[Congressional Record Volume 154, Number 175 (Monday, November 17, 2008)]
[Senate]
[Pages S10582-S10584]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SPECTER:
  S. 3686. A bill to establish an Office of Foreclosure Evaluation to 
coordinate the responsibilities of the Department of the Treasury, the 
Department of Housing and Urban Development, the Federal Housing 
Administration, the Federal Housing Finance Agency, the Neighborhood 
Reinvestment Corporation, the Federal Deposit Insurance Corporation, 
the Board of Governors of the Federal Reserve System, and other Federal 
Government entities regarding foreclosure prevention, and for other 
purposes; to the Committee on Banking, Housing, and Urban Affairs.
  Mr. SPECTER. I am now introducing legislation captioned ``The 
Foreclosure Diversion and Mortgage Loan Modification Act of 2008.'' It 
would create an Office of Foreclosure Evaluation inside the Treasury 
Department, to coordinate a great many efforts. The core purpose of 
this legislation is to provide Federal endorsement and financial 
assistance for setting up programs such as those now in existence in 
Philadelphia and Pittsburgh, and similar programs which exist in New 
York, New Jersey, Ohio, and Connecticut, that suspend foreclosure until 
there has been an opportunity, under court supervision, to have the 
borrower and the lender sit down to try to work out a plan to avoid 
foreclosure. My full statement, which I will ask consent to place in 
the Record, goes into some great detail about the problems that exist 
at the present time regarding foreclosures.
  In addition to the legislation I am proposing, the Federal Deposit 
Insurance Corporation has proposed a program aimed at preventing an 
estimated 1.5 million foreclosures in the next year. I have talked to 
the FDIC Chairwoman Sheila Bair, and think her proposal is a good one. 
The legislation I am proposing and the program Chairwoman Bair has 
proposed would supplement legislation which is now pending in the 
Congress. Last October, Senator Durbin and I separately introduced 
bills that would permit mortgages to be modified by the bankruptcy 
courts. However, Senator Durbin's legislation would permit the court to 
modify the principal sum. I think that goes too far and would have the 
undesirable consequence of making it more difficult to obtain a 
mortgage in the future. My legislation authorizes the bankruptcy courts 
to modify interest rates on variable interest rate mortgages. In many 
cases, there was not full disclosure to borrowers who took out these 
loans. Then they found that their mortgage went from $1,200 a month, 
for illustrative purposes, to $2,000.
  It is my hope that Congress would stay in session beyond just this 
week. It seems to me the economic problems

[[Page S10583]]

we faced last July, before we adjourned for the month of August, 
required our remaining in session; I urged the leaders of the Senate to 
keep the body in session during August. And, I urged the President to 
call the Congress back into session. It seems to me the problem of 
delinquent mortgages and foreclosures is critical at the moment. I 
noticed Senator Dodd was quoted in the Washington Post last Friday as 
saying he plans to introduce legislation and that he thought the FDIC 
proposal was a good one.
  We are finding so many people are facing the threat of foreclosure. 
This is an issue which ought to be considered further. Congress ought 
to stay in session, ought to work these issues through, and ought to 
remain in session long enough to consider the details necessary to make 
a rational judgment on the proposal of economic aid to General Motors 
and the other companies.
  I ask unanimous consent that the full text of my floor statement on 
the mortgage issue and the full text of the legislation be printed in 
the Record as if set forth in full on the Senate floor.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

    Floor Statement of Senator Arlen Specter on Introduction of the 
    Foreclosure Diversion and Mortgage Loan Modification Act of 2008

       Mr. President, I seek recognition today to introduce the 
     ``Foreclosure Diversion and Mortgage Loan Modification Act of 
     2008.'' The bill amends the recently passed Emergency 
     Economic Stabilization Act and the Housing and Economic 
     Recovery Act passed last July to ensure that more attention 
     and resources are given to the urgent need to prevent home 
     foreclosures and to stabilize the housing market.
       The bill creates an Office of Foreclosure Evaluation in the 
     Treasury Department. This Office will coordinate and foster 
     foreclosure prevention efforts of the Treasury Department, 
     the Federal Housing Finance Agency, the Federal Reserve, the 
     Federal Deposit Insurance Corporation, the Department of 
     Housing and Urban Development, and other federal agencies. 
     The Office will also support and collaborate in foreclosure 
     prevention efforts with state and local government agencies, 
     state and local courts, and community based non-profit 
     organizations, such as the State Foreclosure Prevention 
     Working Group.
       The current economic turmoil began with a housing market 
     collapse that has had devastating consequences across the 
     entire financial system. Widespread mortgage modification 
     will address the root cause of the current crisis. Despite 
     talk and efforts since early 2007 to encourage voluntary loan 
     modification, the pace of affordable and sustainable 
     modifications has not been of sufficient scale to contain the 
     harm to our communities and our economy.
       This month, HUD made a preliminary projection that only 
     about 20,000 homeowners may be helped by the Hope for 
     Homeowners program created as part of the Housing and 
     Economic Recovery Act, instead of the anticipated 400,000. In 
     October, a Federal Reserve Governor expressed concerns about 
     the recent rise of shady companies that masquerade as non-
     profit foreclosure prevention organizations, and then charge 
     distressed borrowers thousands of dollars for their services. 
     Congress must act to ensure that homeowners are getting the 
     information and help they need to prevent avoidable 
     foreclosures.
       For the second quarter of 2008, foreclosure filings 
     nationwide were up 121 percent over the second quarter of 
     2007. Comparing third quarter filings, the 2008 increase over 
     2007 is 71 percent. Today there are more than 1.5 million 
     houses in foreclosure--three times the normal rate--and 
     approximately 3.5 million other homeowners are behind on 
     their mortgage payments. Too many families are losing their 
     homes even when it makes more sense for the lenders to let 
     them stay and make payments on a sustainable, modified 
     mortgage. And despite reports from industry groups that there 
     have been many modifications, consumer groups say many of 
     these modifications simply spread missed payments over the 
     remaining life of the loan, which has the perverse effect of 
     raising, not lowering, the monthly payment. A recent Credit 
     Suisse report found that of those mortgages where the monthly 
     payments increased, 44 percent were more than 60 days 
     delinquent after 8 months. By contrast, of those mortgages 
     that received an interest rate reduction, only 15 percent 
     were more than 60 days delinquent after 8 months. Similarly, 
     of those mortgages where the principal balance was reduced 
     only 23 percent were delinquent. .
       In some regions of the country the housing and job markets 
     are holding up fairly well, but in other areas the increase 
     in foreclosures is or will be devastating. But there is some 
     good news: in some of the areas that have been hardest hit, 
     there are newly instituted state-court based mortgage 
     foreclosure diversion programs that require conciliation 
     conferences between lenders and borrowers before a 
     foreclosure or sheriff sale may proceed. In some places, 
     there are hundreds of trained pro bono attorneys willing to 
     help homeowners. Homeowners need these programs because, even 
     though many states have housing financing programs, 
     homeowners may not know about them and they may not know that 
     lenders may offer modifications. A recent policy paper by the 
     Mortgage Bankers Association of America showed that borrowers 
     in 21% of foreclosures initiated in the third quarter of 2007 
     either could not be located or would not respond to repeated 
     attempts by lenders to contact them. According to a report by 
     Freddie Mac, 57 percent of late-paying borrowers do not know 
     that their lenders may offer alternatives to help avoid 
     foreclosure.
       The October 17, 2008 Senate Judiciary Committee hearing I 
     held in Pittsburgh explored Allegheny County's foreclosure 
     prevention program, which is at an early stage. The 
     Philadelphia hearing I held on October 24, 2008 explored a 
     program that was adopted in April 2008, and it appears to be 
     working. In the Philadelphia Mortgage Foreclosure Diversion 
     Program's first few months, there were 1,019 mortgage 
     foreclosure cases scheduled for conciliation conferences. In 
     467 cases (46%), borrowers did not participate. Of the 552 
     (54%) in which borrowers did participate, there was a 
     ``success'' rate of 80%--meaning the homeowners remained in 
     their homes as a result of settlement, postponement, or 
     bankruptcy. Only 2 properties (.4%) were ordered to be sold 
     at sheriff sale. The delays allow for more negotiation, or, 
     in some cases for ``graceful exits'' so families can find a 
     new place to live.
       The witnesses at the Philadelphia hearing testified about 
     successful outcomes for homeowners. One witness, Tania 
     Harrigan, testified that her family fell behind in mortgage 
     payments when her husband was laid off. They filed for 
     bankruptcy but could not afford to pay the fees; the 
     bankruptcy suit was dismissed and the house was listed for 
     sheriff sale for November 4, 2008. Through the Philadelphia 
     foreclosure prevention program, the interest rate was lowered 
     from 9.75% to 7%, which reduced the monthly payment from $437 
     to $411. The lender waived $6,500 in late fees and the 
     arrearage was put back into a new 30-year fixed rate 
     mortgage. Another homeowner who was contacted through the 
     program's door-to-door outreach initiative had an adjustable 
     rate mortgage modified from a 22% interest rate to a fixed 
     rate of 6%. Another homeowner saw a reduction in her monthly 
     payments from $1479 to $1124 after the interest rate went 
     from 9.9% to 5.5%. These were ``voluntary'' in the sense that 
     the court did not impose the terms of the modifications. But 
     the court does require communication, research and 
     preparation before the conference. The court makes 
     foreclosure a last resort instead of the first step by 
     ensuring that servicers or lenders are not simply ignoring 
     alternatives to foreclosure.
       A city employee testified that, as a result of coordinated 
     outreach, calls to the Save Your Home Philly Hotline, which 
     sets up appointments with housing counselors, tripled from 
     150 per month at the beginning of the year to 460 per month 
     currently. City-funded neighborhood assistance groups who 
     have access to court foreclosure files go door-to-door to 
     reach homeowners. The participation rate in the conciliation 
     program for homeowners who answered the door and spoke to the 
     outreach team was 73 percent, compared to 48 percent for 
     families that received no such outreach. The city also funds 
     Community Legal Services to provide legal assistance to 
     distressed homeowners and training to the hundreds of 
     volunteer attorneys who represent clients pro bono.
       New York, New Jersey, Ohio, Connecticut and Florida have 
     similar programs. As I've noted, Pittsburgh is also adopting 
     a foreclosure diversion program. Common Pleas Court Judge 
     Annette Rizzo in Philadelphia testified that she has had many 
     inquiries about the foreclosure diversion program from 
     numerous cities, states, and even from Sweden. These are good 
     developments, and they should be nurtured.
       That is what this legislation would do. It creates a 
     federal Office of Foreclosure Evaluation that will encourage 
     and assist cities and states in adopting mortgage foreclosure 
     diversion programs. The Office will also conduct an 
     informational campaign so that homeowners learn of state and 
     federal housing finance programs that are available to help 
     them, as well as other resources such as free counseling and 
     legal representation by community legal services groups and 
     local bar associations.
       The states and cities are making progress, but federal 
     assistance would help. The bill permits certain HUD Community 
     Block Grant funds to be used for foreclosure prevention 
     programs that provide free counseling and legal aid. 
     Currently those funds may only be used for rehabilitation of 
     vacant or foreclosed properties. There is also a provision 
     that will free up funds so they may be used to support 
     programs that provide legal advice and representation to 
     homeowners in foreclosure actions; the current restriction on 
     using funds for litigation is overly broad. Unlike some plans 
     discussed in the press, this bill does not call for direct 
     payments to borrowers. Rather, it makes federal funds 
     available to support state and local foreclosure 
     prevention programs that work.
       The bill also addresses another reason there are not more 
     affordable and sustainable loan modifications--even though 
     modifications usually leave lenders with more money than the 
     50 cents on the dollar that a foreclosure sale typically 
     brings them. Up until the last 10 or 15 years, a mortgage 
     loan

[[Page S10584]]

     involved two parties--the borrower and a bank that both 
     originated the loan and retained the default risk. If the 
     individual borrower had trouble, it was in the bank's 
     interest to adjust the terms of the loan. But that is no 
     longer the model. Through securitization, the risk of default 
     has been transferred to investors. There is no longer a 
     single entity that has an interest in reworking failing 
     loans. The loans are pooled together and the stream of 
     payments from those mortgages is divided up into securities 
     owned by investors all over the world. A mortgage servicer 
     manages the pools of loans and distributes the payments to 
     investors. It is the mortgage servicer who has the ability to 
     restructure a mortgage or foreclose on the property. However, 
     the servicers do not have the same incentives that banks used 
     to have. The way many pooling and servicing agreements (PSAs) 
     are written, there may be no incentives for the servicers to 
     restructure the loans. Servicers typically get paid a fee if 
     they foreclose, but may have to absorb the cost of 
     renegotiating the loans. One of the first steps the Office of 
     Foreclosure Evaluation should take is to encourage servicers 
     to use technology that would standardize the income to 
     expense and loan resolution process to keep costs down. The 
     Office also should determine what incentives may be needed to 
     encourage servicers to modify contracts. It may ultimately be 
     appropriate for the government to offer servicers a flat fee 
     for each sustainable, affordable modification completed 
     within a certain time period to help cover their additional 
     costs.
       Perhaps a more significant roadblock is that servicers are 
     worried they may be sued by some of the investors. Many 
     servicers still are thinking that it is best to simply pursue 
     foreclosures. Congress tried to address this concern in the 
     Housing and Economic Recovery Act of 2008 and again in the 
     Emergency Economic Stabilization Act, by clarifying that, 
     unless the contract or PSA clearly provides otherwise, the 
     duty owed by the servicer to investors is owed to the entire 
     pool and not to any individual groups or tranches of 
     investors, but the servicers still appear to be reluctant or 
     slow to modify.
       The concerns of the servicers or lenders may not be 
     unfounded. Recently, lawyers claiming to represent investors 
     are challenging the settlement between Countrywide and 11 
     attorneys general; the settlement proposes to modify the 
     loans of 400,000 borrowers. An October 24, 2008 article in 
     the New York Times reported that certain hedge funds are 
     opposing loan modifications because it might hurt their 
     investments. At least two funds recently have warned 
     servicers that they might be sued if they participated in 
     government-backed plans to renegotiate delinquent loans. 
     Congress must take action to protect homeowners who are 
     getting caught in the middle. So far disputes over loan 
     modifications have been theoretical because most mortgage 
     servicers are not aggressively altering the terms of loans, 
     but as a matter of public policy, we cannot let fear of tort 
     and contract claims cause grave harm to consumers and the 
     entire economy.
       The bill addresses the litigation threat by requiring 
     investors' attorneys to conduct a careful inquiry into the 
     factual and legal bases of their claims, including 
     consideration of the recent statutory clarification that the 
     servicer's duty is to the entire pool of investors or 
     beneficial owners. The attorneys also would have to obtain, 
     as a prerequisite to filing suit, a certification from the 
     new Office of Foreclosure Evaluation that the loan 
     modifications in question were unreasonable or not permitted 
     by restrictions on Real Estate Mortgage Investment Conduits 
     under the Internal Revenue Code. This opinion would be 
     admissible, but not conclusive. These administrative 
     prerequisites should result in more uniformity, guidance and 
     clarity regarding applicable legal standards and best 
     practices for servicers, taking into account the public 
     interest and current threat to our economy posed by barriers 
     to reasonable modification. This is not complete immunity 
     from suit. If the litigation threat continues to impede 
     modifications, Congress may have to hold hearings to consider 
     sufficient safeguards for servicers--taking into 
     consideration the importance of having capital available for 
     the mortgage market.
       In addition, although financial services industry groups 
     have criticized arbitrary quotas in PSAs that limit the 
     percentage of loans in a pool that may be modified, some PSAs 
     do contain such quotas. These quotas may have seemed 
     reasonable before the housing market crashed, but they do not 
     make sense now, are against public policy and, to the extent 
     these quotas are less than 25% of the total, they are 
     rendered unenforceable by this bill.
       Finally, to ensure we have reliable data regarding mortgage 
     loan modifications, the bill requires mortgage servicers to 
     report detailed data to the Office of Foreclosure Evaluation. 
     The bill also requires the Office to submit reports to 
     Congress. This data will help the Office and Congress 
     understand whether voluntary efforts are sufficient, and what 
     specific barriers there may be to case-by-case loan 
     modifications, including specific provisions in pooling and 
     service agreements that may be impeding reasonable steps to 
     avoid foreclosures.
       In the end, case-by-case loan modifications may not be 
     sufficient to appreciably slow the rate of foreclosures, in 
     which case the government may have to consider other options. 
     In that regard, I believe the proposal made recently by 
     Sheila Bair, the Chairman of the FDIC, deserves close 
     consideration. Ms. Bair's proposal is based on the FDIC's 
     real world experience with 5000 troubled mortgages at IndyMac 
     Bank, which the FDIC recently took over. Under the proposal, 
     delinquent homeowners would have their mortgage payments 
     reduced to as low as 31 percent of their monthly income. The 
     modifications would be based on interest rate reductions, 
     extension of the term of the mortgage, and principal 
     forbearance--in that order. The same protocol would be 
     applied to all delinquent mortgages, rather than having a 
     case-by-case assessment of each mortgage. The Bair proposal 
     may have the advantage of enabling rapid modification of 
     large numbers of mortgages, stemming the tide of 
     foreclosures. If a modified loan defaults later, the 
     government would share up to half of the losses. The proposal 
     would be funded under the $700 billion financial rescue 
     package. I spoke to Ms. Bair last week, and she estimates her 
     proposal could reach up to 2.2 million mortgages and enable 
     1.5 million homeowners to keep their homes. If effective, 
     across-the-board rather than case-by-case modifications may 
     be necessary.
       In the meantime, the Foreclosure Diversion and Mortgage 
     Loan Modification Act of 2008 will encourage servicers to 
     engage in greater numbers of case-by-case mortgage 
     modifications. This should be a goal those on both sides of 
     the aisle can agree to. I urge my colleagues to support it.
                                 ______