[Congressional Record (Bound Edition), Volume 155 (2009), Part 15]
[Senate]
[Pages 20711-20713]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           BANKRUPTCY REFORM

  Mr. DURBIN. Mr. President, if you look at the root cause of our 
economic crisis today, most people would agree that it started in the 
housing industry. People across America signed up for these new 
mortgages--adjustable rate mortgages--with terms that some people had 
never seen before. Sometimes they were terms that turned out to be 
unrealistic for the person's income and the value of the property; and 
at the end of a reset period, what was an affordable mortgage became 
unaffordable. People were then faced with the grim reality that they 
could not stay in their homes.
  Some of the folks who entered into these mortgages signed up for bad 
mortgages. Others were misled into them. Some signed up for a mortgage 
and lost their jobs. The net result of it, though, was that we saw 
foreclosures across America in record numbers.
  About 2 years ago, I started a legislative effort to change the 
Bankruptcy Code. The Bankruptcy Code is a set of laws for those who 
declare bankruptcy, and those who go into it try to restructure their 
debts and emerge from bankruptcy in a solid financial position.
  When they go to court, virtually any secured asset, that is, a debt 
which has a security of the thing that is borrowed against, can be 
restructured by the court. If it is a vacation home, a mortgage on a 
vacation home, a mortgage on a ranch or a farm, a secured debt on a 
boat, a car--things such as these can be restructured by the court to 
try to come down to terms that are affordable based on the reality of 
the income of the person filing bankruptcy. There is one exception to 
this: the court cannot restructure the mortgage on a primary residence. 
Of all of the things we own, maybe the most important thing is our 
home, and the law specifically precludes the bankruptcy court from 
restructuring the mortgage. So, facing bankruptcy, you go in with your 
mortgage in foreclosure, and the court says: There is nothing we can 
do. We might be able to do something about your vacation home, your 
farm, or your ranch, but nothing about your home. So people end up 
having their homes foreclosed upon.
  It struck me that we needed to change this because there was a time 
when people would borrow money for their home, take out a mortgage from 
a bank down the street, from a banker they knew, and they would make 
their payments to that bank. That world changed when banks started 
selling the paper off to other banks and institutions, and then it went 
wild. It went beyond another bank or institution into groups of 
investors who bought a piece of a share of your mortgage. Someone may 
have bought an interest in the interest payments you were going to make 
in the fifth year of your mortgage. So what started off as a bank down 
the street that you knew personally at a closing turned out to be a 
group of financial institutions you didn't even know and never heard of 
and may never, ever learn the identity of. So when time came for 
foreclosure, you had to herd in all of these financial cats and try to 
get everyone to agree with what would happen next, and it became 
impossible.
  Well, my idea 2 years ago was to change the Bankruptcy Code to allow 
the bankruptcy court to restructure and rewrite the mortgage terms so 
that a person could stay in their home just as they could continue to 
own a vacation home. It seemed to me a modest suggestion but one of 
value because it gave the court a voice in saying to all of these 
different lenders that had a piece of your mortgage: You all better 
come together and gather around the table because we are going to make 
a decision in this court, and you just can't ignore it.
  I introduced this almost 2 years ago. It had staunch opposition from 
the banking industry. They did not want to give that power to the 
bankruptcy court, and they said: You anticipate only 2 million 
foreclosures in America, so we don't see the need for a change in the 
Bankruptcy Code.
  Really? A recent study by the Boston Federal Reserve found that, in 
2007 and 2008, just 3 percent of homeowners at risk of foreclosure 
received modifications that reduced their monthly payments. Just 3 
percent of troubled homeowners received any real help.
  Another study found that more mortgage modifications increased the 
mortgage balance than decreased the balance.
  I called the bill on the floor, and I lost. Well, today, we are 
facing over 9 million foreclosures in bankruptcy. The banking industry 
is still vehemently opposed to any type of change in the bankruptcy 
law, and when it comes to foreclosures in America, the situation is 
going from bad to worse.
  This morning's New York Times business section has a headline: ``U.S. 
Effort Aids Only 9 Percent of Eligible Homeowners.'' The article is 
about the voluntary efforts of mortgagors to renegotiate the terms of 
mortgages for people facing foreclosure. If a person is facing 
foreclosure because of a reset in mortgage terms and the foreclosure 
goes through, it is a disastrous result

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for the family--they lose their home; it is a disastrous result for the 
neighborhood because every time a home goes into foreclosure, the 
neighbors' home values go down--this year alone, foreclosures will 
drain more than $500 billion from neighboring home values; and it is a 
disastrous result for the bank. Banks don't win in foreclosure. I have 
heard estimates that they lose up to $50,000 for every foreclosure. So 
it would seem to me that the avoidance of foreclosure is a good thing 
for everyone involved: the homeowner, other people who own property in 
the neighborhood, as well as the bank. Yet it turns out that when we 
turn to the banks and say: So do something about it voluntarily, their 
response to it is meager and disappointing.
  The Treasury Department said on Tuesday that only a small number of 
homeowners--235,247, or 9 percent of those eligible--had been helped by 
the latest government program created to modify home loans and prevent 
foreclosures. A report released by Treasury officials identified 
lenders who had made slow progress in offering more affordable 
mortgages, naming Bank of America and Wells Fargo as among those 
failing to reach large numbers of eligible borrows. While 15 percent of 
eligible homeowners have been offered help through the mortgage 
modification program, the low rate of actual mortgage reductions has 
frustrated administration officials.
  In a hearing two weeks ago in the Senate Judiciary Committee, we 
heard testimony from the National Consumer Law Center that I found 
troubling. Housing counselors from all over the country have told 
stories of violations of the Administration plan by the servicers. 
Homeowners have been asked to pay fees to apply for a trial 
modification and to waive their legal rights. Servicers have told 
homeowners that homeowners need to skip payments to become eligible, 
which puts them even farther behind. Servicers have refused to offer 
eligible homeowners a modification, and have offered modifications that 
do not comply with the program guidelines--and that is for the 
homeowners lucky enough to get someone at the servicers' call centers 
to answer the phone. Worst of all, servicers continue to pursue 
foreclosures even as they are supposedly working with homeowners on a 
mortgage modification.
  This has to end. Whether the bankers and mortgage servicers are 
failing because of intransigence or incompetence doesn't matter. Our 
economy is hanging in the balance. They have to do much better.
  The Times article goes on to note that some banks have done better 
than others. Where Bank of America has modified only 4 percent of 
eligible mortgages and Wells Fargo, 6 percent, CitiMortgage, a unit of 
Citigroup, fared better at 15 percent, and JPMorgan Chase is among the 
most successful, modifying loans for 20 percent of eligible borrowers.
  In the previous administration, the Secretary of the Treasury, Hank 
Paulson, called me and told me what they were going to do to try to 
rescue the banks.
  I said: Hank, you have to get to the heart of this. It is the 
foreclosure crisis. What are you going to do about the people losing 
their homes?
  He said that they were not going to do anything except a voluntary 
program.
  The voluntary program of the Bush administration didn't work and now 
the voluntary program of this administration is not working. There are 
not enough people who are facing foreclosure who realistically have an 
option of renegotiating the terms of their mortgages.
  I credit President Bush and President Obama with offering the 
opportunity to lead to the industry. Frankly, they have failed. A few 
of these banks have done reasonably well, if you consider 20 percent of 
those eligible being offered mortgage modification something to brag 
about, but others are terrible.
  So yesterday I along with Senator Reed and Senator Whitehouse sent a 
letter to the heads of the 38 banks and mortgage service companies that 
have signed up for the Administration's Home Affordable Modification 
Program. We are asking them a series of pointed questions that will 
help us understand what each servicer is doing to help homeowners avoid 
preventable foreclosures.
  Most importantly, I am asking the servicers to make a commitment that 
they will avoid scheduling a foreclosure on any homeowner who is 
actively working in good faith to work out a loan modification that is 
fair, reasonable, and sustainable.
  Let me mention one other element that should be noted here. Two weeks 
ago in Chicago, a group known as NACA--I believe that stands for the 
Neighborhood Assistance Corporation of America--held an opportunity at 
McCormick Place for those facing foreclosure to come in and try to work 
out new mortgage terms. I was at another meeting, they invited me to 
come over, and I was stunned as I walked into this huge hall filled 
with literally thousands of people on a Saturday morning, thousands of 
people facing mortgage foreclosure. On one side of the room sat a large 
group, about 1,000 people, and they were from Hispanic families; on the 
other side of the room, another 1,000 people, by and large African 
American, with others--Asians, Whites, and others, but primarily 
African American.
  It is clear to me, as you look at the nature of the foreclosure 
crisis, that many people in lower income and middle-income categories, 
particularly those who have been the targets of predators in the past, 
who were preyed upon with these mortgages and now face foreclosure, are 
also people who are most likely to lose their jobs. They are in 
marginal employment, and a slowing economy is going to hurt them first, 
which goes to my point: Not enough is being done. For those who are 
still working and have a chance to pay on their mortgage, these banks 
should be stepping up, showing a lot more commitment to renegotiating 
the terms of their mortgage than they currently are.
  When I offered this change in the Bankruptcy Code to try to move this 
process forward, the banking associations--all of them--opposed it. 
Only one bank, Citigroup, supported my efforts.
  In fact, an interesting thing is that at one point in the 
negotiations, we said to the independent community bankers, the 
hometown bankers we all know: We will exempt you. Because you have such 
a small part of this problem portfolio, we will exempt you and just go 
after the large banks that are responsible for this.
  The so-called independent community banks said: No, we don't want any 
part of it. We are going to stick with our friends, the large banks.
  That leads me to conclude that the independent community banks should 
drop the word ``independent'' from their title. They are now part of 
the larger bank operation when it comes to dealing with this 
foreclosure crisis.
  Much the same can be said for credit unions. Given an opportunity to 
avoid being even part of this change in bankruptcy modifications, they 
refused to support us as well.
  So the entire financial industry has stood back and said: We are not 
going to support--with the exception of Citigroup--any change in the 
Bankruptcy Code, and quite honestly, we are not going to do much when 
it comes to renegotiating the mortgages.
  I don't think this economy is going to get well until we deal with 
this issue. I can take you to neighborhoods in Chicago and surrounding 
communities and tell you that they are flat on their backs because of 
mortgage foreclosures. It is very difficult, if not impossible, for 
these communities to come back, these neighborhoods to come back.
  There are things we need to do.
  First, Congress should consider passing legislation to give 
homeowners who can't afford their mortgage payments the right to remain 
in their homes for a period of time by paying fair market rent to a 
bank. Why not let a family stay in a home rather than let it get run 
down and become a haven for criminal activities and other things when 
it is vacant? It is certainly no good assignment for a bank to be told:

[[Page 20713]]

You now have a foreclosed home, cut the grass and take care of the 
weeds and put plywood on the windows and try to keep the bad guys out. 
That is what most of them face.
  Second, Congress should consider providing matching funds for cities 
and States to create mandatory arbitration programs. They have done it 
in Philadelphia with some success; we ought to do it here and across 
the Nation so that we move this toward arbitration, negotiation, and 
agreements for new modifications on mortgages.
  Third, if these servicers of mortgages, some of which have taken 
billions of dollars in taxpayer bailouts, refuse to meet the 
foreclosure reduction standards and goals they have signed up for under 
this administration, they should be facing penalties. We gave them 
taxpayers' money to save the banks. Some of them used it for bonuses 
for their employees, and now they won't turn around and give a helping 
hand to people who are about to lose their homes? I am sorry, but if 
there is any justice in America, that has to change.
  Will I come back with bankruptcy modification? Well, let's see what 
happens in the next few months. I want to be able to come to my 
colleagues in the next 2 or 3 months and say: Alright, whether you 
support or oppose bankruptcy changes, when it comes to these mortgage 
modifications, let's be honest about where we are today and where we 
need to go. That is absolutely essential.
  So I hope this situation starts to resolve itself. I hope some of 
these banks that hold these mortgages get serious about helping people 
facing foreclosure. It is the only way we are going to stabilize this 
economy and get it moving forward.
  I might add, the blip in the housing market we saw just a few weeks 
ago is likely just that. There had been a temporary moratorium on many 
mortgage foreclosures, leading many people to believe there was a 
turnaround in the housing industry. But a new wave of mortgage resets 
is coming. This time it's the so-called ``option ARMs'' or ``pick-a-
payment'' adjustable rate mortgages.
  These are the ultimate exploding mortgages. They gave homebuyers the 
option of not even covering the interest some months, but after two or 
three years, the monthly mortgage payment can skyrocket, often by 50 
percent or more. An estimated 2.8 million option ARMs are scheduled to 
reset over the next 2\1/2\ years.
  So I am looking for a turnaround in the housing industry. I don't 
think we have quite seen it yet. I hope it comes soon.
  Mr. LEAHY. Mr. President, I suggest the absence of a quorum.
  The ACTING PRESIDENT pro tempore. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. LEAHY. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The ACTING PRESIDENT pro tempore. Without objection, it is so 
ordered.

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