[Congressional Record Volume 155, Number 1 (Tuesday, January 6, 2009)]
[Senate]
[Pages S72-S74]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. FEINSTEIN:
  S. 73. A bill to establish a systematic mortgage modification program 
at the Federal Deposit Insurance Corporation, and for other purposes; 
to the Committee on Banking, Housing, and Urban Affairs.
  Mrs. FEINSTEIN. Mr. President, I rise today to introduce legislation 
that will limit foreclosures and stabilize home values through Federal 
loan guarantees and standardized procedures for mortgage workout 
agreements.
  The Systematic Foreclosure Prevention and Mortgage Modification Act 
would implement the foreclosure prevention plan developed by Federal 
Deposit Insurance Corporation, FDIC, Chairman Sheila Bair.
  There are three key components of this legislation.
  Servicers would be incentivized to modify mortgages, receiving $1,000 
to help cover the costs of each loan modification; the Federal 
Government would share up to 50 percent of any loss should the 
homeowner default after receiving a modification; and participating 
servicers would be required to systematically review and modify all 
suitable loans in their portfolios, applying a standard calculation to 
help expedite loan modifications as cost-effectively as possible.
  The FDIC estimates that roughly 2.2 million home loans, worth $444 
billion, could be modified under this plan, with 1.5 million 
foreclosures avoided.
  This legislation is projected to cost at least $25 billion; however, 
no additional spending is necessary.
  This effort would be funded solely through the Troubled Assets Relief 
Program, TARP, to ensure that one of the core objectives of the bill, 
assistance to homeowners, is achieved.
  The foreclosure crisis and declining housing market remain at the 
epicenter of the economic challenges we face. And, although the Federal 
Government has taken unprecedented steps to address this problem, they 
have not been sufficient.
  Foreclosures are in the best interest of no one.
  Neighborhoods are decimated when homes are repossessed or left 
vacant, property values decline, local economies suffer, and crime 
often increases in blighted areas. Lenders must sustain the costs of 
foreclosure and are left with the burden of reselling properties in a 
distressed market.
  Homeowners are forced to give up on the American dream, and in some 
cases, tenants are forced out of homes they have been renting.
  To date, no TARP funds have been allocated by Treasury to directly 
address the foreclosure crisis.
  This must change, and it must change now.
  According to the FDIC, the pace of loan modifications continues to be 
very slow, with only 4 percent of troubled mortgages being modified to 
prevent foreclosures each month.
  A systematic approach is needed to expedite this process. The FDIC 
has

[[Page S73]]

implemented such a program successfully at Indy Mac Federal Bank, to 
reduce mortgage payments as low as 31 percent of monthly income.
  Loan modifications are based on interest rate reductions, extended 
loan terms, and principal forbearance.
  Unfortunately, banks that have received TARP funds have not been 
compelled to implement foreclosure reduction measures, and adequate 
incentive structures are not in place.
  This legislation provides prudent and cost-effective steps to improve 
assistance for struggling homeowners while also stabilizing the housing 
market.
  Foreclosures have had a devastating impact on our national economy, 
and the damage in my state has been particularly severe.
  California accounts for 1/3 of all foreclosure activity in the United 
States.
  Roughly 800,000 foreclosures will be filed in my state in 2008--a 70 
percent increase over 2007, when 481,392 foreclosures were filed in 
California.
  The foreclosure rate in California is the fourth highest in the 
Nation, with one foreclosure filing for every 218 households.
  In fact, 6 of the 10 metropolitan areas with the highest foreclosure 
rate in the Nation are in California.
  This includes: Merced--one out of every 76 homes in foreclosure; 
Modesto--one out of every 93 homes in foreclosure; Stockton--one out of 
every 94 homes in foreclosure; Riverside and San Bernardino--one out of 
every 107 homes in foreclosure; Bakersfield--one out of every 129 homes 
in foreclosure; and Vallejo and Fairfield--one out of every 133 homes 
in foreclosure.
  And, the situation is only getting worse.
  Property values have plummeted across California, making it difficult 
for many residents with adjustable rate mortgages to refinance into 
more stable, fixed rate products.
  One California community is in a special category of need: the city 
of Stockton, which has been referred to as ``America's foreclosure 
capital.''
  The foreclosure crisis has devastated this city of more than 260,000 
residents.
  Home foreclosures impact neighbors and reduce property values.
  But, the spillover effect in Stockton has been overwhelming.
  Jobs: The downturn in the construction industry has contributed to an 
unemployment rate of 11.9 percent in San Joaquin County, well above the 
national average.
  Schools: Foreclosures have displaced many students who were forced to 
change schools or leave the area when their families lost their homes.
  The student population of Stockton Unified School District, the 
biggest in San Joaquin County, was down about 200 students last year.
  Student displacement has a direct impact on school budgets, which are 
linked to student attendance.
  Most unfortunately, the emotional impact on children being forced to 
switch schools in the middle of the year can be tremendous.
  Public Services: High foreclosure rates have taken a toll on the city 
of Stockton's budget.
  Stockton now faces a nearly $25 million budget deficit.
  City officials have been forced to consider voluntary buyouts for 
municipal employees and mandatory 10-day furloughs to help close the 
gap.
  Because property values have fallen--due to foreclosures and 
increased inventory--Stockton also is facing lower tax revenues, which 
are depended upon to fill the city's $186 million general fund.
  This could have a dramatic effect on the city's emergency services; 
about 75 percent of Stockton's general fund pays for police and fire 
services.
  It is essential that we not forget communities such as Stockton. We 
cannot sit idly by and watch them fall through the cracks.
  This legislation is a much-needed step forward to provide relief to 
Main Street.
  Millions of Americans have lost their homes to foreclosure, and 
millions more are at risk of losing their homes in the coming months.
  Part of this problem was driven by abusive and predatory lending 
practices.
  Part of the problem can be attributed to lax underwriting standards 
and regulators who were asleep at the wheel.
  Part of this problem was due to individuals who made bad choices.
  But, this is a problem that now impacts--either directly or 
indirectly--all hard-working American families.
  These are significant challenges we face, and innovative solutions 
are required.
  This bill will serve as a companion to legislation introduced in the 
House by my colleague from California, Representative Maxine Waters.
  I look forward to working with her, and my colleagues on both sides 
of the aisle, to pass this important legislation as soon as possible.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 73

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Systematic Foreclosure 
     Prevention and Mortgage Modification Act''.

     SEC. 2. SYSTEMATIC FORECLOSURE PREVENTION AND MORTGAGE 
                   MODIFICATION PLAN ESTABLISHED.

       (a) In General.--The Chairperson of the Federal Deposit 
     Insurance Corporation shall establish a systematic 
     foreclosure prevention and mortgage modification program by--
       (1) paying servicers $1,000 to cover expenses for each loan 
     modified according to the required standards; and
       (2) sharing up to 50 percent of any losses incurred if a 
     modified loan should subsequently re-default.
       (b) Program Components.--The program established under 
     subsection (a) shall include the following components:
       (1) Eligible borrowers.--The program shall be limited to 
     loans secured by owner-occupied properties.
       (2) Exclusion for early payment default.--To promote 
     sustainable mortgages, government loss sharing shall be 
     available only after the borrower has made a minimum of 6 
     payments on the modified mortgage.
       (3) Standard net present value test.--In order to promote 
     consistency and simplicity in implementation and audit, a 
     standard test comparing the expected net present value of 
     modifying past due loans compared to the net present value of 
     foreclosing on them will be applied. Under this test, 
     standard assumptions shall be used to ensure that a 
     consistent standard for affordability is provided based on a 
     31 percent borrower mortgage debt-to-income ratio.
       (4) Systematic loan review by participating servicers.--
     Participating servicers shall be required to undertake a 
     systematic review of all of the loans under their management, 
     to subject each loan to a standard net present value test to 
     determine whether it is a suitable candidate for 
     modification, and to modify all loans that pass this test. 
     The penalty for failing to undertake such a systematic review 
     and to carry out modifications where they are justified would 
     be disqualification from further participation in the program 
     until such a systematic program was introduced.
       (5) Modifications.--Modifications may include any of the 
     following:
       (A) Reduction in interest rates and fees.
       (B) Forbearance of principal.
       (C) Extension of the term to maturity.
       (D) Other similar modifications.
       (6) Reduced loss share percentage for ``underwater 
     loans''.--For loan-to-value ratios above 100 percent, the 
     government loss share shall be progressively reduced from 50 
     percent to 20 percent as the current loan-to-value ratio 
     rises, except that loss sharing shall not be available if the 
     loan-to-value ratio of the first lien exceeds 150 percent.
       (7) Simplified loss share calculation.--In order to ensure 
     the administrative efficiency of this program, the 
     calculation of loss share basis would be as simple as 
     possible. In general terms, the calculation shall be based on 
     the difference between the net present value, as defined by 
     the Chairperson of the Federal Deposit Insurance Corporation, 
     of the modified loan and the amount of recoveries obtained in 
     a disposition by refinancing, short sale, or real estate 
     owned sale, net of disposal costs as estimated according to 
     industry standards. Interim modifications shall be allowed.
       (8) De minimis test.--To lower administrative costs, a de 
     minimis test shall be used to exclude from loss sharing any 
     modification that does not lower the monthly payment at least 
     10 percent.
       (9) 8-year limit on loss sharing payment.--The loss sharing 
     guarantee shall terminate at the end of the 8-year period 
     beginning on the date the modification was consummated.
       (c) Regulations.--The Corporation shall prescribe such 
     regulations as may be necessary to implement this Act and 
     prevent evasions thereof.
       (d) Troubled Assets.--The costs incurred by the Federal 
     Government in carrying out the loan modification program 
     established under this section shall be covered out of the 
     funds made available to the Secretary of the

[[Page S74]]

     Treasury under section 118 of the Emergency Economic 
     Stabilization Act of 2008.
       (e) Modifications to Program.--The Chairperson of the 
     Federal Deposit Insurance Corporation may make any 
     modification to the program established under subsection (a) 
     that the Chairperson determines are appropriate for the 
     purpose of maximizing the number of foreclosures prevented.
       (f) Report.--Before the end of the 6-month period beginning 
     on the date of the enactment of this Act, the Chairperson of 
     the Federal Deposit Insurance Corporation shall submit a 
     progress report to the Congress containing such findings and 
     such recommendations for legislative or administrative action 
     as the Chairperson may determine to be appropriate.
                                 ______