[Congressional Record Volume 153, Number 149 (Wednesday, October 3, 2007)]
[Senate]
[Pages S12533-S12535]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 2133. A bill to authorize bankruptcy courts to take certain 
actions with respect to mortgage loans in bankruptcy, and for other 
purposes; to the Committee on the Judiciary.

[[Page S12534]]

  Mr. SPECTER. Mr. President, I seek recognition to introduce the 
Homeowners' Mortgage and Equity Savings Act of 2007. In recent years, 
low interest rates and easily available credit have significantly 
increased home ownership in this country. The U.S. home ownership rate 
increased from 64 percent in 1994 to over 69 percent in 2004. The 
increase has been particularly dramatic among minority groups. During 
that same period, the home ownership rate among Hispanics and Latinos 
rose by around 20 percent, to nearly 50 percent. For African Americans, 
the rate rose by 14 percent, also nearing 50 percent.
  However, with interest rates at all-time lows, lenders increasingly 
offered mortgages to those who previously either would not have 
qualified for a mortgage or could not have afforded the payments on a 
mortgage. To do this, lenders offered new types of mortgages designed 
to keep monthly payments low, at least in the short term. In 
particular, lenders issued large numbers of adjustable rate mortgages, 
``ARMS'', loans that often feature low introductory interest rates that 
later adjust to significantly higher rates. Lenders also issued no-
down-payment or interest-only mortgages, which also often featured low 
introductory interest rates that later increase significantly.
  With the era of easy money and low interest rates over, a crisis 
looms. Many borrowers with adjustable rate, interest-only or no-down-
payment mortgages have been unable to keep up with their monthly 
mortgage payments that have reset to higher rates. In many cases, 
resetting interest rates means monthly payments increase by $250 to 
$300 on a typical $1,200 monthly mortgage. Moreover, many ARMS featured 
early repayment penalties, making it difficult for homeowners to fix 
the situation by refinancing and obtaining less risky mortgages.
  As a result of resetting interest rates, delinquencies and 
foreclosures involving ARMs have risen dramatically. Delinquencies and 
foreclosures have been particularly high among borrowers with weak 
credit who were issued loans at subprime rates. According to the 
Mortgage Bankers Association, between the second quarter of 2006 and 
the second quarter of this year, the percentage of homeowners with 
subprime ARMs who are seriously delinquent, those who are either more 
than 90 days past due or in foreclosure, has nearly doubled, from 6.52 
to 12.40 percent. The number rose by over 20 percent during the second 
quarter of this year alone. The Center for Responsible Lending projects 
that 2.2 million Americans with subprime loans originated between 1998 
and 2006 have lost or will lose their home to foreclosure.

  While the situation has been most severe for homeowners with subprime 
loans, the problem now is spreading to those with prime rate loans. In 
the past year, the percentage of homeowners with prime rate ARMs that 
were seriously delinquent on their mortgage payments more than doubled 
from 0.92 to 2.02 percent. According to the Mortgage Bankers 
Association, in the second quarter of this year, the number of 
homeowners who got foreclosure notices reached an all time high of 0.65 
percent, largely because of increases among homeowners with ARMs, 
delinquencies and foreclosures for fixed rates mortgages have increased 
only moderately. The situation will only get worse in coming months as 
an estimated 2 million homeowners with adjustable rate mortgages see 
their interest rates reset to much higher rates. According to some 
sources, a quarter of those homeowners face losing their homes.
  In my home State of Pennsylvania, the number of homeowners with 
subprime ARMs who are seriously delinquent has risen to 13.82 percent, 
an increase of over 40 percent since this time last year. Among 
homeowners who qualified for prime rate ARMs, the number who are 
seriously delinquent has increased to 2.43 percent, an increase of over 
50 percent since last year. Especially hard hit is the Allentown-
Bethlehem-Easton area, where the foreclosure rate for subprime loans 
originated in 2006 is 20 percent.
  In some cases, borrowers made bad decisions by ignoring the risk and 
taking on mortgages they knew someday they might not be able to afford. 
In other cases, it appears that borrowers were steered to riskier 
mortgages when they qualified for safer options. There is also evidence 
that lenders failed to fully disclose the risks involved with certain 
mortgages and instead emphasized low monthly payments. The push to 
issue subprime and adjustable rate mortgages was aggravated by Wall 
Street investors chasing high rates of return on the secondary market.
  Many homeowners facing foreclosure will seek relief in bankruptcy. 
Bankruptcy has traditionally provided a second chance for borrowers by 
giving them relief from their creditors. Chapter 13 in particular has 
enabled homeowners facing foreclosure to keep their homes. Chapter 13 
gives debtors breathing space by imposing a stay on collection of 
debts, including mortgages, which prevents lenders from foreclosing for 
a period of time. During that time, debtors are given an opportunity to 
get caught up on their mortgage payments. Finally, Chapter 13 makes it 
more likely that debtors will be able to make their mortgage payments 
over the long term by giving them a discharge from many of their other 
debts.
  However, the drafters of the bankruptcy code never anticipated the 
current crisis where so many face possible bankruptcy, not because of 
consumer debts, but because of their mortgages. When the current 
bankruptcy code was drafted in the late 1970s, most homeowners had 
traditional 30-year fixed rate mortgages with substantial down 
payments. As a result, few homeowners faced bankruptcy because of their 
mortgage. As such, the drafters did not see a need for bankruptcy 
judges to have the power to alter the terms of mortgages on primary 
residences.
  Given the fact that so many homeowners now face foreclosure and 
possible bankruptcy because of their mortgages, I believe Congress 
should take action. I am therefore introducing a targeted bill which 
will allow bankruptcy courts to provide relief to homeowners caught up 
in the current crisis. The bill will provide relief for low-income 
homeowners who, because of changed circumstances, can no longer afford 
their mortgages. Easily available credit made homeownership a reality 
for many lower income Americans. It is these same homeowners who are 
the ones now caught up in the credit crunch and facing the loss of 
their homes.
  The bill will allow bankruptcy judges to provide relief by 
restructuring the mortgage terms that have created the biggest problems 
for homeowners. Most importantly, the bill will allow bankruptcy judges 
to prevent or delay interest rate increases as well as to roll back 
interest rates that have already reset. This will make it possible for 
many more debtors to hold onto their homes in the long run.
  The bill also will allow bankruptcy judges to waive early repayment 
or prepayment penalties. Many lenders impose large penalties on 
homeowners that repay their mortgages early, penalties that prevent 
many homeowners from refinancing and switching to a sounder mortgage. 
These penalties are particularly egregious since they don't reflect any 
increased risk taken on by the lender. They are merely intended to 
discourage borrowers from making a better choice for themselves by 
switching to another loan.
  This bill is not a bailout and it is not aimed at those who knew the 
risk and proceeded anyway. When housing prices were rising, speculators 
bid up the prices of homes hoping to quickly sell them for an easy 
profit. With prices falling, many of those speculators find themselves 
with properties worth less than what they paid. These speculators took 
the risk that housing prices would fall and now must live with the 
downside of that risk.
  The bill will allow judges to write down the principal value of the 
loan, but only if both the debtor and creditor agree. Giving judges 
discretion to write down the principal value of loans could provide a 
significant windfall to those who gambled that housing prices would 
never fall, including speculators. That is a gamble lenders and future 
homeowners should not be forced to finance.
  Taking too broad an approach to this problem will only hurt future 
borrowers. Allowing bankruptcy judges free rein to rewrite mortgage 
loans will only increase the risk that lenders take on when they issue 
mortgages. Investors respond to increased risk by insisting on higher 
rates of return and

[[Page S12535]]

mortgage lenders must respond in kind by raising their rates. That will 
only make it more difficult for those Americans who wish to become 
homeowners in the future.
  In the longer run, the market will correct some of what has gone 
wrong. The number of risky loans being issued has already declined 
dramatically, in large part because investors are refusing to provide 
the liquidity necessary to issue such loans. In addition, as predatory 
or fraudulent practices come to light, the Congress, and in particular 
the Banking Committee, should take action to prevent such practices 
from occurring in the future.
  I urge my colleagues to join me in offering relief for those who are 
caught up in the current crisis and face losing their homes.
                                 ______