[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
STRAIGHTENING OUT THE MORTGAGE MESS: HOW CAN WE PROTECT HOME OWNERSHIP
AND PROVIDE RELIEF TO CONSUMERS IN FINANCIAL DISTRESS? (PART II)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
OCTOBER 30, 2007
__________
Serial No. 110-164
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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OCTOBER 30, 2007
Page
OPENING STATEMENT
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Tom Feeney, a Representative in Congress from the
State of Florida, and Member, Subcommittee on Commercial and
Administrative Law............................................. 11
WITNESSES
Dr. Mark M. Zandi, Ph.D., Chief Economist, Moody's Economy.com,
Inc., West Chester, PA
Oral Testimony................................................. 2
Prepared Statement............................................. 4
William E. Brewer, Jr., Esq., The Brewer Law Firm, Raleigh, NC,
on behalf of the National Association of Consumer Bankruptcy
Attorneys
Oral Testimony................................................. 99
Prepared Statement............................................. 101
Mr. David G. Kittle, CMB, Chairman-Elect, Mortgage Bankers
Association, Washington, DC
Oral Testimony................................................. 109
Prepared Statement............................................. 111
Richard Levin, Esq., Cravath, Swaine & Moore LLP, New York, NY,
on behalf of the National Bankruptcy Conference
Oral Testimony................................................. 126
Prepared Statement............................................. 128
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Letter from the National Association of Federal Credit Unions,
submitted by the Honorable Tom Feeney, a Representative in
Congress from the State of Florida, and Member, Subcommittee on
Commercial and Administrative Law.............................. 13
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 16
Material submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law:
Prepared Statement of the Honorable Steve Chabot, a
Representative in Congress from the State of Ohio.......... 26
Prepared Statement of the Securities Industry and Financial
Markets Association........................................ 32
Prepared Statement of Steve Bartlett, on behalf of the
Financial Services Roundtable.............................. 37
Prepared Statement of the American Bankers Association and
America's Community Bankers................................ 43
Prepared Statement of Edward J. Kulik, Senior Vice President,
Real Estate Division, Massachusetts Mutual Life Insurance
Company before the Committee on the Judiciary, United
States Senate.............................................. 57
Material submitted by the Honorable Linda T. Sanchez, a
Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law:
Letter from Robert Shiller, The Cowles Foundation for
Research in Economics...................................... 72
Prepared Statement of Eric Stein, Center for Responsible
Lending.................................................... 78
Article from The New York Times, dated October 8, 2007,
titled ``The American Dream in Reverse''................... 93
Letter to the Honorable John Conyers, Jr., Chairman,
Committee on the Judiciary, and the Honorable Lamar Smith,
Ranking Member, Committee on the Judiciary................. 94
Memo from the Congressional Research Service (CRS)........... 96
Letter from the Honorable Richard Cordray, Ohio Treasurer of
State...................................................... 152
Special Report by Moody's Investor Service................... 153
APPENDIX
Material Submitted for the Hearing Record
Letter to the Honorable Linda T. Sanchez, a Representative in
Congress from the State of California, and Chairwoman,
Subcommittee on Commercial and Administrative Law, from J. Rich
Leonard, Judge, United States Bankruptcy Court, Eastern
District of North Carolina..................................... 160
Letter to the Honorable John Conyers, Jr., a Representative in
Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law, and the Honorable Linda T. Sanchez, a
Representative in Congress from the State of California, and
Chairwoman, Subcommittee on Commercial and Administrative Law.. 163
STRAIGHTENING OUT THE MORTGAGE MESS: HOW CAN WE PROTECT HOME OWNERSHIP
AND PROVIDE RELIEF TO CONSUMERS IN FINANCIAL DISTRESS? (PART II)
----------
TUESDAY, OCTOBER 30, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:18 p.m., in
room 2141, Rayburn House Office Building, the Honorable Linda
T. San-
chez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Conyers, Johnson, Cannon,
and Feeney.
Also Present: Representatives Chabot and Miller of North
Carolina.
Staff Present: Susan Jensen, Majority Counsel; Zachary
Somers, Minority Counsel; and Adam Russell, Professional Staff
Member.
Ms. Sanchez. The Subcommittee on Commercial and
Administrative Law will come to order.
I want to welcome everybody. Unfortunately, the Committee's
other hearing this morning went unavoidably longer than
anticipated, and I want to thank everybody for their patience
and their flexibility.
One of our witnesses, Dr. Mark Zandi, unfortunately will
have to leave shortly. So to permit him to give his testimony
and take questions, we are going to sort of do things in a
little bit different way this afternoon. We are going to take
his testimony first, followed by a round of questions that any
Members may have for him. And then we will return to opening
statements and to our other witnesses.
Dr. Zandi is the Chief Economist and the cofounder of
Economy.com, which provides economic research and consulting
services to corporations, governments and institutions,
maintaining one of the largest online databases of economic and
financial time series.
Dr. Zandi's recent work includes a study of the outlook for
national and regional housing market conditions, the
determinants of personal bankruptcy, the location of high
technology centers and the impact of globalization and
technological change on real estate markets.
In addition to being regularly cited in The Wall Street
Journal, New York Times, Business Week, Fortune and other
leading publications, Dr. Zandi also appears on ABC News, Wall
Street Week, CNN and CNBC.
Dr. Zandi, welcome. Your full written statement will be
made part of the record and we would ask that you please limit
your oral remarks to 5 minutes. And at this time, I would
invite you to please give your testimony.
STATEMENT OF MARK M. ZANDI, Ph.D., CHIEF ECONOMIST, MOODY'S
ECONOMY.COM, INC., WEST CHESTER, PA
Mr. Zandi. Thank you very much. Thank you for the
opportunity to present this testimony today. I also would like
to thank the Mecklenburg Health Center for the opportunity to
use their facility. It was very kind of them, and their
hospitality has been wonderful.
I will make six points in my remarks. First, the Nation's
housing and mortgage markets are suffering a very severe
recession. The housing activity peaked over 2 years, and since
then home sales have fallen nearly 20 percent, housing starts
by 40 percent and house prices by 5 percent. Over half the
Nation's housing markets are currently experiencing substantial
price declines with double-digit price declines occurring
throughout Arizona, California, Florida, Nevada, in the
Northeast Corridor and industrial Midwest.
Further significant declines in construction and prices are
likely throughout next year as a record amount of unsold
housing inventory continues to mount. Given the impact of the
recent subprime financial shock and its impact on the mortgage
securities market and, thus, mortgage lenders, it is reasonable
to expect national house prices to fall by at least 10 percent
from the peak of their eventual trough late next year. This, of
course, assumes that the economy avoids recession and that the
Federal Reserve will continue to ease monetary policy.
Second, residential mortgage loan defaults and foreclosures
are surging, and without significant policy changes, will
continue to do so through 2008 and well into 2009. Falling
housing values, resetting adjustable mortgages for recent
subprime and all day borrowers, tighter lending underwriter
standards and most recently a weakening job market are
conspiring to create the current unprecedented mortgage
problems.
I expect approximately 3 million mortgage loan defaults
this year and next, of which 2 million will go through the
entire foreclosure process forcing these homeowners to leave
their current homes. The impact on these households, their
communities and the broader economy will be substantial.
Foreclosure sales are very costly after accounting for
their substantial transaction costs in certain significantly
depressed, already reeling housing markets, as foreclosed
properties are generally sold at deep discounts from prevailing
market prices. These discounts are estimated to be well over 30
percent.
Third, there is a substantial risk that the housing
downturn in surging foreclosures will result in a national
economic recession. The stunning decline in housing activity
and prices is sure to severely crimp consumer spending into
next year, and the job market appears increasingly weak as it
struggles with layoff in the housing-related industry. Regional
economies such as California, Florida, Nevada and the
industrial Midwest are already near or in recession.
Fourth, without a policy response, mortgage loan
modification efforts are unlikely to prove effective in
forestalling the increase in foreclosures. A recent Moody's
survey of loan servicers found that very little modification
had been done, at least through this past summer.
There are a large number of impediments to modification
efforts. Some tax, accounting and legal hurdles appear to have
been overcome, but large differences in the incentives of first
and second mortgage lienholders and the various investors in
mortgage securities are proving to be daunting. While the total
economic benefit of forestalling foreclosure is significant,
these benefits do not accrue to all of the parties involved in
determining whether to proceed with the loan modification.
Fifth, the legislation to give bankruptcy judges the
authority in Chapter 13 to modify mortgages by treating them as
secured only up to the market value of the property will
significantly reduce the number of foreclosures. To limit any
potential abuses, Congress should provide firm guidelines to
the bankruptcy courts, such as providing a formula for
determining the term to maturity, the interest rate and the
property's market value.
Properly designed legislation could reduce the number of
foreclosures through early 2009 by at least 500,000. This would
be very helpful in reducing the pressure on housing and
mortgage markets and the broader economy.
Six, this legislation will not significantly raise the cost
of mortgage credit, disrupt secondary markets or lead to
substantial abuses. Given that the total cost of foreclosure is
much greater than that associated with a Chapter 13 bankruptcy,
there is no reason to believe that the cost of mortgage credit
across all mortgage loan products should rise. Indeed, the cost
of mortgage credit to prime borrowers may decline.
The cost of second mortgage loans, such as piggyback
seconds, could rise as they are likely to suffer most in
bankruptcy, but such lending has played a clear contributing
role in the current problems.
There is also no evidence that secondary markets will be
materially impacted after a period of adjustment as other
consumer loans, which already have similar protection in
Chapter 13, have well functioning secondary markets.
The residential mortgage securities market will go through
substantial changes in response to the recent financial shock
and will adjust to these new rules. Abuses should also be
limited, given that a workout in Chapter 13 is a very costly
process for borrowers. Indeed the number of bankruptcy filings
has remained surprisingly low since late 2005 bankruptcy
reform, likely affecting the higher cost to borrowers.
Finally, I think it is important that the changes to
bankruptcy law in this legislation sunset after several years.
Based on historical experience, changes to bankruptcy law can
have unintended consequences. I believe the changes in this
legislation--proposed legislation, will have significant
benefits, both short- and long-run, but lawmakers may decide
otherwise after several years of experience.
Allowing the legislation to sunset should also help
dissuade concerns that this legislation is an effort to
readdress other issues in the Bankruptcy Code. The housing
market downturn is intensifying and foreclosures are surging.
Odds are quickly rising that is self-reinforcing a negative
dynamic of foreclosures beginning house price declines to
getting more foreclosures will develop in many neighborhoods
across the country. There is no more efficacious way to short
circuit this cycle than adopting legislation to allow
bankruptcy judges the authority to modify mortgages by treating
them as secured up to the market value of the property.
Thank you.
Ms. Sanchez. Thank you for your testimony Dr. Zandi.
[The prepared statement of Mr. Zandi follows:]
Prepared Statement of Mark M. Zandi
Mr. Chairman and members of the Committee, my name is Mark Zandi; I
am the Chief Economist and Co-founder of Moody's Economy.com.
Moody's Economy.com is an independent subsidiary of the Moody's
Corporation. My remarks represent my personal views and do not
represent those held or endorsed by Moody's. Moody's Economy.com
provides economic and financial data and research to over 500 clients
in 50 countries, including the largest commercial and investment banks;
insurance companies; financial services firms; mutual funds;
manufacturers; utilities; industrial and technology clients; and
governments at all levels.
I will make six points in my remarks. First, the nation's housing
and mortgage markets are suffering a very severe recession. Housing
activity peaked over two years ago, and since then home sales have
fallen nearly 20%, housing starts by 40%, and house prices by 5%. Over
half the nation's housing markets are currently experiencing
substantial price declines, with double-digit price declines occurring
throughout Arizona, California, Florida, Nevada, in the Northeast
Corridor and industrial Midwest. Further significant declines in
construction and prices are likely throughout next year as a record
amount of unsold housing inventory continues to mount give the impact
of the recent subprime financial shock and its impact on the mortgage
securities market and thus mortgage lenders. It is reasonable to expect
national house prices to fall by at least 10% from their peak to their
eventual trough late next year. This assumes that the economy will
avoid recession and the Federal Reserve will continue to ease monetary
policy.
Second, residential mortgage loan defaults and foreclosures are
surging and without significant policy changes will continue to do so
through 2008 and into 2009. Falling housing values, resetting
adjustable mortgages for recent subprime and Alt-A borrowers, tighter
lending underwriting standards, and most recently a weakening job
market are conspiring to create the current unprecedented mortgage
credit problems. I expect approximately 3 million mortgage loan
defaults this year and next, of which 2 million will go through the
entire foreclosure process, forcing these homeowners to leave their
current homes. The impact on these households, their communities, and
the broader economy will be substantial. Foreclosed sales are very
costly after accounting for their substantial transaction costs, and
serve to significantly depress already reeling housing markets, as
foreclosed properties are generally sold at deep discounts to
prevailing market prices. These discounts are estimated to be well over
30%.
Third, there is a substantial risk that the housing downturn and
surging foreclosures will result in a national economic recession. The
stunning decline in housing activity and prices is sure to severely
crimp consumer spending into next year, and the job market appears
increasingly weak as it struggles with layoffs in housing related
industries. Regional economies such as California, Florida, Nevada and
the industrial Midwest are already near or in recession.
Fourth, without a policy response, mortgage loan modification
efforts are unlikely to prove effective in forestalling the increase in
foreclosures. A recent Moody's survey of loan servicers found that very
little modification had been done, at least through this past summer.
There are a large number of impediments to modification efforts. Some
tax, accounting and legal hurdles appear to have been overcome, but
large differences in the incentives of first and second mortgage lien
holders and the various investors in mortgage securities are proving to
be daunting. While the total economic benefit of forestalling
foreclosure is significant, these benefits do not accrue to all of the
parties involved in determining whether to proceed with a loan
modification.
Fifth, the legislation to give bankruptcy judges the authority in a
Chapter 13 to modify mortgages by treating them as secured only up to
the market value of the property will significantly reduce the number
of foreclosures. To limit any potential abuses, Congress should provide
firm guidelines to the bankruptcy courts, such as providing a formula
for determining the term to maturity, the interest rate, and the
property's market value. Properly designed, the legislation could
reduce the number of foreclosures through early 2009 by at least
500,000. This would be very helpful in reducing the pressure on housing
and mortgage markets and the broader economy.
Sixth, this legislation will not significantly raise the cost of
mortgage credit, disrupt secondary markets, or lead to substantial
abuses. Given that the total cost of foreclosure is much greater than
that associated with a Chapter 13 bankruptcy there is no reason to
believe that the cost of mortgage credit across all mortgage loan
products should rise. Indeed, the cost of mortgage credit to prime
borrowers may decline. The cost of second mortgage loans, such as
piggy-back seconds, could rise, as they are likely to suffer most in
bankruptcy, but such lending has played a clear contributing role in
the current credit problems. There is also no evidence that secondary
markets will be materially impacted after a period of adjustment, as
other consumer loans which already have similar protection in Chapter
13 have well functioning secondary markets. The residential mortgage
securities market will go through substantial changes in response to
the recent financial shock and will adjust to the new rules. Abuses
should also be limited given that a workout in Chapter 13 is a very
costly process for borrowers. Indeed, the number of bankruptcy filings
has remained surprisingly low since the late 2005 bankruptcy reform,
likely reflecting the much higher costs to borrowers.
Finally, I think it is important that the changes to bankruptcy law
in this legislation sunset after several years. Based on historical
experience, changes to bankruptcy law can have unintended consequences.
I believe the changes in this proposed legislation will have
significant both short and long-term benefits, but lawmakers may decide
otherwise after several years of experience. Allowing the legislation
to sunset should also help assuage concerns that this legislation is an
effort to re-address other issues in the bankruptcy code.
The housing market downturn is intensifying and mortgage
foreclosures are surging. Odds are quickly rising that a self-
reinforcing negative dynamic of foreclosures begetting house price
declines begetting more foreclosures well develop in many neighborhoods
across the country. There is no more efficacious way to short-circuit
this cycle than adopting legislation to allow bankruptcy judges the
authority to modify mortgages by treating them as secured only up to
the market value of the property.
Ms. Sanchez. We will now begin with a round of questioning
because we know that you cannot stay long with us. So I will
recognize myself for 5 minutes.
It is a little interesting because you have not heard the
testimony of our other panelists, and yet my first question
deals with some testimony that was presented by Mr. Kittle in
his written testimony that he submitted.
He states that if these provisions were enacted, it would
increase the cost and reduce the availability of mortgage
credit for principal residents; and I am interested in hearing
your response to that statement.
Mr. Zandi. You know, I don't think that will be the case. I
think, most fundamentally the reason is that the cost of
foreclosure, the total cost of foreclosure, is measurably
higher than will be the cost of a bankruptcy in Chapter 13
under this proposal.
In terms of the cost of foreclosure they are quite
significant. It is not only the difference in the mortgage
amount and the market value of the property. It is all of the
transaction costs involved, including the legal cost, the
maintenance cost, the cost associated with realtors selling
property post-auction.
It also is the time involved. There is a period of a year
or two that could pass before foreclosure actually takes place
and a person is asked to leave the home, and there is lots of
depreciation and other costs associated with that.
And, finally, I don't think we should discount the cost to
the broader economy of foreclosures and the impact that has on
the communities and the broader economy. It serves to reduce
market values for all homes in those communities, and that is
also a cost.
So I think the point is that when you consider the wide
range of costs involved in a foreclosure it is very, very
significant. Someone bears it, and those costs are measurably
greater than the cost that would ensue in a Chapter 13
bankruptcy under this proposed legislation.
So, in my view, it is hard to argue that the cost of
mortgage credit will rise in aggregate. You may argue that
certain groups will suffer higher costs, that those folks that
are making piggyback seconds definitely will have higher costs,
but for the vast majority of mortgage buyers I don't think it
will make a difference.
Ms. Sanchez. Thank you.
It has also been argued that if a mortgage loan can be
modified or rendered unsecured during bankruptcy it will be far
more difficult to originate or sell mortgages in the secondary
market. As a result, it has been argued that the cost of
mortgages would have to increase to reflect this additional
risk. How would you respond to that argument?
Mr. Zandi. I don't think that will be the case either. It
is a change, and therefore, the secondary market will have to
adjust to that change; but I think it is a relatively
straightforward thing to do.
The issue for the secondary market is, what is the loss on
the mortgage in a foreclosure and how is that different from a
loss that would incur in a Chapter 13 bankruptcy under this
proposed legislation. I mean, the worst-case scenario for the
securities market would be just to assume what they are
assuming now about the loss in foreclosure. That would be sort
of the most conservative outside estimate of the cost. But I do
think with time they will figure it out.
The other point is--and they can do that relatively
quickly.
And the other point is, the market is broken; as it is, it
is not functioning well. A lot of changes have to occur to make
this market function appropriately. And this is a perfect time
to ask them to make this kind of a change because they have to,
in a sense, redo the plumbing because the plumbing is broken.
And why not put in better pipes while you are at it?
Ms. Sanchez. Great.
And the final question, also in his prepared testimony--
and, again, it is kind of weird because you have not heard the
testimony. Mr. Kittle states that the proposed reform to
section 1322(b)(2), which allows a Chapter 13 debtor to modify
a home mortgage, would result in higher down payments and that
the borrower would have to pay 1 to 3 points on the entire
loan, an additional three-eighths of a percent in the mortgage
interest rate; and he also estimates that borrowers would see a
200 basis point jump in interest rates with a 5-to-10-percent
down payment home mortgage with no points or fees at closing.
And I am interested in getting your reaction to that
assertion.
Mr. Zandi. I don't agree. This is very similar to the first
question about the interest rate costs.
There are numerous ways that you can raise the cost to the
borrower. One is the interest rate, the other is the size of
the down payment. I think, in aggregate, when you consider all
mortgage borrowers and all mortgage lending, that we will not
see any significant increase in the cost, whether it be through
an interest rate, whether it be through the size of the down
payment or other lending terms that are offered up to
borrowers.
And just to reiterate, there will be some groups where the
cost will rise. I mean, I do think that some borrowers wished
to put very little down and relied on a piggyback second to be
able to fit into the home 100 percent cumulative loan-to-value
ratio or above. Those borrowings will be, under this
legislation, will be more difficult. But in my view, a large
part of the foreclosures or problems that we are facing are
related to that kind of a lending; and I don't see any downside
to having that be restricted to some degree by the marketplace.
Ms. Sanchez. Great. Thank you.
My time has expired, so at this time I would like to
recognize our distinguished Ranking Member, Mr. Cannon, for 5
minutes of questions.
Mr. Cannon. Thank you for joining us, Mr. Zandi. I am
actually looking forward to the time when we cannot not all be
here together and participate the way you are participating. I
think this is the first time we have actually had a witness on
a videoconference.
Ms. Sanchez. Yes.
Mr. Cannon. So thank you for breaking the ice here and
setting a precedent. Mr. Chairman of the whole Committee, I
hope you are taking note that this works pretty well.
Mr. Zandi, you made a comment that made me wonder if we are
talking about the same thing. You mentioned a sunset, but the
Miller bill does not have a sunset. Do you think it needs a
sunset?
Mr. Zandi. I do. I think that any legislation should have a
sunset provision, because as we all know from previous
bankruptcy reform changes, there are always things that we do
not anticipate. And I fully believe that this proposed change
is a good idea that will work out in the short run and the long
run. But I would counsel that a sunset provision will be
advisable so that we can go back 3, 5 years down the road and
evaluate whether this was an appropriate change or not.
Mr. Cannon. We have people saying that this problem may be
very short-term, others saying that the resets in mortgages may
happen over a long period of time through 2010--2009.
How long, if you had to put a number on it, how far out
would you put that sunset?
Mr. Zandi. I would put it out at least 3 years, because the
problems will be very severe through the spring, summer of
2009; post that, the recent tightening in underwriting
standards will have benefits and the foreclosure problems will
abate significantly by late 2009 into 2010. And by that point,
we will have enough data points to really judge whether this
was appropriate or not.
Mr. Cannon. Given what I think is a risk--and you sort of
presented a no-cost solution here; I don't agree with that. But
given what I think are the risks, should we think in terms of a
2-year sunset so 2009, about this time, we have to reauthorize
it if it has worked and if it is necessary.
Mr. Zandi. Well, I think 2 years might be a little too
short because you need to get the data, you need to see it come
in, and there are lags involved.
Now, suppose that, as I am anticipating foreclosure
problems, continue into the spring of 2009. It will take at
least until the end of 2009, early 2010, to get all the
information in and be able to really digest it, make sense of
it and make sure that things are working properly.
So I would counsel 3 years.
Mr. Cannon. We are moving in a world with quicker data; and
in a case like this, I would hope that we could focus the data,
because the risks, I think, are high. Let me ask one other
question.
My experience--and this is anecdotal and that is why we are
here; but my sense is that many subprime lenders are now
yielding windfall profits by repossessing houses of people who
can't sell their house or can't make their payments and then
selling them in a market that is actually artificially high,
but which has been supported by purchases. And while they are
doing it at a discount--you talked about deep discounts for
foreclosed houses--my sense is the discounts are not so deep,
and that there is a big incentive on the part of the forecloser
to take the house and resell it at a profit from the house.
I suspect that if you give the borrower the time frame and
context to cram down that loan in bankruptcy that the system
will not heal itself so quickly.
Am I wrong about some lenders getting windfall profits from
foreclosing? And secondly, do we have to worry about not
solving the problem by giving borrowers who are in over their
heads more leverage?
Mr. Zandi. I am not aware of a significant amount of profit
being made in the foreclosure, in post sales, post-foreclosure
sales. My sense of the data that I am seeing, which is now
coming in quite quickly, is that prices are falling and they
are falling very rapidly. And all indications are that they
will continue to fall very rapidly, at least for the
foreseeable future.
Fundamentally, the problem here is that there is a massive
amount of unsold inventory, and it is rising because of the
fall in home sales and because of the increase in foreclosure.
So I would be surprised if what you described is occurring in a
very significant broad base; and if it is now, I doubt it will
be in a few months because of the market conditions which are
eroding exceptionally quickly. So I don't think that is an
issue.
Now, with respect--or it soon won't be.
Secondly, with respect to giving more power to the borrower
in the cram-down, to some degree that is the idea. That is the
purpose here. Lenders and servicers and investors are having a
very difficult time coming to terms and figuring out how to
make loan modifications work, even though we all sense that in
a broad--when you consider all the costs of all the
foreclosures, that it would make sense to go through this
process because for each one of the individual parties involved
in the process, they may not make a profit, they may lose.
So it is very, very difficult for everyone to come to terms
on this. And by giving the borrower a little bit more power in
the process, I think you crystallize a sense of urgency on the
part of the lenders, the servicers and the investors to come
together, come to terms and try to figure this out quickly.
Because the problem is now, it is not 6 months from now or 12
months from now, it is now.
Mr. Cannon. I notice, Madam Chairman, that my time has
expired. But I will just point out, if I might take a moment,
that what we are debating here on this bill is exactly what Mr.
Zandi has said, which is, Where do we put the thumb on the
scale here and how heavily do we press?
Thank you, and I yield back.
Ms. Sanchez. The time of the gentleman has expired. We have
just been notified that we have votes across the street, but I
think we have time for Mr. Conyers' round of questions. Mr.
Conyers is recognized for 5 minutes.
Mr. Conyers. Thank you, Chairwoman Sanchez. I want to thank
everyone for arranging this.
There are only two questions that I have. One is that the
industry tells us that they are on top of the problem and that
if we trust them, they can solve this. I know that the ``trust
me'' question always suggests the obvious answer.
But why would they give us this kind of information?
Mr. Zandi. You are asking me, Congressman?
Mr. Conyers. Yes, sir.
Mr. Zandi. Well, I think that many parties involved are
well intentioned. They would like to help solve this
foreclosure problem. But, you know, there are a lot of
countervailing incentives--second-lien versus first-lien
holders, the various flavors of investors, the servicers versus
the investors.
So I think the problem is that they may be well
intentioned, they want to make it work, but given the
incentives that are present and the conflicts that are
involved, it is going to be extraordinarily difficult for them
to come to terms of agreement, at least quickly enough to make
a big enough difference for the people who are losing their
homes today and next year and the year after.
Mr. Conyers. In other words, they have got vested interests
that don't lead them to be as concerned about resolving this
problem as quickly as we can?
Mr. Zandi. That is one way of looking at it.
Or their view is that they can solve this problem in a
different way and a better way, a more profitable way than
another person or party involved and can't come to terms.
Mr. Conyers. Well, you know, the problem that I am finding,
Mr. Zandi, is that some of them were in on the predatory
lending and the incredible schemes that got people into this
mess to begin with.
Mr. Zandi. Yeah. You know, there are certain cases of that,
and certainly there is, I think, evidence that lenders were
overly aggressive, many of whom were in the nonregulated part
of the industry or the lightly regulated part of the industry.
But I think, broadly the industry wants to do the right
thing. They want to do good; they are working hard. But my
point is, because of the impediments in their way, they are
just not going to be able to get it together quickly enough to
make a big difference. And I think with this proposed
legislation it will allow for some of those impediment barriers
to come down, and we will get something done, something
worthwhile, something that will make a difference to this
market and to these households before it is too late.
Mr. Conyers. The last question, Chairwoman, is this to Mark
Zandi.
I have just been encouraged by some of my friends that want
us to freeze all foreclosures and allow American families to
retain their homes. The monthly payments and rent should be
made to banks, designated banks, which can use the funds as
collateral for normal lending practices, thus recapitalizing
the bank system. These payments will be factored into new
mortgages reflecting the deflating of the housing bubble and
the establishment of appropriate property valuations and
reduced interest rates.
Has that occurred to you recently?
Mr. Zandi. Yeah. I wouldn't agree with that. I think that
would be a very significant mistake.
I think--what you are discussing, I think, today in the
form of this legislation is a good middle ground and something
that will do right by lenders and by borrowers. But by
completely shutting down the foreclosure process, I think that
would do more harm than good--particularly to the very people
that I think you would like to help in the long run.
So I really believe that this legislation is a piece of
legislation that will strike the right balance.
Mr. Conyers. I think so, too. I am a cosponsor of it.
And I thank you very much for your comments, Mr. Zandi.
Thank you, Madam Chairman.
Ms. Sanchez. The time of the gentleman has expired, and I
think this is a good time to take a natural break. We need to
go across the street to vote.
Dr. Zandi, I want to thank you for your participation. I
know by the time we get back, you will have to run. But Members
will be submitting written questions that we will ask you to
answer as quickly as possible to be made a part of the record
as well. Again, we want to thank you for your patience and all
of our panelists for their flexibility.
We are going to be in recess while we vote, and we will
come back to finish the hearing.
[Recess.]
Ms. Sanchez. This hearing on the Judiciary Subcommittee on
Commercial and Administrative Law will come to order. We are
trying to speed things along, given our late start. And
normally we would do full-blown opening statements. I am going
to actually recognize Mr. Feeney to give the minority opening
statement. The gentleman is recognized. I will respond, and
then we will proceed with the testimony of our panelists.
Mr. Feeney is recognized.
Mr. Feeney. Well, thank you, Madam Chairman. I think it is
important that we had a second hearing. Some of us were very
concerned that we had rushed through the first consideration.
And I remain determined to point out that the unintended
consequences that may adversely impact credit markets
throughout America in this bill really need to be examined by
the Financial Services Committee, which has the bulk of the
expertise.
Having said that, that decision is admittedly way beyond my
pay grade, as to whether or not the Financial Services
Committee ought to consider what potentially could be the most
damaging impact on credit availability in the homeowners'
market in America of any bill that--in the 6 years since I have
been here. I will say that all of us are sympathetic with the
plight of homeowners that for whatever reason may be foreclosed
on in their homes. So there is an enormous amount of sympathy
with the 1 or 2 or 3 percent of Americans that may suffer this.
But ultimately, there is a price to be paid for allowing a
judge to arbitrarily cram down the mortgage after the fact. And
that price I am afraid could be huge. The protection for home
lending in the Bankruptcy Code goes back at least to 1898. In
1978, Senator DeConcini pointed out the intent of section
1322(b)2 of the code was to preserve the availability of
residential mortgage funding for individuals of modest means.
We need to determine I think as a Congress what it means if we
do away with the availability of mortgages for individuals of
modest means.
Justice Stevens, no right wing justice, in the case of
Nobelman v. American Savings Bank, pointed out that it was the
intent of Congress all along in enacting that very section to
assist with home ownership. And I quote him from that case:
``At first blush, it seems somewhat strange the Bankruptcy Code
should provide less protection to an individual's interest in
retaining possession of his or her home than of other assets.
The anomaly is, however, explained by the legislative history,
indicating the favorable treatment of residential mortgages was
intended to encourage the flow of capital into the home lending
market.''
I would note that we had an economist earlier--and of
course, Ronald Reagan famously remarked that he wished he could
find a one-armed economist because you can always find an
economist that will say, on the one hand, this may occur, and
the other hand, the opposite may occur. To his credit, the
economist that testified, he thought on balance this proposal
would probably be helpful. Also acknowledged in Mr. Zandi's
testimony that the unintended consequences of such legislation
often outweigh the intended positive consequences, and so that
was the sole entire reason why he suggested that we sunset any
reform of the Bankruptcy Code.
There are other economists, presumably who are advising
some of the major players in the lending industry, including
the American Bankers Association, National Association of Home
Builders, the U.S. Chamber of Commerce and others, that are
asserting the importance of protecting availability of credit
to homeowners throughout the country by preserving this section
of the code. And I would also like, Madam Chairman, to ask for
unanimous consent because there is at least one entity that
acts as sort of a mutual fund. That would be the National
Association of Federal Credit Unions, which is not a profit-
making entity. I would like to ask permission, unanimous
consent to insert a letter addressed from the National
Association of Federal Credit Unions to Chairman Conyers and
Ranking Member Lamar Smith.
Ms. Sanchez. Without objection, so ordered.
[The information referred to follows:]
Letter from the National Association of Federal Credit Unions
Mr. Feeney. And finally I would point out that the adverse
consequences are not just going to be potentially to people of
modest means who want to buy homes in the future. If you want
to sell your home to somebody of modest means, there could be
huge adverse consequences because the pool of buyers that have
access to credit may dry up. If you merely want to retain
ownership of your home because there are fewer buyers for like
homes, the equity that otherwise might grow in your home will
be depressed by this variable, this uncertainty that is thrown
into the ability to collect markets, so even people that want
to hang onto their homes for the next 20 or 30 years, in my
view, will be likely to suffer some damage if this is imposed,
not to mention realtors, home builders, title companies,
mortgage companies, surveyors.
As you diminish on the margins the number of people that
could access credit or you reduce the credit availability to
people to buy a larger home or a nicer home than they would--if
it hadn't been for the uncertainty we are putting in the market
here by removing this section of the code, you diminish the
value of all residential real estate in the country.
And with that, Madam Chairman, I would yield back the
balance of my time.
Ms. Sanchez. The gentleman yields back.
And I will yield myself just a couple of minutes to respond
to some of what has been said.
Last month, this Subcommittee held a hearing on the
subprime mortgage meltdown, this very same issue, and we got to
hear from experts on how we got into this mess, and we heard
their views on how to fix it. We have already heard testimony
from one witness today with respect to the proposed legislation
that Congressman Brad Miller and I introduced, H.R. 3609. And I
am pleased to recognize my colleague and welcome him to our
Subcommittee hearing today.
I know it has kind of been a quirky and out-of-order
hearing. But I think everybody will agree, and I think all of
our witnesses at the last Subcommittee hearing on this issue
agreed that foreclosure is the worst possible option for
everybody in all instances. And so I think the legislation, as
crafted by Mr. Miller and I, while we are open to some
suggestions for improving it, I think really strikes at the
heart of what could provide some real relief and some
reasonable measures that are not going to--not going to over
address the problem, if you will.
With that, I am going to yield back my time. And we will,
without objection, allow Members to submit their written
statements for the record. Without objection, the Chair will be
authorized to declare a recess of the hearing at any point.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
Ms. Sanchez. And at this point, I am pleased to introduce
the witnesses for today's hearing. Our first witness is William
Brewer, Jr., certified as a specialist in consumer bankruptcy
law by the North Carolina State Bar. Mr. Brewer has represented
the debtors in a series of cases in the Eastern District of
North Carolina dealing with the effect of purchasing money
security interest in bankruptcy cases. Mr. Brewer has been an
NACBA member since 1993 and a NACBA director since 1997 and has
served as an extremely popular panelist at NACBA's previous
conventions.
Mr. Brewer served as a law clerk to Judge R.A. Hedrick of
the North Carolina Court of Appeals before beginning private
practice in 1977. I want to thank you and welcome you for your
patience and for being here today.
Our second witness is David Kittle. Mr. Kittle is chairman
elect of the Mortgage Bankers Association and president and
chief executive officer of Principle Wholesale Lending, Inc.,
in Louisville, KY. He started with American Fletcher Mortgage
Company and became a top loan originator before moving to
management in 1986. In 1994, Mr. Kittle opened his own company,
Associates Mortgage Group, Inc., and sold it in January of
2006. We want to welcome you here today.
He is the former chairman of MORPAC, MBA's political action
committee, a former vice chairman of the MBA Residential Board
of Governors and is a member of MBA's Advisory Committee. Mr.
Kittle is also a member of the Fannie Mae Advisory Council.
We already heard from our third witness Dr. Zandi a little
out of order.
Our final witness is Richard Levin, vice chair of the
National Bankruptcy Conference. Mr. Levin is a partner at
Skadden Arps, concentrating on corporate restructuring,
insolvency and bankruptcy issues. He was counsel to a House
Judiciary Committee Subcommittee and was one of the principal
authors of the Bankruptcy Code and the Bankruptcy Reform Act of
1978. I will note that this is the second time that Mr. Levin
has testified before this Subcommittee during this
congressional session. The first being during the executive
compensation hearing that we had.
And we welcome you back, Mr. Levin.
Mr. Levin. Thank you very much for having me back, Madam
Chair.
Ms. Sanchez. Not at all. Without objection, all of the
witnesses' written statements will be placed into the record in
their entirety. And we are going to ask that you please limit
your oral remarks to 5 minutes. We have a lighting system that
starts with a green light. At 4 minutes, it will turn yellow to
remind you that you have about a minute left in your testimony.
And when the light turns red, we will ask you to summarize your
final thoughts so that we may hear from all of our panelists.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
With everybody understanding the rules, I will invite Mr.
Brewer to please begin his testimony.
Can you please hit your microphone? Okay. I might recommend
you try the other microphone. Your microphone doesn't appear to
be working. And we will reset your time. All right. Is it
working? None of the microphones are working. Okay.
We are going to pause for just a moment to see if we can
get the microphones working.
Mr. Cannon. Madam Chair, while we are paused, may I ask
unanimous consent to introduce several items into the record?
Ms. Sanchez. Of course.
Mr. Cannon. The first is a statement by Representative
Steve Chabot. The second is a Securities Industry and Financial
Markets Association statement and the third is a testimony or
statement from Financial Services Roundtable, also a statement
from the American Bankers Association and a statement of Edward
J. Kulik, that is K-U-L-I-K--before a 1978 Senate Judiciary
Committee hearing on bankruptcy.
[The information referred to follows:]
Prepared Statement of the Honorable Steve Chabot, a Representative in
Congress from the State of Ohio
Prepared Statement of the Securities Industry and
Financial Markets Association (SIFMA)
Prepared Statement of Steve Bartlett, on behalf of the
Financial Services Roundtable
Prepared Statement of the American Bankers Association and
America's Community Bankers
Prepared Statement of Edward J. Kulik, Senior Vice President, Real
Estate Division, Massachusetts Mutual Life Insurance Company before the
Committee on the Judiciary, United States Senate
Ms. Sanchez. Without objection, so ordered.
And since we are still trying to get the microphones
working, I will ask unanimous consent to enter into the record
a letter from Professor Robert Shiller with the Cowles
Foundation for Research in Economics at Yale University; a
statement by Eric Stein, on behalf of the Center for
Responsible Lending; a New York Times article dated October 8,
2007, entitled, ``The American Dream in Reverse;'' a letter
from a diverse group of consumers, civil rights, labor, housing
and community organizations; and also, from the Congressional
Research Service, a memo regarding the 1978 bankruptcy
legislation and secured lending supplement. Without objection,
so ordered.
[The information referred to follows:]
Letter from Robert Shiller, The Cowles Foundation for
Research in Economics
Prepared Statement of Eric Stein, Center for Responsible Lending
Article from The New York Times, dated October 8, 2007, titled
``The American Dream in Reverse''
Letter to the Honorable John Conyers, Jr., Chairman, Committee on the
Judiciary, and the Honorable Lamar Smith, Ranking Member, Committee on
the Judiciary
Memo from the Congressional Research Service (CRS)
Ms. Sanchez. How are we doing with the microphones down
there? Okay.
Mr. Drew Brewer, we will try this one more time. We invite
to you open your testimony.
TESTIMONY OF WILLIAM E. BREWER, JR., ESQ., THE BREWER LAW FIRM,
RALEIGH, NC, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER
BANKRUPTCY ATTORNEYS
Mr. Brewer. Okay. Working good now.
Chairwoman Sanchez, Ranking Member Cannon and Members of
the Subcommittee, I am grateful to have the opportunity to
offer testimony today that hopefully will facilitate
congressional action that will enable many thousands of your
constituents to avoid losing their homes to foreclosure. My
name is William E. Brewer, Jr., and I am on the Board of
Directors of the National Association For Consumer Bankruptcy
Attorneys.
From that title, you might conclude that I am an officer in
this battle over the proposed amendments of the bankruptcy law,
but I am just a foot soldier. I practice law in Raleigh, North
Carolina, as a sole practitioner. From my 20 years of
representing debtors, I know as much or more as any person in
this room about debtors. What they are like, what motivates
them, what gets them in financial trouble, the great lengths to
which they will go to avoid filing bankruptcy. These things I
know, and that is a perspective I bring to this debate today.
I consult every day with clients who face the stark reality
of losing their homes to foreclosure. When I look into their
faces, I see fear and hope; fear that they are going to lose
their homes, but hope that I, through the bankruptcy process,
can help them save their home. Unfortunately, with increasing
frequency, I am forced to confirm their fears and eliminate
their hopes.
Here is a typical dialogue.
I say: If you are going to keep your house, you have to
resume making your full house payments.
The client says: But they are too high. That is why I am
here.
Me: I know but that is the rule.
Client: Well, I was making them at first, but the payments
kept going up. They are $500 more now than when I started.
Doesn't the bankruptcy law allow me to reduce the amount of the
debt or the interest rate? You said we could do that on my car.
My house is more important than my car.
I say: I know. It makes no sense. But calling Congress can
change it.
The culprit, as you know, is section 1322(b)2 of the
Bankruptcy Code, which prohibits the modification of loans
secured solely by a debtor's principal interest. The blanket
bar to modification is unique to home loans. For example, a
debtor who owns residential rental property can modify a loan
secured by property.
The solution is simple, remove the bar to modification. The
mortgage industry opposes any change to the anti-modification
provision. Others propose that the bar be removed only as to
these 2/28 adjustable rate mortgages and that the bar continue
to apply only to future loans.
Unquestionably, the bar to modification should be
eliminated across the board to existing and future loans.
Though ARMs represent the bulk of these troublesome loans,
there are a plethora of other subprime loans and other
predatory high-interest loans in the market contributing to the
foreclosure crisis. The homeowners trapped in these loans are
no less deserving than the ARM borrowers of a chance to save
their homes from foreclosure. Congressional policy that grants
relief to one and not the other has no defensible rationale.
The same is true for future loans.
The mortgage industry created a mortgage market predestined
for disaster. Through the fragmentation of the various segments
of the industry and the securitization of mortgage, it promoted
the meteoric rise in the issuance of these ill-advised 2/28
ARMs. The mortgage brokers and the loan originators either
didn't pay attention to the fact or perhaps just didn't care
that these loans were no good. They made their money and passed
the risk of loss up the line through securitization.
Metaphorically, the disaster created by the mortgage
industry is a conflagration, putting people out of their homes
all over this country. The incendiary device are these
exploding ARMs. The fire must be put out.
As more and more homes are foreclosed, property values are
driven lower and lower, and neighborhoods are being destroyed.
The industry claims it will get the fire under control with its
voluntary modification program. Do we really want to turn over
that responsibility to the people who started this mess by
playing with matches?
In conclusion, you were elected to deal with this kind of
problem. I implore each of you, whether you be Democrat,
Republican, Blue Dog Democrat to cooperate in a bipartisan way
to enact this legislation which is so badly needed by so many
homeowners. While these financial fires continue to burn, don't
just sit here in Washington playing your fiddles.
[The prepared statement of Mr. Brewer follows:]
Prepared Statement of William E. Brewer, Jr.
Ms. Sanchez. Thank you, Mr. Brewer. I appreciate your
testimony.
And at this time, I would invite Mr. Kittle to begin his
testimony.
TESTIMONY OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, MORTGAGE
BANKERS ASSOCIATION, WASHINGTON, DC
Mr. Kittle. Thank you, Madam Chairman, Ranking Member
Cannon. Thank you for the opportunity to testify before you on
this most important issue.
H.R. 3609 is a well-meaning attempt to close what is
mistakenly described as a bankruptcy loophole and to ensure
that people don't lose their homes to foreclosure with no
material effect on the real estate financial system.
Unfortunately, this bill will have a devastating impact on
current and future homeowners. This legislation would repeal
anti-modification protections on home loans that have been in
existence since the Bankruptcy Act of 1898 and that were
confirmed by the Bankruptcy Code of 1978 and by unanimous
Supreme Court in 1993.
These protections are not loopholes. They were created by
Congress to ensure the continued lowered cost and free flow of
mortgage credit for primary residences. The anti-modification
protections are sound public policy and have helped generations
of families by keeping mortgage interest rates down. Changing
the law will have serious consequences for home buyers,
homeowners with existing mortgages. The hardest hit will be
people in areas with declining home prices.
Members of this Committee have discussed their goal of
keeping people in their homes. We at the Mortgage Bankers
Association share that goal. It pains all of us and me
personally to look at the statistics and the real families
behind them. None of us wants to see a family pushed out of
their home. Current law already provides sufficient protection
to keep borrowers in their homes. As soon as a borrower in
foreclosure files for bankruptcy, the foreclosure is stayed.
The borrower is then allowed 3 to 5 years to repay their
delinquency without fear of foreclosure if they pay their bills
on time. By reorganizing and ultimately discharging the
unsecured debts, money is freed up to pay the mortgage and
arrearage.
H.R. 3609 would have a tremendous impact on the mortgage
finance system. If this bill becomes law, we believe mortgage
rates would jump significantly, going up 1.5 to 2 percent for
everyone taking out a loan, holding loan terms, credit, the
economy and everything else constant. Our home finance system
is based soundly on the idea that mortgage debt is secured
lending. If borrowers do not pay their bills, the lender can
take possession of the home and partially recover from the bad
debt.
The current security and protections in bankruptcy mean
that home lenders are not taking as much risk as creditors take
with them. For example, credit cards. This is why, at the most
basic level, you pay more interest on unsecured debt, such as
credit cards, than for a mortgage. If you chip away at the
security created on home mortgages--and this bill is not a
small chip; it is a sledgehammer attack--you chip away at the
entire core of the mortgage finance system.
In order to account for the added risk, you will add
significant cost to obtaining a mortgage. What does this mean?
Assume you take out a 30-year fixed rate mortgage for $300,000
in today's market. If you are a prime borrower, you will
receive a rate of about 6 percent with no points, giving you a
principal and interest payment of about $1,800 per month. If
you pass this bill, we estimate the same loan at the same terms
could cost as much as 8 percent. That increases your payment to
about $2,200 per month. This will be an increase of $400 per
month, $4,800 per year, for a total over $144,000 over the life
of a loan. This is a massive backdoor tax increase on
homeowners.
Members of the House can take considerable pride in the
steps you have taken already to address the problems in the
mortgage market. You have passed legislation giving the Federal
Housing Administration a greater ability to help troubled
borrowers refinance. You have made it possible for people to
exclude discharges of debt on primary residences from gross
income, saving borrowers from higher tax bills. The House has
passed GSE reform and established an Affordable Housing Trust
Fund. The Financial Services Committee is working on a bill to
ensure that the problems we have recently seen never happen
again. Chairman Frank intends to have that bill on the floor of
the House by the end of this year.
I urge you to reconsider your support for the bill and
assure you that we will work with the House in addressing the
mortgage crisis. This bill is not the answer to the problems,
and we urge you to oppose it. Thank you.
[The prepared statement of Mr. Kittle follows:]
Prepared Statement of David G. Kittle
Ms. Sanchez. Thank you for your testimony, Mr. Kittle.
At this time, I would invite Mr. Levin to give his
testimony.
TESTIMONY OF RICHARD LEVIN, ESQ., CRAVATH, SWAINE & MOORE LLP,
NEW YORK, NY, ON BEHALF OF THE NATIONAL BANKRUPTCY CONFERENCE
Mr. Levin. Thank you, Ms. Chairman, and Members of the
Subcommittee. It is an honor and a pleasure to be here, to be
invited back.
I am here on behalf of the National Bankruptcy Conference,
which is a voluntary nonprofit, nonpartisan organization
committed to the improvements in the bankruptcy law. The
National Bankruptcy Conference was formed in the 1930's at the
request of this Committee to assist the Congress in
deliberations on this complicated and technical area.
I stress that we do not represent any economic interest. We
pledge when we meet to leave our clients at the door and focus
on what we believe is sound bankruptcy policy.
We believe that a bill along the lines of H.R. 3609 is
sound bankruptcy policy. You have my prepared statement. I will
not review all of the points in there. I would like to make
just a few remarks based on what has been said already. But I
cover obviously a lot more territory in the prepared statement.
It is our experience, as Mr. Brewer has said, that
bankruptcy is not a first resort. It is a last resort. It is a
last, last resort. People tend to head toward the bankruptcy
court at 11:59 and 59 seconds. Many of the things that have
been proposed by the Mortgage Bankers as ways of alleviating
the mortgage crisis are helpful, but they are not a complete
solution. I note that, just last Friday, the Joint Economic
Committee majority staff produced a report on the subprime
lending crisis. It proposes many of the things that the
Mortgage Bankers have suggested and more, including an
amendment to Chapter 13. And it traces the history and effect
of the crisis quite well, and I commend its reading to the
Subcommittee.
But the fact is, voluntary measures will not work. We need
a backstop, a last resort if lenders are to come to the table
and negotiate in good faith with borrowers over restructuring
mortgage loans.
H.R. 3609 only recognizes economic facts. It does not
impose losses that are not already present on the ground. The
real estate has lost value. A foreclosure will cause it to lose
even more value, increasing the cost to the lender through
foreclosure expenses, taxes, insurance, maintenance and cost of
resale. H.R. 3609 provides a better solution that is a win-win,
that keeps families in their homes and allows lenders to
mitigate their losses.
We must focus on this. This is the very fabric of our
neighborhoods that we are trying to protect.
We believe that the bills and the law as it currently
exists have adequate safeguards already against abuse. To file
a Chapter 13 case, a debtor--the court must find that the
debtor acted in good faith in filing the case and in proposing
the plan of arrangement.
The debtor must devote all of his or her disposable income
to the plan for 3 to 5 years, and the debtor is hampered in
filing--or restricted from filing bankruptcy because of the
adverse effect it will have on the debtor's credit report,
which will stay on I think it is at this point 10 years, but I
defer to Mr. Brewer on that.
We have no evidence, reading the cases, talking to the
judges, following this area closely, that solvent bankruptcies
are running to the bankruptcy court. And the other protections
that are present are the two Supreme Court decisions within the
last 10 years Rash against Associates Commercial finance, which
provided for what we will call fair market value of an asset
such as a home where the debt is being adjusted until, which
sets forth the Supreme Court's interpretation of a market rate
in interest. The bankruptcy courts are bound by both of these
restrictions if they are to have the power to approve plans and
adjust mortgage interest rates.
Finally, just a word on the effect on rates. Before the
Supreme Court decided Nobelman in 1993, four Circuits permitted
mortgage modifications, and many, many, many bankruptcy courts
did as well. We did not see any perceptible effect on credit
rates, mortgage rates in those jurisdictions than in the only
one circuit that went the other way when the Supreme Court took
up the Nobelman case, the Fifth Circuit.
Second, what H.R. 3609, by recognizing the economic facts
on the ground that are already going on, when lenders go to
foreclose, most the lenders get is the value of the property,
which is what 3609 proposes. And that--even though that has
been the economic fact, if not the law, has not affected
mortgage lending. And finally, every time a change in the
bankruptcy law is proposed that is adverse to lenders, the
statement is made, this will hurt credit rates. The converse
also ought to be true. If rates--if bankruptcy law is made more
generous to lenders, one might think that rates would come
down. Have you looked at your credit card bill recently? Have
your rates changed in the 2 years since the adoption of the
2005 amendments?
Thank you, Ms. Chairwoman.
[The prepared statement of Mr. Levin follows:]
Prepared Statement of Richard Levin
Ms. Sanchez. Thank you, Mr. Levin. Your time has expired.
We are now ready to begin questioning, and I will begin by
recognizing myself for 5 minutes.
Mr. Brewer, Steve Bartlett, on behalf of the Financial
Services Roundtable, stated in his prepared testimony for last
month's hearing that mortgagees are reaching out to help
consumers in trouble on an unprecedented scale. And I am
interested in getting your response to that statement.
Mr. Brewer. I would like Mr. Bartlett's phone number
because I have got some clients that I need to call him about.
Because whether they are reaching out in record numbers, I
don't know. Are they reaching out enough? The answer is, it is
just a tiny little bit of help based on what the problem is.
And I think you have got to look at two issues. One is,
just how many people are they reaching, which is small. And
then, what are they doing when they reach them? I think that is
where the key is. If you look at the testimony here by Mr.
Kittle, it talks about, well, these mortgage servicers are not
going to modify the loans to the extent that this bankruptcy
will. They are talking about maybe letting folks skip two or
three payments, capitalize, put the loan at the end. The
modifications are not real. They are not meaningful as far as
dealing with the underlying problem, which is property that is
worth a whole lot less than what the debt is and interest rates
that, when these ARMs reset, hit, you know, get up to 13, 14,
15 percent. And they are one-way ARMs. They are ARMs in which
they, you know, they never--they were adjustable rate but only
adjustable upwards, never could go beyond that initial teaser
rate. So the answer is, in the real world where I practice--I
only know about Raleigh, North Carolina--it is not happening.
Ms. Sanchez. Okay.
In your prepared statement, you note that homes sold in
foreclosure generally sell for only 70 to 75 percent of the
actual fair market value. I want you to please explain your
basis for that statement.
Mr. Brewer. Well, that is just a rule of thumb that I
have--I mean, obviously I have filed many bankruptcies for
folks who have, perhaps, didn't try to save their home from
foreclosure, so it foreclosed before they came to see me. I
looked at what the value is, based on what appraisal they had,
what tax values were, they have told me it was worth. I see
what the deficiency is. North Carolina is one of those States
that allows a deficiency judgment. When it sells at
foreclosure, the difference the debtor owns. And that is my own
unscientific numbers. You can actually find some cases back in
history--at one point, that was an issue about bankruptcies,
about whether the property brought a fair value at foreclosure
sale. And that was a pretty fairly accepted number. If you have
seen the TV shows where folks are sitting at home and they are
going to make lots of money sitting at home, normally they are
talking about buying these homes at foreclosures at these
bargain basement prices and flipping them and making money off
of them.
Ms. Sanchez. Thank you.
Mr. Levin, what is your recollection of why the exception
or carve out for home mortgages was included in section
1322(b)2 when you helped draft the 1978 bankruptcy amendments?
Because we have heard them described as loopholes but to me are
more appropriate as a carve out.
Mr. Levin. It is not a loophole. Mr. Kittle is correct. It
was a policy decision made at the time. This Committee had a
different view. This Committee thought that the mortgage,
mortgages should be permitted to be modified.
I heard Mr. Feeney say earlier that this was a provision in
the law since 1978. In one sense, that is correct. But the
difference in 1978 was that, before 1978, no secured debt could
be modified, homes, cars, vacation homes, investment property,
nothing. The 1978 law moved a long way in permitting
modification of secured debt but excepted out mortgage debt
because that was the Senate's view. It was not the House's
view. It was not this Committee's view. This Committee thought
it was sound policy at the time to permit it. But as part of a
compromise to get the legislation enacted, which did a
tremendous amount of good for many people for many years, the
House receded on that point.
Ms. Sanchez. Okay. I have here a quote. The Fifth Circuit
in 1984 wrote that the section 1322(b)2, the exception for home
mortgages was included--and I am quoting here from them--
``apparently in response to perceptions or to suggestions
advanced in the legislative hearings that home mortgage lenders
performing a valuable service through their loans needed
special protection against modification thereof.'' And I am
interested in getting your response to that.
Mr. Levin. A couple of responses to that. The first, that
came from I think the statement of the organization represented
by the gentleman sitting on my right. And it is nice to know
that their position has not changed over 30 years.
Second and more important, the home mortgage lending was
very different in 1978 than in 2007, 2006, 2005; 80 percent
loan to value, 20 percent down payment, fixed rates, no
exploding ARMs, no negative amortization, no securitization.
The local bank held your mortgage. These were people you knew
and who supported the community. That is not the market we are
in today anymore.
If anything, the progress of bankruptcy law should keep up
with the changes in the economy, not go back to 1978, unless,
of course, the mortgage industry would like to go back to 1978,
and maybe that would--maybe that would solve this crisis in a
lot of respects.
Mr. Kittle. Madam Chairman, can I comment on that?
Ms. Sanchez. Thank you, Mr. Levin.
My time has expired. If I can get unanimous consent for 30
seconds, we will allow you to respond. Without objection.
Mr. Kittle. Thank you, Mr. Chairman.
It was nice to know Mr. Levin was there in 1977. I am not
sure I was born in 1977.
Ms. Sanchez. We are going to check your driverss license
after that statement.
Mr. Kittle. The Senate at that time held for all
protections as far as the bankruptcy went. The House held for
no protections, and a compromise was gained. And I am sure he
would concur with that.
There was a witness, Mr. Edward Kulik, senior vice
president of Mutual Life Insurance. His views were captured and
actually put into law. And he pointed out that reducing a
mortgagees's claims to the actual value of any real estate
securing the claim would have a dramatically negative impact on
the mortgage industry. That is what he said. That was embraced
by the Committee, and it became part of the statute.
I will close by saying, Supreme Court Justice Stevens said
also in the 1993 decision: At first blush, it seems somewhat
strange. The anomaly is, however, explained by the legislative
history, indicating that favorable treatment of residential
mortgagees was intended to encourage the flow of capital into
the home lending market. It was there for a purpose.
Ms. Sanchez. Thank you. My time has expired.
At this time, I will recognize the Ranking Member of the
Subcommittee, Mr. Cannon, for 5 minutes.
Mr. Cannon. I am always pleased to take my time. And by the
way, thank you for letting the gentleman respond without taking
my time.
I would also like to thank Mr. Levin for being here today.
You know, I have worked very closely with the National
Bankruptcy Conference and appreciate the expertise and the
tremendous work that was done, especially on the passage of the
bankruptcy bill a couple of years ago, which took great effort.
I think that quote, by the way, was Senator DeConcini, not
the National Mortgage Bankers Association, and he was a
Democratic Senator. Just I think that might play interestingly
in the record. We will have to look a little more on that. I
think that is the quote that we had before us.
For the record, Mr. Conyers is going to do the research on
that. And if it turns out it was Mr. DeConcini, the Democratic
Party may disown him, although that may not be relevant at this
stage of his life.
Mr. Levin, you talked about--I think you said something to
the effect, voluntary measures might get--won't get the job
done or won't get lenders to the table; the problem is more
urgent. But they are the guys who have the most to lose, are
they not?
Mr. Levin. I am sorry for interrupting you.
Mr. Cannon. Go ahead.
Mr. Levin. They are not actually the guys to lose. In 1978,
they were the guys with most to lose because the local banker
was making the loan and keeping it on his books. Now these
loans are securitized in pools into mortgage-backed securities
which are purchased by collateralized debt----
Mr. Cannon. Let me say, rather than the lenders, let me
say, the owners of the paper are the ones who have the most to
lose. People who ought to be getting there and solving the
problem and by minimizing their losses if it costs so much to
go through a foreclosure process, they ought to be the ones in
there that are driving that forward.
Mr. Levin. You would think so. However, they are not the
ones who are at the table. The ones who are at the table are
the mortgage loan servicers, and the servicers get a fee for
the work they do. And they get a bigger fee when they foreclose
because that is a big process.
Mr. Cannon. Right. The guys that are going to have to pay
that fee, whoever that--that may be a mutual fund. It may be
all kinds of folks out there that own this kind of paper. There
ought to be terrific pressure on those folks to solve the
problem.
Mr. Levin. There ought to be. But what happens is, there is
a certain assembly line mentality to this. It i simpler and
easier to work through the process than to try to custom tailor
a solution to every single problem.
Mr. Cannon. Well, Mr. Brewer talked about that he is not
seeing much--and he noted, it was anecdotal--with the
industry's attempt to rework these issues, and maybe Mr. Kittle
would like to speak about this. But I think--was it Mr. Brewer
we had here or Mr. Bartlett--was talking about something in the
neighborhood of 1,500 renegotiations per week. So over a
couple-year period between now and the end of 2009, you are
talking about 150,000. We heard on the last panel, there may be
as many as 500,000 of these such houses that will go into some
kind of crisis mode. One would expect that as the word gets
out--and by the way Mr. Brewer, I suspect that you can find the
phone number online. And I think there is a pretty strong----
Mr. Brewer. I have called it. I have called it. It is a
black hole.
Mr. Cannon. Well, I guess my point is, what is the best
thing for America to have a black hole that gets light over
time because you have huge incentives by the owners of this
paper to solve the problem short of blowing the market apart
with foreclosures, or a bill that would fundamentally transform
how we securitize the biggest segment of wealth in America? And
you obviously have something to say, Mr. Brewer.
Mr. Brewer. Well, if that question is put to me, the answer
is, I don't see why we can't do both. I mean, if these folks
are going to fix the problem or fix--I think your numbers will
make--I think that might represent--if those numbers are real--
I doubt they are--but that may be 30 percent of the problem.
Mr. Cannon. Pardon me. I am about out of time, and I would
like Mr. Kittle to have the opportunity to respond to those
issues.
Mr. Kittle. Thank you, Congressman Cannon.
Our Members are reaching out, but communication is a two-
way street, which I think Mr. Brewer would agree. We call the
consumer on a regular basis, can provide the data to show that,
many times, many times, the calls are not returned. We are
joined with NeighborWorks; our Home Loan Learning Center Web
Site has gone from getting hits as low as 200,000 per month up
to 1.6 million hits in August alone. We spent over----
Mr. Cannon. Those numbers--you are talking about numbers
that are big enough to solve the problem and would indicate
that--I mean, this is a complicated world with different people
owning paper. This is not like 1978. But if I understand what
you are saying right, there is a massive outreach by your
industry to help proactively solve the problem.
Mr. Kittle. There absolutely is a massive outreach. Are we
reaching everybody? No. Because, again, sir, communication is a
two-way street.
Ms. Sanchez. The time of the gentleman has expired. I would
request unanimous consent for 30 seconds for Mr. Brewer to
continue his thoughts since we allowed Mr. Kittle during my
round of questioning to do the same.
Mr. Brewer. Thank you. My point is that the idea of
voluntary modifications to the extent that the real--to the
extent they actually help people save their homes is good.
Folks will turn to that first. But I am telling you from that,
down there in the trenches, it is not enough. It is not even
anywhere close to enough. So this Congress needs to do
something for those people that those voluntary modifications
are not reaching. And, again, I think that the real issue is
the fact that what they are offering folks in a way of
modifications do not fix the problem. We are talking--they are
negotiating with the same people who sold them on the idea of
these exploding ARMs in the first place.
Mr. Kittle. That is not accurate.
Mr. Cannon. Madam Chair, may I ask 15 seconds to say
something conciliatory here?
Ms. Sanchez. Fifteen seconds, Mr. Cannon, and then we are
going to move on to Mr. Conyers.
Mr. Cannon. The Chairman of the full Committee is laughing
because he knows I can do it in 15 seconds.
Ms. Sanchez. Your time starts now.
Mr. Cannon. This is a matter of where the thumb goes on the
scale. And I suggest that the overwhelming weight that we are
talking about putting on the scale here may distort it to the
great detriment of your clients in the future and hope that we
can find something that will balance the problem.
Thank you, Madam Chair.
Mr. Kittle. Can I correct the inaccurate statement?
Ms. Sanchez. I apologize. We do want to ensure that
everybody gets an opportunity to ask questions. And we have
gone a little long.
So I will at this time like to recognize Mr. Conyers for 5
minutes of questioning. And before we begin, Mr. Conyers' time,
I want to recognize Mr. Chabot, the gentleman from Ohio, who
has been sitting in for the last 30 minutes or so on this
hearing. I know he has a keen interest in this issue, and we
welcome you to the Subcommittee and thank you for your
interest.
And now I will recognize Mr. Conyers for 5 minutes.
Mr. Conyers. Thank you, Madam Chairman. The Detroit area
has the fourth largest number of foreclosures of anyone.
Atlanta comes in number seven. It is a serious problem. And
most of our experts agree that it is going to get worse before
it gets better. How did a nice guy like Kittle get involved in
this stuff, representing the mortgage people? I mean, what
happened in your life that created this----
Mr. Kittle. Well, I chose to be here, Congressman. And
mortgage bankers are nice people, just like I am. So I am
pleased to be here to represent them today.
Mr. Conyers. Well, that is very reassuring. And if anyone
could do it, it would be you that make us feel reassured.
But you know, this Committee is quite collegial with Chris
Cannon and Tom Feeney and Mr. Chabot from Cincinnati; Brad
Miller is over here. We have got a real political situation
here. And that is that we can talk all we want. But this bill
is going to be tough to get through the House and the Senate,
gentlemen. It is not going to be an easy thing to do, and
unless we can get Mr. Chabot and Mr. Miller and this Committee
together, that to me is my goal. We have sensational
discussions and exchanges on this Committee. But you see, there
are a lot of people that are now--I will be putting out a press
release later on, and so will a lot of others--but the problem,
Chris, is that we have got people who will be listening and
looking at this and say, good night, the Sanchez Committee is
really getting us taken care of. We are talking upward of
500,000 people or families now. And help is on the way.
The Members, the witnesses that have been invited here
today, is there anything you can recommend out of your vast
experience? I know Mr. Brewer and Attorney Ted Kalo from North
Carolina know of each other. But tell me, knowing the
difficulties of getting both Houses of the Congress together,
what I am beginning to get worried about is what is going to
really happen? I mean, it will be a noble effort and all these
people are saying, ah, boy, Chairman Conyers, I know he would
do it. And I knew Chabot would do it. I knew Brad Miller could
come through. Sanchez has got more work than any other
Subcommittee in the Judiciary. Where are we? Mr. Brewer.
Mr. Brewer. If you are asking me how you get this bill
passed, that is way above my pay grade, but I mean----
Mr. Conyers. So tell me anyway.
Mr. Brewer. Well, I think you either do it sooner or you do
it later because I--if I am right, if what I am hearing is
these modification--these voluntary modifications are going to
fix the problems, I will come back here and admit I was wrong.
But I will bet anybody here any amount of money that we will
come here--you wait until next spring and you don't do
something and this foreclosure crisis, this fire I am talking
about, is going to be burning out of control, and you will have
to do something, you know, because people will ultimately
demand it.
Ms. Sanchez. Attorney Levin, what say you?
Mr. Levin. I don't know where the middle ground is to
answer your question directly. But the answer is not, do
nothing. The answer is not, let the lenders decide when they
want to give up value.
To Mr. Cannon's thumb-on-the-scale point, it is a very
important consideration in all bankruptcy legislation. At this
point, my experience tells me that homeowners with homes with
values that have fallen and cannot afford the payments do not
have anything on their side of the scale. I think passing
something along these lines would give them a little bit of
negotiating leverage. Now they have none. And it would be
cabined and regulated by the bankruptcy judges under the
Supreme Court's decision. But I don't think doing nothing is
the answer.
Mr. Conyers. Madam Chairwoman, could I ask Mr. Kittle for
his advice?
Ms. Sanchez. I will grant you an additional 30 seconds
because your time has expired so that Mr. Kittle may respond.
Mr. Kittle. Thank you, Madam Chairman. First of all, to
correct what he said earlier, that the people are not dealing
with the same people that originated the loans. The servicers,
in many cases, bought those loans from brokers who had no
fiduciary responsibility in the transaction. So they are
talking with a servicer who is there who wants to help them
work the loan out.
Congressman, if could I give you a quick example of how
this cram down bill will harm the people that you want to
protect, and the quick example is: On an FHA loan, there is a
statute in FHA loans that says they cannot insure when you do
the cram down. Therefore, the part you would cram down--and I
will use an example of a $150,000 loan, and it gets crammed
down to $100,000. The FHA insurance can't pay on that $50,000.
It goes back to the servicer. The servicer has to eat that
money. It has to pay that money to Ginnie Mae, and the servicer
takes the cost. That is a statute.
Therefore, those loans, because of higher risk, in many
cases, will not be made unless interest rates are raised or
points or fees to mitigate the risk going forward.
Ms. Sanchez. The time of the gentleman has expired.
Mr. Cannon. Madam Chair, may I ask unanimous consent for 30
seconds to compliment--that is not compliment Mr. Conyers, but
complement--make a statement that is complementary to the
statement that he had just made.
Ms. Sanchez. You can compliment Mr. Conyers, too.
Mr. Cannon. I do that at almost every opportunity I get,
and I will do that right now.
Ms. Sanchez. If you will be brief, I do want to give
everybody an opportunity to ask questions, Mr. Cannon. But go
ahead.
Mr. Cannon. The gentleman has talked about the people
watching this Committee hearing today. And I think many people
in America may actually be watching it. Therefore, I think it
is extraordinarily important that they begin taking
responsibility for their own lives because the likelihood that
this bill will get passed in a way that will actually affect
them is I think fairly minor. And so let me point out that the
global flow of capital is dramatically important here. If we
want capital in America to continue making loans, we are going
to need to deal with this.
And I would love to have Mr. Kittle say for the record how
people can get in touch with the association that is dealing
with these mortgages so people can start calling up and
screaming at bankers and telling them what they can do and what
the value of their house is.
Ms. Sanchez. I will allow Mr. Kittle to do that, but I
would like to get through our round of questions first.
At this time, I will recognize the very patient Mr. Feeney
for 5 minutes of questions.
Mr. Feeney. Thank you.
And again, I want to thank the Chairman for having a second
hearing on this very important issue.
I think all of us sympathize with people who have to come
see you, Mr. Brewer. Nobody wants to be in that position. And I
will tell you that I serve on the Financial Services Committee.
And you know, for 30 years, Congressmen and Congresswomen have
been beating up, begging, brow beating the credit industry to
make credit more available to nontraditional borrowers. We are
now up to 70 percent home ownership. America is the first
country in the history of the planet where 70 percent of
families could actually live in a home that they own. That is a
miraculous thing.
But let's acknowledge that much of the bubble that has been
created in real estate is because of credit that was too loose.
Loans that just simply didn't make sense unless market prices
were going to dramatically increase forever.
The market has already overreacted. It has overreacted so
severely that policymakers in this building, as we are trying
to make credit more risky and therefore tighten credit
availability, the Financial Services Committee is actually
encouraging Fannie Mae and Ginnie Mae to loosen credit
availability. We have the Fed that just dropped interest rates
by half a point in order to make sure that we don't dry up
credit markets and literally turn a partial recession in one
market of our economy into a deep depression in all areas of
the economy.
So the question here is not whether the patient is sick. I
happen to agree with your proposed analysis and the gentleman
from Moody's, too, that the situation is likely to get worse in
the next 6 to 12 months, not get better. I happen to agree with
that. But like medieval blood letting by doctors, my question
is, are we making the situation worse by being sympathetic? My
question is, what happens going forward to credit markets?
Because, ultimately, the way to relieve yourself of a problem
of debt on a piece of property is to have a rising--unless you
can get a job that pays you twice as much--is having rising
property values. That only happens if there are buyers
available. The problem in today's market across the country and
especially in the States that have had double-digit declines is
that there are just no buyers to sell to at the price that the
owner needs to cover the cost of his mortgage.
Now I think there may be things that we can do to get the
holders of these mortgages and the folks that actually service
the loans in better contact with. That is what this Committee
and the Financial Services Committee ought to be doing. I
talked to a local judge because at our last panel we had a
bankruptcy judge testify that almost none of the servicers or
securitized holders of mortgages were available to assist the
individual that needed help. And just as Mr. Levin said, you
can't deal with this on a case-by-case basis when it is
happening across the country.
I talked to an Orlando judge who happens to be a friend of
mine, and he does foreclosure, not bankruptcy, admittedly a
different animal, but similar. He said that, on a regular
basis, he can dial up a phone at 2 in the afternoon and tell
the servicer of a loan that the property is going to be sold
the next day. One thing all of the witnesses both in this panel
and the previous panels have agreed, in this market, especially
with declining real estate values, holders of mortgages do not
want that property back. It cost them months of interest rate
payments, of paying attorneys, of paying realtors to remarket
and fix-up costs. So it is in the interest of the holders of
securitized mortgages across the country to find a way to
negotiate these loans.
But what you do in this piece of legislation that the two
of the three of you have endorsed is you have said to all
future lenders that you are adding uncertainty into the credit
markets. All creditors, all lenders abhor risk. They abhor
uncertainty, and you are adding to the uncertainty. And what
you are doing is to say that a judge arbitrarily can modify the
terms of the mortgage despite what is in the best interest of
the long-term economy. And you are taking that decision out of
the hands of the people that now are at risk.
So I understand that none of the three of you--maybe Mr.
Levin, maybe you have an economics degree. I think Mr. Kittle
has referred--I don't know whether you are an economist. But I
am worried about the long-term economic impacts. And I am
afraid, like medieval doctors, we are taking a sick patient,
and we are letting blood all over the place so that we can
argue, as Mr. Levin said, we are doing something. And
admittedly, the American people want us to do something. But I
am afraid for the patient in the future.
With that, if the Chairman would allow, I would be happy to
invite comments.
Mr. Brewer. Do you want my comment on that? Because this is
my thought. I was with you because what you were describing was
a situation in which doing nothing is bad because we are going
to have all these foreclosures. There are going to be losses in
the community. There is not going to be enough people buying
these houses. Why don't we let the people who are in the houses
now, who could make these payments at a reasonable rate and who
could pay for the house at its current fair market value? In my
area, the market is not that depressed. I understand, in other
places, it is terrible. But wherever that level is--and this is
not arbitrary. The court--you know, you determine the fair
market value. They pay that lender a reasonable interest rate.
If you want to let it be like the till rate that is done on car
loans, fine. If this Congress wants to set what that rate is--
--
Mr. Feeney. Well, respectfully, this bill contains no
constraints whatsoever on the bankruptcy judge, and it takes
out--there are no constraints whatsoever in this bill.
Ms. Sanchez. The time of the gentleman has expired.
And I would also just like to comment briefly on that last
point that bankruptcy judges tend to be experts in assessing
the value of assets. I am going to ask--pardon me--unanimous
consent to enter into the record a letter from Richard Cordray,
the Ohio Treasurer of State, who sent a letter in support of
H.R. 3609, and also I would ask unanimous consent to enter into
the record--Moody's did a subprime mortgager survey on loan
modifications with the finding that less than 1 percent of
serviced loans that experienced a reset in the months of
January, April and July of 2007 were actually modified by the
mortgagees. Without objection, those will be entered into the
record.
And at this time, I would like to recognize the gentleman
from Georgia, Mr. Johnson, for his 5 minutes of questions.
[The information referred to follows:]
Letter from the Honorable Richard Cordray, Ohio Treasurer of State
Special Report by Moody's Investor Service
Mr. Johnson. Thank you, Madam Chair. In our background
material, it recites that, in 2006, there were 1.2 million
foreclosures in the United States, representing an increase of
42 percent over the prior year, an explosion in foreclosures.
And economists estimate that 5 percent of all mortgage holders
are expected to default on their mortgage loans this year and
next, resulting in a whopping $400 billion worth of defaults
and $100 billion in losses to investors in mortgage securities.
And that being the projection, and it being foreseeable
that this would have a tremendously negative impact on the
economy of this Nation, I want to ask Mr. Kittle, what would be
worse, for that situation to unfold, or would it be better for
a bankruptcy court to be able to ensure that many of those
loans, instead of going into default and becoming
nonconforming, would be continuing, would be allowing loans to
continue to perform but only partial performance? Which would
be better, nonperformance or partial performance, to the
lending industry in this country?
Mr. Kittle. Thank you, Congressman. I am happy to address
that.
I think it would be better for the market to let it correct
itself----
Mr. Johnson. Well, now, that is a different question.
Mr. Kittle. But I will finish and answer your question the
way you put it.
--and I think it would be better for it to play out and not
to have this legislation go through.
And here is why: There are a couple of points and
statistics that have not been given today. We keep talking
about the mortgage products putting these people into
foreclosure.
Mr. Johnson. Well, you haven't answered my question.
Mr. Kittle. I am going to.
The three main reasons for foreclosure, Congressman, are
unemployment, divorce and illness, not the mortgage products.
So that needs to be said.
Mr. Johnson. If you have got a mortgage, if you have got an
adjustable rate mortgage which is getting ready to adjust
upward, and it will cause the--and the value of your property
is going down because of foreclosures around it----
Mr. Kittle. But it is not the mortgage products all the
time that are causing the foreclosures around the property.
Mr. Johnson. Whatever the cause might be, wouldn't it be
better to enable the debtors to continue to pay something on
those loans as opposed to ensure that they go into default?
Mr. Kittle. No, and for this reason.
Because if you enact this legislation, the future interest
rates will be up by 2 percent. Borrowers will not be able to
obtain credit because the risk will be so high some investors
will pull out of the market. You will hurt future purchases.
Mr. Johnson. I heard you say that. But now you have got a
market of lending as to debtors' principal residences. Then you
have got a number of loans that are made for investment
property in real estate. You have got commercial property
loans. The residential lending industry that is consumed or
that portion of the residential lending industry consumed by
debtor-occupied homes is probably not as great as that overall
market, but yet the overall market allows for a bankruptcy
judge to come in and modify the loans.
Mr. Kittle. Are you speaking on the investment loans?
Mr. Johnson. Any other kind of property, other than a
debtor's primary residence.
Mr. Kittle. Well, there is equity in those properties,
that's correct.
Mr. Johnson. Let me ask Mr. Brewer.
Do you understand the question?
Mr. Brewer. Yeah, I do.
Mr. Johnson. We are only talking about a portion of the
whole market.
Mr. Brewer. It is obviously the industry--I mean, it is
like you are trying to force them to do what is in their best
interest. And the most efficient way to modify these loans is
not through this cumbersome jump through all these hoops
counselor's process, but for those people who cannot make their
loan payments, to modify them through a bankruptcy; and it is
the most efficient way to do it.
Mr. Johnson. Let me add that according to Moody's back in
August, a study by Moody's, only 1 percent of the loans that
qualified for a workout were actually being voluntarily worked
out by the industry.
Mr. Levin, what can you add to that?
Mr. Levin. On that specific question, as I said earlier,
sometimes lenders need--let me put it this way.
If I am going to negotiate with you about something and you
get to make the final decision, you don't have to take my views
into account at all, and you invite me to the negotiating
table, take it or leave it. What negotiation is there? Whenever
one party to a negotiation has all of the decision-making
authority, there is no real negotiation; it is a unilateral
decision.
What this law would do would be to try to put some
negotiating leverage on both sides, regulated by a bankruptcy
judge, regulated by Supreme Court decisions, constraints on the
process where the Supreme Court has said, a valuation has to be
done according to this standard, interest rates have to be done
according to that standard.
There is nothing in these bills that talks about valuation
and interest rate. It is already in the law. These bills would
hitch onto that. That is what I think about voluntary
negotiation.
Sure it can be done, but why would it be?
Mr. Johnson. And it works very well in circumstances other
than debtors' primary residences, which is what is causing the
big problem that we are faced with today and which this
legislation, H.R. 3609--which was introduced by Representative
Miller, who is seated to my right, along with Representative
Sanchez and others--seeks to address.
And so, with that, I will yield back my time.
Ms. Sanchez. The time of the gentleman has expired. I want
to thank all of our----
Mr. Kittle. Madam Chairman, may I make one 15-second
comment, please?
Ms. Sanchez. I will allow you 15 additional seconds and
nobody else gets additional time.
Mr. Cannon. I ask to give him 20 seconds so he can announce
a phone number and we page.
Ms. Sanchez. I will allow you 15 seconds for that purpose,
and we are watching the clock.
You are on, Mr. Kittle.
Mr. Kittle. Okay.
I wish Mr. Zandi were here--and he is not--because the 1
percent figure you just allude to is misleading and inaccurate.
He says 1 percent of all ARMs, 50 percent of the subprime ARMs,
almost 50 percent, have already refinanced. There is a high
percentage of those subprime ARMs that are paying on time.
Therefore, his using 1 percent of all ARMs is totally
inaccurate.
I would encourage you to ask Mr. Zandi to verify his
statistics. And also ask him if his own company, Moody's, even
supports the bill.
Ms. Sanchez. The gentleman's time has expired.
And we appreciate again the patience of all the witnesses.
We have had a number of scheduling difficulties with this
hearing.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask that they answer as promptly as they
can so that we can make them a part of the record. Without
objection, the record will remain open for five legislative
days for the submission of any additional materials.
Again, I want to thank everybody for their time and their
patience. I want to thank Representatives Miller and Chabot,
who joined us. Back in the old days they would have had an
opportunity to participate in the asking of questions of our
panelists, and I am sorry that that was not the case today. But
I do appreciate your presence here and your interest in this
issue.
And this hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Letter to the Honorable Linda T. Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law, from J. Rich Leonard, Judge, United
States Bankruptcy Court, Eastern District of North Carolina
Letter to the Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the Judiciary, and
Member, Subcommittee on Commercial and Administrative Law, and the
Honorable Linda T. Sanchez, a Representative in Congress from the State
of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law