[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HOME FORECLOSURES: WILL VOLUNTARY MORTGAGE MODIFICATION HELP FAMILIES
SAVE THEIR HOMES? (PART II)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
DECEMBER 11, 2009
__________
Serial No. 111-65
__________
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 DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
JUDY CHU, California TOM ROONEY, Florida
LUIS V. GUTIERREZ, Illinois GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
DANIEL MAFFEI, New York HOWARD COBLE, North Carolina
ZOE LOFGREN, California DARRELL E. ISSA, California
HENRY C. ``HANK'' JOHNSON, Jr., J. RANDY FORBES, Virginia
Georgia STEVE KING, Iowa
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
JUDY CHU, California
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
DECEMBER 11, 2009
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 2
The Honorable William D. Delahunt, a Representative in Congress
from the State of Massachusetts, and Member, Subcommittee on
Commercial and Administrative Law.............................. 3
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Ranking Member, Committee on the Judiciary. 4
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Member, Subcommittee on
Commercial and Administrative Law.............................. 5
The Honorable Robert C. ``Bobby'' Scott, a Representative in
Congress from the State of Virginia, and Member, Subcommittee
on Commercial and Administrative Law........................... 7
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............................................. 7
WITNESSES
Mr. Adam J. Levitin, Georgetown University Law Center
Oral Testimony................................................. 8
Prepared Statement............................................. 11
Ms. Faith Schwartz, Hope Now Alliance
Oral Testimony................................................. 25
Prepared Statement............................................. 27
Ms. Margery E. Golant, Golant & Golant, P.A.
Oral Testimony................................................. 45
Prepared Statement............................................. 47
Mr. Henry E. Hildebrand, III, National Association of Chapter 13
Trustees
Oral Testimony................................................. 67
Prepared Statement............................................. 69
APPENDIX
Material Submitted for the Hearing Record
Response to Post-Hearing Questions from Adam J. Levitin,
Georgetown University Law Center............................... 102
Response to Post-Hearing Questions from Faith Schwartz, HOPE NOW
Alliance....................................................... 105
Response to Post-Hearing Questions from Margery E. Golant, Golant
& Golant, P.A.................................................. 108
Response to Post-Hearing Questions from Henry E. Hildebrand, III,
National Association of Chapter 13 Trustees.................... 113
HOME FORECLOSURES: WILL VOLUNTARY MORTGAGE MODIFICATION HELP FAMILIES
SAVE THEIR HOMES? (PART II)
----------
FRIDAY, DECEMBER 11, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:41 a.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Conyers, Delahunt, Johnson,
Scott, Chu, Franks, Smith, Jordan, and Coble.
Staff Present: (Majority) James Park, Counsel; Adam
Russell, Professional Staff Member; and (Minority) Zachary
Somers, Counsel.
Mr. Cohen. This hearing of the Judiciary Committee,
Subcommittee on Commercial and Administrative Law, will now
come to order.
Without objection, the Chair will be authorized to declare
a recess to the hearing. And I will now recognize myself for a
short statement.
Today's hearing is part two of our examination of the
voluntary mortgage modification efforts, with particular focus
on the effectiveness of the Treasury Department's Home
Affordable Modification Program, or HAMP. And I say
effectiveness or ineffectiveness, which is something to be
determined.
For me, the foreclosure crisis particularly hits home. In a
survey of the top 100 metro areas, my home City of Memphis
ranks 18th in the number of foreclosures. And in my town hall
meetings, more people call me and talk to me about their
personal foreclosures than anyplace else. Tonight, of course,
is the first night of Hanukkah, and without a house, there is
no place to put a menorah, so it is particularly relevant that
we start today.
In a comparison of States, my home state of Tennessee
routinely ranks among the top States in the number of
foreclosures. Mr. Hildebrand surely knows, as the Chapter 13
trustee from Nashville, one of our witnesses, the extent of the
foreclosure crisis is such that even some middle-class areas
are affected by growing foreclosure numbers. The foreclosure
crisis extends well beyond subprime mortgages.
With unemployment at 10 percent, many responsible
homeowners find themselves on the brink of losing their homes
through no cause of their own. It could be medical bills that
forced them into bankruptcy. It could be just being laid off
because of the economy and the previous Administration's
failure to regulate that.
So, back in July, we heard testimony that raised concerns
about the effectiveness of the HAMP program. That was in July.
And so far, government's efforts at helping families avoid
losing their homes appears not to be working effectively. Some
of my colleagues and I suspect that this is because the
government's efforts have focused almost exclusively on
encouraging mortgage lenders and servicers to voluntarily
modify mortgage terms for distressed borrowers. It might be the
same as encouraging President Karzai to root out corruption.
Evidence suggests that encouraging voluntary modifications
alone is at best minimally effective at helping financially
struggling borrowers stay in their homes.
I recognize that HAMP at 9 months of age is still
relatively new, but I am deeply troubled by continuing reports
in the media and from the Congressional Oversight Panel,
suggesting the HAMP program is simply ineffective in stemming
home foreclosures. Certainly my constituents think it is
ineffective because they are not getting help, and they have
tried.
This Congress has acted earlier. I cosponsored and helped
champion Chairman Conyers's bill, H.R. 1106, the Helping
Families Save Their Homes Act of 2009, which, among other
things, would have given authority to bankruptcy judges to
modify debtors' mortgage terms in bankruptcy, including a
reduction of the mortgage principal amount. I also sponsored
Chairman Conyers' amendment to the financial regulatory reform
legislation now being considered on the House floor and debated
this morning. This amendment contains language that is
substantially identical to the judicial mortgage modification
authority of H.R. 1106.
In my view, this provision would have substantially and
effectively reduced the number of foreclosures. Unfortunately,
this provision has not yet been signed into law, as it hasn't
been passed by the Senate. Adopting this provision would help
to strengthen any program to encourage voluntary mortgage
modifications by loan servicers. You need a hammer to make the
anvil work.
I thank the witnesses for appearing today, and I look
forward to their testimony. I now recognize my colleague from
the State that gave us our Christmas tree, Mr. Franks, the
distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Franks. Well, thank you, Mr. Chairman.
And thank all of you for being here.
Mr. Chairman, undoubtedly the foreclosure crisis is one of
the biggest issues facing America, but this Committee's
jurisdiction to address the crisis is largely limited to
modifying the Bankruptcy Code. As I have maintained ever since
this issue was raised by the majority, I truly believe that
allowing mortgage cramdown in bankruptcy poses a major threat
to the housing sector and the overall economy.
It is completely unfair to future borrowers. It harms
lenders and investors. And it undermines the stability
necessary for recovery. As we have seen, such a proposal does
not meet the threshold of support needed to pass the U.S.
Senate. This is important, because the uncertainty that
cramdown will create for mortgage originators is exactly what
the housing sector does not need in the currently volatile
housing market. Now allowing cramdown would simply be a
continuation of the heavy-handed government interference in the
housing and lending markets that got us into this precarious
predicament in the first place.
As we know, the political housing establishment, in the
name of increasing home ownership, significantly contributed to
the current crisis. This was accomplished through the
intentional weakening of traditional mortgage lending
standards. These weakened underwriting standards were
encouraged by the Community Reinvestment Act mandated by
Congress and spurred on by Fannie Mae and Freddie Mac.
Now, simply, Mr. Chairman, what I see happening here as my
friends on the left worked so hard to coerce banks into
changing their lending practices and even to making loans that
were untenable, now we see them coming forward and suggesting
that those banks should now make those loans that failed
because of the interference as free as they possibly can. And
it is a recipe that cannot stand.
I hope it is not lost on my friends in the majority that
the lesson of the foreclosure crisis is not that we need more
government intervention, but that we need less. Allowing
mortgage cramdown in bankruptcy would simply be an extension of
the failed government interference in the housing sector of the
past.
Of course, according to the title of today's hearing, we
are not here to discuss mortgage bankruptcy cramdown. We are
here to discuss voluntary loan modifications. And although
voluntary loan modification efforts have not been perfect, I
would submit the evidence demonstrates that lenders and
servicers are making an effort to keep borrowers in their
homes. There have been over 650,000 trial mortgage
modifications under the Administration's Home Affordable
Modification Program and over 5 million as part of the HOPE Now
Alliance.
Lenders and servicers continue to work every day to keep as
many homeowners in their homes as possible. But, Mr. Chairman,
their efforts are stifled and complicated by how poorly
underwritten many of these loans really are and, more
importantly, by an unemployment rate that continues to hover at
or above 10 percent. As we all know, if a homeowner loses their
job, it makes it difficult or almost impossible to repay any
type of debt.
So, Mr. Chairman, I guess at this point, I just look
forward to the witnesses' testimony and hope that they can
provide some positive suggestions, apart from bankruptcy
cramdown, for how we can improve voluntary modification
efforts.
And I thank the Chairman and yield back.
Mr. Cohen. Thank you, Mr. Franks.
I now recognize the next gentleman in order, which would be
the esteemed Vice Chair who just determined that he would like
to make a statement on this issue.
Mr. Delahunt. I will be very brief.
My friend from Arizona, the distinguished Ranking Member,
referenced his understanding of how we arrived here in these
very, very dire reality in terms of the housing market, and I
could not disagree with him more.
And I think the facts are that, if one examines mortgages
issued pursuant to the Community Reinvestment Act, that it is
surprisingly a performance, in terms of foreclosures and
troubled mortgages, that I only wish was true of the entire
mortgage industry. The foreclosure rate is miniscule compared
to the mortgages that were issued by, if you will, the
unregulated market. So that is what the facts are.
. But I think that is going to be determined at some future
time by the commission that is independent, that is bipartisan
in nature, that will review how we actually got here. We didn't
get here because of government. We got here because government
didn't do its job. That is how we got here, at least it didn't
do its job until the election in 2009 and the inauguration of
President Obama. Now we are cleaning up the mess of government
that did not pay attention to its responsibilities.
So it isn't about government overregulating. It is
government abdicating its responsibility to supervise and
ensure that the marketplace works, and works fairly, and is not
susceptible and vulnerable to basically scam artists that
actually have put us into this position.
Now, he is concerned about cramdowns. It is interesting
that, if it is a business property, you can do a cramdown, but
you can't do it if it is a private home. You know, I wonder how
that happened. It would be interesting to go back and look at
the legislative history, Mr. Chairman, to see how that was
achieved. But it's okay to do it for investment properties, for
second homes, for cars, for boats, for every asset but the home
that somebody lives in with their family. I just would like to
see the consumer treated fairly. That is all.
Every marketplace has its rules, and that is what I hope we
can achieve and do what we did before, and have the Senate
finally wake up. Because, unfortunately, despite good
intentions, the voluntary programs don't seem to be working.
And I know people are making an effort to do what is right.
But, you know, I think if we continue to go the route of a
voluntary program, we are just going to extend the pain. The
pain will be extended. And you know what is going to happen, we
are never going to get out of this housing slump. We are going
to continue to see lower and lower prices and additional
foreclosures. And if that is what the minority party wants,
that is what is going to happen.
With that, I yield back.
Mr. Cohen. Thank you, sir.
I now recognize the distinguished Ranking Member of the
full Committee who represents the district which my
predecessor, Mr. Crockett, went to defend and gave his life
for.
Mr. Smith.
Mr. Smith. Thank you, Mr. Chairman. We won't go into the
details as to why one of your distant predecessors moved to
Texas, but we appreciate at least the correlation between the
two States.
We all hope that voluntary loan modifications can help pull
America's homeowners out of the foreclosure crisis.
Unfortunately, modification efforts are being made more
difficult by continuing high unemployment, which is not being
reduced by the Administration's economic policies.
In contrast to these voluntary modification efforts, today
the House is considering an amendment to H.R. 4173 that gives
bankruptcy judges broad discretion to rewrite and cram down
mortgages in bankruptcy.
The bankruptcy amendment to H.R. 4173 not only fails to
solve the foreclosure crisis, but also makes the crisis deeper,
longer, and wider. Allowing bankruptcy courts to modify home
mortgages will have adverse consequences for all, while
providing little real relief to distressed borrowers.
Bankruptcy cramdown will invariably lead to higher interest
rates and less generous borrowing terms for future borrowers.
Unemployment has been a driving factor behind most
foreclosures. But because individuals without regular income
may not file for bankruptcy under Chapter 13, cramdown will do
nothing for those most in need of relief, the unemployed.
Additionally, many borrowers walk away from their homes,
not because they can't afford their monthly payments but
because their homes are mortgaged for more than they are worth.
These borrowers should live with the responsibility for their
decisions, not receive bailouts from bankruptcy courts.
Allowing relief through the bankruptcy system merely
transfers the cost of bad financial decisions to prospective
home buyers who will find it much harder to get a mortgage.
Rather than revitalizing the housing sector, this will prolong
the housing recession.
Furthermore, we must not forget that cramdown will not only
impact lenders but investors as well. These investors often
include pension funds representing the retirement savings of
millions of people. We should not pass the cost of
irresponsible borrowing and lending off on current and future
retirees.
Considering that cramdown will produce only modest results
at best, it is regrettable that the House is once again
considering cramdown. We need to do everything we can to help
solve the foreclosure crisis, but we must avoid measures like
cramdown that punish the successful, tax the responsible, and
hold no one accountable. Hopefully, the House will reject the
cramdown amendment to H.R. 4173, just as the Senate wisely
rejected cramdown earlier this year.
I hope the witnesses can provide us with some positive
suggestions for improving voluntary mortgage modification
programs, suggestions that are not dependent on enactment of
cramdown. However, I don't believe that we will truly get out
of this crisis until we focus our efforts on legislation that
effectively improves the economy, creates jobs, and revitalizes
the housing market.
Thank you, Mr. Chairman. I yield back.
Mr. Cohen. Thank you, Mr. Smith. I now recognize the
gentleman from Georgia, the Committee Chair of the Antitrust
Committee and Courts.
Mr. Johnson. Thank you, Mr. Chairman, for holding this
important hearing on the Home Affordable Modification Program.
It is ironic that the banking industry that made so much money
based on these mortgage-backed securities that they both sold
and purchased, that they would--I mean, they made a lot of
money. When things got bad for them, they got a government
bailout. When they got the bailout, when they got the money,
they failed and refused to use it to help folks on Main Street
with issues such as foreclosure relief, and instead used it in
part for obscene bonuses for work that was supposed to be
meritorious but actually put us in the shape where the citizens
had to bail them out.
And it is ironic that the Representatives in Congress who
care more about the banking industry than they do about the
people that they represent; it is ironic that--it is really an
irony, you know, they will not support bankruptcy judges being
able to restructure loans on the debtor's primary residence.
The banking industry is fighting right now with our TARP money
to oppose that. Why they are doing it, I don't know, but money,
they say money is the root of all evil.
But, today, we will explore the viability of HAMP, Home
Affordable Modification Program, and we will explore whether
voluntary mortgage modification is a viable way to keep
families in their homes. There are many who say that it is
viable, but it is not being exercised in good faith by the
banks. And it is, this modification, mortgage modification is
of extreme importance in today's economy. Currently, our Nation
is experiencing a major mortgage foreclosure crisis, and many
families are struggling to make ends meet.
For homeowners who are struggling with their mortgage, a
foreclosure can be devastating, impacting your credit,
impacting your ability to obtain new employment if you have
lost your job, and it has so many negative side effects. And
foreclosure not only affects the family who owned the house,
but also the neighborhood surrounding the house, bringing down
the value of the surrounding houses, creating places where
criminals and criminal conduct could take place, and just
making the neighborhood look as if no one cares about it. And
it is a psychological problem that ensues in people in the
neighborhoods where there is large foreclosure activity, and it
is just not good for people, and it is not good for America for
us to--and for the banking industry and their supporters, to
not want to take meaningful action to help the folks who are
struggling on Main Street.
HAMP was intended to help homeowners modify their mortgage
payments to make them more affordable and avoid foreclosure. It
was designed to strengthen the housing market and stabilize the
overall economy. It has been alleged that HAMP is a failure and
has failed to help the majority of distressed homeowners modify
their mortgages and stay in their homes. I am deeply concerned
about these most serious allegations, and I am glad, Mr.
Chairman, that you have called a hearing on this particular
issue. If those allegations of ineffectiveness of HAMP are
true, then Congress should act to ensure that HAMP is
restructured to fulfill its intended and very needed purpose.
I thank the Chairman once again, and I look forward to
hearing from our witnesses today, and I yield back.
Mr. Cohen. Thank you, Mr. Johnson.
Does Mr. Coble, the gentleman from North Carolina desire--
thank you, sir.
I now recognize the gentleman from Virginia, the honorable
Mr. Scott, Chairman of the Crime Subcommittee.
Mr. Scott. Thank you, Mr. Chairman. And, as they say, I
will be brief.
There are two issues that I think are important. The first
deals with the fact that many people are what is called upside
down in their mortgages, where they owe more than the house is
worth. In situations where there is secured collateral and the
value is less than the debt, the property is liquidated; the
secured creditor gets what is achieved from a distress sale,
which is usually lower, minus expenses, and that is all they
get.
There is an option to what is called cramdown; that is, you
can reaffirm the debt at the value of the property. That is
virtually always a better deal for the creditor because he is
going to end up getting more than he would have in the
distressed sale minus the expenses. And so that the so-called
cramdown is available in bankruptcy except for home mortgages.
We need to find out why that exception is there and whether
that is an appropriate exception. The other--and whether or not
that is a deterrent to modifications.
The other is whether or not there are some disadvantages in
accounting for modifications, because I understand that there
may be a situation where, if you agree--if a bank agrees to a
modification, they have to realize the loss, which they didn't
have to do before they agreed to a modification, which
negatively affects their earnings. And there may be a situation
where it affects their balance sheet, where the modification
gives them less capital, less lending authority. So whether
there are disadvantages in the accounting system, disincentives
in the accounting system to agreeing to modifications, and also
to why and certainly the reason why we shouldn't have cramdown,
whether or not that would be an incentive to modification.
So I will looking at those two issues, Mr. Chairman. And I
thank you for holding the hearing.
Mr. Cohen. Thank you, sir.
I would now like to recognize the distinguished Chairman of
the Committee, the champion of cramdown, the champion of the
people, the dispossessed, those in need of help, those who are
calling and needing support to live the American way of life,
the distinguished gentleman from Michigan, Mr. Conyers.
Mr. Conyers. Thank you, Mr. Chairman. I think you should
remain Chairman in the next Congress as well. So ordered.
This is important to us because, as you are going to
testify, the subprime mortgage debacle was what triggered the
financial place that we find ourselves in not nationally but
globally as well, because they chopped up all those mortgages,
rebundled them, and sent them out all over the country to all
the markets and all over the world.
Now, our Judiciary Committee, and I think everybody here on
the Subcommittee, supported a simple solution since we have
jurisdiction of bankruptcy to allow the primary home, as
Chairman Scott was referring to, to be able to be adjusted
where there was fairness and a just cause for doing it. We
passed it in the House. The Senate, as usual, they weren't able
to shut off the filibusters, so the bill was withdrawn, and so
we are working again.
I just left a press conference of the Congressional Black
Caucus, and that is what we were talking about; how do we
create jobs and ease this crisis that we are in?
I would like to hear from all of you about the sad fact
that coming out of an economic downturn, getting the jobs rate
up is the toughest single thing that we have to do. And so I am
proud of the Chairman for holding the hearing, and I look
forward to your testimony. Thank you.
Mr. Cohen. Thank you, Mr. Chairman.
I would now like to thank everybody for their statements.
Without objection, other Members' opening statements will
be included in the record.
Mr. Cohen. I am pleased to introduce our witnesses, and we
do them in the order of their testimony. First, thank you all
for participating. Without objection, your written statements
will be placed in the record. I ask you to limit your oral
remarks to 5 minutes. Note that we have a lighting system that
starts with a green light. After 4 minutes, it turns yellow,
which means you have got a minute to go. At red, it is 5
minutes, and you should be finished or in the process of being
finished.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions, again,
theoretically subject to the 5-minute limit.
Our first witness is Mr. Adam Levitin. Professor Levitin
specializes in bankruptcy and commercial law. Before joining
the Georgetown faculty, he practiced in the business finance
and restructuring department of Weil, Gotshal & Manges limited
liability partnership in New York. He also served as special
counsel for mortgage affairs for the Congressional Oversight
Panel.
His research focuses on financial institutions, the role of
the consumer and business credit economy, credit card
regulation, mortgage lending, identity theft, deficit DIP
financing, and debtor in possession financing and bankruptcy
claims trading. Thank you for coming, Professor Levitin, and
will you proceed with your testimony.
TESTIMONY OF ADAM J. LEVITIN,
GEORGETOWN UNIVERSITY LAW CENTER
Mr. Levitin. Mr. Chairman, Ranking Member Franks, and
Members of the Committee, good morning.
My name is Adam Levitin. I am the associate professor of
law at Georgetown University Law Center. I also serve as
special counsel to the Congressional Oversight Panel for the
Troubled Asset Relief Program and am the Robert Zinman Resident
Scholar at the American Bankruptcy Institute. The views I
express today are my own.
We are now over 2 years into our foreclosure crisis,
unequaled since the Great Depression. The picture is grim.
Mortgage foreclosure rates are at four and a half times their
historic level. Over 2 million American families have already
lost their homes in foreclosure sales. Millions more will over
the next few years. The cornerstone of Federal efforts to
mitigate the foreclosure crisis is the Home Affordable
Modification Program, or HAMP.
HAMP provides taxpayer-funded incentive payments to
mortgage servicers, lenders, and homeowners to facilitate
standardized loan modifications. A HAMP modification involves
an initial trial modification period, after which the
modification converts to what is termed a permanent status,
even though permanent modification is actually only a 5-year,
after which monthly payments increase.
In order for a HAMP modification to avert, rather than
merely delay foreclosure, three things are necessary. First, a
trial modification must be commenced. Second, the trial
modification must convert to so-called permanent status. And,
third, the permanently modified loan must not redefault.
HAMP has had some success at the first stage. There has
been around 1 million trial modifications offered to borrowers,
and around 70 percent have resulted in trial modifications
commencing. Commencing the trial modification is easy, though.
It can be done on a no-doc, a verbal basis. Even so, there was
a sharp decline in the monthly number of new HAMP trials
commenced in November, suggesting that monthly enrollment in
the program might have already peaked.
Unfortunately, exceedingly few trial modifications have
converted to permanent status. Data released yesterday by
Treasury indicates that 9 months into HAMP, there are but
31,382 permanent modifications. Treasury has predicted a 50 to
75 percent conversion rate, but the Congressional Oversight
Panel reported that as of the end of October, less than 5
percent were converting to permanent status by the end of the
standard 3-month trial period.
HAMP's trial to permanent conversion rate has improved in
recent months, but it is still at a pathetically low level,
suggesting that the total number of permanent modifications
produced by HAMP will be quite limited, and certainly not
enough to have a noticeable impact on the foreclosure crisis.
Conversion from trial to permanent status, however, is not the
only obstacle for HAMP modification to be successful. The
modified loan must also continue to perform.
It is too early to say much about redefaults on permanent
HAMP modifications, but Treasury's own baseline prediction is
that 40 percent will redefault within the first 5 years. I
think that is optimistic, unfortunately. The closest structural
analog to HAMP modified loans are the exotic subprime loans
that we saw in recent years.
To be fair, the monthly payments on HAMP modified loans are
far more affordable, but both HAMP mods and subprime loans
feature below-market introductory rates that step up over time,
balloon payments, and extremely high loan-to-value ratios.
Indeed, HAMP loans actually look worse than some subprime loans
because of their deep level of negative equity, typically
around 124 percent loan-to-value ratio. The sustainability of
HAMP modifications, therefore, is highly suspect.
Taken as a whole, low conversion rates and high expected
redefault rates suggest that the success rate for HAMP
modifications will be exceedingly low. Even based on Treasury's
own assumptions, there will only be a 20 to 30 percent success
rate, which will mean that current trial modifications would
yield less than 250,000 permanent modifications. That is a drop
in the bucket relative to foreclosures. HAMP is, unfortunately,
incapable of producing the volume of modifications necessary to
have a macro-economic impact, even if it does help individual
borrowers.
Treasury seems to believe that HAMP can be corrected
through some technical fixes and moral suasion. I hope that is
correct, but I would submit that the program is fundamentally
incapable of helping a substantial number of homeowners faced
with foreclosure. What is more, homeowners cannot wait 6 months
to find out if Treasury has finally gotten it right this time.
The mortgage industry has had multiple bites at the apple
to get voluntary modification and refinancing programs working:
private modifications, the Hope Now Alliance, the FHA-secure
refinancing program, HOPE for Homeowners Refinancing Program,
and now HAMP. All of these programs rely on voluntary mortgage
servicer cooperation for success, and none has done the job.
For a variety of reasons, including limited capacity, skewed
incentives, and contractual restrictions, mortgage servicers
are either unable or unwilling to perform sustainable
modifications in sufficient volume.
I would urge Congress to consider modification
possibilities that do not rely on servicer participation. It is
time to try something else. HAMP is not working.
[The prepared statement of Mr. Levitin follows:]
Prepared Statement of Adam J. Levitin
__________
Mr. Cohen. Thank you, Professor.
Our second witness is Ms. Faith Schwartz. Ms. Schwartz is
the executive director of HOPE NOW Alliance, a coalition of
Nationwide servicers, lenders, investors, counselors, and other
mortgage market participants working together to help
homeowners in distress. Previously she served as HOPE NOW's
project manager. Prior to joining HOPE NOW, she was senior vice
president of Enterprise Risk and Public Affairs at Option One
Mortgage Corporation, a subsidiary of H&R Block, Inc., and
worked Not Walk to the Courthouse With You, or something to
that effect. Ms. Schwartz has also served as the chair of the
Mortgage Banking Association's Nonconforming Credit Committee
in both 2005 and in 1996. And she was director of sales
national lending for Freddie Mac.
Ms. Schwartz, welcome. And you may begin your testimony.
TESTIMONY OF FAITH SCHWARTZ, HOPE NOW ALLIANCE
Ms. Schwartz. Thank you. Good morning, Chairman Cohen,
Ranking Member Franks, and Members of the Subcommittee.
My name is Faith Schwartz, and I am the executive director
of the HOPE NOW Alliance, and I appreciate the opportunity to
appear before you today to discuss the loss mitigation efforts
under way.
HOPE NOW is a broadbased industry, a nonprofit alliance
working to reach and help as many homeowners as possible stay
in their homes. Many HOPE NOW servicers are participating in
HAMP. The Alliance is continuing to work with the GSEs and the
Administration in implementing and improving the HAMP program.
HAMP is an important tool to prevent foreclosures.
HOPE NOW servicers are providing other modifications and
workout solutions for homeowners who do not qualify for HAMP.
Also, HOPE NOW members are continuing outreach events for
borrowers who have special--and we also have a new Web tool to
better assist homeowners in applying for HAMP.
The current economic conditions are having a detrimental
impact on homeowners and their ability to receive a loan
modification. HOPE NOW and its members are working hard to help
as many borrowers as possible. Unemployment continues to be our
biggest challenge, and we are working with the industry and
regulators on a solution to assist homeowners who want to stay
in their homes while they look for reemployment.
First, I want to clarify that HAMP is not a voluntary
program. Servicers are required to evaluate all Fannie and
Freddie Mac loans for HAMP eligibility. Further, once a
servicer signs up for HAMP, there is a legal contractual
agreement between the servicer and the Administration requiring
that all loans be reviewed for HAMP eligibility before going to
foreclosure.
On average, over 20,000 trial modifications are being made
every week, and a total of 728,000 have been reported thus far
of trial modifications. And all of those people are making
lower payments every month, substantially lower payments.
The key focus is now turning these trial modifications into
permanent modifications. Servicers are doing everything
possible to gather the required documentation from borrowers to
make the modification permanent. We have suggested to Treasury
some improvements to make this process easier, of which I might
highlight later in the testimony.
HAMP is not the only useful tool that servicers are using
to help borrowers. In 2009 alone, 2.6 million homeowners
received a non-HAMP mortgage workout which prevented
foreclosures. Since mid-2007, that number is 5.8 million
homeowners. There are a variety of tools available to help
distressed homeowners, including loan modifications, repayment
plans, extended forbearance and, if none of them work, deed in
lieu and short sale. We encourage Treasury to report on non-
HAMP workouts in addition to HAMP workouts to give a more
complete picture of what is going on under way and show the
true number of homeowners being assisted and avoiding
foreclosure.
Since March 2008, HOPE NOW has held 55 local outreach
events, helping 50,000 homeowners with the assistance of the
Federal Reserve, banks, municipal government agencies, and
other support, homeowners are given an opportunity to meet with
a servicer or counselor to get help. We are planning at least
30 more in 2010. Additionally, we continue to support the
Homeowners Preservation Foundation's Hotline, (888) 995-HOPE,
24 hours a day, 7 days a week, 365 days a year.
Finally, HOPE NOW has launched a Web portal, HOPE Loan
Port, with six housing counseling agencies and six Nationwide
servicers and a mortgage insurer. HOPE Loan Port counselors can
submit borrowers' applications to HAMP, including full
financial data and all necessary documentation directly to the
servicer. This provides better communication among servicers,
counselors, and homeowners, and eliminates the lost
documentation issue. The objective is to scale this to market.
For loans in bankruptcy, HOPE NOW is working with
servicers, bankruptcy attorneys, and Treasury in creating a
loan workout solution for homeowners in bankruptcy, and I
anticipate there will be progress made on this issue, which
needs to address a best practice for modifications of loans
already in bankruptcy.
There are ongoing issues and struggles with the HAMP
program as has been noted. We are working on many of these, and
I would like to highlight a few that we have recommended to
Treasury. One is to streamline the HAMP documentation. The
documentation requirements of HAMP should strike a balance of
being less extensive but maintain the integrity of
modifications. Document collection and perfection is often the
cause of delays in turning trial mods to permanent mods. We
believe Treasury should eliminate the requirement of tax
returns for wage earners, and allow the use of most recent W-2
or two recent pay stubs. Some servicers do estimate an uptake
of 20 to 30 percent of permanent mods.
Another example is to revise the redefault assumptions in
HAMP NPV model. The net present value methods should be updated
to reflect the positive impact of a trial performance and
income verification. Servicer data indicates that borrowers who
are successful in completing 3-month trial mods have
significantly better performance than those who don't. With
these changes, we anticipate the improvement on redefaults
could include more borrowers, and you could get a better pick-
up on productivity on loans.
In conclusion, HOPE NOW and its members are dedicated to
implementing HAMP, providing solutions to those not eligible
for HAMP, and reaching and assisting as many distressed
homeowners as possible. Servicers continue to expand capacity,
increase efficiency, and enhance execution on loan
modifications, and I am certainly willing to keep you all
informed of that progress. Thanks for the opportunity to
testify.
[The prepared statement of Ms. Schwartz follows:]
Prepared Statement of Faith Schwartz
__________
Mr. Cohen. Thank you, Ms. Schwartz. I appreciate your
testimony.
And our next witness will be Ms. Golant. Ms. Golant is a
former assistant general counsel for--our third witness is Ms.
Marjorie Golant. Yeah. Okay. But she is still a former
assistant. Whatever. Partner of the Boca Raton Florida law firm
Golant & Golant. Ms. Golant currently represents borrowers and
financial service litigation, defensive foreclosure and firm
litigation and bankruptcy mitigation. She handles issues of
securitization and structured finance issues, predatory
lending, predatory servicing in truth lending, Florida Consumer
Collection Practice Act and fair debt collection practices.
Former assistant general counsel for Ocwen Financial, the
second largest U.S. Subprime mortgage servicer, and head of the
residential litigation subgroup, which managed all litigative
mortgages and an approximately 500,000 loan U.S. Portfolio.
Former district court magistrate judge in Pennsylvania.
Judge, would you proceed with your testimony.
TESTIMONY OF MARGERY E. GOLANT, GOLANT & GOLANT, P.A.
Ms. Golant. Thank you, Mr. Chairman, Ranking Member Franks,
and Members of the Subcommittee, I appreciate your inviting me.
Thank you for inviting me to testify regarding my work helping
families facing foreclosure.
My testimony is based upon my work for these families and
also my earlier work on quote/unquote the other side. In
addition to my work for the servicer, I also worked at two
foreclosure law firms prior to that, so I really can see this
from both sides. I want to tell you what the foreclosure crisis
currently means for real people.
The current efforts are not enough. I work on Main Street;
I defend homeowners whose goal is to try to save their homes.
These people are not wise guys who gambled with unaffordable
mortgages. Most are ordinary hardworking Americans. Due to
circumstances beyond their control, they fell into a pit of
quicksand and now cannot get out. They are frightened,
desperate, and losing hope.
Most of us do not realize that if a borrower becomes more
than 60 days delinquent, the servicer thereafter rejects any
subsequent mortgage payments unless at the same time the
borrower cures the default. So even if people manage to get a
new job, get back on their feet, they are still not allowed to
resume making payments, even if they want to and are able to.
The result is that they then often become trapped in the
foreclosure spiral, although many would gladly resume making
full or partial payment.
When they come to me, they are terrified. They have tried
to gain entry into HAMP, tried to work with their servicers,
submitted financials, and even in desperation fell victim to
loan modification scammers, often the same mortgage brokers
that got them into this situation in the first place. All
became my clients when, despite their efforts, foreclosure was
filed anyway, forcing them to face the fact that the loss of
their home was imminent and that they were helpless to stop it.
I set out to try to find them leverage. This is difficult,
since our system currently affords them none. Generally, it is
only when I back the plaintiff into an untenable foreclosure
case that any sort of potential concession emerges. I also make
a formal motion asking the court to require the servicer to
accept a HAMP application. Opposing counsel usually fights
fiercely against this, although my clients were clearly
qualified for HAMP and had tried for months to get into it.
To date, I have filed approximately 60 of these motions. In
only two of the cases, foreclosure counsel sent me HAMP
application packets. All others were contested. Where hearings
have occurred, all but one of the judges granted my motion.
However, not one of my clients who got into a trial mod has to
date received a permanent mod, even after exceeding the 3-month
trial period, submitting all required documentation, and making
all payments.
I take issue with any claims that the foreclosure crisis is
improving. It is not so. Most troublesome is that the owners of
many of these foreclosed homes could and would have made
payments had there been simply a way to get there.
HAMP and purely voluntary programs of course do exist, but
do not do enough or work fast enough to change the landscape
significantly. The real problems are that the mortgage industry
players lack the ability, the authority, and the wherewithal to
really solve this mess, and there is no time to create
something totally new, such as HAMP, and have it move quickly
enough. Structural hurdles make it virtually impossible for the
voluntary programs to work on any sort of meaningful scale
quickly. Something must be done to resolve this problem. What
has been done so far has not worked in quantity and cannot work
fast enough to turn the tide.
Allowing bankruptcy judges to construct judicial
modifications of these mortgages should be given a chance. I
commend you, Mr. Chairman, the full Judiciary Committee, and
indeed the full House of Representatives for adopting
legislation that would allow for mortgage modification in
bankruptcy, and I appreciate your fighting spirit for pushing
the bill again as an amendment to the financial services reg
reform bill now being debated by Congress.
Such an approach could and could immediately make a
difference without a learning curve and without any cost to the
taxpayers. Bankruptcy judges have extensive experience dealing
with financial problems, and they are optimized for just such a
function. Bankruptcy courts routinely resolve debt and
delinquency issues. Judicial modification of many kinds of
secured loans has been the norm in bankruptcy. The process is
rigorous. Solutions are formulated wherein the best interest of
the creditors are prioritized. The entire process is overseen
by the Department of Justice.
Because of the tangled web of interests and lack of
authority to restructure the loans, servicers are unable to do
it and are not vested with any other real option but to
foreclose. We need something more. If bankruptcy courts are
given the ability to address the problem, the results would be
a rigorous yet fair solution that would in a significant number
of cases provide mechanisms to save homes, and it would be
immediate. Thank you very much for your time and attention.
[The prepared statement of Ms. Golant follows:]
Prepared Statement of Margery E. Golant
ATTACHMENT
__________
Mr. Cohen. Thank you, Judge. I appreciate your testimony.
Our final witness is Mr. Henry E., Hank, Hildebrand, III.
Mr. Hildebrand has served as standing trustee for Chapter 13
matters in the Middle District of Tennessee since 1982, and as
standing Chapter 12 trustee for that district since 1986. He
has been a friend of mine since 1982, working closely with the
Tennessee General Assembly on matters above and beyond these
issues. Counsel of the national law firm of Lassiter, Tidwell,
Davis, Keller & Hogan, and an honorary Kentucky colonel and
Tennessee colonel. He is a fellow of the American College of
Bankruptcy and serves on its education committee. He is
chairman of the Legislative and Legal Affairs Committee of the
National Association of Chapter 13 Trustees and the board of
directors of that same group's consumer bankruptcy education
group. Adjunct faculty member at the National School of Law and
St. Johns University School of Law and highly respected member
of the National and Tennessee State community.
Thank you, Mr. Hildebrand. Will you proceed with your
testimony?
TESTIMONY OF HENRY E. HILDEBRAND, III,
NATIONAL ASSOCIATION OF CHAPTER 13 TRUSTEES
Mr. Hildebrand. Thank you, Mr. Chairman.
And thank you, Mr. Frank, Members of the Committee.
I am delighted to appear here today on behalf of the
National Association of Chapter 13 Trustees. There are about
212 Chapter 13 trustees across the country who are charged with
the responsibility of administrating the Chapter 13 program
across the country.
Chapter 13, of course, is the mechanism in bankruptcy
whereby there is an administration of repayment in bankruptcy.
Debts are actually paid back. We are now paying back
approximately $6 billion a year of debt repayment through the
Chapter 13 program.
Traditionally, Chapter 13 has constituted the last resort
of a borrower in which to save a home in which the mortgage is
in default. It has provided the tools whereby that mortgage can
be cured and payments can be maintained. And over the time that
Chapter 13 has been effective since 1979, millions of families
have saved their homes through Chapter 13, curing defaults,
maintaining mortgages, and getting themselves back on their
feet.
It is remarkably successful where I come from. It is
remarkably successful across the country. But the Chapter 13
model in curing mortgage defaults and maintaining payments is
based upon a mortgage model that is no longer a valid model. We
have been inundated with and we are now facing what I call the
exotic mortgage, the mortgage that doesn't fit the natural,
historical model of mortgages, and debtors, borrowers getting
these mortgages not only didn't understand what they were
getting into, they fell into default not even knowing what the
requirements were under their own mortgage.
So the question is, does Chapter 13 from a model from 1979
provide the tools to be able to cure the problems that exist
under these exotic mortgages? The Chapter 13 trustees are
disappointed that the Senate didn't agree with the House in
providing a tool for dealing with the exotic mortgages in
Chapter 13. Bankruptcy has been described as the last platform
whereby you create a new dialogue between parties who can act
in their own economic self-interest.
As Professor Allen White's study--and I know he testified
before this Committee in the spring. He reviews these, and he
points out that the economic interests would seem to point
toward increased HAMP modifications. As he reported in a report
I just got yesterday, mortgages in the pool he looked at,
mortgage modifications result in a loss of approximately
$12,000 per mortgage. In foreclosures, the loss is
approximately $147,000 per foreclosure. That is not acting in
your own economic self-interest.
Why? Well, risk is not connected with reward under these
mortgages. The model simply does not work. Legal barriers exist
between the servicing entity, the mortgage entity, and the
entity that actually has the possibility of reward.
So the HAMP programs you are seeing have been largely
unsuccessful in dealing with the vast number of borrowers that
are in default. It is not what we wanted. It is not what you
wanted. It is not what Treasury wanted. But it is the truth;
the HAMP system right now does not work.
Can we make it work better? I hope so. And the trustees are
certainly willing and participating now in processes where we
can make this work better. Can it work better where borrowers
are in bankruptcy? Remember, bankruptcy, they are there, many
of them, in Chapter 13 in order to save their home. They
already have the incentive to try and save their home. They
want the house. They want the mortgage paid. They just need
help doing it. Bankruptcy creates a system whereby
documentation can be provided. Let's change the HAMP program to
allow the bankruptcy documentation to suffice instead of adding
an additional layer.
Does this mean that, because it didn't work, that we stop
on the process of trying to make HAMP better? No. We still need
to do that. We need to make it work. So the trustees would
encourage you to continue to look at the tools that can make
Chapter 13 a better mechanism to cure defaults and get these
mortgages back on track. If, as Representative Franks has
pointed out, that 1106 is not the way you want to go, and I
would agree, the trustees would agree that 1106 can be tweaked
or can be improved. But it does recognize, as Mr. Scott had
pointed out, that Chapter 13 recognizes that values for
mortgages that are being cured are different than the
distressed values that are facing in foreclosure.
The second recommendation we would make, bring trustees and
attorneys into the HAMP process. Do not exclude them. Do not
ignore them. Encourage trustees and debtors attorneys to
participate in the process.
And, finally, we would recommend that if the HAMP process
is stalled, doesn't work, results in silence, create judicial
review of the HAMP process. If the mortgage modification is not
acceptable, at least take a look at allowing the judges to
review the determinations made in the HAMP process.
Thank you for the opportunity to be here, Mr. Chairman. And
I am willing to answer any questions you may have.
[The prepared statement of Mr. Hildebrand follows:]
Prepared Statement of Henry E. Hildebrand, III
__________
Mr. Cohen. Thank you, Mr. Hildebrand. You have shown that
you are as knowledgeable about preserving the use of and
preservation of real assets as you are liquid assets.
Mr. Hildebrand. Thank you, Mr. Chairman.
Mr. Cohen. We now begin questioning. And I recognize myself
for 5 minutes for questioning.
Ms. Schwartz, you are put in the somewhat difficult
position of being the only person here that attempts to defend
the HAMP program. Professor Levitin says it is a failure. Judge
Golant apparently says something similar, and so does Mr.
Hildebrand. They all have suggestions, like the cramdown
provision. Tell me the things that they have said that you
agree with.
Ms. Schwartz. Thank you for the question.
Listen, I think we all get frustrated that we can't see all
of this wrapped up with a bow and finish every month at a
greater number. But the truth is there are a lot of people
paying $500 or $600 less on a mortgage. In fact, 728,000
people.
I think what the government has done through HAMP has put
some uniformity into the program that there has not been across
the market. I have been involved for 2 years, as you know, on
this. So that is a good thing. Pull-through will be a good
thing. Working with third parties will be a good thing. Time is
of the essence. We all know that. There are 3.5 million people
60 days late on their mortgage.
That said, what I agree with is that we should work on
loans that are already in bankruptcy and figure out a way to
help those people get modifications. That is something we are
already working on with some of my colleagues at the table here
with Treasury.
Another issue is not one loan should go to foreclosure that
hasn't been reviewed for a HAMP mod or another mod. Because,
let me assure you all, the loans that fail HAMP will get other
mods, and they do, as do many other----
Mr. Cohen. Let me interrupt you slightly, because I know
you have many other areas to go to that you want to agree with
these folks.
Judge, you are shaking your head. Tell me why.
Ms. Golant. They are not getting reviewed. I only see
people when they have tried their hearts out and have not
gotten reviewed. They haven't gotten any answer. And while they
are still waiting for an answer, the process server shows up
with a foreclosure complaint. Then they come to me. So I know
they are not getting reviewed.
Mr. Cohen. Ms. Schwartz.
Ms. Schwartz. Yes. So a requirement and a legal contract
with the United States Government for everyone who has signed
up for it is this loan will be reviewed for eligibility on a
HAMP modification, and many others.
The foreclosure--rate of foreclosures has gone down, the
foreclosure sales, and there is this cue of people in waiting
for sales while they are being reviewed for eligibility. And
they haven't all been timely reviewed, we all know that because
we are seeing the numbers, but that is the process that has
been prescribed, and it is the process within these
organizations to do so. And maybe it is the lack of
communication that is half of this.
Mr. Cohen. Professor Golant, let me ask you this. The
question on the cramdown, as the other side says, this will dry
up the market and raise credit rates and all these things and
make it more difficult for people to get mortgages if we do
this. We allow family farms to have their conditions modified,
homes modified, vacation homes, yachts. Have you seen this in
financing for yachts and vacation homes?
Ms. Golant. No, Mr. Chairman. And in fact, the bill as I
understand it is only for existing mortgages anyway. So it
couldn't possibly affect new finance.
Mr. Cohen. Anybody else seeing a big problem in this
country with financing yachts?
Mr. Hildebrand. I serve as the Chapter 12 trustee in the
middle district and have done that for 20 years. And in the
context of farmers, they are allowed to do this. They are
allowed to restructure their home mortgages or farm mortgages
over the period of time longer than the 5-year term of the
plan, and they have worked, and it has not caused farm credit
to disappear.
Mr. Cohen. Professor Levitin, you say it is a failure. Is
there any way to cure HAMP.
Mr. Levitin. Well, it depends on what you want HAMP to do.
If you want HAMP to have a macroeconomic impact, I don't think
there is any way to fix it.
That said, it doesn't mean we should toss HAMP out. HAMP
does help people. I mean, to the extent we can help any person
who is in foreclosure, we should try to do it. And HAMP is
helping some people, but it is just not ever going to produce
the volume we need to keep up with foreclosures.
Mr. Cohen. Does anybody know what percentage of people it
is helping? Is it like 4 percent?
Ms. Schwartz, do you have any idea?
Ms. Schwartz. Well, I think we don't know that answer yet,
because they are all in process, 60, 90, 120 days under the
grace period of getting their final docs in. So that
measurement is difficult to assess.
Mr. Jordan. Mr. Chairman?
Mr. Cohen. Yes?
Mr. Jordan. Just in response to the question, we had a
hearing in Cleveland this Monday with Mr. Kucinich on the
Domestic Policy Subcommittee of OGR. Testimony from Ms.
Caldwell from Treasury was 650,000 are in some type of
preliminary modification trial phase.
But, to date, my numbers that we got, confirmed by Ms.
Caldwell, were 1,711 families in the HAMP program. That is all
that have had their loans modified.
Mr. Cohen. 1,711 out of 65,000?
Mr. Jordan. 650,000 are in the trial phase. 1,711 families
have had their loans actually modified; that is it--permanent
modification. It is that bad.
Mr. Cohen. Thank you, Mr. Jordan.
Ms. Schwartz?
Ms. Schwartz. I just actually had the number from the
Treasury report that there are 31,000 permanent modifications.
And, remember, you have to be 90-days current with full
documentation to get permanent. There are a substantial number
of people current on their payments but have not documented,
just to keep the distinction.
Mr. Cohen. Before I yield to the Ranking Member of the
minority, Judge, do you have a response?
Ms. Golant. I do, your honor--I am sorry, Mr. Chairman--
because----
Mr. Cohen. No, ``your honor'' works. I like that.
Ms. Golant. Yes, your honor. I try to get people even to be
allowed to apply for HAMP, because, despite the participation
agreements, many servicers will not even allow it. So I have
people that have also made their 3-month payments and they are
still not getting permanent mods.
But I am talking about people that can't even get in the
door. I don't know why, but it is not that I am not trying. And
when I try, I get resistance. I don't get a package, ``Here,
send it in, and we will consider it.'' I get a hearing in front
of a judge, because they won't agree.
Mr. Cohen. Thank you.
I now yield to the Ranking Member from Arizona, Mr. Franks.
Mr. Franks. Well, thank you, Mr. Chairman.
Mr. Chairman, let me just, if I could, begin by trying to
clarify a couple of things.
Related to the comparison on the Chapter 12, the family
farm comparison, there were only 314 of those last year. So it
is, kind of, not a really very good comparison.
And I also wanted to just--because I understand that there
is a partisan disagreement over how this challenge came into
existence. But there are a lot of statements on the other side
of the aisle that says that rebundling and all of these things
that were done with the derivatives were the problem.
But I just want to remind everyone, if the loans that were
the fundamental matrix of those instruments, if the loans that
made up those financial instruments had performed as one would
have expected them normally to do so, none of this would have
happened. All of the derivatives would have been fine. I am not
suggesting it was a perfect system, but I am saying that the
problem, the thing that caused this problem was that bad loans
were made.
And, certainly, the CRA put a great deal of pressure on
banks to make bad loans. And banks, due to their own fault or
due to the pressure that was in the system, kind of did away
with the three main legs that hold up loans. One of those is
income, one of those is credit history, and, of course, one of
those is the collateral, how much money they put into the loan
in the first place. And when you take those three things out,
as a lot of that happened, that is what catalyzed this problem.
And we should be, as a Congress, looking very hard on ways
to prevent that again and at least to face that squarely. And I
don't really think it is a partisan issue, and, unfortunately,
it has become that. But I don't know what else we can do with
that.
Ms. Schwartz, I have been very obviously impressed with
your testimony today. You note that there have been 680,000
trial modifications under HAMP. What does it take to convert a
trial modification to a permanent modification? And what are
the main impediments to making those conversions?
Ms. Schwartz. Well, I could just name a few. I think
because there are taxpayer dollars involved with these
modifications, what you have seen in the past is maybe less
rigorous dotting of the ``i'' and crossing of the ``t'' before
you would grant a permanent modification. It would be
performance on pay history that gets them there, you know, some
documentation like a hardship, maybe a pay stub, et cetera.
This is more prescriptive. In fact, if you need a W-2 and
tax returns and a 4506(t) and the hardship letter and the other
documentation, if it is going back and forth with servicers,
counselors, and the borrower 10 times on the same mortgage, it
is very difficult to be efficient and effective.
And with any government program, you are at risk of making
a mistake, and no one wants total make a mistake if they put
them into a mod. A lot of process and friction is in the
system, understandably. These are taxpayer dollars.
So that is the biggest difference, is documentation,
streamlining, and trying to contact with the borrower that
don't return calls, and maybe 120 days later you start getting
into the process. There are just all kinds of issues.
Mr. Franks. Is there any way to eliminate some of these
impediments without putting the program in the same kind of
challenges that got us here?
Ms. Schwartz. Yes, sir. I mean, we do have some
recommendations, and to the government, that we think there are
ways to improve it. I don't know that you are going to get the
pull-through that everyone wants and expects for a program like
this. And, again, unemployment is one the biggest drivers. Lack
of income means you cannot modify a loan.
Mr. Franks. I guess that is my question. How is
unemployment affecting mortgage-modification efforts? And isn't
it, or is it, the single greatest impediment to these
modifications?
Ms. Schwartz. I think it is one of the biggest ones, in
that we are all in such a changing landscape that what was true
120 days before when you start the trial modification, a loss
of income of one spouse, maybe overtime being cut changes the
dynamics. And when the income documentation gets documented, it
is different than what it was 90 days ago.
And so this changing landscape, it is difficult to keep the
process in place. And it is a threat, I think, to all of the
good work going on with all parties, whether it is counselors,
lawyers, and servicers. This changing landscape is clearly the
issue.
Mr. Franks. Mr. Chairman, I guess, with that, I will just
suggest that one thing that we should be able to get together
on on both sides of this aisle here is to recognize the
importance of jobs and productivity to solving these problems.
It is the only way home.
And it is astonishing how a lot of the economists can talk
in big words, but, fundamentally, the economy is about
productivity, and that is measured in large part by jobs. And I
hope that we can get together and face that. I don't know if
either side has the answer on how to fix it, but we should
agree that that is a huge, huge issue.
And I yield back.
Mr. Cohen. Thank you, sir.
I would now like to recognize Mr. Delahunt. Would you like
to ask questions? Mr. Conyers passes, I believe.
Mr. Conyers?
Mr. Conyers. No, I don't pass.
Mr. Cohen. You don't pass. You pass everything; you pass
with honors.
You are recognized, Mr. Conyers.
Mr. Conyers. You can't Chair two Subcommittees at the same
time.
Let's see what we are talking about here. This is, I won't
say a funny kind of hearing, but we have two witnesses that say
everything is going along about as well as it can and two that
are clearly dissatisfied.
Now, my investigator tells me that the HOPE coalition is
made up of community counselors, bankers, and mortgage company
officials. True?
Ms. Schwartz. Yes, and investors and Freddie Mac and all
the nonprofit, HUD-approved counseling agencies, that is
correct.
Mr. Conyers. How many bankers?
Ms. Schwartz. Well, we have about 34 different servicing
institutions. Many of the top banks are members of HOPE NOW.
Mr. Conyers. They are the ones that created the problem.
Ms. Schwartz. You know what, sir? They are the ones who
need to get you out of this. You need to work with us----
Mr. Conyers. Oh. Because they got us into this.
Ms. Schwartz. They are the ones in charge of executing
modifications and helping borrowers through loss mitigation.
And to not have them work through this to help get out of it
would be a mistake.
Mr. Conyers. How many are there?
Ms. Schwartz. Pardon me?
Mr. Conyers. How many bankers are there, just roughly?
Ms. Schwartz. I just don't know the breakout of who is--let
me think. Maybe it is 18 out of 33 or something. I have to
relook at that.
Mr. Conyers. Well, look at it, and we want to put it in the
record.
Ms. Schwartz. Sure. Sure.
Mr. Conyers. What about mortgage company people?
Ms. Schwartz. So all of these institutions----
Mr. Conyers. All of them are? Most of them are?
Ms. Schwartz. Well, I mean, we have the resources of people
to work with us on all the Committees and help go to the
outreach events and send teams of people to meet with
borrowers. So there are all, kind of, walks of life within
these companies.
Mr. Conyers. Yeah, how many?
Ms. Schwartz. Thousands, probably, working to help. I don't
understand the question perhaps. I apologize.
Mr. Conyers. That is all right. Well, that is a great
acronym, HOPE. Reverend Jesse Jackson, ``Keep hope alive.''
How many people have you helped?
Ms. Schwartz. This year alone, the records on 40 million
loans, which is the majority of the market share, indicates
that 2.6 million people have had either modifications or
repayment plans, in addition to the 700,000 government trial
plans. 3.4 million people, while 700,000 went to actual
foreclosure sale. Four times higher.
Mr. Conyers. What am I missing in this question, counsel?
What is the basis for saying--you are saying millions were
saved. How can you identify who was prevented from foreclosure?
The numbers you reveal are staggering and raise some questions.
Ms. Schwartz. Well, those are actually records we get on
the data of people that are in repayment plans or actual
modification, which is a structural change in a contract, and
we have the government actual modification trials. And then
foreclosure sales are records, and so we know how many go to
actual sale.
And there are a lot of people in between. There are
millions of people whole need help, and we know that. So I am
acknowledging that. What I am trying to share with you is data
that is very strong data around this issue.
Mr. Conyers. Professor, help me out here.
Mr. Levitin. Sure, Mr. Chairman.
First, it is important to distinguish between the private
modifications counted by HOPE NOW and private modifications and
repayment plans that are included in Ms. Schwartz's statistics
and HAMP modifications. There have been, as Ms. Schwartz notes,
several million repayment plans and private modifications.
There are a couple of important things to note about those.
First, we don't know what the terms of any of those are.
And the terms actually matter. A repayment plan can be a very
helpful thing or it can be a useless thing, depending on its
terms. So just looking at an absolute number doesn't really
tell us that much.
Secondly, there is some element of double-counting in the
repayment plans and modifications. Because often a borrower
gets in a repayment plan and fails in the repayment plan and
then gets a modification and maybe fails in that modification
and gets another modification. And we don't know how long, you
know--how this string of events goes.
But just looking at, sort of, the cumulative numbers from
HOPE NOW compared with foreclosures is not the most meaningful
comparison. Certainly, HOPE NOW and its members are trying to
do various mitigation actions. How effective those are is
another question entirely.
Mr. Conyers. Well, you know, this isn't working out so
well, Mrs. Schwartz. What is the problem here? What is the
difference between what I asked you and what Professor Levitin
responds? Does he understand this program fully?
Ms. Schwartz. He does. We have talked several times.
And I think what is important here, sir, is--I know you are
right, in that if 30 percent or 40 percent go back in default
and you try another modification--for instance, maybe the HAMP
modification--you know, that is another bite at the apple
before you go to foreclosure.
And what I would say with my numbers that are accurate is
we count every foreclosure, so they would flow through our
pipelines and show you what has happened. And, clearly,
millions of people are not in the final stage of foreclosure
over the efforts. That is clear. Two out of three don't go to
foreclosure, And that is historic in the last year, through
these efforts. It used to be one out of two go to foreclosure.
That said, more work needs to be done, I totally agree. But
I would say that every loan should be reviewed for a workout
alternative. And that is the prescriptive legal agreement of
what HAMP is. And after they have been exhausted, they go to
foreclosure sale. And, you know, I would like to think that
that is exactly what is happening, but I don't know every
answer on this one.
Mr. Conyers. Well, you say the mortgage bankers and the
mortgage people are the ones that can help us get out of it.
Who is it that helped us get into it?
Ms. Schwartz. Well, I think there are a lot of parties to
all these transactions. We all know that.
Mr. Conyers. Yeah. But I am talking about these two groups.
Ms. Schwartz. We have counselors----
Mr. Conyers. Don't you want to blame the subprime mortgage
thing as triggering this off?
Ms. Schwartz. You know what? Those have stabilized. We are
into the prime--two to three times higher foreclosures on prime
mortgages.
Mr. Conyers. Yeah, but I am talking about what started it.
You shake your head. That means yes?
Ms. Schwartz. Yes, I think it started in the product of
high-risk layering and subprime, and it has migrated to a
different issue. Negative equity is now a big issue that hasn't
been discussed. That is another haunting issue, as is
unemployment. So the nature of making a modification has
changed.
Mr. Conyers. But the bankers and the mortgage people are
the ones that gave out the subprime mortgages.
Ms. Schwartz. I am working with the loan servicers, sir,
whose job is to----
Mr. Conyers. I am not talking about that one guy. I am
talking about the industry people. These are the guys that got
us into this. Now, most people recognize and acknowledge that.
This is a couple of years old now. So why are we going back and
forth and modifying all of this?
I am going to have, Ms. Schwartz, some additional questions
for you to submit for the record because of the 5 minutes. And
the Chairman has been generous. We need to go into this a
little deeper.
And I thank the gentleman.
Mr. Delahunt. [Presiding.] Yeah, and I thank the Chairman
of the full Committee.
We have a series of votes. Let me inquire of the panel. I
think this is an important hearing. It is my understanding that
we are looking at probably a 45-minute recess. If you are
willing to come back, I don't want to encroach on your time,
but I think this is an important hearing. It might only be one
or two of us that come back, but I think hearing from you at
this point with the kind of questions that are being posed by
the Chairman of the full Committee, Mr. Conyers, is important.
If it is a significant inconvenience, individuals,
obviously the Chair, would not be in any way offended if you
didn't return. But it would be great to hear from you, because
I think you all have so much to contribute.
Can I have a show of hands if there is a genuine
willingness to return around quarter of 2:00?
Then that is what we will do.
Mr. Scott. Mr. Chairman?
Mr. Delahunt. Yes, Mr. Scott?
Mr. Scott. Could I be recognized? I just have a couple of
questions that I would like to ask before we go.
Mr. Delahunt. Of course. And what we will do, we will end
up and give the remaining time, as much as he needs, to Mr.
Scott. He won't return, but I promise I will. And I know the
Chairman of the Committee, Mr. Cohen, he will be here, because
he, too, is a Kentucky colonel.
And, with that, I will yield to the gentleman from
Virginia.
Mr. Scott. Thank you, Mr. Chairman.
I wanted to ask Mr. Hildebrand, in a normal bankruptcy, if
you have a yacht and it is upside-down and you owe more than
the value of the yacht, what happens?
Mr. Hildebrand. The implication in the question is, can
bankruptcy judges, can a bankruptcy plan structure and
recognize the economic reality that you mentioned in your
opening remarks, that the collateral is the extent of the
secured claim, whether it is a yacht or a piece of business
equipment or whether it is an airplane for United Airlines or
whether it is the plants for General Motors?
Bankruptcy judges are entrusted with the ability to make
these valuations, determine them for everything except the home
mortgage.
Mr. Scott. Okay. Now, on the yacht, you could reaffirm the
debt, but you would only have to reaffirm the debt up to the
value of the yacht, is that right?
Mr. Hildebrand. If I could distinguish, reaffirmation would
require a voluntary consent on both sides, pretty much like an
agreement. On a plan, like a Chapter 11 plan, Chapter 12 plan,
or Chapter 13 plan, it is the value you provide. And as long as
the court determines that the value is fair and that it is a
fair market value for whatever the collateral is, that is the
extent of your secured claim that you must pay.
Mr. Scott. Okay. Now, if the debtor wants to reaffirm, does
he need permission from the creditor?
Mr. Hildebrand. For a reaffirmation in a Chapter 7, yes,
sir.
Mr. Scott. What about a 13?
Mr. Hildebrand. In a 13, no. That would be part of the plan
process in the restructuring.
Mr. Scott. Okay. So, in a 13, the debtor can say, ``I want
to reaffirm,'' and the debt he has to reaffirm is the value of
the yacht at that time?
Mr. Hildebrand. The plan he proposes is whatever the value
of the yacht is----
Mr. Scott. Right. And that is probably a better deal for
the creditor, because it is not a distress sale minus expenses.
Mr. Hildebrand. And as we have the amendments from 2005, it
recognizes that the value we are giving this is not distressed
value, wholesale value, auction value; it is retail value.
Mr. Scott. Okay. Now, the reason that a person would
reaffirm at a higher rate on a home is essentially not because
a creditor would get any more in a liquidation, they would
actually get less, but because he is over a barrel if he
doesn't reaffirm, he is homeless. Is that right?
Mr. Hildebrand. To the extent a borrower agrees to pay more
than the economic dictates, the answer would be yes.
Mr. Scott. Okay. Now, to take advantage of a debtor in that
case, is that fair?
Mr. Hildebrand. I am not sure I am the one to answer what
is fair and not fair.
Mr. Scott. Making them reaffirm to higher economic value
than the creditor would be entitled to on liquidation because,
if he doesn't reaffirm, he is over a barrel. Either he
reaffirms at the higher rate or he is homeless.
Mr. Hildebrand. Traditionally, bankruptcy law has been
created to be fair to the most people involved. And, in the
context of putting one creditor entity, or any entity, having
more clout, if you will, more ability to hold somebody over a
barrel, that works to the detriment not simply of the borrower
or the debtor, but all the other creditors in the case.
Mr. Scott. I think I hear you saying that is not fair,
which we would agree with.
Mr. Hildebrand. I wouldn't disagree with that.
Mr. Scott. Mr. Chairman, I would ask all of the witnesses,
because we don't have time for a coherent answer, on accounting
incentives and disincentives, whether or not the generally
accepted--what is it, GATT?--generally accepted accounting
practices give a disincentive to modifications or incentives to
modifications.
I understand there may be some realization problems that
may affect the balance sheet and earnings that would give
people a disincentive to modify. And if any of the witnesses
can comment on that briefly or in writing, I would appreciate
it.
Mr. Levitin. Mr. Scott, I do not speak as an expert on
accounting principals, but I can say this: Accounting
principals are a disincentive for doing modifications that
involve principal writedowns. Because when you write down
principal, that immediately appears--that has a loss
realization event on a balance sheet. Whereas if you lower
interest rates, that does not affect how the loan appears on a
balance sheet, even if they would have the same effect----
Mr. Scott. And all of that is artificial, because the fact
that you modified doesn't put you in any better position,
because you are about to lose even more if you let the thing go
into foreclosure.
Mr. Levitin. That is correct.
Mr. Delahunt. I have been notified by staff that, rather
than 40 minutes, it is closer to an hour and 15. Now, you know,
I am sure that some of us are more than willing to come back
around 2:15. If that presents a problem and you can't make it,
that is fine. I just think your testimony is that important, I
will show up and we will have a conversation.
And if anyone here is significantly inconvenienced or has
anything else to do, like Christmas shopping or whatever, we
understand. We don't want to impose. But I think maybe Mr.
Coble and maybe myself and I know the Chair of the Subcommittee
will also return.
So, why don't we plan on seeing each other around 2:15,
2:20? There is a great cafeteria here.
And we are in recess.
[Recess.]
Mr. Delahunt. We are back in session.
Let me extend my gratitude to this panel. Not only have you
all made a contribution to the discourse, but you have
established the fact that you have patience and can endure,
which means that you would make fine Members of Congress,
particularly in the Senate--or in the House, waiting for the
Senate to do something.
And I think we are going to be joined shortly by the Chair
of the Subcommittee, Mr. Cohen, but let me proceed. And let me
pose a hypothesis. I see clear problems in terms of utilizing
voluntary modifications. I think it has been articulated by at
least three of our panelists. Clearly, any particular program,
no matter how well-intentioned, would have to be revamped, take
into account all of what I believe to be obvious impediments to
success. That requires a sustained effort and much consultation
among the parties.
I read something recently in the media about how the
Treasury Department was going to shame those banks who were not
or did not appear to be cooperating, in terms of helping to
resolve this problem. I just don't think that works.
And it is not just bankers. I don't want to particularly
castigate anyone. I think it is just that there are different
viewpoints, different obligations. Banks, other corporations,
have a primary obligation to shareholders. There are obviously
self-interests. Self-interest is not limited to lenders. It is
not limited to politicians. It is not limited to professors or
CEOs of nonprofits. It is what human nature is all about. But
there needs to be a balance.
Now, in terms of the voluntary programs, does this make
sense: If there were--and this is the hypothesis--if there were
authority conferred on the bankruptcy courts to reduce
principal, in your individual judgments, would we find lenders
moving more quickly to voluntary programs?
Since you are shaking your head, Ms. Golant, let me begin
asking you, am I anywhere in the ballpark? Would it provide
leverage?
Ms. Golant. Absolutely. Absolutely. And that is one of the
huge issues now. And that is why when I get the plaintiff, the
bank, in a jam in the foreclosure case, that for the first time
gives the borrower leverage, then we get somewhere.
Right now, other than in that very limited context,
borrowers have no leverage. So, yes, the possibility of a
judicial modification or of a Chapter 13 would certainly
provide leverage.
Mr. Delahunt. See, that is what my instinct tells me, and
that, you know, programs like HAMP--and, you know, I appreciate
the fact that there is substantial counseling going on through
these programs. I think that is a positive. But I don't think
it gets us to the point where we are dealing with the issue.
I think what we are doing by going the voluntary route is
delaying--delaying the ultimate resolution. And we are just
extending the pain and suffering and possibly and potentially
exacerbating into a full-scale crisis that, at some point in
time, could really do permanent and serious damage to not just
real estate but to our overall economy.
Mr. Hildebrand?
Mr. Hildebrand. Mr. Chairman, I administer about 600 new
Chapter 13 cases every month. And in each one of those cases,
there is issues that deal with the valuation of collateral or
the interest rate that is an appropriate interest rate, how
much debtors have to pay back. And what we have seen is that
only one or two or three maybe a month have actually litigated,
because in the backstop or the backdrop of the fact that there
is a judicial remedy, a judicial response, negotiations take
place.
So, as I said in my original testimony, bankruptcy creates
a platform upon which there is negotiation, where parties can
act in their own economic self-interest.
So I totally agree with your hypothetical. And it is
accurate that, whether it is a modification of the principal
amount or whether it is a judicial backstop to the HAMP
program, where if HAMP is silent or there is no response or the
HAMP is somehow mysteriously denied, there is some judicial
response to review it, to see exactly what is going on.
And, in that context, which is not the same as the 1106
response, it is something different, which is should there be a
judicial backstop, which is the purview of this Committee, and
it would be appropriate.
Mr. Delahunt. Would the two of you agree that it would make
Ms. Schwartz's program significantly more effective?
Mr. Hildebrand. No question.
Ms. Golant. Yes.
Mr. Delahunt. And we would see data that, in a relatively
short period of time, would reflect?
Mr. Hildebrand. There is no question that, if a
modification was requested and there is silence, then--and
there is a backstop to that, whether it is a judicial review,
then there would be a heavy incentive to participate in the
HOPE program or the HAMP program by the servicers and by the
investors. They will exercise that right, and it will
facilitate a resolution to the process.
Ms. Golant. And, in addition, Mr. Chairman, at this point,
with the voluntary programs, there is no two-way dialogue,
there is no balance of power.
And that is why, when these voluntary modifications are
proposed, many times borrowers will accept them even though
they know they can't pay them, because it is better than
nothing, in their view. And there is no opportunity to
negotiate at all, so it is take it or leave it. And they
figure, well, we better take it or else we will lose our house.
If there was a way to discuss and to have recourse to a
judicial process, if need be, it would make a huge difference.
Mr. Delahunt. Well, Ms. Schwartz, you are next.
Ms. Schwartz. My pleasure.
Mr. Delahunt. And we have plenty of time.
Ms. Schwartz. Well, let me first----
Mr. Delahunt. So this is going to be much more of a
conversation than is usually the case in a formal congressional
hearing because of the fact that I now have the gavel. And I
Chair the Europe Subcommittee on Foreign Affairs, and I
describe it as ``the Committee with no rules,'' because I think
it is much more important to be able to engage in a dialogue
and fully flesh out these issues and see where there is
agreement and see where there is consensus.
I think it is clear you know where I am coming from. But
that does not, in any way, mean that I don't appreciate the
value of voluntary programs, particularly counseling aspects.
And, if you will, think of it in this way: Oftentimes,
courts will refer matters for mediation, and those mediators
oftentimes have demonstrable effect on serious problems,
because it keeps the court calendars somewhat unclogged and it
doesn't, in any way, like I say, diminish the significance. It
just creates a different role for voluntary modification
programs.
Ms. Schwartz?
Ms. Schwartz. Well, thank you very much.
You know, the way I think about it--and I really have spent
time, frankly, with foreclosure attorneys, bankruptcy
attorneys, all the nonprofit counselors, the bankers, the
servicers. I feel like I have spent a lot of time on this.
But I do need to reiterate: First, there is a requirement
for banks who have signed up with the United States Treasury
and have loans that are owned by Fannie Mae and Freddie Mac, it
is a requirement, as their job, as servicers, to go to HAMP.
If it does not comply, and they can still be NPV positive
to their investor----
Mr. Delahunt. NPV means what now?
Ms. Schwartz. Net present value test, which is the
unfortunate cold calculation of either a foreclosure is
preferred or a modification and workout. And we heard today
that modifications are far better for investors than are
foreclosures, certainly in this market.
And so, whether they are redefaulting or not because of
unemployment and other burdensome issues in the economy, those
are requirements of the contracts they have in place with many
parties and the United States Government.
And the reason I say that is, when I hear ``voluntary,'' it
makes me kind of crazy, because the agreements for people to
look through loans are to work on an NPV test before and after
to assess if they go to foreclosure. Those are the facts.
Mr. Delahunt. We are going save you for cleanup, Professor
Levitin.
Ms. Schwartz. No, no. He will clean up. We are cleaning up
offline, too. But I don't----
Mr. Delahunt. But let me interrupt, because, you know, I
hear what you are saying, and I am sure that is true. But how
many individuals who find themselves in foreclosure proceedings
are aware of that contract?
It is like, when you talk about the credit card contract,
there is nobody in this room that has ever read their credit
card contract. I mean, I think we are asking too much of
people.
And, you know, what agency is policing, monitoring the
contracts?
Ms. Schwartz. It is also the communication with the
homeowner. So an honest conflict is there are State laws that
govern the foreclosure process. Remember, I earlier said two-
thirds of the people that start that process have not gone to
foreclosure and they get worked out. But it is cumbersome that
people are working on modifications and going down the route of
foreclosure. That happens a lot, because the State laws govern
timelines, et cetera, on foreclosure versus the workouts. Some
of the workouts do not pass the testing--and the rigorous
testing--that goes on.
But I might also add, many people make 30 to 40 attempts to
reach the homeowner--FedExes, calls, door-knockers--and don't
have any communication sometimes until after the foreclosure
process. Again, those are pretty good facts on the grounds of
what attempts have been made. But we should do better at
measuring that to understand where the breakdown is for the
borrowers who call in and----
Mr. Delahunt. I am not going to dispute that. I guess my
position is, we don't have time.
Ms. Schwartz. I know. It is tough.
Mr. Delahunt. Really, I don't think the American public is
aware nor Members of Congress are aware that, given the data
that I see in terms of the increasing numbers of foreclosures,
that time is of the essence here.
If we continue to drag this out and attempt to perfect all
of the pieces of the programs that, again, I am sure are
worthy, we are going to find ourselves in a real serious,
severe crisis. Because we don't have anybody--we get together
like this, and we have a conversation, and, you know, Chairman
Cohen and I are going to be on a plane going back to our
respective districts, you will be going back to your offices,
and everybody here will feel that it has been a good
discussion. But we need action now.
And I get very frustrated because I understand the banks
have their role, but, in the end, it is self-defeating, I
think, for the lenders, as well. Because God forbid they have a
total collapse on the real estate market, we are going to be
back to where we were in September of 2008. I can see that as a
real possibility. And there are no more bailouts coming from
this Congress. That ain't gonna happen. It is just not going to
happen.
Again, I am thinking of, you know, the authority to reduce
principal as a mechanism to--when you have everybody's feet to
the fire, you have the servicer out there, and it is somebody
else's problem, and it is the lender and the investor. And, you
know, how do you find where the mortgage is, because it has
been securitized and it is off in some, you know, Never Never
Land anywhere. And you are making calls, and the robocall comes
and you are afraid it is the creditor so you don't pick up the
phone.
I mean, these are very real, human responses. And unless
you get--and these trustees are good. We have a good bankruptcy
system in this country. And I dare say, Mr. Hildebrand and his
colleagues are not out to punish people, including all the
stakeholders. As he said in part of his statement, you know, we
want to be fair. We understand that bankruptcy is incorporated
into the Constitution by the Founders to give people a chance,
but at the same time there is a balance to ensure that the
investor and the lender, you know, be treated fairly and
equitably, as well.
I just think that we have gone down a road that could very
well bring us back even to a more dangerous and risky situation
than what we were looking at better than a year ago. And here
we are today with, you know--and I really wanted to come back,
and I appreciate the four of you indulging me, because I want
to get it on the record. Because, God forbid, but if I am
correct and my instincts are accurate, I want to be able to
refer to this record and say, ``I told you so. I told you so.''
And all I hear is it is the CRA and Fannie Mae and Freddie
Mac and all of this and that government is the problem. Well,
you know, it might be a--I am not suggesting that government is
the answer, but a bankruptcy court system that has evolved from
our Constitution has proven to be a very effective instrument
of helping people and, at the same time, being fair and
equitable.
That is my concern. I want your program to work. I really
do. But I think you need a little bit of a hammer hanging out
there.
Ms. Schwartz. Two things. I just want to be very clear.
HOPE NOW doesn't, you know, really go on or off for what
legislation should pass. We work with all the rules and the
tools that are in the arsenal. So, today, HAMP is a dominant
part of what we do. If it fails HAMP, we do other mods, et
cetera.
My personal background is a capital market background for
the first 15 to 18 years of my career. And what I would just
share is today we have a broken market still. And the mortgage-
backed security market and the trading market and the
government is, fortunately for all of us, investing in those.
What I do know is, I don't know what a bankruptcy on a
first lien mortgage would mean to the markets, but our markets
aren't even acting yet in a functional way. There are no global
investors. And, even in the United States, it is the government
buying our assets.
So I don't know what bankruptcy would do. I just don't have
enough data to know that. I worry about that.
Mr. Delahunt. Okay, but here is my guess. And I have
listened to a lot of experts, and you know what I have
discovered? Everybody is guessing. Okay? There really aren't
any experts.
Ms. Schwartz. I worry that that could be an issue.
Mr. Delahunt. But I think that the major concern I have is
timeliness. Okay? And I don't see leverage to create the
dynamic necessary to resolve the problem.
I am not an advocate, you know, to go into a situation with
guns blazing and, you know, tear down the markets. I think you
are correct. I don't see, right now, a rational market. And
until it hits bottom--and that is, I think, why people are
hesitant, because they don't think it has hit bottom.
And I think I agree with my Republican colleagues; it isn't
about subprime now, it is about unemployment. But, you know,
there is this chicken and egg argument, too. If you go
underwater, then you lose your house and people are holding
back in terms of expenditures, you create more joblessness. You
create this vicious cycle.
And I don't know. Again, I am not saying it is a panacea,
you know, to cram down authority. But I am saying it is a
significant--and it is not even a tool. I would like to think
that the voluntary modification programs would work if you just
had that sitting over on the side.
Ms. Golant. It would help.
Mr. Delahunt. Professor Levitin, am I making any sense to
you?
Mr. Levitin. Perfect sense. This is----
Mr. Delahunt. You must agree with me then.
Mr. Levitin. Of course. This is, should we approach this
with a stick or a carrot or both? Treasury's approach has been
to offer a carrot; taxpayer-funded incentives paid to
servicers, to lenders, and in some cases to homeowners, to
encourage HAMP modifications.
A carrot is a good way of encouraging behavior. But when it
is combined with a stick, it is likely to be much more
effective. Take the carrot, and, if you don't, out comes the
stick. And bankruptcy would be the stick.
There are a few things that Ms. Schwartz said that I want
to comment on, not so much to disagree with her but just to
expand on her comments.
Ms. Schwartz rightly noted that servicers who sign up for
HAMP--and it is largely voluntary, whether they sign up for
HAMP--that servicers who sign up for HAMP are then under a
contractual obligation. They have a contract with Fannie Mae,
as Treasury's agent, that they will operate under the terms of
the program.
It is worth noting, though, you know, what is the penalty
for a servicer that fails to do this? Well, the only thing that
is in that servicer participation agreement is regular
contractual rights; that if Treasury thinks a servicer isn't
complying with the servicing contract, isn't giving a proper
review to a borrowers' cases, then Treasury's only real remedy
is to take the servicer to court and sue them. And I think that
is credibly unlikely. And, frankly, what would the damages be
to Treasury? The servicer might even be saving Treasury money
if the lender----
Mr. Delahunt. Is that accurate, Ms. Schwartz?
Ms. Golant. Yes.
Mr. Delahunt. Is that really the remedy?
Ms. Schwartz. I haven't read all the legal terms of the
contract, but I know banks take seriously a contract with the
United States.
Mr. Delahunt. I am sure they do. And I am sure they don't
want that on their record. But I would know, if I am a banker
and I want to keep my balance sheet looking well and be able to
hold those assets so that, you know, when I have to report to
stockholders--and I know how the bureaucracy moves and how
often I am going to get sued. I might take the risk of not
disregarding my contractual obligations, but really not giving
it my all either, if it didn't suit my self-interest.
I mean, again, I like to put these things in terms that I
can understand. And the government doesn't have enough lawyers,
you know, to bring those kind of suits.
Go ahead, Professor.
Mr. Levitin. I want to be clear that I am not alleging any
actual bad faith.
Mr. Delahunt. No, I understand. Nor am I.
Mr. Levitin. But this is a program with very limited
oversight, and that is just the nature. If you are trying to
modify tens of thousands of loans, that there is limited--
without tremendous staffing, you can't do serious oversight.
And, in that space where you don't have a lot of oversight and
where servicers may have incentives not to do the
modifications, it wouldn't be surprising if we saw servicers
dragging their feet.
Treasury is making incentive payments to servicers. It is
far from clear, though, whether the incentive payments are
enough to make this work.
Mr. Delahunt. Well, see, that is my point, too. You know, I
look at the numbers, it is $1,000. And I am the servicer; let's
say I am the guy on the phone. I don't mean the servicer, the
corporate entity. But if I am the guy on the phone--and how is
he getting paid? Is it a commission?
Ms. Golant. Probably.
Mr. Delahunt. What is my piece of the $1,000, or am I just
a straight salary? Again, I know how it--and maybe I am wrong,
but I just think of human nature.
And when we talk about how we got here, I can remember
talking to mortgage brokers, and I say, why the subprime? And
the answer was very simple. Well, the subprime because, you
know, the salesman that was out there pitching the mortgage--
because I saw these numbers, and I presume that you wouldn't
have any great disagreement, but 70 percent of those that took
a subprime loan could have qualified for the traditional 30-
year fixed rate, which they might have been able to sustain.
I said, how did that happen? Because I am naive; I don't
really know. Well, because they got $13,000 commission for
pushing the subprime rather than the $3,000 that they would
have got for the traditional. And then you get loosey-goosey
with the underwriting standards, and you get into--you know, it
was the wild West.
And that is why I take offense when I hear it is the
Community Reinvestment Act that did this. That is baloney. That
has no data at all to support it. It just doesn't. But we hear
it because we want it to be that way because government is bad.
Government had nothing to do with that. It is human nature. And
you have to, kind of, keep our demons from surfacing and hurt
the community at large. That is my sense of government.
I mean, I am a free-market guy. I am a capitalist.
Yes, you are not recognized yet, because Mr. Levitin had
his hand raised.
Mr. Levitin. I will gladly cede to Mr. Cohen.
Mr. Cohen. Thank you. And I appreciate that, Professor
Levitin. Machiavelli a long time ago said, power is taken, not
given. Chairman Delahunt, example one.
You know, this has been a good discussion. It is an
excellent discussion. The problem is, the House just voted down
the cramdown provision as an amendment to the Wall Street bill
we had. The Senate has never passed it.
And the problem is, you know, you are right about
government and the problems and there wasn't regulation and all
these things. But if we can't get 218 votes--well, we get 218
in the House and we passed it once. But if the Senate can't
pass it, we have to have something else to help people. And
that is the reality.
And that is just the same thing as the public option. If
there aren't the votes for public option in the Senate, the
House, as good as we can be and Florence Nightingale wanting to
be, you got to do something else.
And that is--you have got to deal with the Senate. We need
a unicameral legislature, we really do, and it would be on this
cameral. But, you know, it's a mess. How would you recommend we
go about that.
Mr. Delahunt. [Presiding.] Well, I would like to propose to
the four of you, because the Chairman is correct. I was
disappointed in the vote, but I----
Mr. Cohen. You rallied.
Mr. Delahunt. I am sorry?
Mr. Cohen. You rallied and came back to Chair the
Committee.
Mr. Delahunt. But I came back. And I am very disappointed.
And I think it says something about our system, our political
system and how, you know, how there are powerful interests that
oftentimes, I believe, don't really understand their own
interests in the long term. You know, they see it in a very
short window. Got to keep those balance sheets there. We don't
want to do this. And I understand that, and I am not being
critical of their self-interest, because that is their
obligation.
At the same time, in terms of their long-term benefit, it
would be ideal to clean up this mess before the mess continues
to exacerbate and brings down those big banks one more time,
because I don't know how the Chairman feels, but I know that
the bailout time is over. If they want the market to function
in a way where there is no government support, intervention,
regulation, they will discover it if there is another September
of 2008; it will be a debacle, because there is no political
will in the United States Congress that I can discern on either
side of the aisle for any continued support.
If it gets bad again, let's be clear, those that killed
that legislation today, killed that amendment, are the ones
that are going to be responsible. And let them face the
American people and say, well, we thought it, you know, we
thought it was in the long-term best interest of the market.
There is really no data anywhere that indicates that interest
rates will rise. That is baloney. That is just the short-term
view. I like to think that it is our responsibility here in the
Congress to take a long-term view and try to understand what
the best interest of our free-market economy is so that we
have, at the end of the day, a functioning, functional
capitalistic system.
But my question is, how do we give Ms. Schwartz the
leverage, if we can't get the bill through so that the
voluntary modification programs work, without going through all
of the bureaucratic, you know, gyrations that we no longer have
time for? You know, maybe we should lock the four of you in a
room someplace and tell you to come up with some answers and
come back so that we can satisfy those powerful interests on
Wall Street so that we can save Wall Street from itself and
save the American economy.
Professor.
Mr. Levitin. There are some steps that can be taken
definitely to improve the HAMP program, and I think a few of
those would be, firstly, greater transparency, both on the
overall, sort of the macro level of the program; the data the
Treasury has been releasing has not been particularly granular.
It makes it hard for any kind of real outside analysis. But
also, on the borrowers side, that the Treasury has not released
publicly the details of its net present value calculation, that
if I am a borrower and looking to get a HAMP modification, I
should be able to have, go to a Web site, plug in my data and
see the net present value calculation and how it weighs out.
There is a fear that if that is made public that would allow
for the system to be gamed.
Mr. Delahunt. Do you all, everybody feel that is a
thoughtful suggestion?
Ms. Schwartz, you are the minority witness here, so you
have got to----
Ms. Schwartz. Okay. Well, I think more improvements can be
done to the NPV test, and I believe there is going to be a
transparent test put out in the new year. So I think more can
be done there. I can't speak to whether it is consumer facing,
or there is a double check that no one was out of, no one did
anything wrong.
Mr. Delahunt. How do we give you, let me start with you,
Ms. Schwartz. How do we give you real clout?
Ms. Schwartz. Well, I don't know, but I----
Mr. Levitin. I will make a suggestion.
Mr. Delahunt. Okay.
Mr. Levitin. Treasury needs a club to go with the carrot.
And if bankruptcy isn't to be that club, then some sort of very
concrete, monetary penalty to be imposed on servicers for
violations of the terms of the HAMP servicer participation
agreement.
Mr. Delahunt. But can they really enforce it? Do they have
the compliance team that can enforce it?
Ms. Golant. Even as it currently stands, Mr. Chairman,
there are--borrowers, do not have the ability as the intended
third party beneficiaries of these contracts, to come into
court, they would be willing to, and enforce for Treasury.
But, several times, it has been attempted. In fact, there
is a new class action that has just been filed in the last few
weeks where that is exactly what borrowers are trying to do.
But the courts don't understand why borrowers can stand in the
shoes of Treasury. So so far that has not been available. But
because, without some sort of balance of power, there is just
no way to get the wheels turning. That is what is missing is
enforceability, accountability and leverage.
Mr. Delahunt. Ms. Schwartz, let me ask you outright, what
do you think about the cramdown issue?
Ms. Schwartz. You know, I am not going to say.
Mr. Delahunt. You are not going to venture an opinion.
Ms. Schwartz. I mean, I will tell you, I have empathy for
all sides of this. You know I do. I would work around the clock
to stop foreclosure.
Mr. Delahunt. And let me say that I really respect and
appreciate what you are doing.
Ms. Schwartz. You know, the uncertainty is concerning that
someone from my background, and I see a broken market, and I
just worry that that just keeps it broken for longer.
I think our job is a couple of things. Why aren't we
figuring it out a product to help the unemployed? You know,
that could be 30 percent or 40 percent of this problem so that
it is in front of the HAMP mod. We have some kind of program to
slow down the required payments and then slowly get into
partial payments to get to a HAMP mod once they are back on
their feet and re-employed. That is what we should be talking
about. Let's talk about making sure no borrower goes to
foreclosures without a review for HAMP mods. I agree. We are
all in violent agreement.
Ms. Golant. But they do.
Ms. Schwartz. I hear you, but since I don't know those
metrics, it is hard for me to respond to that because I see the
metrics of all the people getting workouts, some in process,
and all the ones who didn't go to foreclosure because they are
in the process of review. So I am sure you are right. But let's
get to the more detail and facts and then proper controls into
place so that doesn't happen.
Mr. Delahunt. But see, I agree with you. But I don't think
we have the time.
Ms. Schwartz. Well, we should go in a room and figure that
out.
Mr. Delahunt. I mean that respectfully. And I just think
that we need that, and I don't even want to use the word stick,
but I want to have that option available to leverage so that
the kind of suggestions and recommendations that you make,
because I know how slow the decision-making process is, whether
it is here in the U.S. Congress or in any agency or
bureaucracy, and there is interagency review and all of that
other stuff, that we are going to find ourselves next September
looking like it is 2008 rather than 2010. That is my fear.
Mr. Hildebrand. Mr. Chairman, there is a vast gulf between
where the law is now, where mortgages cannot be modified at all
except for curing a default and maintaining payments, and the
proposal that just got defeated, which is to allow cramdowns
and restructuring, to allow some kind of modification that may
not involve evaluation of the mortgage, fees and costs and
interest adjustments, and things that are within the HAMP model
that could be done, that are not cramming down the mortgage if
that is not a political option. So those options need to be, I
would suggest, should be addressed, should be discussed, which
is why the suggestion of having a backstop, a judicial backstop
to a HAMP program that may not be working fast enough will
certainly speed it up.
Mr. Delahunt. Who would administer the judicial backstop?
Could the bankruptcy courts do that?
What do you think of that, Ms. Schwartz.
Ms. Schwartz. I don't feel like I am expert enough to have
an opinion.
Mr. Delahunt. Everybody has got an opinion now. Come on.
Ms. Schwartz. I mean, I think that we have enough rules in
place to make sure we are doing the right thing, and we need to
measure the outcomes where it is being violated.
Ms. Golant. There are no enforcement mechanisms, though.
Ms. Schwartz. Well, I don't know. I think the FBI, the
Freddie Mac compliance unit, the Inspector General and SIGTARP
are all pretty powerful.
Mr. Hildebrand. Mr. Chairman, I would ask, where do I go
when I see a debtor across the table from me that has not heard
from the HAMP request, over 30 days or 60 days or 90 days,
hasn't even heard, where do I go to say they are not doing what
they say they are going to do, or not contractually obligated
to do, so that this family has a shot, anyway, to stay in their
house? Where do I go? And there is no place that we can go. I
will agree with Ms. Schwartz though----
Mr. Delahunt. That is a concern.
Ms. Schwartz. We need to have a place for them to go. I
totally agree. The hotline takes complaints for Treasury, for
Fannie Mae and Freddie Mac for anyone who is falling out.
Mr. Delahunt. You know what? The four of you are as good as
it gets, okay? How about helping us and come up with a concept
or a mechanism to do that back up. And let's not create a new
bureaucracy. Let's give some sort of additional authority to
the trustees or whatever. I mean, I am just really, really
concerned about this. And I am going to turn the gavel back to
the real Chair of the Commercial and Administrative Law
Subcommittee, Mr. Steve Cohen of Tennessee.
Mr. Cohen. [Presiding.] I thank the distinguished gentleman
from Massachusetts and the vice Chair for that discussion that
he led and for the time he spent and for his many good works
and years of service to the Bay State, as well as the United
States. And he got back here quicker than I did. I am sure he
was disappointed, as I was. I was very disappointed at the vote
today. And there were a series of votes I was disappointed in.
Sarbanes/Oxley wasn't extended to be fully implemented. And the
cramdown provision, so to speak, mortgage modifications, wasn't
passed. But we passed the bill. But that is--you don't get
everything. You don't get some things. But I appreciate you all
being here, and if you all could work together to bring
something to us to consider, because it looks like we are not
going to have--although sometimes you can put these provisions
on other bills that look like they are alien, but that is the
only way you can sometimes get good alien projects to become
law. So this system sometimes has a method to its madness.
I thank each of you for your time you have taken to be
witnesses for this testimony today. Without objection, Members
will have 5 legislative days to submit any additional written
questions which we will forward to the witnesses and ask you to
answer as promptly as you can. They will be made a part of the
record.
Without objection, the record will remain open for 5
legislative days for the submission of any other additional
material. And, again, I thank everyone for their time and
patience.
I wish everybody a Happy Hanukkah, a Merry Christmas, a
Happy Kwanzaa and any other holidays that you may hold dear and
near. This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 3:11 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Response to Post-Hearing Questions from Adam J. Levitin,
Georgetown University Law Center
Response to Post-Hearing Questions from Faith Schwartz,
HOPE NOW Alliance
Response to Post-Hearing Questions from Margery E. Golant,
Golant & Golant, P.A.
Response to Post-Hearing Questions from Henry E. Hildebrand, III,
National Association of Chapter 13 Trustees