hogwash up at you and to get the deal done.
    Senator Franken. Thank you.
    Mr. Rao, one last question. I have been very concerned with 
the issue of robo-signing in which employees of mortgage 
servicers have improperly signed affidavits executing 
foreclosures without having actual firsthand knowledge of the 
facts of the mortgage. Would loss mitigation programs in 
bankruptcy courts have prevented this problem or at least 
mitigated the problem? Or could it prevent a similar issue in 
the future by ensuring that more attention is paid to each 
individual case?
    Mr. Rao. I think that definitely could mitigate the 
problem, primarily because bankruptcy courts have been 
addressing this issue for some time. In my written testimony, I 
listed a number of cases dating back 10, 15 years in which 
bankruptcy courts have encountered problems with false 
affidavits and false documents being filed and have sanctioned 
parties for filing them. So although it has become sort of 
popular in the press right now and there has been a lot of 
coverage of it, it is actually not at all new to bankruptcy 
courts, and bankruptcy judges have done a very good job of 
ensuring the truth and veracity of the documents that get filed 
in the courts. So having it be part of a loss mitigation 
program would only improve that.
    Senator Franken. Thank you. And I thank all of you for your 
testimony.
    Thank you, Mr. Chairman.
    Senator Whitehouse. Thank you, Senator Franken.
    I think we will call the hearing now to a conclusion. I 
want to first of all thank our Ranking Member, Senator 
Grassley, who is an extraordinarily distinguished member of 
this body, for the time that he took here with us today, and I 
look forward to working with him and to have my staff work with 
his staff on helping to resolve the issues about whether this 
is a secret cramdown program of some kind, which I hope the 
judge's testimony helped dissipate, but to make sure that that 
is clear to all concerned and to make sure that the investors' 
voices are heard in this, because they are another party that 
benefits from these types of programs. And with any luck, we 
will be able to get to a resolution that allows us to go 
forward.
    In order particularly to facilitate the questions that come 
from Senator Grassley, he has additional written questions that 
we have accepted into the record, and I would urge all of you, 
to the extent that they are directed to you, to respond as 
rapidly as you can. We close the record of the hearing after 
one week, ordinarily, so obviously the quicker Senator 
Grassley's questions can get to you, the more that week that 
remains for you to answer and get them back. But I think it 
would be very helpful, and I would urge you to be as punctual 
as possible in getting those answers back.
    The record of this hearing will be kept open for one week 
in order to accommodate your answers and any other materials 
that any members of the Committee may wish to add. And I just 
want to particularly thank those who have traveled some 
distance for being here. Mr. Grossman, I think you are actually 
nearby, but it appears that Professor Sanders has come from 
Georgia, and I am grateful to you for that. Maybe not. Maybe 
you are from nearby. I thought you were----
    Mr. Sanders. Fairfax, Virginia.
    [Laughter.]
    Senator Whitehouse. Oh, you were easy then, even though 
there is a fair amount of snow on the ground by Washington 
standards.
    Mr. Rao has come down from New England. I appreciate that 
very much. Judge Drain has come down from New York. I 
appreciate that very much. Mr. Britt has come from Riverside, 
Rhode Island, where he is successfully hanging on to his home 
after at least 20 months of a bureaucratic nightmare. And I am 
grateful for the testimony of all of you. You have each 
contributed to this hearing, and I appreciate it. But, again, 
as a former practicing attorney, I cannot help but extend a 
particular appreciation to Judge Drain, who I know has a very 
busy schedule in his court, and to have you with us, sir, I 
think is particularly significant and much, much appreciated on 
my part, Your Honor.
    So thank you all very much. The hearing is adjourned 
subject to the week for providing of answers.
    [Whereupon, at 11:48 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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