[House Report 111-19]
[From the U.S. Government Publishing Office]
111th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 111-19
======================================================================
HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY ACT OF 2009
_______
February 24, 2009.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Conyers, from the Committee on the Judiciary, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 200]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Judiciary, to whom was referred the bill
(H.R. 200) to amend title 11 of the United States Code with
respect to modification of certain mortgages on principal
residences, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
The Amendment.................................................... 2
Purpose and Summary.............................................. 4
Background and Need for the Legislation.......................... 5
Hearings......................................................... 24
Committee Consideration.......................................... 24
Committee Votes.................................................. 24
Committee Oversight Findings..................................... 29
New Budget Authority and Tax Expenditures........................ 30
Congressional Budget Office Cost Estimate........................ 30
Performance Goals and Objectives................................. 34
Constitutional Authority Statement............................... 34
Advisory on Earmarks............................................. 34
Section-by-Section Analysis...................................... 35
Changes in Existing Law Made by the Bill, as Reported............ 38
Minority Views................................................... 44
The Amendment
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Helping Families Save Their Homes in
Bankruptcy Act of 2009''.
SEC. 2. ELIGIBILITY FOR RELIEF.
Section 109 of title 11, United States Code, is amended--
(1) by adding at the end of subsection (e) the following:
``For purposes of this subsection, the computation of debts
shall not include the secured or unsecured portions of--
``(1) debts secured by the debtor's principal residence if
the current value of such residence is less than the secured
debt limit; or
``(2) debts secured or formerly secured by real property
that was the debtor's principal residence that was sold in
foreclosure or that the debtor surrendered to the creditor if
the current value of such real property is less than the
secured debt limit.'', and
(2) by adding at the end of subsection (h) the following:
``(5) The requirements of paragraph (1) shall not apply in a case
under chapter 13 with respect to a debtor who submits to the court a
certification that the debtor has received notice that the holder of a
claim secured by the debtor's principal residence may commence a
foreclosure on the debtor's principal residence.''.
SEC. 3. PROHIBITING CLAIMS ARISING FROM VIOLATIONS OF THE TRUTH IN
LENDING ACT.
Section 502(b) of title 11, United States Code, is amended--
(1) in paragraph (8) by striking ``or'' at the end,
(2) in paragraph (9) by striking the period at the end and
inserting ``; or'', and
(3) by adding at the end the following:
``(10) the claim for a loan secured by a security interest
in the debtor's principal residence is subject to a remedy for
rescission under the Truth in Lending Act notwithstanding the
prior entry of a foreclosure judgment, except that nothing in
this paragraph shall be construed to modify, impair, or
supersede any other right of the debtor.''.
SEC. 4. AUTHORITY TO MODIFY CERTAIN MORTGAGES.
Section 1322 of title 11, United States Code, is amended--
(1) in subsection (b)--
(A) by redesignating paragraph (11) as paragraph
(12),
(B) in paragraph (10) by striking ``and'' at the
end, and
(C) by inserting after paragraph (10) the
following:
``(11) notwithstanding paragraph (2) and otherwise
applicable nonbankruptcy law, with respect to a claim for a
loan originated before the effective date of this paragraph and
secured by a security interest in the debtor's principal
residence that is the subject of a notice that a foreclosure
may be commenced with respect to such loan, modify the rights
of the holder of such claim (and the rights of the holder of
any claim secured by a subordinate security interest in such
residence)--
``(A) by providing for payment of the amount of the
allowed secured claim as determined under section
506(a)(1);
``(B) if any applicable rate of interest is
adjustable under the terms of such security interest by
prohibiting, reducing, or delaying adjustments to such
rate of interest applicable on and after the date of
filing of the plan;
``(C) by modifying the terms and conditions of such
loan--
``(i) to extend the repayment period for a
period that is no longer than the longer of 40
years (reduced by the period for which such
loan has been outstanding) or the remaining
term of such loan, beginning on the date of the
order for relief under this chapter; and
``(ii) to provide for the payment of
interest accruing after the date of the order
for relief under this chapter at a fixed annual
rate equal to the currently applicable average
prime offer rate as of the date of the order
for relief under this chapter, corresponding to
the repayment term determined under the
preceding paragraph, as published by the
Federal Financial Institutions Examination
Council in its table entitled `Average Prime
Offer Rates--Fixed', plus a reasonable premium
for risk; and
``(D) by providing for payments of such modified
loan directly to the holder of the claim; and'', and
(2) by adding at the end the following:
``(g) A claim may be reduced under subsection (b)(11)(A) only on
the condition that if the debtor sells the principal residence securing
such claim, before receiving a discharge under this chapter and
receives net proceeds from the sale of such residence, then the debtor
agrees to pay to such holder--
``(1) if such residence is sold in the 1st year occurring
after the effective date of the plan, 80 percent of the amount
of the difference between the sales price and the amount of
such claim (plus costs of sale and improvements), but not to
exceed the amount of the allowed secured claim determined as if
such claim had not been reduced under such subsection;
``(2) if such residence is sold in the 2d year occurring
after the effective date of the plan, 60 percent of the amount
of the difference between the sales price and the amount of
such claim (plus costs of sale and improvements), but not to
exceed the amount of the allowed secured claim determined as if
such claim had not been reduced under such subsection;
``(3) if such residence is sold in the 3d year occurring
after the effective date of the plan, 40 percent of the amount
of the difference between the sales price and the amount of
such claim (plus costs of sale and improvements), but not to
exceed the amount of the allowed secured claim determined as if
such claim had not been reduced under such subsection; and
``(4) if such residence is sold in the 4th year occurring
after the effective date of the plan, 20 percent of the amount
of the difference between the sales price and the amount of
such claim (plus costs of sale and improvements), but not to
exceed the amount of the allowed secured claim determined as if
such claim had not been reduced under such subsection.
``(h) With respect to a claim of the kind described in subsection
(b)(11), the plan may not contain a modification under the authority of
subsection (b)(11)--
``(1) in a case commenced under this chapter after the
expiration of the 15-day period beginning on the effective date
of this subsection, unless--
``(A) the debtor certifies that the debtor
attempted, not less than 15 days before the
commencement of the case, to contact the holder of such
claim (or the entity collecting payments on behalf of
such holder) regarding modification of the loan that is
the subject of such claim; or
``(B) a foreclosure sale is scheduled to occur on a
date in the 30-day period beginning on the date the
case is commenced; and
``(2) in any other case pending under this chapter, unless
the debtor certifies that the debtor attempted to contact the
holder of such claim (or the entity collecting payments on
behalf of such holder) regarding modification of the loan that
is the subject of such claim, before--
``(A) filing a plan under section 1321 that
contains a modification under the authority of
subsection (b)(11); or
``(B) modifying a plan under section 1323 or 1329
to contain a modification under the authority of
subsection (b)(11).''.
SEC. 5. COMBATING EXCESSIVE FEES.
Section 1322(c) of title 11, United States Code, is amended--
(1) in paragraph (1) by striking ``and'' at the end,
(2) in paragraph (2) by striking the period at the end and
inserting a semicolon, and
(3) by adding at the end the following:
``(3) the debtor, the debtor's property, and property of
the estate are not liable for a fee, cost, or charge that is
incurred while the case is pending and arises from a debt that
is secured by the debtor's principal residence except to the
extent that--
``(A) the holder of the claim for such debt files
with the court (annually or, in order to permit filing
consistent with clause (ii), at such more frequent
periodicity as the court determines necessary) notice
of such fee, cost, or charge before the earlier of--
``(i) 1 year after such fee, cost, or
charge is incurred; or
``(ii) 60 days before the closing of the
case; and
``(B) such fee, cost, or charge--
``(i) is lawful under applicable
nonbankruptcy law, reasonable, and provided for
in the applicable security agreement; and
``(ii) is secured by property the value of
which is greater than the amount of such claim,
including such fee, cost, or charge;
``(4) the failure of a party to give notice described in
paragraph (3) shall be deemed a waiver of any claim for fees,
costs, or charges described in paragraph (3) for all purposes,
and any attempt to collect such fees, costs, or charges shall
constitute a violation of section 524(a)(2) or, if the
violation occurs before the date of discharge, of section
362(a); and
``(5) a plan may provide for the waiver of any prepayment
penalty on a claim secured by the debtor's principal
residence.''.
SEC. 6. CONFIRMATION OF PLAN.
Section 1325(a) of title 11, United States Code, is amended--
(1) in paragraph (8) by striking ``and'' at the end,
(2) in paragraph (9) by striking the period at the end and
inserting a semicolon, and
(3) by inserting after paragraph (9) the following:
``(10) notwithstanding subclause (I) of paragraph
(5)(B)(i), whenever the plan modifies a claim in accordance
with section 1322(b)(11), the plan provides that the holder of
such claim retain the lien until the later of--
``(A) the payment of such holder's allowed secured
claim; or
``(B) discharge under section 1328; and
``(11) whenever the plan modifies a claim in accordance
with section 1322(b)(11), the court finds that such
modification is in good faith and that the debtor did not
obtain the extension, renewal, or refinancing of credit that
gives rise to a modified claim by the debtor's material
misrepresentation, false pretenses, or actual fraud.''.
SEC. 7. DISCHARGE.
Section 1328 of title 11, United States Code, is amended--
(1) in subsection (a)--
(A) by inserting ``(other than payments to holders
of claims whose rights are modified under section
1322(b)(11))'' after ``paid'', and
(B) in paragraph (1) by inserting ``or, to the
extent of the unpaid portion of an allowed secured
claim, provided for in section 1322(b)(11)'' after
``1322(b)(5)'', and
(2) in subsection (c)(1) by inserting ``or, to the extent
of the unpaid portion of an allowed secured claim, provided for
in section 1322(b)(11)'' after ``1322(b)(5)''.
SEC. 8. RULE OF CONSTRUCTION.
Nothing in this Act or the amendments made by this Act shall be
construed to modify any obligation of the Federal Housing
Administration, the Veterans Administration, or the Department of
Agriculture under a contract that guarantees or insures the payment of
any part of a loan secured by a security interest in a principal
residence.
SEC. 9. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.
(a) Effective Date.--Except as provided in subsection (b), this Act
and the amendments made by this Act shall take effect on the date of
the enactment of this Act.
(b) Application of Amendments.--The amendments made by this Act
shall apply with respect to cases commenced under title 11 of the
United States Code before, on, or after the date of the enactment of
this Act.
Purpose and Summary
Our Nation is currently experiencing a mortgage foreclosure
crisis unprecedented since the Great Depression. It is severely
harming neighborhoods, communities, and the United States
economy as a whole. Our economic recovery depends upon
stabilizing the housing sector; and this requires more
effective measures to stem the flood of foreclosures.
Voluntary loan modification efforts have not been enough.
Enabling bankruptcy courts to implement economically
appropriate loan modifications where the parties are unwilling
or unable to do so can have an impact on a sufficient scale and
time frame to meaningfully address the foreclosure crisis. H.R.
200, the ``Helping Families Save Their Homes in Bankruptcy Act
of 2009,'' gives the bankruptcy courts this ability,
eliminating the anomaly in current law that prohibits judicial
modification of primary residence mortgages.
Background and Need for the Legislation
BACKGROUND
The Current Foreclosure Crisis
An Overview
Home foreclosures today are at an all-time high, and they
are ``poised to accelerate as the country's recession
deepens,'' according to industry data released in December
2008.\1\ During 2008, more than 2.3 million homes were in
foreclosure,\2\ with one in ten Americans falling behind on
their mortgage payments or facing foreclosure during the third
quarter of that year.\3\ Compared to 2006, the number of
properties in foreclosure during 2008 rose by 225 percent.\4\
Mortgage foreclosures during 2007 through 2008 are estimated to
have resulted in ``a whopping $400 billion worth of defaults
and $100 billion in losses to investors in mortgage
securities.''\5\ The foreclosure rate is ``approaching heights
not seen since the Great Depression.''\6\
---------------------------------------------------------------------------
\1\Renae Merle, Mortgage Troubles Rise to Record Level, Wash. Post,
Dec. 6, 2008 (reporting on data supplied by the Mortgage Bankers
Association).
\2\Press Release, RealtyTrac, Foreclosure Activity Increases 81
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than
2.3 Million Properties Reported (Jan. 15, 2009), at http://
www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; see also Helping
Families Save Their Homes: The Role of Bankruptcy Law: Hearing Before
the S. Comm. on the Judiciary, 110th Cong. (2008) (testimony of Michael
D. Calhoun, President, Center for Responsible Lending). (``Using recent
data from the Mortgage Bankers Association, we calculate that
foreclosures on all types of mortgages are occurring at an annual rate
of 2.3 million.'').
\3\Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to
Record, Bloomberg.com (Dec. 5, 2008), at http://www.bloomberg.com/apps/
news?pid=20601087&sid=a37uyBrX6dvY&refer=worldwide.
\4\Press Release, RealtyTrac, Foreclosure Activity Increases 81
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than
2.3 Million Properties Reported (Jan. 15, 2009), at http://
www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; In 2006, there
were 1.2 million foreclosures in the United States, representing an
increase of 42 percent over the prior year. Nelson D. Schwartz, Can the
Mortgage Crisis Swallow a Town?, N.Y. Times, Sept. 4, 2007
\5\Mark Zandi, Op-ed, The Mortgage Mess, Boston Globe, July 22,
2007. Similarly, the Center for Responsible Lending, estimated that 20
percent of subprime home loans made between 2005 and 2006 could end in
foreclosure. Geraldine Fabrikant, After Foreclosure, a Big Tax Bill
From the I.R.S., N.Y. Times, Aug. 20, 2007. In 2007, up to 2 million
households were at risk of losing their homes through foreclosure. See,
e.g., Steve Lohr, Loan by Loan, the Making of a Credit Squeeze, N.Y.
Times, Aug. 19, 2007, at 1 Bus. Sec.; Evolution of an Economic Crisis?
The Subprime Lending Disaster and the Threat to the Broader Economy:
Hearing Before the Joint Economic Committee, 110th Cong. (2007)
(prepared testimony of Martin Eakes, CEO of the Center for Responsible
Lending) (citing a range of projected foreclosures with the highest at
1.7 million); Roger Lowenstein, Subprime Time--How Did Homeownership
Become So Rickety, N.Y. Times Magazine, Sept. 2, 2007, at 11.
\6\Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?,
N.Y. Times, Sept. 4, 2007.
---------------------------------------------------------------------------
Certain parts of the Nation are experiencing this crisis
more intensely than others. For example, more than 7 percent of
housing units in Nevada received at least one foreclosure
notice in 2008.\7\ Other top foreclosure States for 2008 were
Florida, California, Colorado, Michigan, Ohio, Georgia,
Illinois, and New Jersey.\8\ In the City of Detroit, an average
of 126 foreclosures are occurring every day.\9\
---------------------------------------------------------------------------
\7\Press Release, RealtyTrac, Foreclosure Activity Increases 81
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than
2.3 Million Properties Reported (Jan. 15, 2009).
\8\Id.
\9\Helping Families Save Their Homes in Bankruptcy Act of 2009 and
Emergency Homeownership and Equity Protection Act: Hearing on H.R. 200
and H.R. 225 Before the H. Comm. on the Judiciary, 111th Cong. (2009)
(testimony of Matthew Mason, Assistant Director, UAW-GM Legal Services
Plan).
---------------------------------------------------------------------------
The glut of foreclosures has adversely affected new home
sales, and has depressed home values generally. Last year,
Federal Reserve Chairman Ben Bernanke acknowledged that
``housing starts and new home sales have both fallen by about
50 percent from their respective peaks.''\10\ And, as The Wall
Street Journal reported in October 2008, ``The relentless slide
in home prices has left nearly one in six U.S. homeowners owing
more on a mortgage than the home is worth, raising the
possibility of a rise in defaults--the very misfortune that
touched off the credit crisis last year.''\11\ The Journal
explained that more foreclosures are likely ``because it is
hard for borrowers in financial trouble to refinance or sell
their homes and pay off their mortgage if their debt exceeds
the home's value.''\12\
---------------------------------------------------------------------------
\10\Federal Reserve Chairman Ben S. Bernanke, Speech at the Women
in Housing and Finance and Exchequer Club Joint Luncheon, Washington,
DC (Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm; see, e.g., Brian Louis, Paulson Mortgage Plan
Surfaces Too Late to Stem Housing Slide, Bloomberg.com (Dec. 7, 2007)
(reporting 48 percent drop in new home sales since 2005).
\11\James R. Hagerty & Ruth Simon, Housing Pain Gauge: Nearly 1 in
6 Owners ``Under Water''--More Defaults and Foreclosures Are Likely as
Borrowers with Greater Debt Than Value in Their Homes Are Put in a
Tight Spot, Wall St. J., Oct. 8, 2008, at A5.
\12\Id.
---------------------------------------------------------------------------
Home values nationwide have fallen an average of 19% from
their peak in 2006, and this ``price plunge has wiped out
trillions of dollars in home equity.''\13\ And some predict
that home values ``may take decades to return to the heights of
2\1/2\ years ago.''\14\
---------------------------------------------------------------------------
\13\Dennis Cauchon, Why Home Values May Take Decades To Recover,
U.S.A. Today, Dec. 12, 2008, at 1A; see also Bob Willis & Shobhana
Chandra, U.S. Economy: Home Prices Fall at Near-Depression Pace,
Bloomberg.com (Dec. 23, 2008) (``Sales of single-family houses in the
U.S. dropped in November [2008] by the most in two decades and resale
prices collapsed at a pace reminiscent of the Great Depression, dashing
hopes that the market was close to a bottom.''); Shobhana Chandra, U.S.
Home Resales Fall; Prices Drop by Record 13.2%, Bloomberg.com (Dec. 23,
2008); Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to
Record, Bloomberg.com (Dec. 5, 2008) (reporting that the median home
price in the fourth quarter of 2008 will be 19% lower from the record
in 2006's second quarter, according to a November 24, 2008 forecast by
Fannie Mae, the world's largest mortgage buyer).
\14\Dennis Cauchon, Why Home Values May Take Decades To Recover--
Some See 2006 as `Lifetime' Peak in Prices, USA Today, Dec. 12, 2008,
at 1A.
---------------------------------------------------------------------------
As enormous as the losses to date have been, projections of
what lies ahead appear to be even more dire.\15\ Some
economists fear ``the tide of foreclosures'' may become ``self-
perpetuating.''\16\ As Susan Wachter, a real estate finance
professor at the Wharton School of the University of
Pennsylvania, explained, ``In the market that we have in front
of us, prices decline and supply increases, driving prices down
further. The worst case is not a recession but a housing
depression.''\17\ She projects that ``foreclosures and tight
credit could send home prices falling to the point that
millions of families and thousands of banks are thrust into
insolvency.''\18\
---------------------------------------------------------------------------
\15\See, e.g., Vikas Bajaj, Home Prices Seem Far From Bottom, N.Y.
Times, Oct. 16, 2008, at A1 (reporting that the ``American housing
market . . . is far from hitting bottom'').
\16\David M. Herszenhorn & Vikas Bajaj, Tricky Task of Offering Aid
to Homeowners, N.Y. Times, Apr. 6, 2008.
\17\Id.
\18\Dennis Cauchon, Why Home Values May Take Decades To Recover,
U.S.A. Today, Dec. 12, 2008, at 1A.
---------------------------------------------------------------------------
Credit Suisse estimates that there may be more than eight
million foreclosures over the next 4 years in the United
States, accounting for 16 percent of all mortgages, including
59 percent of all subprime mortgages and more than 11 percent
of all other mortgages, including Alt-A, option ARMS, and even
prime mortgages.\19\ If the Nation were to experience a severe
recession, Credit Suisse estimates that the number could rise
to 10.2 million foreclosures.\20\ This new forecast from Credit
Suisse is up sharply from the two to six million foreclosure
range cited in previous estimates from industry sources.\21\
And this is in addition to the 1.2 million homes estimated to
have been already lost to foreclosure.\22\ Fannie Mae predicts
that there may not be a turnaround until 2010, and that the
current crisis and ``its effect on the housing market will be a
drag on the entire U.S. economy.''\23\
---------------------------------------------------------------------------
\19\Rod Dubitsky, et al., Foreclosure Update: over 8 million
foreclosures expected, Credit Suisse, Fixed Income Research, Dec. 4,
2008. In 2007, Moody's Economy.com Chief Economist Mark Zandi estimated
that approximately 2.8 million loan defaults will occur in 2008 and
2009, although ``[n]ot all will end in foreclosure.'' ``Of these,'' he
stated, ``1.9 million homeowners will go through the entire foreclosure
process and ultimately lose their homes.'' The Looming Foreclosure
Crisis: How To Help Families Save Their Homes: Hearing Before the S.
Comm. on the Judiciary, 110th Cong. (2007) (prepared testimony of Mark
Zandi, Chief Economist, Moody's Economy.com).
\20\Id.; cf. Helping Families Save Their Homes: The Role of
Bankruptcy Law: Hearing Before the S. Comm. on the Judiciary, 110th
Cong. (2008) (testimony of Michael D. Calhoun, President, Center for
Responsible Lending) (estimating that 6.5 million homes, i.e., ``one in
eight homes with outstanding mortgages, will be lost to foreclosre over
the next 5 years,'' according to industry data).
\21\In the spring of 2008, ``industry analysts estimated that as
many as three million subprime mortgages could end up in foreclosure
over the next several years.'' Edmond L. Andrews, Relief for Homeowners
Is Given to a Relative Few, N.Y. Times, Mar. 4, 2008.
\22\Center for Responsible Lending, Loan Foreclosures &
Delinquencies vs. Lender Workouts, Sept. 2008.
\23\Fannie Mae: No Home Market Rebound Till 2010, Detroit News,
Jan. 8, 2008.
---------------------------------------------------------------------------
Initially, the foreclosure crisis was driven by defaults on
subprime mortgages. In 2007, analysts correctly predicted that
the ``worst lay ahead''\24\ in that many subprime borrowers
would face 40 percent or greater increases in their monthly
mortgage payments once their initial `teaser' rates expire and
their fixed interest rates reset into higher-rate variable
rates.\25\ It is estimated that 65 percent of subprime loans
originated in 2007 will end up in default, compared with 45
percent of those originated in 2006.\26\
---------------------------------------------------------------------------
\24\Evolution of an Economic Crisis? The Subprime Lending Disaster
and the Threat to the Broader Economy: Hearing Before the Joint
Economic Committee, 110th Cong. (2007) (prepared testimony of Martin
Eakes, CEO of the Center for Responsible Lending); see, e.g., Op ed.,
Jack Kemp, Bringing Bankruptcy Home, L.A. Times, Jan. 18, 2008 (``It is
clear that sub-prime loan foreclosures are only going to get worse.'');
Edmund L. Andrews, In Washington, Measuring a Lifeline, N.Y. Times,
Aug. 28, 2007 (```This is really just the beginning,' said Karen
Weaver, global director for securitization research at Deutsche Bank.
`There's a big wave of defaults coming over the next 12 to 18
months.''').
\25\Evolution of an Economic Crisis? The Subprime Lending Disaster
and the Threat to the Broader Economy: Hearing Before the Joint
Economic Committee, 110th Cong. (2007) (prepared testimony of Martin
Eakes, CEO of the Center for Responsible Lending); see, e.g., Edmund L.
Andrews, In Washington, Measuring a Lifeline, N.Y. Times, Aug. 28, 2007
(``Deutsche Bank estimates that $400 billion in subprime loans are
scheduled for rate increases of 30 percent or more by the end of 2008).
\26\ Ruth Simon, Mortgages Made in 2007 Go Bad at Rapid Clip, +Wall
St. J., Aug. 7, 2008.
---------------------------------------------------------------------------
But prime mortgages originated in 2007 are also expected to
go bad at a greater rate than those from 2006. An analysis
prepared in August 2008 for The Wall Street Journal revealed
that 0.91 percent of prime mortgages from 2007 were seriously
delinquent--either in foreclosure or at least 90 days past
due--after 12 months. The equivalent figure for 2006 prime
mortgages was just 0.33 percent in the first year.\27\
---------------------------------------------------------------------------
\27\Id.
---------------------------------------------------------------------------
The spike in unemployment is certainly augmenting the
mortgage foreclosure crisis.\28\ Last year, nearly 2.6 million
jobs were lost, with three-quarters of these losses occurring
in the final 4 months of the year.\29\ Job loss not only makes
it hard for homeowners to keep up with payments on existing
mortgages; it also makes it hard for homeowners with adjustable
rate mortgages to refinance at an more affordable fixed
rate.\30\
---------------------------------------------------------------------------
\28\Stephanie Armour, Job Cuts Adding to Growing Number of Housing
Defaults, U.S.A. Today, Dec. 15, 2008, at 1A.
\29\Letter from Gerald M. Howard, President & Chief Executive
Officer, National Association of Home Builders, to Members of Congress
(Jan. 14, 2009) (on file with the Committee).
\30\Id. (````Many people have adjustable-rate mortgages that they
were planning on refinancing,' says Elena Rivkin Franz, a real estate
lawyer in the San Francisco area. `Unfortunately, if you don't have a
steady stream of income, you can't get a refinance, or at least an
affordable one.''').
---------------------------------------------------------------------------
The societal and economic costs of home foreclosures are
not only devastating to the families that directly experience
them. Foreclosures depress home values across entire
communities. A single foreclosure ``could impose direct costs
on local government agencies totaling more than $34,000.''\31\
Federal Reserve Chairman Ben Bernanke noted, ``At the level of
the individual community, increases in foreclosed-upon and
vacant properties tend to reduce house prices in the local
area, affecting other homeowners and municipal tax bases.''\32\
As a consequence of nearby foreclosures on subprime loans,
forty million homeowners will see their property values decline
as by more than $350 billion.\33\ And these are just the
effects of subprime foreclosures; foreclosures on prime and
``Alt-A'' loans will push the losses much higher.
---------------------------------------------------------------------------
\31\William C. Apgar et al., The Municipal Cost of Foreclosures: A
Chicago Case Study, Homeonwership Preservation Foundation Housing
Finance Policy Research Paper No. 2005-1, at 1 (Feb. 27, 2005).
\32\Ben Bernanke, Federal Reserve Chairman, Remarks at the
Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by
Bloomberg.com, available at http://www.bloomberg.com/apps/
news?pid=20601068&sid=apeU.0IaETdM&refer=economy).
\33\See Center for Responsible Lending, Updated Projections of
Subprime Foreclosures in the United States and Their Impact on Home
Values and Communities, Aug. 2008, available at http://
www.responsiblelending.org/pdfs/updated-foreclosure-and-spillover-
brief-8-18.pdf.
---------------------------------------------------------------------------
Chairman Bernanke further noted, ``At the national level,
the rise in expected foreclosures could add significantly to
the inventory of vacant unsold homes--already at more than 2
million units at the end of 2007--thereby putting further
pressure on house prices and housing construction.''\34\ In
fact, the National Association of Realtors estimates that 35 to
40 percent of resold homes nationwide were distressed
assets.\35\ And, as Moody's Economy.com Chief Economist Mark
Zandi observed, ``All indications are that we have a long way
to go before the housing market stabilizes.''\36\ In light of
the tight credit market and the reluctance of Americans to
purchase a home when they expect prices to keep falling, he
added, ``It's about as bad a market as you can get.''\37\
---------------------------------------------------------------------------
\34\Ben Bernanke, Chairman, Federal Reserve, Remarks at the
Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by
Bloomberg.com, available at http://www.bloomberg.com/apps/
news?pid=20601068&sid=apeU.0IaETdM&refer=economy).
\35\Catherine Rampell, Housing Resales Rose 5.5% in September, N.Y.
Times, Oct. 24, 2008, at B7.
\36\Id.
\37\Id.
---------------------------------------------------------------------------
In the 18 months since the Judiciary Committee first began
exploring the foreclosure crisis, solutions offered by the
industry and the Federal Government have failed to address the
problem, and may have exacerbated it. Voluntary solutions from
the industry have fallen far short of what is necessary to
contain the problem. The urgency of more potent government
intervention could not be overstated. As FDIC chairman Sheila
Bair recently testified, ``We are behind the curve. . . . We
are falling behind. . . . [W]e need to act and we need to act
quickly and we need to act dramatically.''\38\
---------------------------------------------------------------------------
\38\Vikas Bajaj, U.S. Vows More Help for Homeowners, N.Y. Times,
Oct. 24, 2008 (Chairman Bair was testifying about an FDIC proposal to
use Federal loan guarantees to encourage servicers to voluntarily
modify failing loans).
---------------------------------------------------------------------------
Origins of the Crisis
Starting in the 1990's and then surging up through 2006,
millions of subprime\39\ and nontraditional\40\ mortgages were
issued. According to the U.S. Treasury Department, there were
fewer than one million of these mortgages in 2000; today there
are an estimated six million of them,\41\ at an approximate
value of $1 trillion.\42\
---------------------------------------------------------------------------
\39\A ``subprime mortgage'' is typically considered to be a
security interest in the borrower's home that secures a debt for a loan
that has an annual percentage rate that is higher than that of a
conventional 30-year mortgage. See, e.g., H.R. 3519, the Mortgage
Reform and Anti-Predatory Lending Act of 2007, 110th Cong. (2007).
\40\A ``nontraditional mortgage'' is typically defined as a
security interest in the debtor's principal residence that secures a
debt for a loan that at any period during the term of the loan provides
for the deferral of the payment of principal or interest by permitting
periodic payments that do not cover the full amount of interest due or
that cover only the interest rate. The definition does not include a
home equity line of credit that is in a subordinate loan position or a
reverse mortgage. Interagency Guidance on Nontraditional Mortgage
Product Risks--Final Guidance, 71 Fed. Reg. 58609-18 (Oct. 4, 2006), at
http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
\41\Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the
NYC Subprime Lending and Foreclosure Summit, Dec. 12, 2007.
\42\Id.
---------------------------------------------------------------------------
As a result of these mortgages, homeownership rates ``among
minorities increased to new highs.''\43\ The Congressional
Research Services found, however, that subprime mortgages were
``disproportionately used by the elderly and members of
minority groups,'' and that there is some evidence that
minorities who could have qualified for cheaper prime loans
instead borrowed in the more expensive subprime market.''\44\
---------------------------------------------------------------------------
\43\Id.
\44\Edward Vincent Murphy, Congressional Research Report to
Congress, Subprime Mortgages: Primer on Current Lending and Foreclosure
Issues, RL33930, at 3 (Mar. 19, 2007).
---------------------------------------------------------------------------
These mortgages were also often marketed to people with
``credit scores high enough to qualify for conventional loans
with far better terms,'' according to an analysis prepared for
The Wall Street Journal.\45\ In 2005, the peak year of the
subprime mortgage boom, ``borrowers with such credit scores got
more than half--55%--of all subprime mortgages that were
ultimately packaged into securities for sale to
investors[.]''\46\ As The Wall Street Journal observed, ``The
surprisingly high number of subprime loans among more credit-
worthy borrowers shows how far such mortgages have spread into
the economy--including middle-class and wealthy communities
where they once were scarce.''\47\
---------------------------------------------------------------------------
\45\Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very
Credit-Worthy, Wall. St. J., Dec. 3, 2007, at A1.
\46\Id.
\47\Id.
---------------------------------------------------------------------------
Losses started in the subprime market, where the most
common loan marketed during the past 4 years was a highly risky
loan called a hybrid adjustable-rate mortgage (ARM), often
known as a 2/28 or 3/27 because the interest rate is fixed for
either two or 3 years, and then is adjustable typically every 6
months for the balance of the 30-year term. There are three
particularly problematic aspects of this type of loan: (1) the
rate increases, often sharply, at the end of the initial
period, and often without regard to whether interest rates in
the economy stay the same or even decline; (2), lenders
typically made these loans with the understanding that the
borrower could not afford the rate increase, and will be
required to refinance before the rate reset; and (3)
refinancing before reset entails the payment of a substantial
``prepayment'' penalty, which typically equals three to 4
percent of the loan balance.\48\
---------------------------------------------------------------------------
\48\Additionally, subprime lenders generally did not escrow for
taxes and insurance as prime lenders do, which left many families
reeling when those bills came due. This practice gives the borrower the
impression that the payment is affordable when, in fact, there are
significant additional costs. A study by the Home Ownership
Preservation Initiative in Chicago found that for as many as one in
seven low-income borrowers facing difficulty in managing their mortgage
payments, the lack of escrow of tax and insurance payments were a
contributing factor. Partnership Lessons and Results: Three Year Final
Report, Home Ownership Preservation Initiative, at 31 (July 17, 2006),
at http://www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf
---------------------------------------------------------------------------
Federal Reserve Chairman Ben Bernanke in January 2008 noted
that ``poor underwriting and, in some cases, fraud and abusive
practices contributed to the high rates of delinquency that we
are now seeing in the subprime ARM market.''\49\ He explained,
``[T]he more fundamental reason for the sharp deterioration in
credit quality was the flawed premise on which much subprime
ARM lending was based: that house prices would continue to rise
rapidly.''\50\ He continued:
---------------------------------------------------------------------------
\49\Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women
in Housing and Finance and Exchequer Club Joint Luncheon, Washington,
DC (Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm
\50\Id.
When house prices were increasing at double-digit
rates, subprime ARM borrowers were able to build equity
in their homes during the period in which they paid a
(relatively) low introductory (or ``teaser'') rate on
their mortgages. Once sufficient equity had been
accumulated, borrowers were often able to refinance,
avoiding the increased payments associated with the
reset in the rate on the original mortgages. However,
when declining affordability finally began to take its
toll on the demand for homes and thus on house prices,
borrowers could no longer rely on home-price
appreciation to build equity; they were accordingly
unable to refinance and found themselves locked into
their subprime ARM contracts. Many of these borrowers
found it difficult to make payments at even the
introductory rate, much less at the higher post-
adjustment rate. The result, as I have already noted,
has been rising delinquencies and foreclosures, which
will have adverse effects for communities and the
broader economy as well as for the borrowers
themselves.\51\
---------------------------------------------------------------------------
\51\Id.
It appears that many borrowers who are losing their homes
to foreclosure could have qualified for more affordable,
conventional loans. A study for The Wall Street Journal found
that of the subprime loans originated in 2006 that were
packaged into securities and sold to investors, 61 percent
``went to people with credit scores high enough to often
qualify for conventional [i.e., prime] loans with far better
terms.''\52\ Financial incentives encouraged mortgage brokers
and lenders to aggressively market highly risky exploding ARM
loans instead of the sustainable loans for which borrowers
qualified.\53\ As former Federal Reserve Chairman Alan
Greenspan explained:
---------------------------------------------------------------------------
\52\Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very
Credit-Worthy As Housing Boomed, Industry Pushed Loans To a Broader
Market, Wall St. J., Dec. 3, 2007, at A1.
\53\Mortgage brokers play a key role in today's mortgage market.
According to the Mortgage Bankers Association, mortgage brokers in 2006
originated 45 percent of all mortgages, and 71 percent of subprime
loans. See Mortgage Bankers Association, Research Data Notes:
Residential Mortgage Origination Channels (Sept. 2006).
The big demand was not so much on the part of the
borrowers as it was on the part of the suppliers who
were giving loans which really most people couldn't
afford. We created something which was unsustainable.
And it eventually broke. If it weren't for
securitization, the subprime loan market would have
been very significantly less than it is in size.\54\
---------------------------------------------------------------------------
\54\Jon Meacham & Daniel Gross, The Oracle Reveals All--Did the Fed
Cause the Real-Estate Bubble To Burst? Are We Entering a Recession? And
Who Should Be Our Next President? A Candid Conversation., Newsweek,
Sept. 24, 2007, at 32, 33. Similarly, Federal Reserve Chairman Ben
Bernanke outlined the need for further analysis:
The recent developments in U.S. and foreign financial
markets will stimulate considerable review and analysis in
the months and years to come. Around the world,
legislatures, regulators, supervisors, accounting boards,
central banks, and others with responsibility for oversight
of the financial system are already hard at work trying to
distill the lessons to be drawn from this experience and
their implications for policy. Many in the private sector,
including banks, credit-rating agencies, and the investment
community, are likewise actively reviewing and responding
to these developments. Some of the areas that will draw
scrutiny are the appropriate use of credit ratings by
investors, banks, and supervisors; the need for enterprise-
wide, better-integrated risk-management techniques in large
financial institutions; the appropriateness of accounting
rules governing asset valuation and the use of off-balance-
sheet vehicles; and weaknesses in the originate-to-
distribute model and in the design of structured credit
products, among many others. In the longer term, the
response of the public and private sectors to this
---------------------------------------------------------------------------
experience should help create a stronger financial system.
Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women in
Housing and Finance and Exchequer Club Joint Luncheon, Washington, D.C.
(Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm.
Impact of the Crisis
Impact on Home Values Nationwide
In 2007, Mark Zandi, chief economist of Moody's
Economy.com, correctly predicted that ``[e]xisting home prices
may fall as much as 15 percent by 2009 from their peak'' in
2006\55\ and that the ``fallout'' would hit nearly all of
us.\56\ He explained:
---------------------------------------------------------------------------
\55\Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem
Housing Slide, Bloomberg.com (Dec. 7, 2007).
\56\Mark Zandi, Op-ed, The Mortgage Mess, Boston Globe, July 22,
2007.
First, home values will sink. Loans will be tougher
to get, meaning fewer families will qualify for
mortgages. Foreclosure sales will put more properties
on the market at steep discounts. Less housing demand
and more supply add up to lower prices.
Homeowners will find it more difficult to tap the
equity in their homes for cash via home-equity loans or
cash-out refinancing. Such lending is already fading
quickly.
On the other side of the coin are investors who chose
the riskier flavors of the new mortgage securities and
now face big losses. If that sounds like someone else's
problem, think again. Lots of pension plans that manage
the savings of millions of ordinary workers and
retirees have invested in hedge funds in recent years.
Many of those funds are exposed.\57\
---------------------------------------------------------------------------
\57\Id.
Depressed economic conditions in an area can further
depress the housing market there. According to the Mortgage
Bankers Association, ``[H]eavy job losses in the Midwest states
of Ohio, Michigan and Indiana and the collapse of previously
booming housing markets in California, Florida, Nevada and
Arizona'' exacerbated the foreclosure rates in these areas.\58\
In Michigan, for example, where several major manufacturers
have filed for bankruptcy, unemployment rates have spiked.
Representative John Dingell (D-MI) has noted the ``vicious
cycle'' as homes in affected communities depreciate in value,
are foreclosed upon, and left to decay, with little hope of
attracting new buyers.\59\
---------------------------------------------------------------------------
\58\Martin Crutsinger, New Mortgage Foreclosures Set Record,
Yahoo!Finance--Associated Press, Sept. 6, 2007, at http://
www.washingtonpost.com/wp-dyn/content/article/2007/09/06/
AR2007090601677_2.html.
\59\Erika Lovley, Mortgage Meltdown Leads to Lost Jobs in Arizona,
Politico, Sept. 5, 2007, at 12.
---------------------------------------------------------------------------
Impact on Communities
Not only is foreclosure in neither the homeowner's nor the
lender's interest; it also adversely affects entire
neighborhoods and communities. As Treasury Secretary Paulson
noted, ``Foreclosure is to no one's benefit.''\60\ He
acknowledged, for example, ``estimates that mortgage investors
lose 40 to 50 percent on their investment if it goes into
foreclosure.''\61\ The damage of foreclosure, he noted, is
``not limited only to those who lose their homes'' as ``[homes
in foreclosure can pose costs for whole neighborhoods, as crime
goes up and property values decline.''\62\ Another Treasury
Department official observed, ``Concentrated foreclosures drive
down property values and undermine the financial stability of
families, communities and ultimately our economy.''\63\
Economists and the mortgage lending industry agree.\64\
---------------------------------------------------------------------------
\60\Paul Krugman, Op-ed, Henry Paulson's Priorities, N.Y. Times,
Dec. 10, 2007 (quoting U.S. Treasury Secretary Henry Paulson).
\61\Id.
\62\Henry Paulson, Secretary, U.S. Treasury, Remarks on Actions
Taken and Actions Needed in U.S. Mortgage Markets at the Office of
Thrift Supervision National Housing Forum (Dec. 3, 2007).
\63\Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the
NYC Subprime Lending and Foreclosure Summit, Dec. 12, 2007.
\64\See, e.g., Carolyn Said, Modified Mortgages: Lenders Talking,
Then Balking, San Francisco Chronicle, Sept. 13, 2007 (reporting that a
Mortgage Bankers Association representative acknowledged that a
``foreclosure can cost the lender from 20 to 40 percent of the loan
balance''); Mark Zandi, A Step Behind, Moody's Economy.com, Dec. 13,
2007 (noting that ``[e]ven in less stressed times, homes in foreclosure
sell at a 20% to 30% discount to prevailing market values, driving down
surrounding house prices'').
---------------------------------------------------------------------------
The rising incidence of foreclosures is also having broader
societal impacts. While municipal tax revenues fall, greater
demands for fire and police protection are presented by
abandoned properties that become havens for arson, drug use,
and prostitution. According to a study commissioned by the
Homeownership Preservation Foundation of Minneapolis, various
costs incurred by government agencies responding to
foreclosures in Chicago and Cook County, Illinois amounted to
$34,199 for each foreclosure.\65\
---------------------------------------------------------------------------
\65\William C. Apgar et al., The Municipal Cost of Foreclosures: A
Chicago Case Study, Homeonwership Preservation Foundation Housing
Finance Policy Research Paper No. 2005-1, at 1 (Feb. 27, 2005).
---------------------------------------------------------------------------
The City of Baltimore has filed a Federal suit against
Wells Fargo for allegedly predatory subprime lending practices
targeting African American residents.\66\ Among other relief,
Baltimore is seeking damages for the increased l costs it has
incurred for fire, police, and other services as a result of
home mortgage foreclosures.\67\
---------------------------------------------------------------------------
\66\Gretchen Morgenson, Baltimore Is Suing Bank Over Foreclosure
Crisis, N.Y. Times, Jan. 8, 2008.
\67\Id.
---------------------------------------------------------------------------
The growing foreclosure crisis has confronted suburban law
enforcement officials with an unfamiliar challenge: policing
empty houses. As evictions mount and houses remain vacant for
months or even years, these properties become havens for
squatters, vandals, thieves, partying teenagers, and worse.\68\
In some areas, police officers are targeting vacant houses for
regular patrols, using maps of foreclosed properties as guides,
while working with community watch groups to identify trouble
spots.
---------------------------------------------------------------------------
\68\Jonathan Mummolo & Bill Brubaker, As Foreclosed Homes Empty,
Crime Arrives, Wash. Post, Apr. 27, 2008, at A1.
---------------------------------------------------------------------------
A joint study by the Georgia Institute of Technology and
the Woodstock Institute showed that when the foreclosure rate
increases 1 percentage point, neighborhood violent crime rises
2.33 percent.\69\ As one of the study's researchers explained,
``The key here is the concentration of those foreclosures at a
neighborhood level. When you have more than one foreclosure in
a few block area, that's when you start to think about the
effects on property values and the effects on crime.''\70\
---------------------------------------------------------------------------
\69\J.W. Elphinstone, Foreclosures, Vacancies and Crime--The Surge
in Defaults on Risky Mortgages is Having a Ripple Effect in Some
Cities, Portland Press Herald--Maine Sunday Telegram, Nov. 14, 2007.
\70\Id.
---------------------------------------------------------------------------
Home foreclosure has brought increased criminal activity
into middle class neighborhoods such as the historic Westview
neighborhood of Atlanta, Georgia, where 22 of the 85 bungalows
in were vacant in 2007 as the result of foreclosure and
mortgage fraud, and ``house fires, prostitution, vandals and
burglaries'' have terrorized the remaining residents.\71\
Similarly, a subdivision near Sacramento, California that
``sprouted 10,000 homes in 4 years'' now has many homes that
``stand empty, weeds overtaking lawns, signs lining the street:
`Bank Repo,' `For Rent,' `No trespassing--bank owned property.'
A typical home's value has dropped from about $570,000 to the
low $400,000's.''\72\ The remaining ``homeowners are fighting
what typically have been considered inner city problems of
gangs, drugs, theft and graffiti.''\73\
---------------------------------------------------------------------------
\71\Id.
\72\Id.
\73\Id.
---------------------------------------------------------------------------
Impact on Women and Minorities
Women and minorities have been particularly impacted by the
foreclosure crisis. The New York Times reported that for each
of the past 4 years, more than half the foreclosures in a
Baltimore neighborhood were homes owned primarily by women.\74\
Nationwide, women are 32 percent more likely to have received
subprime loans than men, according to the Consumer Federation
of America.\75\ African-American and Latino borrowers likewise
appear to have been disproportionately marketed subprime
mortgages.\76\ For instance, lending data for 2005 show that
more than half of African-American borrowers, and four out of
ten Latino mortgage borrowers, received loans that were higher-
cost, an indicator of subprime status.\77\
---------------------------------------------------------------------------
\74\John Leland, Baltimore Finds Subprime Crisis Snags Women, N.Y.
Times, Jan. 15, 2008.
\75\Id.
\76\Susan Schmidt & Maurice Tamman, Housing Push for Hispanics
Spawns Wave of Foreclosures, Wall St. J., Jan. 5, 2009.
\77\Id.
---------------------------------------------------------------------------
Compared with their white counterparts, African American
and Latino borrowers were more than 30 percent more likely to
receive a higher rate on many types of loans, even after
accounting for differences in risk, according to a 2006 report
from the Center for Responsible Lending, a research and policy
nonprofit.\78\ As Wade Henderson, President and Chief Executive
Officer of the Leadership Conference on Civil Rights, observed,
``It has long been clear to our groups that America has a
separate and unequal lending system, and that African American,
Latino and other minority consumers disproportionately secure
credit from an unscrupulous and unregulated lending
market.''\79\
---------------------------------------------------------------------------
\78\Debbie Gruenstein et al., Unfair Lending: The Effect of Race
and Ethnicity on the Price of Subprime Mortgages, Center for
Responsible Lending, at 3 (May 31, 2006).
\79\Ending Mortgage Abuse: Safe Guarding Homebuyers: Hearing Before
the Subcomm. on Housing, Transportation, and Community Development of
the S. Comm. on Banking, Housing, and Urban Affairs, 110th Cong. (2007)
(testimony of Wade Henderson, President and Chief Executive Officer,
the Leadership Conference on Civil Rights).
---------------------------------------------------------------------------
Impact on Older Americans
Although senior citizens have long been considered among
the most frugal and resistant to incurring debt, changing
economic conditions--particularly declining pension and
investment income and rising costs for basic expenses such as
prescription drugs, health care, and utilities--have made it
difficult for many to make ends meet on fixed incomes. Some of
these ``cash-poor'' but ``equity-rich'' seniors used the equity
in their homes to help meet medical and living expenses, and in
the process were targeted by unscrupulous subprime mortgage
lenders. These unwary borrowers received subprime refinance
loans with low initial teaser rates that were not properly
underwritten. Now, as those teaser rates expire and are
replaced with escalating higher rates, some seniors, including
many who owned their homes outright just a few years ago, are
now finding that they simply cannot afford to stay in their
homes, and are facing the nightmare of foreclosure.
Analysts at the American Association of Retired Persons
(AARP) have found that ``Americans age 50 and over represent
about 28 percent of all delinquencies and foreclosures in the
current crisis.''\80\ That translates into a full 684,000
Americans age 50 and over who were either delinquent or in
foreclosure at the end of 2007; about 50,000 were actually in
foreclosure or had already lost their homes. The analysis
concludes that ``older Americans appear particularly vulnerable
to house price declines and subprime loans.''\81\
---------------------------------------------------------------------------
\80\AARP Public Policy Institute, ``A First Look at Older Americans
and the Mortgage Crisis,'' Insight on the Issues (Sept. 2008).
\81\Id.
---------------------------------------------------------------------------
Having a subprime loan is associated with a higher
delinquency and foreclosure rate among all age groups.
Nevertheless, AARP states that the impact of subprime lending
appears to be disproportionately harder on older Americans.
Homeowners under age 50 with subprime loans are 13 times more
likely to be in foreclosure than those with prime loans. At age
50, the number jumps to 17 times more likely to be in
foreclosure.\82\
---------------------------------------------------------------------------
\82\Emily Brandon, Study: Falling Housing Prices are Jeopardizing
Retirement Security, U.S. News & World Rep., Sept. 22, 2008.
---------------------------------------------------------------------------
Why seniors fall into this debt trap is aptly explained in
the following news report:
``All my clients tell the same story; it's almost
like a script,'' said Donna Dougherty, a staff attorney
with Queens Legal Services for the Elderly. Typically,
a homeowner falls behind on taxes, a credit card bill
or is hit with an unexpected medical bill. As a result,
he or she ends up on a list of homeowners in debt or
with a less than perfect credit score, but with
substantial home equity. That's when the phone calls
begin. ``When somebody calls out of the blue and says
`We'll help you so you don't lose your home,' it's
almost like a white knight showing up,'' says
Dougherty. ``Seniors are absolutely one of the key
targeted groups.''\83\
---------------------------------------------------------------------------
\83\Joseph Huff-Hannon, Facing Foreclosure: Brooklyn Retiree on
Verge of Losing Home as Subprime Lenders Target Cash-Poor Black
Seniors, Independent, Apr. 25, 2008, at http://www.indypendent.org/
2008/04/25/facing-foreclosure/
An analysis of more than 4,000 loans by Ameriquest Mortgage
conducted by the Seattle Times found that one in three
borrowers in King County, Washington was aged 50 or older and
one in seven was 60 or older when they took out a mortgage with
the lender.\84\ Nearly all of the borrowers already owned their
homes. As a case in point, the Seattle Times reported on a 93-
year-old woman who ``took out a high-cost, high-interest
mortgage against her home of more than four decades'' that went
into foreclosure within months.\85\ It also examined the case
of a 79-year-old janitor, who obtained ten subprime
refinancings over 9 years after the death of her husband. As a
result of these refinancings, the homeowner's mortgage debt
swelled from $32,000 in 1998 to $382,000 in 2005.\86\
---------------------------------------------------------------------------
\84\Susan Kelleher & Justin Mayo, Homeowners in Debt, Seniors Prime
Targets of Riskiest Loans, Seattle Times, Dec. 17, 2007.
\85\Id.
\86\Id.
---------------------------------------------------------------------------
Although losing a home to foreclosure is a disaster no
matter what the homeowner's age is, it is an overwhelming
catastrophe for older people. According to the Public Policy
Institute, seniors ``rely on their homes both for shelter and
as a retirement asset,'' and therefore ``[l]osing a home
jeopardizes long-term financial security, with limited time to
recover.''\87\ AARP reports that the problem of older
households and foreclosures is likely to grow, as homeowners
increasingly carry mortgage debt in their retirement years. In
2007, 53 percent of all owners with a head of household age 50
or older had a mortgage, up from 34 percent just two decades
ago.\88\
---------------------------------------------------------------------------
\87\Foreclosures Hit Older Americans; 28% of Affected Homeowners
Are Age 50 and Up, Associated Press, Sept. 19, 2008 (quoting Susan
Reinhard, Senior Vice President, Public Policy Institute).
\88\William Apgar, Joint Center for Housing Studies, Harvard
University, presentation at AARP Forum, Sept. 19, 2008.
---------------------------------------------------------------------------
Impact on Renters
Across the country, thousands of renters have become
innocent victims of the foreclosure crisis. They have been
forced to move because the owner of the property was in
foreclosure. Security deposits have been lost, and lives turned
upside-down, as people scramble to find a new place to live on
short notice.
Almost 15 million renters--40 percent of all renters
nationwide--live in single-family homes, townhouses, condos or
duplexes, according to U.S. Census data.\89\ While there are no
national figures on foreclosure-related evictions, these types
of rental properties have been vulnerable to foreclosure
because they tend to be owned by small investors. In most
States, when a bank forecloses on a landlord, the tenant has no
guarantee of being allowed to stay in the property. In
addition, neither the lender nor the landlord has any legal
obligation to inform the tenant of the foreclosure. As a
result, it is common for the renter to first learn of the
foreclosure when he or she is being told to vacate the property
within a few days or weeks.
---------------------------------------------------------------------------
\89\Doug Guthrie, Renters caught in foreclosure meltdown, Detroit
News, Oct. 17, 2008.
---------------------------------------------------------------------------
Although the data are incomplete on the number of renters
who are evicted due to foreclosure, the National Low Income
Housing Coalition estimates that as many as 40 percent of the
families who have or could lose their homes due to foreclosure
are renters.\90\ These individuals are unlikely to get their
security deposits returned, and they will also incur unforeseen
expenses to relocate to new rental housing. And if they live
paycheck to paycheck with no savings to rely on in emergencies,
they are at high risk of joining the ranks of America's
homeless.
---------------------------------------------------------------------------
\90\Letter from Coalition to Protect Renters in the Foreclosure
Crisis to House Speaker Nancy Pelosi et al. (Oct. 21, 2008), at http://
www.nlihc.org/doc/House-letter-on-renter-assistance-in-stimulus.pdf.
---------------------------------------------------------------------------
As the Coalition explains, ``Foreclosure usually means
eviction for renters. Because renters as a group have lower
incomes than homeowners and because most renters who are
evicted due to foreclosure never get their security deposits
back, they face a period of housing instability at the very
least and many are at risk of homelessness.''\91\ Catholic
Charities USA, the Nation's largest network of social services
agencies, concurs. It notes, ``Foreclosure is causing a
significant increase in homelessness within our network all
across the country.''\92\
---------------------------------------------------------------------------
\91\Press Release, National Low Income Housing Coalition, Renters
Make Up 45% of Households Whose Homes Are in Foreclosure in Four New
England States (May 7, 2008), at http://www.utahhousing.org/documents/
NLIHC-Letterhead-templat-2008-good3.pdf.
\92\Steve Brandt & Warren Wolfe, Wave of Foreclosures Hits Renters,
Star Trib.--Minneapolis-St. Paul, Oct. 29, 2007 (quoting Jane Stensen,
Senior Director for Human Services, Catholic Charities USA).
---------------------------------------------------------------------------
Impact on the Financial Marketplace--Both Here and Abroad
Turmoil in the mortgage industry has had a domino effect on
the financial marketplace and lending community generally.
Since 2006, at least 100 mortgage companies have halted
operations or sought buyers.\93\ With respect to the financial
marketplace, the Treasury Department's Under Secretary for
Domestic Finance, in testimony before the House Financial
Services Committee, explained:
---------------------------------------------------------------------------
\93\Rick Green, Lehman Shuts Unit; Toll of Lenders Tops 100:
Subprime Scorecard, Bloomberg.com, Sept. 18, 2007.
The uncertainty regarding both the future prospects
of these mortgage-backed securities and the
methodologies the credit rating agencies used to rate
these securities compelled investors to reassess the
risk of these securities and subsequently reassess
price. Given the uncertainty of the underlying credit
and cash flows, few buyers were willing to risk their
capital. Valuation became extremely difficult as a no-
bid environment seized certain segments of the market.
This reappraisal has spread across the credit market
spectrum, first affecting residential-mortgage backed
securities and then spreading to other asset classes,
and, particularly, securitized products. Spreads have
widened and a lack of liquidity has affected these
other asset classes. The financing of buy-out
transactions has been challenged as higher risk premia
resurfaced after a long period of favorable conditions.
Volatility has increased, from Treasury bills to the
stock markets.
----------
In early August [2007], this uncertainty began to
spread to the asset-backed commercial paper market,
typically a very liquid market. . . . Subsequently,
banks became increasingly concerned about their own
liquidity in view of the possibility that they might
have to provide backup for commercial paper and take
other assets onto their balance sheets. In response to
such developments, the Federal Reserve took several
measures to increase liquidity and promote the orderly
functioning of financial markets.\94\
---------------------------------------------------------------------------
\94\Recent Events in the Credit and Mortgage Markets and Possible
Implications for U.S. Consumers and the Global Economy: Hearing Before
the H. Comm. on Financial Services, 110th Cong. (2007) (statement of
Robert Steel, Treasury Department Under Secretary for Domestic
Finance).
These measures included making additional reserves available to
the Nation's banking system and lowering the interest discount
rate, among other actions.\95\ The mortgage crisis has had
international ramifications and has been blamed for causing ``a
global credit crunch.''\96\
---------------------------------------------------------------------------
\95\Id.
\96\Eric Pfanner, British Mortgage Lender Is Offered Emergency
Loan, N.Y. Times, Sept. 14, 2007.
---------------------------------------------------------------------------
Hedge funds pool invested money to buy and sell stocks,
bonds, and many other assets, with the prospect of yielding
high returns, but based on risky investment strategies.\97\
Hedge fund investment is limited by law to the very wealthy
``who are presumed to be capable of understanding the risks and
bearing the losses of financial speculation.''\98\ Attracted by
high returns, institutional investors, such as pension funds
and university endowments, are placing more of their money in
hedge funds.\99\ And as hedge funds invested in the risky
subprime mortgage market,\100\ some high-profile funds incurred
major losses, and several have filed for bankruptcy.\101\ As a
result, ``rank-and-file workers, retirees, and others may be
unwittingly exposed to hedge fund losses.''\102\ Thus, the
mortgage crisis not only has had ripple effects throughout
financial markets, but it has also undermined the economic
security of many working-class Americans.
---------------------------------------------------------------------------
\97\Mark Jickling, Hedge Funds: Should They Be Regulated,
Congressional Research Service Report for Congress, at 1 (July 2,
2007). Studies find that the mortality rate for hedge funds is about
20% per year and that the average life span is about 3 years.
\98\Mark Jickling & Alison A. Raab, Hedge Fund Failures,
Congressional Research Service Report for Congress, summary (Aug. 1,
2007). Hedge funds are open to ``accredited investors,'' defined as
those with over $1 million in assets. Id.
\99\Id.
\100\Nara Der Hovanesian & Matthew Goldstein, The Mortgage Mess
Spreads, Business Week, Mar. 7, 2007.
\101\See, e.g., Bear Stearns Hedge Funds File for Bankruptcy,
Associated Press, Aug. 1, 2007; Alex Markels, Taking Credit's
Temperature--Risky Home Lonas Run a Fever, and the Market Prays It
Doesn't Spread, U.S. News & World Report, July 23/30, 2007, at 37
(``Several hedge funds, which used hundreds of millions of dollars in
investor capital to borrow billions more for big bets on subprime-
backed debt, have been shut down or needed bailing out.''). For
example, two Bear Stearns hedge funds heavily invested in bonds backed
by home loans recently collapsed and filed for bankruptcy protection on
July 31, 2007 under chapter 15 of the Bankruptcy Code. Bear Stearns
Hedge Funds File for Bankruptcy, Associated Press, Aug. 1, 2007. The
funds filed for chapter 15 (which pertains to transnational
insolvencies) because they are registered in the Cayman Islands. Id.
\102\Mark Jickling & Alison A. Raab, Hedge Fund Failures,
Congressional Research Service Report for Congress, summary (Aug. 1,
2007). Hedge funds are open to ``accredited investors,'' defined as
those with over $1 million in assets. Id.
---------------------------------------------------------------------------
Impact on Secondary Mortgages and Other Industries
Still others are concerned about the spillover effects of
the foreclosure crisis into other areas.\103\ As BusinessWeek
explained:
---------------------------------------------------------------------------
\103\Mara Der Hovanesian, The Home Equity Crisis Ahead--Even Banks
that Dodged the Subprime Bullet Face Losses from Loans Based on Homes
Now at Risk, BusinessWeek, Jan. 16, 2008.
What's more, there's little that can be done to
prevent the pain from the deterioration of this $850
billion market. A lender on a mortgage has the first
claim on the underlying property. In the case of
foreclosure, it can sell the property and recoup some
money. The bank with the home-equity piece has no such
collateral and is usually out the money. ``The home-
equity lender is going to get hosed,'' says Amy Crews
Cutts, deputy chief economist at mortgage giant Freddie
Mac[.]\104\
---------------------------------------------------------------------------
\104\Id.; see, e.g., Marc Labonte, Would a Housing Crash Cause a
Recession?, Congressional Research Report for Congress, RL34244 (Nov.
7, 2007).
Various industries involved in the housing market have been
adversely affected. Last November, pending home sales in the
United States ``fell to the lowest level on record,'' according
to the National Association of Home Builders.\105\ At a 2007
hearing before the House Financial Services Committee, the
Association testified that its ``members and their customers
have been significantly impacted by the mortgage upheaval and
there is deep concern that the dislocations in the financing
markets will increase the depth and length of the housing
downturn.''\106\ In addition, ``many people in the retail real
estate industry are bracing themselves for a slowdown in
spending as the subprime mortgage crisis and the decline in
housing values continue to send ripples through the
economy.''\107\
---------------------------------------------------------------------------
\105\Legislative and Regulatory Options for Minimizing and
Mitigating Mortgage Foreclosures: Hearing Before the H. Comm. on
Financial Services, 110th Cong. (2007) (prepared testimony submitted by
the National Association of Home Builders).
\106\Id.
\107\Terry Pristin, Shopping Centers Begin to Feel Ripples of
Housing's Ills, N.Y. Times, Sept. 12, 2007, at C6.
---------------------------------------------------------------------------
Some assert that the ``fundamental problem with housing is
oversupply.''\108\ Economist Mark Zandi correctly predicted in
2007 that even if interest rates were frozen on one fifth of
2006 subprime loans resetting in 2008, existing home prices
could fall by as much as 15 percent.\109\ Others cite
Americans' pessimism itself as the cause. As the Chief
Executive Officer of Toll Brothers, Inc., the Nation's largest
luxury home builder, explained, ``Right now I think it takes a
brave soul to buy a home because there's so much chatter about
housing prices dropping. . . . As soon as that fear leaves the
market and we have some kind of equilibrium, we'll be back on
top.''\110\ Still others blame the complexity of the
securitization process and the reluctance of mortgage servicers
(entities that collect mortgage payments on behalf of
investors) to enter into loan modifications because they fear
being sued by mortgage investors.\111\ Some critics questioned
whether the Paulson Plan was ``intended to achieve real
results.''\112\
---------------------------------------------------------------------------
\108\Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem
Housing Slide, Bloomberg.com (Dec. 7, 2007) (quoting Nicolas Retsinas,
Director of Harvard University's Joint Center for Housing Studies).
\109\Id. (citing Mark Zandi, Chief Economist, Moody's Economy.com).
\110\Id. (quoting Robert Toll, Chief Executive Officer, Toll
Brothers, Inc.). The article also noted that Toll Brothers, Inc. has
``lost about $5 billion of market value since July 2005, when new home
sales peaked in the U.S.'' Id.
\111\See, e.g., Editorial, Show Us the Mortgage Relief, N.Y. Times,
Dec. 9, 2007.
\112\Op. Ed., Paul Krugman, Henry Paulson's Priorities, N.Y. Times,
Dec. 10, 2007.
---------------------------------------------------------------------------
NEED FOR THE LEGISLATION
Responses to the Mortgage Foreclosure Crisis Have Been Inadequate To
Date
Overview
As of 2008, 30 percent of families holding recent subprime
mortgages owed more on their mortgage than their home was
worth.\113\ These families are at an increased risk of
foreclosure because ``negative equity'' precludes the homeowner
from selling, refinancing, or getting a home equity loan or
other mechanism for weathering short-term financial
difficulty.\114\
---------------------------------------------------------------------------
\113\Edmund Andrews, Relief for Homeowners is Given to a Relative
Few, N.Y. Times, Mar. 4, 2008 (loans originated in 2005 and 2006).
\114\Kristopher Gerardi et al., Subprime Outcomes: Risky Mortgages,
Homeownership Experiences, and Foreclosures, Federal Reserve Bank of
Boston Working Papers, No 07-15 (Dec. 3, 2007) at 3-4.
---------------------------------------------------------------------------
Regulators and economists are increasingly cautioning that
loan balances must be reduced to avoid unnecessary foreclosures
that will further damage the economy.\115\ Federal Reserve
Chairman Ben Bernanke observed in March 2008:
---------------------------------------------------------------------------
\115\See also Edmund L. Andrews, Fed Chief Urges Breaks for Some
Home Borrowers, N.Y. Times, Mar. 4, 2008; John Brinsley, Bernanke Call
for Mortgage Forgiveness Puts Pressure on Paulson, Bloomberg.com (Mar.
5, 2008); Phil Izzo, Housing Market Has Further to Fall, Wall St. J.,
Mar. 13, 2008 (``Last week, Federal Reserve Chairman Ben Bernanke
suggested that lenders could aid struggling homeowners by reducing
their principal--the sum of money they borrowed--to lessen the
likelihood of foreclosure. Some 71% of respondents [i.e., economists
surveyed by the New York Times] agreed with the suggestion. '').
[T]he current housing difficulties differ from those in
the past, largely because of the pervasiveness of
negative equity positions. With low or negative equity,
as I have mentioned, a stressed borrower has less
ability (because there is no home equity to tap) and
less financial incentive to try to remain in the home.
In this environment, principal reductions that restore
some equity for the homeowner may be a relatively more
effective means of avoiding delinquency and
foreclosure.\116\
---------------------------------------------------------------------------
\116\Ben S. Bernanke, Chairman, Federal Reserve, Speech at the
Independent Community Bankers of America Annual Convention (Mar. 4,
2008).
Notwithstanding industry leaders' public endorsements of
these principles, support for loan modifications from the Bush
Administration,\117\ exhortations by Federal banking agencies
and the Conference of State Banking Supervisors,\118\ and
voluntary efforts by lenders and servicers have resulted in a
minimal number of viable loan modifications. In December 2008,
Secretary of Housing and Urban Development Steve Preston
acknowledged that the ``centerpiece of the Federal Government's
effort to help struggling homeowners has been a failure.''\119\
The problems are two-fold: too few people are in foreclosure
prevention programs; and of those who are being reached for
loan modifications, too few are getting sustainable new terms.
---------------------------------------------------------------------------
\117\ Press Release, Office of the White House, Aug. 31, 2007. See
also the Interagency Statement on Loss Mitigation Strategies for
Servicers of Residential Mortgages, at http://www.federalreserve.gov/
newsevents/press/bcreg/20070904a.htm (encouraging lenders to address
subprime hybrid ARM resets by pursuing ``appropriate loss mitigation
strategies designed to preserve homeownership. . . . Appropriate loss
mitigation strategies may include, for example, loan modifications,
deferral of payments, or a reduction of principal.'').
\118\Statement on Loss Mitigation Strategies for Servicers of
Residential Mortgages http://www.federalreserve.gov/boarddocs/
srletters/2007/SR0716.htm.
\119\Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure,
+Wash. Post, Dec. 17, 2008, at A1.
---------------------------------------------------------------------------
An empirical study released in August 2008 examined
negotiated mortgage modifications based on data compiled from
monthly servicer remittance reports from July 2007 through June
2008, found ``that while the number of modifications rose
rapidly during the crisis, mortgage modifications in the
aggregate are not reducing subprime mortgage debt.''\120\ Of
even greater significance, the study found that these
modifications ``rarely if ever reduced principal debt, and in
many cases increased the debt.''\121\ In addition, ``many
modifications actually increased the monthly payment.''\122\ As
Sheila Bair, Chair of the Federal Deposit Insurance
Corporation, remarked, ``Why there's been such a political
focus on making sure we're not unduly helping borrowers but
then we're providing all this massive assistance at the
institutional level, I don't understanding it. . . . It's been
a frustration for me.''\123\
---------------------------------------------------------------------------
\120\Alan M. White, Abstract, Rewriting Contracts, Wholesale: Data
on Voluntary Mortgage Modifications from 2007 and 2008 Remittance
Reports (Aug. 2008), at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1259538
\121\Id.
\122\Id.
\123\Id.
---------------------------------------------------------------------------
Last fall, the State Foreclosure Prevention Working Group,
comprised of State attorneys general and State banking
regulators, issued its third in a series of reports looking at
the state of foreclosures in this country. Key findings include
the following: (1) nearly eight out of ten seriously delinquent
homeowners are not on track for any loss mitigation outcome,
down from seven in ten in previous reports; (2) new efforts to
prevent foreclosures are on the decline, despite a temporary
increase in loan modifications through the second quarter of
2008; and (3) one out of five loan modifications made in the
past year is currently delinquent.\124\
---------------------------------------------------------------------------
\124\State Foreclosure Prevention Working Group Reports, Analysis
of Subprime Mortgage Servicing Performance, Data Report No. 3, Sept.
2008, at http://www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport3.pdf.
---------------------------------------------------------------------------
Of the various types of modifications that lenders have
provided, the second largest category of modification actually
increased the homeowner's monthly mortgage payments.\125\ These
figures include modifications done by the Hope Now Alliance,
the program convened by the Treasury Department to encourage
loan modification. As acknowledged by the vice chair of
Washington Mutual, who helped run the program, many of the
homeowners who have sought assistance from Hope Now ``will not
receive long-term relief and could ultimately face higher total
costs.''\126\ Chairman Bernanke noted that loan modifications
involving ``reductions of principal balance have been quite
rare.''\127\
---------------------------------------------------------------------------
\125\Rod Dubitsky et al., Subprime Loan Modifications Update,
Credit Suisse Fixed Income Research (Oct. 1, 2008) at 2.
\126\David Cho & Renae Merle, Merits of New Mortgage Aid Are
Debate--Critics Say Treasury Plan Won't Bring Long-Term Relief, Wash.
Post, Mar. 4, 2008 (citing remarks of Bill Longbrake, senior policy
adviser for the Financial Services Roundtable and vice chair of
Washington Mutual).
\127\Ben S. Bernanke, Chairman, Federal Reserve, Speech at the
Independent Community Bankers of America Annual Convention (Mar. 4,
2008).
---------------------------------------------------------------------------
Professor Alan White of Valparaiso University School of Law
examined the modifications that are taking place and concluded
that ``we are going backwards'' and that ``voluntary
modifications are putting people underwater more than they
already are[.]''\128\ The result is that there is a high level
of defaults after a modification. Specifically, Professor White
found that less than 10 percent of the time do the voluntary
programs result in a reduced principal loan balance, with more
than half of modifications capitalizing unpaid interest and
fees into larger and more drawn-out debt on the back end of the
mortgage ; and only about a third of voluntary mortgage
modifications reduce monthly payment burdens for homeowners,
with nearly half actually saddling distressed homeowners with
increased payments under the modifications.\129\
---------------------------------------------------------------------------
\128\Kate Berry, Early Read Finds Many Loan Mods Falling Short, Am.
Banker, Nov. 24, 2008.
\129\Alan White, Rewriting Contracts, Wholesale: Data on Voluntary
Mortgage Modifications From 2007 and 2008 Remittance Reports, at http:/
/ssrn.com/abstract=1259538; Alan M. White, Deleveraging the American
Homeowner: The Failure of 2008 Voluntary Mortgage Contract
Modifications, __ Conn. L. Rev. __ (forthcoming 2009) (reporting on
updated data)
---------------------------------------------------------------------------
There are a number of reasons why voluntary loss mitigation
cannot keep up with demand. One reason is that the way
servicers are compensated by lenders often creates a bias for
moving forward with foreclosure rather than engaging in
foreclosure prevention. As reported in Inside B&C Lending,
``Servicers are generally dis-incented to do loan modifications
because they don't get paid for them but they do get paid for
foreclosures.''\130\ So even when a loan modification would
better serve investors and homeowners, some loan servicers have
an undue economic incentive to proceed to foreclosure. As one
expert explained:
---------------------------------------------------------------------------
\130\Inside Mortgage Finance Reprints, Subprime Debt Outstanding
Falls, Servicers Pushed on Loan Mods (Nov. 16, 2007) (quoting Karen
Weaver, a managing director and global head of securitization research
at Deutsche Bank Securities).
One problem is that servicers are compensated for
their costs of foreclosing, but not for their costs of
renegotiating. Another problem is that servicers impose
fees when debtors pay late or default, and the
servicing contracts allow them to keep the fees if they
can be collected. Since renegotiating a mortgage often
involves giving up these fees, they give servicers an
additional incentive to foreclose rather than
negotiate. Thus most mortgage servicing contracts are
unsuited to dealing with the housing crisis.\131\
---------------------------------------------------------------------------
\131\Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms,
and the Mortgage, National Bureau of Economic Research Working Paper
No. 14549, at 14-15 (Dec. 2008); see also Alan M. White, Deleveraging
the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract
Modifications, __ Conn. L. Rev. __ (2009) (forthcoming) (``No single
servicer or group of servicers, however, has any economic incentive to
organize a pause in foreclosures or an organized deleveraging program
to benefit the group.'').
Even when servicers do want to engage in effective loss
mitigation, they face other structural obstacles. One major
obstacle is the number of homes that have more than one
mortgage or lien against them. Between one-third and one-half
of the homes purchased in 2006 with subprime mortgages have
second mortgages,\132\ and many other homeowners have open home
equity lines of credit secured by their home. The holder of the
first mortgage will generally not want to provide modifications
that would simply free up the homeowner's resources to make
payments on a formerly worthless junior lien, nor to modify a
loan where there is a second mortgage in default.\133\ Second
mortgage holders ``have the right to prevent refinancing or
renegotiation of first mortgages unless the second mortgage is
paid off.''\134\ As Credit Suisse reports, ``It is often
difficult, if not impossible, to force a second-lien holder to
take the pain prior to a first-lien holder when it comes to
modifications,'' thereby dooming the effort.\135\
---------------------------------------------------------------------------
\132\Credit Suisse, Mortgage Liquidity du Jour: Underestimated No
More, at 5 (Mar. 12, 2007).
\133\Jody Shenn, `Piggyback' Mortgages May Cut Modifications, Fed
Says, Bloomberg.com (Dec. 30, 2008) (reporting on Federal Reserve study
that attempts ``to loosen terms on hundreds of thousands of delinquent
home loans may be hindered by so-called piggyback second mortgages that
gained popularity during the U.S. housing boom'').
\134\Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms,
and the Mortgage, National Bureau of Economic Research Working Paper
No. 14549, at 15 (Dec. 2008).
\135\Ivy Zelman et al., Credit Suisse, Subprime Loan Modifications
Update, at 8 (Oct. 1, 2008).
---------------------------------------------------------------------------
Another structural obstacle is posed by securitization.
When servicing securitized loans, servicers are bound by the
terms of the agreement with investors, known as a ``pooling and
servicing agreement'' (PSA), which may limit what they can do
by way of modification. For example, some PSAs limit the number
or percentage of loans in a pool that can be modified.\136\
Moreover, even if the PSA is not a problem, most modifications
will have differing impacts on different groups of investors;
for example, a change in interest rate may impact different
investors than a waiver of a prepayment penalty. Servicers may
decline to enter into a modification out of fear of an investor
lawsuit. As Federal Reserve Chairman Ben Bernanke explained:
---------------------------------------------------------------------------
\136\See Credit Suisse, The Day After Tomorrow: Payment Shock and
Loan Modifications (Apr. 5, 2007) (noting specific examples of PSAs
with various modification restrictions, including 5% by balance, 5% by
loan count, limits on frequency, and limits on interest rate).
Unfortunately, even though workouts may often be the
best economic alternative, mortgage securitization and
the constraints faced by servicers may make such
workouts less likely. For example, trusts vary in the
type and scope of modifications that are explicitly
permitted, and these differences raise operational
compliance costs and litigation risks. Thus, servicers
may not pursue workout options that are in the
collective interests of investors and borrowers. Some
progress has been made (for example, through
clarification of accounting rules) in reducing the
disincentive for servicers to undertake economically
sensible workouts. However, the barriers to, and
disincentives for, workouts by servicers remain serious
problems that need to part of current discussions about
how to reduce preventable foreclosures.\137\
---------------------------------------------------------------------------
\137\Ben S. Bernanke, Chairman, Federal Reserve, Remarks to the
Independent Community Bankers of American Annual Conference (Mar. 4,
2008).
The necessity of government action also is gaining
recognition among Wall Street leaders. A senior economic
advisor at UBS Investment Bank has observed that ``when markets
fail, lenders and borrowers need some sort of regulatory and
legislative framework within which to manage problems, rather
than be forced to act in the chaos of the moment.''\138\
Moreover, as former Federal Reserve Board Vice Chairman Alan
Blinder recently noted, the fact that most of the mortgages at
issue have been securitized and sold to investors across the
globe ``bolsters the case for government intervention rather
than undermining it. After all, how do you renegotiate terms of
a mortgage when the borrower and the lender don't even know
each other's names?''\139\
---------------------------------------------------------------------------
\138\George Magnus, Large-scale Action Is Needed To Tackle the
Credit Crisis, Financial Times, Apr. 8, 2008.
\139\Alan S. Blinder, From the New Deal, a Way Out of a Mess, N.Y.
Times (Feb. 24, 2008).
---------------------------------------------------------------------------
Judicial Modification of Mortgages
A mechanism for enabling a court to break the deadlock and
provide an economically rational solution that avoids
foreclosure and nets the lender at least as much as would be
recovered through a foreclosure sale is needed.
Current Bankruptcy Law
While the fallout from the subprime mortgage ``extends from
hedge fund managers to rank-and-file investors,'' the ``most
personally punishing setback is a family losing its
home.''\140\ In an effort to forestall a foreclosure sale, a
borrower may resort to filing for bankruptcy relief, which
stays most creditor collection attempts, including foreclosure
sales, at least for a period of time.\141\ Such protection--
known as the automatic stay--is limited, however. If the debtor
does not cure the default leading to the foreclosure, i.e., pay
the arrearages due under the mortgage, and remain current on
all future payments, the mortgage lender can obtain a court
order terminating the automatic stay and thereby allow the
foreclosure sale to proceed.\142\
---------------------------------------------------------------------------
\140\Steve Lohr, Loan by Loan, the Making of a Credit Squeeze, N.Y.
Times, Aug. 19, 2007, at 1 Bus. Sec.
\141\11 U.S.C. Sec. 362(a) (2008).
\142\11 U.S.C. Sec. 362(d) (2008). Typically, the basis for
granting relief from the automatic stay is that the mortgagee lacks
``adequate protection.'' 11 U.S.C. Sec. Sec. 361, 362(d)(1) (2008).
---------------------------------------------------------------------------
For most consumers facing a foreclosure sale who want to
retain their homes, chapter 13 of the Bankruptcy Code\143\
provides some modicum of protection. In the context of a
chapter 13 repayment plan, a debtor may cure a default under a
mortgage ``within a reasonable time,'' providing the debtor
remains current on his or her post-petition mortgage
payments.\144\ While this ability to cure a default under a
residential mortgage is valuable, chapter 13 does not protect a
consumer debtor from having to pay escalating interest costs
and hidden fees that are often involved in subprime mortgage
agreements.
---------------------------------------------------------------------------
\143\Chapter 13 is a form of bankruptcy relief by which a debtor,
in exchange for retaining possession of his or her assets, proposes a
repayment plan pursuant to which the debtor devotes all of his or her
disposable income for a period of up to 5 years. Creditors in a chapter
13 case must receive under the plan at least as much as they would
receive if the case was converted to chapter 7 for liquidation.
\144\11 U.S.C. Sec. 1322(b)(5) (2008).
---------------------------------------------------------------------------
It should be noted that, while a chapter 13 debtor may
modify the rights of most other types of secured or unsecured
creditors in the context of a chapter 13 repayment plan,\145\
the current law expressly prohibits a chapter 13 debtor from
modifying the rights of a creditor secured ``only by a security
interest in real property that is the debtor's principal
residence.''\146\ Not only does this treat principal residences
less favorably than second homes, vacation homes, and other
properties. Curiously, if the mortgage lender also has a
security interest in other property of the debtor--so that the
debt is not secured only by a security interest in the debtor's
principal residence--the prohibition on modifying the mortgage
terms does not apply.
---------------------------------------------------------------------------
\145\As a result of an amendment to the bankruptcy law in 2005, a
purchase money security interest in a motor vehicle acquired for the
debtor's personal use may not be bifurcated if the debt was incurred
during the 910-day period preceding the bankruptcy filing. The same
prohibition applies to a claim secured by anything else of value if the
debtor incurred the debt within 1 year of the bankruptcy filing. 11
U.S.C. Sec. 1325(a) (2008).
\146\11 U.S.C. Sec. 1322(b)(2) (2008).
---------------------------------------------------------------------------
The Supreme Court has held that this exception to a chapter
13's ability to modify the rights of creditors applies even if
the mortgagee is undersecured.\147\ Thus, if a chapter 13
debtor owes $300,000 on a mortgage for a home that is worth
less than $200,000, he or she must repay the entire amount in
order to keep his or her home, even though the maximum that the
mortgage lender would receive upon foreclosure is the home's
value--i.e., $200,000--less the costs of foreclosure.
---------------------------------------------------------------------------
\147\Nobelman v. American Sav. Bank, 508 U.S. 324 (1993).
---------------------------------------------------------------------------
Hearings
The Committee on the Judiciary held 1 day of hearings on
H.R. 200, the ``Helping Families Save Their Homes in Bankruptcy
Act of 2009,'' and H.R. 225, the ``Emergency Homeownership and
Equity Protection Act,'' on January 22, 2009. Testimony was
received from Representative Brad Miller (D-NC); Representative
Jim Marshall (D-GA); David M. Certner, Legislative Policy
Director, American Association of Retired Persons; Adam J.
Levitin, Associate Professor of Law, Georgetown University Law
Center; Christopher J. Mayer, Senior Vice Dean, Columbia
Business School; and Matthew Mason, Esq., Assistant Director,
UAW-GM Legal Services Plan.
Committee Consideration
On January 27, 2009, the Committee met in open session and
ordered the bill, H.R. 200 favorably reported with an
amendment, by a rollcall vote of 21 to 15, a quorum being
present.
Committee Votes
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
following rollcall votes occurred during the Committee's
consideration of H.R. 200.
1. An amendment by Mr. Smith: (1) specifying that a claim
for a loan secured by a security interest in the debtor's
principal residence may be modified in certain specified
respects to the extent necessary so that the monthly mortgage
payment is not less than 31 percent and not more than 38
percent of the debtor's current monthly income; and (2)
providing that if the claim has been modified to an amount
below the original principal of the loan pursuant to section
1322(b)(11)(A) and the residence is sold, transferred or
refinanced during the term of the plan, the plan requires the
debtor to enter into an enforceable agreement with the holder
that it is entitled to receive, in addition to the unpaid
portion of the allowed secured claim, the net proceeds of the
sale or the amount of the allowed unsecured claim, whichever is
less. Defeated 14 to 20.
ROLLCALL NO. 1
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman......................................................
Mr. Boucher.....................................................
Mr. Nadler...................................................... X
Mr. Scott....................................................... X
Mr. Watt........................................................ X
Ms. Lofgren..................................................... X
Ms. Jackson Lee................................................. X
Ms. Waters...................................................... X
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez................................................... X
Mr. Sherman.....................................................
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez..................................................... X
Ms. Wasserman Schultz........................................... X
Mr. Maffei...................................................... X
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr........................................... X
Mr. Coble....................................................... X
Mr. Gallegly.................................................... X
Mr. Lungren..................................................... X
Mr. Issa........................................................ X
Mr. Forbes......................................................
Mr. King........................................................ X
Mr. Franks...................................................... X
Mr. Gohmert..................................................... X
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney......................................................
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 14 20
----------------------------------------------------------------------------------------------------------------
2. An amendment by Mr. Franks limiting the legislation to:
(1) mortgages originated in the period beginning January 1,
2004 through December 31, 2007 and (2) to cases commenced in
the 3-year period beginning on the Act's date of enactment.
Defeated 15 to 20.
ROLLCALL NO. 2
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman...................................................... X
Mr. Boucher.....................................................
Mr. Nadler...................................................... X
Mr. Scott....................................................... X
Mr. Watt........................................................ X
Ms. Lofgren..................................................... X
Ms. Jackson Lee................................................. X
Ms. Waters......................................................
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez................................................... X
Mr. Sherman..................................................... X
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez..................................................... X
Ms. Wasserman Schultz........................................... X
Mr. Maffei......................................................
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr........................................... X
Mr. Coble....................................................... X
Mr. Gallegly.................................................... X
Mr. Lungren..................................................... X
Mr. Issa........................................................ X
Mr. Forbes...................................................... X
Mr. King........................................................ X
Mr. Franks...................................................... X
Mr. Gohmert..................................................... X
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney......................................................
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 15 20
----------------------------------------------------------------------------------------------------------------
3. An amendment by Mr. Forbes: (1) deleting the exception
to the mandatory pre-filing credit counseling requirement in
the Amendment in the Nature of a Substitute; and (2) requiring
the court to find, as a condition of confirmation, that the
debtor did not obtain the extension, renewal, or refinancing of
credit that gives rise to a modified claim by
misrepresentation, false pretenses, or actual fraud. Defeated
12 to 20.
ROLLCALL NO. 3
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman...................................................... X
Mr. Boucher.....................................................
Mr. Nadler...................................................... X
Mr. Scott....................................................... X
Mr. Watt........................................................
Ms. Lofgren..................................................... X
Ms. Jackson Lee................................................. X
Ms. Waters......................................................
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez................................................... X
Mr. Sherman..................................................... X
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez..................................................... X
Ms. Wasserman Schultz........................................... X
Mr. Maffei...................................................... X
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr...........................................
Mr. Coble.......................................................
Mr. Gallegly.................................................... X
Mr. Lungren..................................................... X
Mr. Issa........................................................ X
Mr. Forbes...................................................... X
Mr. King........................................................ X
Mr. Franks......................................................
Mr. Gohmert..................................................... X
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney......................................................
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 12 20
----------------------------------------------------------------------------------------------------------------
4. An amendment by Mr. King requiring the court to find, as
a condition of confirmation, that the debtor did not obtain the
extension, renewal, or refinancing of credit that gives rise to
a modified claim by the debtor's material misrepresentation,
false pretenses, or actual fraud. Approved 21 to 3.
ROLLCALL NO. 4
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman...................................................... X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott....................................................... X
Mr. Watt........................................................
Ms. Lofgren..................................................... X
Ms. Jackson Lee.................................................
Ms. Waters......................................................
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez...................................................
Mr. Sherman.....................................................
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez.....................................................
Ms. Wasserman Schultz........................................... X
Mr. Maffei...................................................... X
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr...........................................
Mr. Coble.......................................................
Mr. Gallegly....................................................
Mr. Lungren.....................................................
Mr. Issa........................................................
Mr. Forbes...................................................... X
Mr. King........................................................ X
Mr. Franks......................................................
Mr. Gohmert.....................................................
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney...................................................... X
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 21 3
----------------------------------------------------------------------------------------------------------------
5. An amendment by Mr. Jordan revising the legislation to
apply to nontraditional and subprime mortgages, as defined in
the amendment. Defeated 14 to 20.
ROLLCALL NO. 5
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman...................................................... X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott....................................................... X
Mr. Watt........................................................
Ms. Lofgren..................................................... X
Ms. Jackson Lee................................................. X
Ms. Waters...................................................... X
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez................................................... X
Mr. Sherman..................................................... X
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez..................................................... X
Ms. Wasserman Schultz........................................... X
Mr. Maffei...................................................... X
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr........................................... X
Mr. Coble.......................................................
Mr. Gallegly.................................................... X
Mr. Lungren..................................................... X
Mr. Issa........................................................
Mr. Forbes...................................................... X
Mr. King........................................................ X
Mr. Franks...................................................... X
Mr. Gohmert..................................................... X
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney...................................................... X
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 14 20
----------------------------------------------------------------------------------------------------------------
6. Motion to report H.R. 200 favorably, as amended. Passed
21 to 15.
ROLLCALL NO. 6
----------------------------------------------------------------------------------------------------------------
Ayes Nays Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman...................................... X
Mr. Berman...................................................... X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott....................................................... X
Mr. Watt........................................................ X
Ms. Lofgren..................................................... X
Ms. Jackson Lee................................................. X
Ms. Waters...................................................... X
Mr. Delahunt.................................................... X
Mr. Wexler...................................................... X
Mr. Cohen....................................................... X
Mr. Johnson..................................................... X
Mr. Pierluisi................................................... X
Mr. Gutierrez................................................... X
Mr. Sherman..................................................... X
Ms. Baldwin..................................................... X
Mr. Gonzalez.................................................... X
Mr. Weiner...................................................... X
Mr. Schiff...................................................... X
Ms. Sanchez..................................................... X
Ms. Wasserman Schultz........................................... X
Mr. Maffei...................................................... X
[Vacant]........................................................
Mr. Smith, Ranking Member....................................... X
Mr. Goodlatte................................................... X
Mr. Sensenbrenner, Jr........................................... X
Mr. Coble.......................................................
Mr. Gallegly.................................................... X
Mr. Lungren..................................................... X
Mr. Issa........................................................ X
Mr. Forbes...................................................... X
Mr. King........................................................ X
Mr. Franks...................................................... X
Mr. Gohmert..................................................... X
Mr. Jordan...................................................... X
Mr. Poe......................................................... X
Mr. Chaffetz.................................................... X
Mr. Rooney...................................................... X
Mr. Harper...................................................... X
-----------------------------------------------
Total....................................................... 21 15
----------------------------------------------------------------------------------------------------------------
Committee Oversight Findings
In compliance with clause 3(c)(1) of rule XIII of the Rules
of the House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
New Budget Authority and Tax Expenditures
Clause 3(c)(2) of rule XIII of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority or increased tax
expenditures.
Congressional Budget Office Cost Estimate
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, the Committee sets forth, with
respect to the bill, H.R. 200, the following estimate and
comparison prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act of
1974. The Committee notes that one statement in the CBO letter
might be misconstrued. Its statement that ``H.R. 200 would not
apply to debtors with loans guaranteed by the Federal Housing
Administration, the Department of Veterans Affairs, or the
Department of Agriculture'' incorrectly describes the rule of
construction in section 8 of the bill. As explained in the
section-by-section analysis in this report, the rule of
construction merely provides that the obligations of the FHA,
the VA, and USDA under their mortgage loan guarantee programs
are unaffected by the bill. All types of mortgage loans that
otherwise meet the terms of the bill, including those backed by
the aforementioned guarantee or insurance programs, are covered
by the bill. The Statement in the CBO letter should be read
consistent with the Committee's intent, as reflected in the
section-by-section analysis and this paragraph.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 23, 2009.
Hon. John Conyers, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 200, the Helping
Families Save Their Homes in Bankruptcy Act of 2009.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Leigh Angres.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure.
H.R. 200--Helping Families Save Their Homes in Bankruptcy Act of 2009.
Summary: H.R. 200 would authorize bankruptcy courts to
modify the terms of some mortgages on principal residences
during Chapter 13 bankruptcy proceedings. CBO estimates that
enacting H.R. 200 would reduce direct spending (in the form of
increased offsetting receipts) by $31 million over the 2009-
2019 period and increase revenues by $23 million over the same
time period, thus reducing future budget deficits over this
period by a total of $54 million. Based on information provided
by the Administrative Office of the United States Courts
(AOUSC), CBO estimates that any additional discretionary costs
to adjudicate more bankruptcy cases would not be significant;
such costs would be subject to the availability of appropriated
funds. The judiciary currently spends about $900 million a year
for all bankruptcy activities.
The effects on direct spending over the 2009-2013 and 2009-
2018 periods are relevant for enforcing the House's pay-as-you-
go rule under the current budget resolution. CBO estimates that
enacting H.R. 200 would reduce direct spending by $26 million
over the 2009-2013 period and by $31 million over the 2009-2018
period. Enacting H.R 200 would increase revenues by $18 million
over the 2009-2013 period and $23 million over the 2009-2018
period.
H.R. 200 would impose intergovernmental and private-sector
mandates, as defined in the Unfunded Mandates Reform Act
(UMRA), on certain creditors, including state and local pension
funds and housing agencies. Because of uncertainty about the
number of bankruptcy plans that would be modified as a result
of this legislation and how those changes would affect holders
of secured claims, CBO cannot determine whether the aggregate
cost of complying with the mandates would exceed the annual
thresholds for
intergovernmental or private-sector mandates ($69 million
in 2009 and $139 million in 2009, respectively, adjusted
annually for inflation).
Estimated cost to the Federal Government: The costs of this
legislation fall within budget function 750 (administration of
justice.)
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Fiscal Year, in Millions of Dollars--
--------------------------------------------------------------------------------------------
2009- 2009-
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
Estimated Budget Authority -4 -9 -6 -4 -3 -1 -1 -1 -1 -1 * -27 -31
Estimated Outlays -4 -9 -6 -4 -3 -1 -1 -1 -1 -1 * -27 -31
CHANGES IN REVENUES
Estimated Revenues 3 6 4 3 2 1 1 1 1 1 * 19 23
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: * = less than $500,000.
Basis of estimate: For this estimate, CBO assumes that H.R.
200 will be enacted near the middle of fiscal year 2009.
H.R. 200 would allow bankruptcy courts to modify the terms
of some mortgages for a primary residence during Chapter 13
bankruptcy proceedings. (This type of bankruptcy, often
referred to as ``reorganization,'' involves a repayment plan
that sets forth how debts will be settled.) Under current law,
Chapter 13 halts mortgage foreclosure proceedings, thus giving
homeowners an opportunity to restructure their financial
arrangements. Bankruptcy courts can establish a payment plan
for overdue mortgage payments on primary residences but cannot
change the amount, timing, or interest rate terms of mortgage
payments. In 2008, about 354,000 cases were filed for Chapter
13 bankruptcy, a 14 percent increase over the number filed in
2007.
H.R. 200 would apply to Chapter 13 cases filed before, on,
or after the date of enactment, but would limit which debtors
would qualify for a loan modification under the bill. First,
the debtor's mortgage would have to be initiated prior to the
effective date of the bill and subject to a notice of
foreclosure. Second, H.R. 200 would not apply to debtors with
loans guaranteed by the Federal Housing Administration, the
Department of Veterans Affairs, or the Department of
Agriculture.
Finally, the bill would require debtors to inquire about
loan modifications with their mortgage servicer. Specifically,
after the 15-day period beginning on the date of enactment, a
mortgage modification may be proposed under Chapter 13 only if
the debtor attempted to contact the mortgage servicer regarding
a loan modification at least 15 days before filing for
bankruptcy relief (this rule would not apply in cases where a
foreclosure sale is scheduled to occur within 30 days of the
date of the bankruptcy filing). For pending Chapter 13 cases,
the debtor would have to certify that the debtor attempted to
contact the mortgage holder about a loan modification. The bill
would expand Chapter 13 eligibility by excluding home mortgage
debt when determining if the debtor qualifies to file for
Chapter 13, under certain circumstances.
The bill also would constrain the debtor's profit from a
home sale in certain cases. H.R. 200 would require a debtor to
share the net proceeds of a home sale with the lender, if the
sale occurs within the first 4 years of the debtor completing a
Chapter 13 plan. The amount the lender would receive would be
80 percent of the net profit in the first year, and then
decline to 20 percent by the fourth year.
Impact on Bankruptcy Filings. Bankruptcy filings fluctuate
over time and are dependent on economic trends and personal
financial conditions. Between 1987 and 2008, Chapter 13 filings
have ranged from a low of 140,000 in 1987 to a high of 470,000
in 2003. The primary reason that individuals file for Chapter
13 is to forestall foreclosure on their home--over 96 percent
of Chapter 13 filers are homeowners and 70 percent of filers
propose a plan to repay overdue mortgage payments. Because of
the high number of foreclosures expected over the next several
years (several million, based on information provided by the
Center for Responsible Lending), CBO expects that bankruptcy
filings will substantially increase in the near term--without
enactment of H.R. 200. Under current law, based on information
provided by the AOUSC, CBO estimates that Chapter 13 filings
are likely to increase to almost 400,000 in 2009, a 13 percent
increase over the number in 2008.
Economists and bankruptcy experts have found that the
greater the financial benefit gained from filing for
bankruptcy, the greater the likelihood a household will file.
CBO expects that the financial benefit to filing under the bill
would be greater than under current law. Based on an analysis
of similar proposals to allow loan modification in Chapter 13,
CBO estimates that over one million households would benefit
financially from filing for Chapter 13 bankruptcy under the
bill.
Studies analyzing household's decision to file for
bankruptcy indicate that of those households that could realize
a financial benefit from filing for bankruptcy, only a fraction
actually make the decision to file. Of the over one million
households that could benefit from filing for bankruptcy under
the legislation in the next few years, we estimate that about
350,000 additional households would file for bankruptcy over
the 2009-2019 period, with about two-thirds of those filings
occurring within the first 3 years after enactment.
The number of additional bankruptcy filings that would
occur under the bill is, however, very uncertain. Some
bankruptcy experts believe that filings would not increase
substantially under H.R. 200 because the current fees and legal
costs associated with filing for bankruptcy are high; the
Government Accountability Office (GAO) reports that the median
cost for filing Chapter 13 bankruptcy is $3,000. In the short
term, new filings also might be limited by the supply of
experienced bankruptcy lawyers who can handle additional
filings. Further, some industry specialists maintain that the
bill would encourage voluntary modification of mortgages
outside of bankruptcy because many mortgage holders would
prefer to work out their own arrangements rather than be
subject to those imposed by a bankruptcy court. Other experts,
however, contend that Chapter 13 filings would increase
significantly as legal, tax, accounting, and payment concerns
would deter voluntary modifications. Accordingly, debtors might
view Chapter 13 modification as the best option for retaining
their homes. Finally, whether significant numbers of debtors
would be driven to seek bankruptcy protection by the prospect
of mortgage relief might ultimately depend on how bankruptcy
courts responded to the new authority that would be provided by
H.R. 200.
Budgetary Impact of Additional Bankruptcy Filings.
Additional filings would increase collections of bankruptcy
fees. Those fees ($235 per Chapter 13 filing) are distributed
among several government entities. About half of the amount
collected is used to cover the judiciary's and U.S. Trustees'
added costs and thus has no net effect on Federal spending. A
portion of those filing fees, however, is recorded as an
offsetting receipt (a credit against direct spending) in the
Federal budget and deposited into a special fund in the
Treasury; those amounts are not available for spending unless
provided in an appropriation act. CBO estimates that enacting
the legislation would increase such offsetting receipts by $31
million over the 2009-2019 period.
Revenues. Another portion of Chapter 13 filing fees is
deposited into the general fund of the Treasury and recorded as
increased revenues. CBO estimates that enacting H.R. 200 would
increase such revenues from additional Chapter 13 filing fees
by $23 million over the 2009-2019 period.
Potential Budgetary Impact on the Government-Sponsored
Enterprises for Housing. Enacting H.R. 200 could affect the
value of the financial instruments (mortgages and mortgage-
backed securities) held or guaranteed by the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac)). These government-sponsored
enterprises (GSEs) were placed in conservatorship in 2008 and
are under the direct control of the Federal Government. CBO
considers the GSEs' operations to be part of the Federal
budget. Enacting H.R. 200 could change the value of those
financial instruments and thus affect the Federal budget. It is
unclear, however, whether enactment of the legislation would
increase or decrease future costs for the GSEs.
Losses resulting from mortgages held by the GSEs are
shouldered by those entities. Modifying loans in bankruptcy
might be more or less costly compared to foreclosure and would
depend on future house prices, the length of time needed to
sell foreclosed properties, the terms of potential mortgage
modifications, the likelihood of re-default for modified loans,
and the amount mortgage payments might be reduced in the
bankruptcy process. Similar uncertainty exists for the impact
of H.R. 200 on the value of mortgage-backed securities
guaranteed and held by the GSEs.
Intergovernmental and private-sector impact: H.R. 200 would
impose intergovernmental and private-sector mandates, as
defined in UMRA, on certain creditors, including state and
local pension funds and housing agencies. The bill would allow
bankruptcy judges to modify the rights of holders of certain
claims on mortgage debt by making changes to the terms of home
mortgage agreements during bankruptcy proceedings. Under
current law, bankruptcy judges are prohibited from changing the
terms of loans for primary residences. The bill also would
require such claimholders to file timely notice with the court
before adding fees, costs, or charges while a bankruptcy case
is pending.
The costs of those mandates would depend on the number of
mortgage agreements that judges would choose to modify and how
those changes would affect the value of secured claims. The
amount recovered by a claimholder through a bankruptcy
proceeding relative to the amount that could be recovered
through foreclosure would vary depending on market conditions.
In some cases, claimholders might not incur any additional
costs. Because of those uncertainties, CBO cannot determine
whether the aggregate cost of complying with the mandates in
the bill would exceed the annual thresholds for
intergovernmental or private-sector mandates ($69 million in
2009 and $139 million in 2009, respectively, adjusted annually
for inflation).
Estimate prepared by: Federal Costs: Leigh Angres; Impact
on state, local, and tribal governments: Melissa Merrell;
Impact on the private sector: Paige Piper/Bach.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
Performance Goals and Objectives
The Committee states that pursuant to clause 3(c)(4) of
rule XIII of the Rules of the House of Representatives, H.R.
200 will authorize judicial modification of a mortgage secured
only by a homeowner's principle residence in a chapter 13
bankruptcy case, under certain circumstances, so that such
mortgage will be more affordable for an eligible homeowner.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in article I, section 8, clause 4 of the
Constitution.
Advisory on Earmarks
In accordance with clause 9 of rule XXI of the Rules of the
House of Representatives, H.R. 200 does not contain any
congressional earmarks, limited tax benefits, or limited tariff
benefits as defined in clause 9(d), 9(e), or 9(f) of Rule XXI.
Section-by-Section Analysis
The following discussion describes the bill as reported by
the Committee.
Sec. 1. Short Title. Section 1 sets forth the short title
of the bill as the ``Helping Families Save Their Homes in
Bankruptcy Act of 2009.''
Sec. 2. Eligibility for Relief. Bankruptcy Code section
109(e) sets forth secured and unsecured debt limits to
establish a debtor's eligibility for relief under chapter 13.
Section 2 of the bill amends section 109(e) to provide that the
computation of debts does not include the secured or unsecured
portions of debts secured by the debtor's principal residence,
under two alternative circumstances. The first is if the
current value of the debtor's principal residence is less than
the secured debt limit specified in section 109(e). The second
is if the debtor's principal residence was sold in foreclosure
or the debtor surrendered it and its current value is less than
the secured debt limit specified in section 109(e).
In addition, section 2 of the bill amends Bankruptcy Code
section 109(h) to waive the mandatory requirement that a debtor
have received credit counseling prior to filing for bankruptcy
relief, under certain circumstances. The waiver applies in a
chapter 13 case where the debtor certifies to the court as to
having received notice that the holder of a claim secured by
the debtor's principal residence may commence (or has
commenced) a foreclosure proceeding against such residence.
Sec. 3. Prohibiting Claims Arising from Violations of the
Truth in Lending Act. Under the Truth in Lending Act, a
mortgage borrower has a right of rescission with respect to a
mortgage secured by his or her residence, under certain
circumstances.\148\ Bankruptcy Code section 502(b) enumerates
various claims of creditors that are not entitled to payment in
a bankruptcy case, subject to certain exceptions. Section 3 of
the bill amends Bankruptcy Code section 502(b) to provide that
a claim secured by an interest in the debtor's principal
residence is not entitled to payment in a bankruptcy case to
the extent that such claim is subject to a remedy for
rescission under the Truth in Lending Act, notwithstanding the
prior entry of a foreclosure judgment. In addition, section 3
of the bill specifies that it shall not be construed to modify,
impair, or supersede any other right of the debtor.
---------------------------------------------------------------------------
\148\15 U.S.C. Sec. 1635 (2008).
---------------------------------------------------------------------------
Sec. 4. Authority to Modify Certain Mortgages. Under
Bankruptcy Code section 1322(b)(2), a chapter 13 plan may not
modify the terms of a mortgage secured solely by real property
that is the debtor's principal residence. Section 4 amends
Bankruptcy Code section 1322(b) to create a limited exception
to this prohibition. The exception only applies to a mortgage
that: (1) originated before the effective date of this Act; and
(2) is the subject of a notice that a foreclosure may be (or
has been) commenced with respect to such mortgage.
In addition, the debtor must certify pursuant to new
section 1322(h) that he or she attempted--not less than 15 days
before filing for bankruptcy relief--to contact the mortgage
lender (or the entity collecting payments on the lender's
behalf) regarding modification of the mortgage. This
requirement does not apply if the foreclosure sale is scheduled
to occur within 30 days of the date on which the debtor files
for bankruptcy relief. If the chapter 13 case is pending at the
time the new section 1322(h) becomes effective, then the debtor
must certify that he or she attempted to contact the mortgage
lender or entity collecting payments on its behalf regarding
modification of the mortgage before either: (1) filing a plan
under Bankruptcy Code section 1321 that contains a modification
pursuant to new section 1322(b)(11); or (2) modifying a plan
under Bankruptcy Code section 1323 or section 1329 to contain a
modification pursuant to new section 1322(b)(11).
Under new section 1322(b)(11), the debtor may propose a
plan modifying the rights of the mortgage lender (and the
rights of the holder of any claim secured by a subordinate
security interest in the residence) in several respects. It is
important to note that the intent of new section 1322(b)(11) is
permissive. Accordingly, a chapter 13 debtor may propose a plan
that includes any or all types of modification authorized under
section 1322(b)(11).
First, the plan may provide for payment of the amount of
the allowed secured claim as determined under Bankruptcy Code
section 506(a)(1). Second, the plan may prohibit, reduce, or
delay any adjustable interest rate applicable on and after the
date of the filing of the plan. Third, it may extend the
repayment period of the mortgage for up to 40 years (reduced by
the period for which the mortgage has been outstanding), or the
remaining term of the mortgage beginning on the date of the
order for relief under chapter 13, whichever is longer.
Fourth, the plan may provide for the payment of interest at
a fixed annual rate equal to the currently applicable average
prime offer rate as of the date of the order for relief under
chapter 13, as determined pursuant to specified criteria. The
rate must correspond to the repayment term determined under new
section 1322(b)(11)(C)(I) as published by the Federal Financial
Institutions Examination Council in its table entitled,
``Average Prime Offer Rates--Fixed.'' In addition, the rate
must include a reasonable premium for risk.
Fifth, the plan may provide for payments of such modified
mortgage directly to the mortgage lender. The reference in new
section 1322(b)(11)(D) to ``holder of the claim'' is intended
to include a servicer of such mortgage for such holder.
New section 1322(g) provides that a mortgage may be reduced
under new section 1322(b)(11)(A) only on the condition that if
the debtor sells the principal residence securing the claim
before the debtor receives a discharge under chapter 13, the
debtor agrees to pay from the net proceeds of such sale a
portion of those proceeds to the mortgage lender. If the
residence is sold in the first year following the effective
date of the chapter 13 plan, the lender is to receive 80
percent of the amount of the difference between the sales price
and the amount of the lender's claim (plus costs of sale and
improvements); this amount cannot exceed, however, the amount
of the allowed secured claim determined as if it had not been
reduced under the new section 1322(b)(11)(A). If the residence
is sold in the second year following the effective date of the
chapter 13 plan, then the applicable percentage is 60 percent.
If the residence is sold in the third year following the
effective date of the chapter 13 plan, then the applicable
percentage is 40 percent. And if the residence is sold in the
fourth year following the effective date of the chapter 13
plan, then the applicable percentage is 20 percent. It is the
intent of the Committee that if the unsecured portion of the
mortgagee's claim is partially paid under this provision, it
should be reconsidered under Bankruptcy Code section 502(j) and
reduced accordingly.
Sec. 5. Combating Excessive Fees. Section 5 of the bill
amends Bankruptcy Code section 1322(c) to provide that the
debtor, the debtor's property, and property of the bankruptcy
estate are not liable for any fee, cost, or charge incurred
while the chapter 13 case is pending and that arises from a
claim for debt secured by the debtor's principal residence,
unless the holder of the claim complies with certain
requirements. It is the Committee's intent that the reference
in this provision to a fee, cost, or charge include an increase
in any applicable rate of interest for such claim, as well as
to a change in escrow account payments.
The requirements with which the holder of the claim must
comply are the following: First, the claimant must file with
the court an annual notice of the fee, cost, or charge (or on a
more frequent basis as the court determines), within 1 year
after the fee, cost, or charge was incurred or 60 days before
the case is closed, whichever is earlier. Failure to give the
required notice is deemed to be a waiver by the holder of any
claim for the fees, costs, or charges, for all purposes. Then
any attempt to collect them constitutes a violation of the
Bankruptcy Code's discharge injunction under section 524(a)(2)
and the automatic stay under section 362(a), whichever is
applicable.
Second, the fee, cost, or charge must be lawful under
applicable nonbankruptcy law, reasonable, and provided for in
the applicable security agreement. Third, the value of the
debtor's principal residence must be greater than the amount of
the claim, including the fee, cost, or charge.
Section 5 of the bill further provides that a chapter 13
plan may waive any prepayment penalty on a claim secured by the
debtor's principal residence.
Sec. 6. Confirmation of Plan. Bankruptcy Code section
1325(a) sets forth the mandatory criteria for confirmation of a
chapter 13 plan. Section 6 of the bill amends section 1325(a)
to provide certain protections for a creditor whose rights are
modified under new section 1322(b)(11).
Section 6 imposes three new conditions for confirmation
where the plan modifies a claim under new section 1322(b)(11).
First, the plan must require that the creditor retain its lien
until the later of when the claim (as modified) is paid or the
debtor obtains a discharge. Second, the court must find that
the modification under section 1322(b)(11) is in good faith.
Third, the court must find that the debtor did not obtain the
extension, renewal, or refinancing of credit that gives rise to
a modified claim by the debtor's material misrepresentation,
false pretenses, or actual fraud.
Sec. 7. Discharge. Bankruptcy Code section 1328 sets forth
the requirements by which a chapter 13 debtor may obtain a
discharge, and the scope of such discharge. Section 7 of the
bill amends section 1328(a) to clarify that the unpaid portion
of an allowed secured claim modified under new section
1322(b)(11) is not discharged.
Sec. 8. Rule of Construction. Section 8 provides that
nothing in the Act or the amendments made by it may be
construed to modify any obligation of the Federal Housing
Administration, the Veterans Administration, or the Department
of Agriculture under a contract that guarantees or insures the
payment of any part of a loan secured by an interest in a
principal residence.
Sec. 9. Effective Date; Application of Amendments. Section
9(a) provides that the Act and the amendments made by it,
except as provided in subsection (b), take effect on the Act's
date of enactment. Section 9(b) provides that the amendments
made by the Act apply only to cases commenced under title 11 of
the United States Code before, on, or after the Act's date of
enactment.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, existing law in which no change
is proposed is shown in roman):
TITLE 11, UNITED STATES CODE
* * * * * * *
CHAPTER 1--GENERAL PROVISIONS
* * * * * * *
Sec. 109. Who may be a debtor
(a) * * *
* * * * * * *
(e) Only an individual with regular income that owes, on
the date of the filing of the petition, noncontingent,
liquidated, unsecured debts of less than $250,000 and
noncontingent, liquidated, secured debts of less than $750,000,
or an individual with regular income and such individual's
spouse, except a stockbroker or a commodity broker, that owe,
on the date of the filing of the petition, noncontingent,
liquidated, unsecured debts that aggregate less than $250,000
and noncontingent, liquidated, secured debts of less than
$750,000 may be a debtor under chapter 13 of this title. For
purposes of this subsection, the computation of debts shall not
include the secured or unsecured portions of--
(1) debts secured by the debtor's principal
residence if the current value of such residence is
less than the secured debt limit; or
(2) debts secured or formerly secured by real
property that was the debtor's principal residence that
was sold in foreclosure or that the debtor surrendered
to the creditor if the current value of such real
property is less than the secured debt limit.
* * * * * * *
(h)(1) * * *
* * * * * * *
(5) The requirements of paragraph (1) shall not apply in a
case under chapter 13 with respect to a debtor who submits to
the court a certification that the debtor has received notice
that the holder of a claim secured by the debtor's principal
residence may commence a foreclosure on the debtor's principal
residence.
* * * * * * *
CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE
* * * * * * *
SUBCHAPTER I--CREDITORS AND CLAIMS
* * * * * * *
Sec. 502. Allowance of claims or interests
(a) * * *
(b) Except as provided in subsections (e)(2), (f), (g), (h)
and (i) of this section, if such objection to a claim is made,
the court, after notice and a hearing, shall determine the
amount of such claim in lawful currency of the United States as
of the date of the filing of the petition, and shall allow such
claim in such amount, except to the extent that--
(1) * * *
* * * * * * *
(8) such claim results from a reduction, due to
late payment, in the amount of an otherwise applicable
credit available to the debtor in connection with an
employment tax on wages, salaries, or commissions
earned from the debtor; [or]
(9) proof of such claim is not timely filed, except
to the extent tardily filed as permitted under
paragraph (1), (2), or (3) of section 726(a) of this
title or under the Federal Rules of Bankruptcy
Procedure, except that a claim of a governmental unit
shall be timely filed if it is filed before 180 days
after the date of the order for relief or such later
time as the Federal Rules of Bankruptcy Procedure may
provide, and except that in a case under chapter 13, a
claim of a governmental unit for a tax with respect to
a return filed under section 1308 shall be timely if
the claim is filed on or before the date that is 60
days after the date on which such return was filed as
required[.]; or
(10) the claim for a loan secured by a security
interest in the debtor's principal residence is subject
to a remedy for rescission under the Truth in Lending
Act notwithstanding the prior entry of a foreclosure
judgment, except that nothing in this paragraph shall
be construed to modify, impair, or supersede any other
right of the debtor.
* * * * * * *
CHAPTER 13--ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME
* * * * * * *
SUBCHAPTER II--THE PLAN
* * * * * * *
Sec. 1322. Contents of plan
(a) * * *
(b) Subject to subsections (a) and (c) of this section, the
plan may--
(1) * * *
* * * * * * *
(10) provide for the payment of interest accruing
after the date of the filing of the petition on
unsecured claims that are nondischargeable under
section 1328(a), except that such interest may be paid
only to the extent that the debtor has disposable
income available to pay such interest after making
provision for full payment of all allowed claims; [and]
(11) notwithstanding paragraph (2) and otherwise
applicable nonbankruptcy law, with respect to a claim
for a loan originated before the effective date of this
paragraph and secured by a security interest in the
debtor's principal residence that is the subject of a
notice that a foreclosure may be commenced with respect
to such loan, modify the rights of the holder of such
claim (and the rights of the holder of any claim
secured by a subordinate security interest in such
residence)--
(A) by providing for payment of the amount
of the allowed secured claim as determined
under section 506(a)(1);
(B) if any applicable rate of interest is
adjustable under the terms of such security
interest by prohibiting, reducing, or delaying
adjustments to such rate of interest applicable
on and after the date of filing of the plan;
(C) by modifying the terms and conditions
of such loan--
(i) to extend the repayment period
for a period that is no longer than the
longer of 40 years (reduced by the
period for which such loan has been
outstanding) or the remaining term of
such loan, beginning on the date of the
order for relief under this chapter;
and
(ii) to provide for the payment of
interest accruing after the date of the
order for relief under this chapter at
a fixed annual rate equal to the
currently applicable average prime
offer rate as of the date of the order
for relief under this chapter,
corresponding to the repayment term
determined under the preceding
paragraph, as published by the Federal
Financial Institutions Examination
Council in its table entitled ``Average
Prime Offer Rates--Fixed'', plus a
reasonable premium for risk; and
(D) by providing for payments of such
modified loan directly to the holder of the
claim; and
[(11)] (12) include any other appropriate provision
not inconsistent with this title.
(c) Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law--
(1) a default with respect to, or that gave rise
to, a lien on the debtor's principal residence may be
cured under paragraph (3) or (5) of subsection (b)
until such residence is sold at a foreclosure sale that
is conducted in accordance with applicable
nonbankruptcy law; [and]
(2) in a case in which the last payment on the
original payment schedule for a claim secured only by a
security interest in real property that is the debtor's
principal residence is due before the date on which the
final payment under the plan is due, the plan may
provide for the payment of the claim as modified
pursuant to section 1325(a)(5) of this title[.];
(3) the debtor, the debtor's property, and property
of the estate are not liable for a fee, cost, or charge
that is incurred while the case is pending and arises
from a debt that is secured by the debtor's principal
residence except to the extent that--
(A) the holder of the claim for such debt
files with the court (annually or, in order to
permit filing consistent with clause (ii), at
such more frequent periodicity as the court
determines necessary) notice of such fee, cost,
or charge before the earlier of--
(i) 1 year after such fee, cost, or
charge is incurred; or
(ii) 60 days before the closing of
the case; and
(B) such fee, cost, or charge--
(i) is lawful under applicable
nonbankruptcy law, reasonable, and
provided for in the applicable security
agreement; and
(ii) is secured by property the
value of which is greater than the
amount of such claim, including such
fee, cost, or charge;
(4) the failure of a party to give notice described
in paragraph (3) shall be deemed a waiver of any claim
for fees, costs, or charges described in paragraph (3)
for all purposes, and any attempt to collect such fees,
costs, or charges shall constitute a violation of
section 524(a)(2) or, if the violation occurs before
the date of discharge, of section 362(a); and
(5) a plan may provide for the waiver of any
prepayment penalty on a claim secured by the debtor's
principal residence.
* * * * * * *
(g) A claim may be reduced under subsection (b)(11)(A) only
on the condition that if the debtor sells the principal
residence securing such claim, before receiving a discharge
under this chapter and receives net proceeds from the sale of
such residence, then the debtor agrees to pay to such holder--
(1) if such residence is sold in the 1st year
occurring after the effective date of the plan, 80
percent of the amount of the difference between the
sales price and the amount of such claim (plus costs of
sale and improvements), but not to exceed the amount of
the allowed secured claim determined as if such claim
had not been reduced under such subsection;
(2) if such residence is sold in the 2d year
occurring after the effective date of the plan, 60
percent of the amount of the difference between the
sales price and the amount of such claim (plus costs of
sale and improvements), but not to exceed the amount of
the allowed secured claim determined as if such claim
had not been reduced under such subsection;
(3) if such residence is sold in the 3d year
occurring after the effective date of the plan, 40
percent of the amount of the difference between the
sales price and the amount of such claim (plus costs of
sale and improvements), but not to exceed the amount of
the allowed secured claim determined as if such claim
had not been reduced under such subsection; and
(4) if such residence is sold in the 4th year
occurring after the effective date of the plan, 20
percent of the amount of the difference between the
sales price and the amount of such claim (plus costs of
sale and improvements), but not to exceed the amount of
the allowed secured claim determined as if such claim
had not been reduced under such subsection.
(h) With respect to a claim of the kind described in
subsection (b)(11), the plan may not contain a modification
under the authority of subsection (b)(11)--
(1) in a case commenced under this chapter after
the expiration of the 15-day period beginning on the
effective date of this subsection, unless--
(A) the debtor certifies that the debtor
attempted, not less than 15 days before the
commencement of the case, to contact the holder
of such claim (or the entity collecting
payments on behalf of such holder) regarding
modification of the loan that is the subject of
such claim; or
(B) a foreclosure sale is scheduled to
occur on a date in the 30-day period beginning
on the date the case is commenced; and
(2) in any other case pending under this chapter,
unless the debtor certifies that the debtor attempted
to contact the holder of such claim (or the entity
collecting payments on behalf of such holder) regarding
modification of the loan that is the subject of such
claim, before--
(A) filing a plan under section 1321 that
contains a modification under the authority of
subsection (b)(11); or
(B) modifying a plan under section 1323 or
1329 to contain a modification under the
authority of subsection (b)(11).
* * * * * * *
Sec. 1325. Confirmation of plan
(a) Except as provided in subsection (b), the court shall
confirm a plan if--
(1) * * *
* * * * * * *
(8) the debtor has paid all amounts that are
required to be paid under a domestic support obligation
and that first become payable after the date of the
filing of the petition if the debtor is required by a
judicial or administrative order, or by statute, to pay
such domestic support obligation; [and]
(9) the debtor has filed all applicable Federal,
State, and local tax returns as required by section
1308[.];
(10) notwithstanding subclause (I) of paragraph
(5)(B)(i), whenever the plan modifies a claim in
accordance with section 1322(b)(11), the plan provides
that the holder of such claim retain the lien until the
later of--
(A) the payment of such holder's allowed
secured claim; or
(B) discharge under section 1328; and
(11) whenever the plan modifies a claim in
accordance with section 1322(b)(11), the court finds
that such modification is in good faith and that the
debtor did not obtain the extension, renewal, or
refinancing of credit that gives rise to a modified
claim by the debtor's material misrepresentation, false
pretenses, or actual fraud.
* * * * * * *
Sec. 1328. Discharge
(a) Subject to subsection (d), as soon as practicable after
completion by the debtor of all payments under the plan, and in
the case of a debtor who is required by a judicial or
administrative order, or by statute, to pay a domestic support
obligation, after such debtor certifies that all amounts
payable under such order or such statute that are due on or
before the date of the certification (including amounts due
before the petition was filed, but only to the extent provided
for by the plan) have been paid (other than payments to holders
of claims whose rights are modified under section 1322(b)(11)),
unless the court approves a written waiver of discharge
executed by the debtor after the order for relief under this
chapter, the court shall grant the debtor a discharge of all
debts provided for by the plan or disallowed under section 502
of this title, except any debt--
(1) provided for under section 1322(b)(5) or, to
the extent of the unpaid portion of an allowed secured
claim, provided for in section 1322(b)(11);
* * * * * * *
(c) A discharge granted under subsection (b) of this
section discharges the debtor from all unsecured debts provided
for by the plan or disallowed under section 502 of this title,
except any debt--
(1) provided for under section 1322(b)(5) or, to
the extent of the unpaid portion of an allowed secured
claim, provided for in section 1322(b)(11) of this
title; or
* * * * * * *
Minority Views
INTRODUCTION
The ongoing crisis in the U.S. home mortgage market has
roiled, not just the U.S. housing market, but the very
frameworks of our national and international financial systems.
Several solutions have been suggested to address the crisis. To
date, these measures have not remedied enough troubled loans to
restore order to the market. It is urgent that we find more
effective solutions, and that we apply them promptly.
H.R. 200, however, is not one of the solutions that will
solve the problem. H.R. 200 seeks to address the crisis by
suspending the laws of economics--rather than by faithfully
observing them, applying them, and thereby curing our ill
economy. The bill fails to solve the problems in a host of
ways. Rather than reduce risk to stimulate credit, it increases
the risks associated with existing principal residence
mortgages, exposing them for the first time to modification in
bankruptcy. Once this dangerous precedent is set, it will be
easier for Congress to allow for bankruptcy modification of
principal residence mortgages in the future. What is more,
lenders will be forced to increase the interest rates they
charge in order to account for the potential risk that
borrowers file for bankruptcy and loans are modified by the
courts. With increased borrowing costs to account for risk,
future housing affordability will be reduced, which could make
homeownership more difficult in the future and push home prices
even lower.
Making matters still worse, H.R. 200 seeks to stem the
current wave of foreclosures, not by targeting the subprime and
nontraditional loans driving the crisis, but by
indiscriminately sweeping all types of mortgages into
bankruptcy. This blunderbuss-approach inevitably will dilute
the bill's effectiveness and inject moral hazard into consumer
decisions regarding whether to seek voluntary loan
modifications, enter bankruptcy, or attempt through other means
to resolve their financial distress. What will be the result?
Almost certainly, it will be an avalanche of unnecessary
bankruptcy filings that will overwhelm the bankruptcy courts
and needlessly drag millions upon millions of dollars in
petitioners' non-mortgage debt into bankruptcy. And because
bankruptcy will permanently damage the petitioner's credit for
years to come, allowing bankruptcy filings in these cases may
do more serious long-term injury to the finances of the
borrowers who seek to take advantage of this provision than
other potential solutions.
More ominous still, the bill threatens to prompt a new wave
of capital-reserve hoarding by banks. As bankruptcy courts
modify mortgages, banks will have to increase their capital
reserves to account for the impact mortgage write-downs in
bankruptcy have on the market values of mortgage-backed
securities. Increased capital reserves means decreased lending
of all types. Thus, the bill threatens, not to solve the
crisis, but merely to trigger a repeat of the near financial
meltdown the country experienced in the fall of 2008--a
financial earthquake that precipitated the expenditure of
hundreds of billions of taxpayer dollars. We must not tempt a
repeat of that experience.
These are but a few of the most prominent ways in which
H.R. 200, by ignoring economic realities, will only make the
mortgage crisis and the broader economic crisis facing the
country deeper, wider and longer. In committee, Republicans
promoted alternative measures that could have helped to stem
foreclosures and close the gap in voluntary mortgage workouts
in harmony with fundamental economic principles. At mark-up,
Republicans offered amendments that would at least have
substantially narrowed the focus of this bill, so that it would
have made bankruptcy modification available only on the loans
that provoked the crisis, and only in ways that would have
minimized collateral damage to the economy. All of these
proposals were rejected by the majority. Committee Republicans
therefore cannot support this legislation.
EXPERT OPINIONS ON PRIMARY RESIDENCE MORTGAGES
IN BANKRUPTCY
LDepartment of Housing and Urban Development: ``The
Department is concerned about the effects of legislative
proposals, such as S.61 and H.R. 200, that would remove the
special status for principal residences. . . . Having the
option of cramdown would increase the attractiveness of Chapter
13 filings versus working directly with lenders to find an
appropriate loss mitigation workout plan. . . . It is the
Department's conclusion that S. 61 and H.R. 200 create a
fundamental change in the quality and value of residential real
estate as collateral for a mortgage loan. It is this
uncertainty that will lead to higher mortgage costs for most
borrowers.''
LProfessor Christopher Mayer, Columbia Business
School: ``But proposals to change the Bankruptcy Code are
deeply problematic. . . . These proposals would raise future
borrowing costs and could encourage solvent borrowers to miss
payments (a form of moral hazard). The financial crisis would
be much worse if fifty-two million borrowers, who are now
current, attempt to invalidate their mortgages. Equally
important, proposals to change the Code could dramatically
increase bankruptcy-filing rates. . . . Thus, proposed reforms
could push millions of borrowers into bankruptcy, delaying the
resolution of the current crisis for years. Finally, bankruptcy
reform is a blunt tool: it applies a one-size-fits-all approach
to loan modification, and it would impact all mortgages,
including the majority of outstanding loans now owned by Fannie
Mae and Freddie Mac.''
LProfessor Todd Zywicki, George Mason University
School of Law: ``Amending the Bankruptcy Code to permit
modification of home mortgages must appear especially tempting
as a political matter because it doesn't appear to require
further expenditure of public funds, thus it appears to be
`free' to Washington. Allowing mortgage modification will
provide a windfall for some troubled homeowners, but its costs
will be borne by aspiring future homeowners and any American
who uses credit of any kind, from car loans to credit cards.
The ripple effects could deepen the troubles the currently
roiling America's consumer credit markets. Finally, because of
the federal takeover of Fannie Mae and Freddie Mac, the losses
incurred in bankruptcy may eventually come back to the
taxpayers anyway.''
LProfessor Mark Scarberry, Pepperdine University
School of Law: ``Changing the risk characteristics of home
mortgages retroactively in this way not only would likely
depress further the value of the existing home mortgages.
Increased risk would mean increased interest rates to
compensate for the risk, and denial of mortgage credit to some
who presently would qualify under appropriate underwriting
standards. There also would be a shadow cast on the
trustworthiness of American mortgage-backed securities. The
implications are disturbing given that such securities are held
worldwide by investors who count on the protection of property
and contract rights under American law.''
LBarclays Capital: ``Losses from bankruptcy cramdowns
could be significantly larger than servicer-driven
modifications. Moral hazard and the potential for high plan
failure rates could further increase losses and charge-offs
without stemming foreclosures or accelerating a housing
recovery. Bankruptcy filings could double or more, increasing
credit card charge-offs by 2-4pp. We fear a massive sell-off
that would worsen valuations, threatening further balance sheet
write-downs.''
LJulian Mann, First Pacific Advisors: ``A proposed
change to bankruptcy law to allow judges to reduce homeowners'
mortgages may boost the capital needs of banks and insurers by
hundreds of billions of dollars. . . . The loss of mortgage-
bond payments because of bankruptcy changes would require
financial institutions to mark down more securities to market
values. . . . [T]he proposed changes would raise the cost of
loans and cause foreign investors to flee American debt
creating doubt about U.S. contracts. . . . [M]any borrowers
will end up defaulting on debt reworked by bankruptcy judges.''
LUBS Investment Research: ``[T]he proposal to allow
primary residence cramdowns, if passed in its current form,
would likely have dire consequences--resulting in a sizable
wave of new bankruptcy filings. . . . The compilation of
[impacts of the legislation] is likely to put further strain on
the financial system, increase losses, decrease the
availability of credit and increase risk premiums for mortgages
and consumer debt.''
LJustice Stevens, Nobelman v. American Savings Bank:
``At first blush it seems somewhat strange that the Bankruptcy
Code should provide less protection to an individual's interest
in retaining possession of his or her home than of other
assets. The anomaly is, however, explained by the legislative
history indicating that favorable treatment of residential
mortgagees was intended to encourage the flow of capital into
the home lending market.''
BACKGROUND
A. Primary Residence Exception
Section 1322(b)(2) of the Bankruptcy Code provides that a
Chapter 13 bankruptcy plan may: ``modify the rights of holders
of secured claims, other than a claim secured only by a
security interest in real property that is the debtor's
principal residence.''\1\ This important exception means that
home mortgages may not be modified in bankruptcy and that the
original contract between the borrower and the lender must be
maintained.
---------------------------------------------------------------------------
\1\11 U.S.C. Sec. 1322(b) (emphasis added); accord 11 U.S.C.
Sec. 1123(b)(5) (for Chapter 11 bankruptcies).
---------------------------------------------------------------------------
While this limitation may seem to be an unwarranted
anomaly, Justice Stevens explained the importance of the
exception in Nobelman v. American Savings Bank:\2\
---------------------------------------------------------------------------
\2\Nobelman v. American Savings Bank, 508 U.S. 324 (1993).
At first blush it seems somewhat strange that the
Bankruptcy Code should provide less protection to an
individual's interest in retaining possession of his or
her home than of other assets. The anomaly is, however,
explained by the legislative history indicating that
favorable treatment of residential mortgagees was
intended to encourage the flow of capital into the home
lending market.\3\
---------------------------------------------------------------------------
\3\Id. at 332 (Stevens, J. concurring).
The legislative history of the primary residence exception
buttresses Justice Stevens' explanation in Nobelman. Under
Chapter XIII of the Bankruptcy Act of 1898, the statutory
predecessor of the current Chapter 13, an individual wage
earner's reorganization plan could not ``deal with'' (i.e.
modify or otherwise affect) the rights of a creditor holding a
claim secured by real property.\4\ In 1978, when Congress set
about updating the Bankruptcy Act of 1898, it had the
opportunity to eliminate that exception, but specifically chose
not to do so.\5\
---------------------------------------------------------------------------
\4\Bankruptcy Act of 1898, Pub. Law No. 61, 30 Stat. 544-66
(repealed 1978), Sec. 606(1)).
\5\Grubbs v. Houston First American Savings Association, 730 F.2d
236 (5th Cir. 1984), and Matter of Clark, 738 F.2d 869 (7th Cir. 1984),
contain summaries of the legislative history of section 1322 of the
Bankruptcy Code.
---------------------------------------------------------------------------
As originally proposed, the House version of section 1322
of the Bankruptcy Code entirely eliminated this rule. The
Senate version, on the other hand, preserved the real estate
protection afforded under the 1898 Act. Edward J. Kulick, who
testified before the Senate Judiciary Committee's Subcommittee
on Improvements in the Judicial Machinery, pointed out that
reducing a mortgagee's secured claim to the actual present
value of the real property would have a dramatically negative
impact on the mortgage industry.\6\ In discussing the
residential mortgage market, he testified that the proposed
House version of section 1322 (which would have allowed cram-
down) would have a decidedly negative impact on the
availability of home mortgage funds, especially when the
financial resources of an individual home buyer were not
particularly strong. He proposed the carved out anti-
modification language that is presently in section 1322 of the
Code.
---------------------------------------------------------------------------
\6\Bankruptcy Reform Act of 1978: Hearings Before the Subcommittee
on Improvements to the Judicial Machinery, S. Comm. on the Judiciary,
95th Cong. 702-14 (1977) (testimony of Edward J. Kulick).
---------------------------------------------------------------------------
Thus, the anti-modification (anti-cramdown) protection that
is afforded to home mortgage lenders under section 1322 and
Nobelman has its roots in the Bankruptcy Act of 1898. In 1978,
a compromise was reached when the mortgage industry agreed to
permit limited modification of the rights of home mortgage
lenders under section 1325 of the Code. This compromise was
reached because the home mortgage industry, which performed a
valuable public service through the making of loans, needed
special protection against modification.\7\ The intent of
section 1322(b)(2) of the Code was to preserve the availability
of residential mortgage funding for individuals of modest
means.
---------------------------------------------------------------------------
\7\Grubbs, 730 F.2d at 246.
---------------------------------------------------------------------------
The protections afforded home mortgage lenders in Chapter
13 were, in 1994, extended to Chapter 11 cases as well. In
1994, 11 U.S.C. Sec. 1123(b)(5) was amended so that it too
states that secured claims can be modified ``other than a claim
secured only by a security interest in real property that is
the debtor's principal residence.''
B. Foreclosure Crisis
The problem now challenging financial markets and the
economy stems from historically low interest rates that
encouraged millions of Americans to refinance their fixed rate
mortgages or to purchase new homes. The lower interest rates
meant that buyers could afford larger mortgages. Effectively, a
bidding war broke out that raised the price of homes; higher
prices limited the number of potential buyers. In response, the
mortgage industry developed new products that allowed otherwise
unqualified individuals (by income, assets, and/or credit
history) to receive loans to buy or refinance a house. These
same products also allowed creditworthy households to buy more
expensive houses or to refinance their current houses to obtain
cash for other uses.
Many borrowers took out riskier mortgage instruments,
referred to as ``subprime'' loans. In recent years, subprime
loans have come to account for an ever larger share of the
mortgage finance market. By 2005, they accounted for about 20
percent of all outstanding mortgages, up from just 5 percent in
1994. Among the several distinct types of subprime loans on the
market, the one causing considerable concern is the subprime
hybrid called ``2/28'' or ``3/27,'' which allows borrowers a
low monthly payment during the first two to three years, but
then resets to a higher interest rate and payment for the
remaining 28 or 27 years, respectively. As these interest rates
reset, many borrowers have been unable to meet the higher
payment. As a result, defaults and foreclosures are rising.
The foreclosure crisis is the result of borrowers, lenders,
brokers and investors all getting caught up in the ``irrational
exuberance'' of the rising market:
LBrokers eager to earn fees sought out
previously under-served, less-qualified borrowers.
LLenders competing for business relaxed
underwriting standards, and shifted credit risk to Wall
Street by selling pools of loans to issuers of
mortgage-backed securities.
LBorrowers exploited lax underwriting
standards: many overstated their incomes, borrowing
more than they could reasonably expect to repay and
purchasing more expensive homes than they could truly
afford. Many borrowers put down very small downpayments
on the assumption that rising prices would build equity
in their homes. Some even gambled on being able to buy
and ``flip'' an investment property before introductory
rates ended.
LWall Street eagerly securitized millions of
loans, unconcerned about loan quality as long as there
were buyers for the securities, which increased the
capital available to lenders to keep the cycle going.
Also contributing to the creation of the crisis and the
encouragement of lax underwriting standards was the purchasing
and insuring of non-traditional and subprime loans by Freddie
Mac and Fannie Mae (``GSEs''). For example, in 1992, when
Congress imposed an affordable housing mission on the GSEs, the
Department of Housing and Urban Development issued regulations
that required them to make affordable housing more plentiful.
In order to meet HUD's requirements and to keep their support
in Congress, the GSEs began purchasing and insuring more and
more subprime and non-traditional loans. This ready-market for
mortgages at the GSEs spurred on the easy lending and lax
underwriting that led to the housing bubble.
When this housing bubble burst, the result was and has
continued to be a foreclosure crisis. Currently, approximately
four million homeowners are delinquent on their mortgages and
another twelve to fifteen million are underwater on their
loans, owing more on their mortgage than their house is worth.
According to Case and Shiller/S&P, housing prices dropped about
18 percent last year. Declining housing prices and lax
underwriting standards when loans were written led to 2.25
million foreclosures being started last year according to the
Federal Reserve and projections for another 1.7 million
foreclosure starts this year.
DISCUSSION
A. Proponents' Rationale
Those lawmakers and advocacy groups pushing for reforms to
the Bankruptcy Code are doing so because they believe that
other options will not be an adequate avenue to keeping
borrowers in their homes. In general, a borrower in default on
his loan may:
Lrepay the loan, curing the default;
Lrefinance the loan to a loan with a lower
interest rate and thus a lower monthly payment;
Ltry to work with the lender to restructure
the mortgage to bring his monthly obligations in line
with his ability to pay;
Lif the home's market value is greater than
the loan balance, the borrower is likely to sell it
himself; or
Lif the loan balance is greater than the
home's value, let the lender pursue foreclosure.
The two best two options, refinancing and loan
modification, are, according to advocacy groups, often not
available to subprime borrowers facing default. Refinancing at
a lower interest rate is often not available because the
borrower either cannot qualify or because the value of the
house has dropped so that the house is currently mortgaged for
more than its worth. Loan modification or loan workout is often
not an option because: the borrower is unable to determine who
the actual holder of the mortgage note is; mortgage servicers
who are not the mortgage holders are scared that modifying a
mortgage may make them legally liable to the mortgage holder;
servicers are overwhelmed with requests for modification; or
the borrower does not qualify for modification under the
lender's policies.
Advocacy groups also assert that no one wins in a
foreclosure and thus bankruptcy reform is the best option for
everyone. They argue that a foreclosure can cost a lender from
20 to 40 percent of the loan balance, and that lenders should
prefer to have a performing loan (albeit adjusted through
bankruptcy) than have a vacant property in a slow market.
Overall, advocacy groups' basic claim is that the proposed
bankruptcy reform would be better than foreclosure in terms of
cost to lenders, but at least with bankruptcy reform borrowers
would get to stay in their homes. Moreover, supporters assert
that houses around a home that is foreclosed lose value; thus
avoiding foreclosure is a benefit to surrounding homes.
B. Consequences of Enacting H.R. 200
Proponents of H.R. 200 have sold the bill as the
``costless'' solution to the foreclosure crisis because it does
not require any upfront government spending. In this regard,
H.R. 200 appears to be particularly appealing legislation.
However, this bill is far from costless. On the contrary, H.R.
200 is deeply flawed and will create costs for taxpayers and
future borrowers. Moreover, it will send ripple effects through
the credit markets, the housing market, and the bankruptcy
system.
1. Cost to future borrowers
Some of the largest costs this bill will impose will be
borne by future homeowners and current homeowners who seek to
refinance in the future. Allowing home mortgages to be re-
written in bankruptcy will significantly increase the risks
associated with mortgage lending thus increasing the costs of
lending. Those costs will be passed on to the borrower. In
fact, the lending industry contends that this legislation would
raise interest rates by as much as two full percentage points
on a primary residence mortgage. Moreover, lenders would be
forced to require higher down-payments or mortgage insurance
for all primary residence mortgages--requirements that would
most affect low- and middle-income families. As a result,
instead of actually helping families affected by the subprime
crisis, this legislation threatens to do no more than swap the
victims.
Indeed, at today's interest rates, a prime borrower with a
30-year fixed rate loan of $300,000 at 6% interest would pay
$1,799 per month in principal and interest. If mortgage
bankruptcy legislation is enacted, the Mortgage Bankers
Association estimates that holding the economy, interest rates,
borrower's credit, etc. constant, the rate for the same loan
could go up to as much as 8%, leading to a monthly payment of
$2,201, an annual increase of $4,824 and more than $144,000
over the life of the loan.
One does not have to take the Mortgage Bankers
Association's word on the effects of the bill. In testimony
before this Committee, Christopher Mayer, Senior Vice Dean and
Paul Milstein Professor of Real Estate at Columbia Business
School, confirmed that costs will increase if this legislation
is enacted. According to Professor Mayer, ``empirical evidence
suggests that if mortgages are subject to strip-down in
bankruptcy, the cost of future credit will rise as lenders
incorporate this new risk into their lending decisions.''\8\
Additionally, Professor Mayer testified that ``[b]ankruptcy
reform would increase borrowing costs further, resulting in
even less borrowing and likely further reduce demand for
housing.''\9\
---------------------------------------------------------------------------
\8\H.R. 200, ``Helping Families Save Their Homes in Bankruptcy'':
Hearing Before the H. Comm. on the Judiciary, 111th Cong. (2009)
(testimony of Christopher J. Mayer, Senior Vice Dean, Columbia Business
School).
\9\Id.
---------------------------------------------------------------------------
Proponents of the bill have argued that because the
manager's amendment limits the bill to existing mortgages, this
bill will not impose costs on future borrowers. This argument
is inaccurate for several reasons. First, the costs of writing
down a loan because of bankruptcy must be borne by someone.
That cost cannot be passed on to current borrowers, because
their loans have already been consummated. Thus, the costs of
write-downs will have to be passed on to future borrowers.
Second, once the precedent has been set, it will be much easier
for Congress to allow for modification of principal residence
mortgages in the future, as has been done in the past with
Chapter 12 of the Bankruptcy Code, which started off as a
temporary section and was eventually made permanent. The
uncertainty over whether this new bankruptcy modification will
be extended in the future or made permanent will become a
factor that lenders will price into their loans. Finally, if
mortgage-backed securities investors are hit with massive
write-downs on top of the write-downs they are already taking,
those investors will be less likely to put capital back into
the market in the future or will seek higher premiums before
they invest. Less capital or higher premiums will lead to
higher borrowing costs.
2. Cost to taxpayers
The exposure to taxpayers from non-performing mortgages is
very large. The outstanding debt and mortgage guarantees from
Freddie Mac and Fannie Mae (``GSEs'') are in excess of $5
trillion. Additionally, the Federal Housing Administration
(FHA) has hundreds of billions of dollars in loans at risk and
the Federal Deposit Insurance Corp. (FDIC) has billions more
from loan guarantees through takeovers of Indy Mac, Washington
Mutual, and other failed lenders. The government also has
guarantees for debt from loans to AIG, Citigroup, and Bank of
America. Moreover, the Federal Reserve has risks from former
Bear Sterns securities and other securities it now holds as
collateral. This exposure would be compounded if the federal
government creates a ``bad bank'' to purchase and manage
troubled assets.
Because of this exposure, allowing bankruptcy modification
of principal residence home mortgages would be costly to the
federal government and the taxpayers. For example, when a
mortgage that has been packaged into a mortgage-backed security
guaranteed by the GSEs is modified in bankruptcy, the value of
the mortgage is negatively affected. The GSEs would realize a
loss on the guarantee, and those losses flow through to the
federal government in its role as conservator of those
institutions and thus to taxpayers. In addition, prior to the
enactment of the ``Emergency Economic Stabilization Act''
(which created the Troubled Asset Relief Program, or ``TARP'')
and recent actions by the Federal Reserve, it was private
sector parties owning mortgage-backed securities that would
bear any losses resulting from cram downs. However, under TARP
the federal government can buy troubled loans and mortgage-
backed securities. The government has also guaranteed against
losses from some large financial institutions. Bankruptcy
modification of this debt and mortgage-backed securities would
trigger massive losses for the federal government and
taxpayers.
3. FHA/VA lending programs
The FHA and the Department of Veterans Affairs (VA) have
programs that make affordable, low down-payment loans possible,
by providing lenders insurance against non-payment by
borrowers. This insurance, however, does not cover losses due
to bankruptcy cram-down. Moreover, FHA/VA servicers could
endure losses on FHA/VA loans if they are required to advance
principal and interest payments on the original, pre-bankruptcy
modified loan balance, rather than on the reduced amount.
Therefore, reducing the principal through bankruptcy cram-down
would cause devastating financial losses to FHA/VA lenders.
Without the protection of government insurance, lenders will be
driven away from offering low down payment FHA/VA loans,
especially at low interest rates. Instead lenders will either
move to higher down payment loan programs which offer more
protection against cram-down risk or exit FHA/VA lending
altogether. In either case, cram-down will reduce the
availability and increase the cost of low down payment loans.
As an assistant deputy secretary of Housing and Urban
Development recently testified, ``any legislation in this area
would likely create a powerful disincentive to doing business
with FHA and [the Government National Mortgage
Association.]''\10\
---------------------------------------------------------------------------
\10\FHA Oversight of Loan Originators: Hearing Before the H. Comm.
on Financial Services, 111th Cong. (2009) (testimony of Philip Murray,
Deputy Assistant Secretary for Single Family Housing, Department of
Housing and Urban Development).
---------------------------------------------------------------------------
The outcome to which the HUD official testified is
particularly bad considering that FHA/VA loans are not the
problem. While foreclosure rates for other types of loans have
skyrocketed over the past year, foreclosure rates for FHA/VA
loans have remained low and stable. This stability is due in
large part to robust FHA/VA foreclosure-prevention and loan-
modification programs. In fact, FHA loans have less than one-
third of the foreclosure rate of subprime loans and VA
foreclosure rates are even lower.
The manager's amendment attempted, but failed, to deal with
the FHA/VA insurance problem. The manager's amendment inserted
a non-binding rule of construction designed to exempt FHA/VA
loans from cram-down. However, it is unclear how this rule
would even work--the changes H.R. 200 makes to section 1322(b)
do not exempt FHA/VA loans but the courts are directed to
interpret the statute as if they are exempted. Such an approach
to exempting FHA/VA loans is highly questionable, and thus the
FHA/VA insurance problem remains despite the manager's
amendment to H.R. 200.
4. Bank write-downs
Recent analysis of the proposals to allow bankruptcy courts
to modify principal residence home mortgages concludes that the
write-downs associated with allowing bankruptcy modification
could require banks to increase their capital reserves by
hundreds of billions of dollars. This is because there is
language in the prospectuses of many mortgage-backed securities
that would cause bankruptcy losses to be shared among all
securities holders, even those that hold AAA rated bonds.\11\
Indeed, according to Standard & Poor's, because bankruptcy
carve-outs ``were not initially sized for the change in law the
proposed legislation contemplates,''\12\ it can be expected
that ``increases in bankruptcy losses could, in short order,
result in principal losses being allocated to the senior-most
certificates.''\13\
---------------------------------------------------------------------------
\11\According to Standard & Poor's Ratings Direct, ``[w]hile losses
resulting from loan modifications outside of bankruptcy are allocated
according to the rules governing traditional credit losses, losses from
bankruptcy principal write-downs and other judicial modifications to
the secured lien may be allocated in certain transactions to all of the
securities pro rata after the transaction reaches a minimum threshold
of bankruptcy losses.'' Standard & Poor's, The Potential Effect of
Proposed Bankruptcy ``Cram-Down'' Legislation on U.S. RMBS , Ratings
Direct, January 30, 2009, at 4.
\12\Id. at 9.
\13\Id. at 4.
---------------------------------------------------------------------------
In instances where the loss is shared by AAA bonds,
according to J.P. Morgan, ``rating agencies may downgrade a
significant amount of AAA securities to below investment
grade.''\14\ More bank write-downs will result if securities
are downgraded below AAA. According to Julian Mann of First
Pacific Advisors, the ``loss of mortgage-bond payments because
of the bankruptcy changes would require financial firms to mark
down more securities to market values.''\15\ As J.P. Morgan
analysis of the situation explains,
---------------------------------------------------------------------------
\14\J.P. Morgan, Securitized Products Weekly, January 23, 2009, at
11.
\15\Jody Shenn, Bankruptcy Bill May Hurt Banks on Mortgage-Bond
Quirk, Bloomberg, Jan. 21, 2009, http://www.bloomberg.com/apps/
news?pid=20601009&sid=abIxZqXis96s.
This means that assets will need to be marked-to-
market, with losses hitting income. An even larger
issue is around risk based capital weightings. For
example, AAA securities have a 20% weighting, while BB
has a 200% weighting. This means that banks and
insurance companies could be required to hold 10 times
more capital (or more if downgraded below BB), even
though non-bankruptcy related loss scenarios show
minimal risk of loss to the AAA.\16\
---------------------------------------------------------------------------
\16\J.P. Morgan, supra note 14, at 11.
The Treasury Department, through the TARP, and the Federal
Reserve have spent the past few months trying to infuse capital
into banks. Write-downs related to this bankruptcy legislation
would be counter-productive and could threaten to undo their
efforts or require them to infuse more capital into the banking
system.
5. Increased bankruptcy filings will lead to delay, less
oversight
Some experts believe that bankruptcy filings could double
or triple as a result of this legislation. Currently, about
80,000 Americans file for bankruptcy each month--a rate that is
just shy of the roughly 100,000 house per month foreclosure
rate. Recent numbers indicate that some 4 million homeowners
are currently delinquent on their mortgages and some 12-15
million homeowners are underwater on their mortgages. A surge
in bankruptcy filings could result if even a fraction of these
homeowners file for bankruptcy in order to reduce their
interest rates or cram-down the principal owing on their homes.
It does not appear that the bankruptcy courts, the U.S.
Trustees program, or Chapter 13 trustees could effectively
handle an increased volume of cases over a short period of
time. Thus, a dramatic surge in filings related to this bill
could lead to delayed resolution of the crisis and less
oversight of bankruptcy cases.
In terms of bankruptcy judges, enactment of H.R. 200 will
increase the burden on court dockets. This increased burden
will come in the form of the large number of new Chapter 13
filings and the adjudication of issues of first impression that
H.R. 200 will create. For example, in section 4 of H.R. 200,
the phrase ``notice that a foreclosure may commence'' raises
legal and factual questions: does a call or letter from a
lender stating that if the late mortgage payments are not made
the bank may begin the foreclosure process suffice, or does the
borrower actually have to receive notice that the bank has
begun the foreclosure process. Additionally, most cases will
raise disputes regarding the value of the home and the
appropriate ``reasonable premium for risk'' to apply.
H.R. 200 will also place increased burdens on the United
States Trustees. United States Trustees appoint and oversee
private Chapter 13 trustees, enforce fraud and abuse provisions
of the Bankruptcy Code, and litigate important legal issues
arising in bankruptcy cases. It may not be possible for the
U.S. Trustees to maintain their current level of oversight of
the bankruptcy system with the increased Chapter 13
bankruptcies that will be filed if H.R. 200 is enacted.
Also affected by an increase in Chapter 13 filings would be
the private Chapter 13 trustees, who are the backbone of the
Chapter 13 system; they administer the Chapter 13 plan, assess
the viability of the debtor's proposed repayment plan, collect
funds from the debtor, and distribute proceeds to creditors.
Allowing modification of principal residence home mortgages
will necessarily increase the workload for Chapter 13 trustees.
A steep increase in Chapter 13 filings may quickly overwhelm
trustees who are not adequately staffed to process the
increased caseload.
In sum, the increased filings after enactment of H.R. 200
will make it harder for the Chapter 13 system to function,
leading to either a much slower process, decreased oversight of
the system, or some combination thereof. The goal of
foreclosure relief should be to resolve this crisis as quickly
as possible. It does not appear, however, that the bankruptcy
system is the route to a quick resolution of the crisis.
6. Failure rate in bankruptcy
Approximately two-thirds of all Chapter 13 bankruptcies
terminate before being completed. These failures to complete
the Chapter 13 plan leave the homeowners liable for their
mortgage debt and creditors in a much worse position relative
to having addressed the problem at the time of the bankruptcy
filing. With the likelihood that a Chapter 13 plan will fail,
allowing bankruptcy modifications may only delay a resolution
of the foreclosure crisis. Some suggest that allowing
modification will increase the success rate; however, any
increase would have to be significant to make bankruptcy
modification even moderately successful at addressing the
foreclosure crisis. The 57 percent failure rate for Chapter 12
bankruptcies, in which cram-down is currently allowed, suggests
that the failure rate for Chapter 13 bankruptcies will still be
significant even if H.R. 200 is enacted.\17\
---------------------------------------------------------------------------
\17\A recent study by the Office of the Comptroller of the Currency
found that more than 50 percent of borrowers that receive a loan
modification missed at least one payment in the six months after the
lender modified their loans.
---------------------------------------------------------------------------
7. Moral hazard and bankruptcy abuse
H.R. 200 presents incentives to file for bankruptcy that
could lead to borrowers opting for bankruptcy rather than loan
modifications and could create moral hazard leading many
borrowers to abuse the system. First, in terms of loan
modifications, borrowers may have little incentive to accept
non-bankruptcy loan modification programs when they can
petition a bankruptcy court to have their mortgage crammed-down
to the fair market value. Cram-down gives the borrower a
permanent reduction in the outstanding mortgage debt. When
housing prices rise, as they eventually will, the borrower
enjoys the appreciation.\18\ With this possibility out there,
borrowers would have a strong incentive to reject a lender
offered modification proposal and either hold out for a better
deal or file for bankruptcy.
---------------------------------------------------------------------------
\18\The manager's amendment put some limitations on this, allowing
for some lender recapture if the house is sold within five years of
completion of the Chapter 13 plan.
---------------------------------------------------------------------------
In addition to the problems this bill may create with
regard to loan modifications, enactment of H.R. 200 could lead
to the possibility that borrowers will abuse the bankruptcy
system to take advantage of incentives to filing for bankruptcy
created by the bill. These incentives have not existed in the
past as ``[t]raditionally, the ability to modify consumer debt
was limited to depreciating assets like cars and boats, thus
this temptation for strategic behavior was mitigated because
borrowers had little prospect of profiting because the property
was unlikely to increase in value in the future.''\19\
---------------------------------------------------------------------------
\19\H.R. 200, ``Helping Families Save Their Homes in Bankruptcy'':
Hearing Before the H. Comm. on the Judiciary, 111th Cong. (2009)
(written testimony of Todd J. Zywicki, Professor, George Mason
University School of Law).
---------------------------------------------------------------------------
Currently, approximately 50 million borrowers are paying
their mortgages on time; however, roughly a third of these
borrowers owe more on their mortgage than their house is worth.
For these borrowers who are underwater on their mortgages, the
otherwise unappealing prospect of filing for bankruptcy may
become an attractive option once cram-down of mortgage
principal is made possible. As Professor Mayer has pointed out,
``[w]hile many commentators have downplayed this argument as
scare tactics, it is not hard to envision late night TV
advertisements informing homeowners that they no longer need to
make their mortgage payments and yet could still remain in
their home.''\20\
---------------------------------------------------------------------------
\20\Mayer, supra note 8.
---------------------------------------------------------------------------
Proponents of H.R. 200 have asserted that the concern over
negative impact on credit scores will prevent borrowers from
abusing the system. However, the fact that many borrowers are
walking away from underwater mortgages, allowing those homes to
be foreclosed, when delinquency and foreclosure also negatively
impact one's credit score, undercuts this argument. The chance
to reduce principal by tens or even hundreds of thousands of
dollars in some cases, to re-write the interest rate, and
extend the maturity date of a mortgage may encourage many
borrowers to go into bankruptcy despite the adverse impact on
their credit score.
8. Nothing will stop future Congresses from applying cram-
down more broadly
The manager's amendment to H.R. 200 limits the bill to
existing mortgages; however, once the precedent has been set,
it will be much easier for Congress to provide for modification
of principal residence mortgages in the future. Indeed, if the
past is a prologue, it should be expected that this is exactly
what will happen. Chapter 12 of the Bankruptcy Code provides
the perfect example. The Chapter 12 family farmer bankruptcy
provisions were originally enacted in 1986 with a seven-year
sunset. In 1993, that sunset was extended by five years and was
subsequently extended multiple times, with only a brief lapse,
until Chapter 12 was made permanent in 2005.
Because of the history of Chapter 12 and of other sunsets
that are later extended, once the principal residence exemption
is lifted, even if for only existing mortgages, the risk exists
that this limited opening will be broadened in the future.
Lenders will price mortgages for this risk accordingly.
C. Republican Amendments
At the January 27, 2009, markup of H.R. 200, Republican
members of the Committee offered five amendments. With the
exception of an amendment offered by Mr. King, all Republican
amendments were defeated on party-line votes.
Smith Amendment: Ranking Member Smith offered an amendment
that would have required courts to apply a three-step process,
modeled after that employed by the Federal Deposit Insurance
Corporation (FDIC), when altering mortgages to keep monthly
mortgage payments between 31 percent and 38 percent of a
homeowner's current monthly income. Also similar to the FDIC
approach, the Smith Amendment would have required debtors to
agree to equity recapture for lenders if the debtor sells the
house for a profit after an equity cramdown. Mr. Smith's
amendment was defeated on a 14 to 20 party-line vote.
Franks Amendment: Mr. Franks offered an amendment that
would have limited the bill to loans originated between January
1, 2004 and December 31, 2007, the time-frame during which many
of the most problematic loans were made. Additionally, Mr.
Franks' amendment would have limited the bill's provisions to
bankruptcies filed within three years of the date of enactment.
Mr. Franks' amendment was defeated on a 15 to 20 party-line
vote.
Forbes Amendment: Mr. Forbes offered an amendment that
would have maintained the requirement that those debtors that
receive mortgage modifications go through credit counseling.
The amendment also would have precluded debtors that made
misrepresentations or committed actual fraud from modifying
their mortgages in bankruptcy. Mr. Forbes' amendment was
defeated on a 12 to 20 party-line vote.
King Amendment: Mr. King offered an amendment to prohibit
debtors who obtained or refinanced their loans based on
material misrepresentations, false pretenses, or actual fraud
from being able to modify their mortgages in bankruptcy. Mr.
King's amendment was agreed to on a 21 to 3 vote.
Jordan Amendment: Mr. Jordan offered an amendment to limit
bankruptcy mortgage modification to subprime and non-
traditional loans--the two types of loans at the heart of this
crisis. Such a limitation was included in the version of the
mortgage bankruptcy bill reported out of this Committee in the
last Congress (H.R. 3609, 110th Cong.). Mr. Jordan's amendment
was defeated on a 14 to 20 party-line vote.
D. Answers to Majority's Rationale for Rejecting Republican Amendments
As discussed above, at the markup Republicans offered five
amendments aimed at narrowing the scope of the bill to those
loans that are at the heart of the foreclosure crisis. In
arguing against supporting Republican amendments, members of
the majority made several arguments. These arguments are
incorrect or miss the mark. Below are responses to the
majority's principal arguments:
1. Vacation homes, second homes, and other secured debt in
bankruptcy
Throughout the debate over mortgage bankruptcy legislation
in this and the last Congress, the argument has been repeatedly
made that this legislation is not extraordinary because the
Bankruptcy Code already permits the modification of other forms
of secured debt in bankruptcy. As attractive this argument may
be, it is simply not the case.
Under the current provisions of Chapter 13, if a secured
creditor's lien is crammed-down, the entire amount of the
secured claim (after the cram-down) plus interest must be paid
off during the three-to-five year duration of the Chapter 13
plan. For example, were a Chapter 13 debtor to submit a plan
that proposed to cram-down a mortgage on a vacation home from
$450,000 to $400,000, that plan would have to provide for the
payment of the entire $400,000 in three-to-five years in equal
monthly installments. Accordingly, as a practical matter, a
debtor cannot cram-down a first mortgage on a vacation home,
because the payments needed to pay off even the crammed-down
amount over three-to-five years will be too large. In the
unlikely circumstance that a debtor could afford such large
payments, that debtor would be undeserving of bankruptcy
relief.
Under H.R. 200, however, a debtor could pay off a crammed-
down home mortgage over a period that could be in excess of
thirty years. Thus, H.R. 200 makes cram-down feasible for home
mortgages--treating home mortgages much differently than
mortgages on vacation homes and other investment property.
Moreover, the interest rate to which the holder of the home
mortgage would be entitled for the thirty-plus year period
would be set by the court rather than by the mortgage
contract.\21\ Conversely, when other secured creditors' liens
are crammed-down in Chapter 13, the liens are subject to a
court-determined interest rate for no more than five years and
cannot be required to wait longer to be paid.
---------------------------------------------------------------------------
\21\The bankruptcy judge could set the interest rate at ``a fixed
annual percentage rate, in an amount equal to the then most recently
published annual yield on conventional mortgages . . . plus a
reasonable premium for risk.''
---------------------------------------------------------------------------
Furthermore, since enactment of the 2005 amendments to the
Bankruptcy Code, in many instances, limitations have been
placed on the ability to cram-down the claims of secured
creditors in Chapter 13. For instance, auto loans are only
subject to cram-down if the loan was made more than 910 days
(roughly two and half years) prior to filing for bankruptcy.
Thus, H.R. 200 moves home mortgages from receiving special
protection aimed at encouraging the flow of capital into the
home mortgage market, to being treated less favorably than most
other secured consumer debts, including debts for depreciating
assets like automobiles.
2. Family farms in Chapter 12
Proponents of H.R. 200 have pointed to the family farmer
provisions of Chapter 12, which allow for cram-down, in support
of their argument that principal residence mortgage
modifications should be allowed in Chapter 13. Reference to
Chapter 12, however, does not support their argument.
First, analogizing Chapter 12 to allowing home mortgage
modification in Chapter 13 is particularly inapt because, as a
practical matter, Chapter 13 filings dwarf Chapter 12 filings.
In the twelve-month period ending in June 2008 there were
344,421 Chapter 13 filings compared to only 314 Chapter 12
filings.
Second, during the Clinton administration the Department of
Agriculture concluded that Chapter 12 ``may have substantially
increased costs for farm businesses.''\22\ According to that
study,
---------------------------------------------------------------------------
\22\U.S. Department of Agriculture, Do Farmers Need a Separate
Chapter in the Bankruptcy Code?, at 3 (1997).
A conservative estimate of the incremental impact of
Chapter 12 over Chapter 11 is that it raises indirect
bankruptcy costs by about a fourth. To offset the costs
Chapter 12 imposes on creditors, interest rates to farm
borrowers will rise 0.25-1.0 percent on average. Much
higher costs will be borne by financially weaker farm
borrowers, either in the form of increased interest or
other charges, or in their inability to obtain loans at
any price.\23\
---------------------------------------------------------------------------
\23\Id.
---------------------------------------------------------------------------
Moreover, the study also found that,
The major marginal effect of Chapter 12 is to encourage
both inefficient farmers who would otherwise liquidate
and efficient farmers who would otherwise continue
their operations at greater expense to reorganize their
businesses under the protection of bankruptcy. These
provisions increase direct bankruptcy costs by
encouraging bankruptcy filings by some farmers who
would not otherwise have done so. They also increase
indirect costs by increasing the number of farmers who
choose to reorganize inefficient farms. This impact
could be mitigated by allowing lenders the option of
recapturing writedowns in secured debt if asset values
recover. Such an option exists under Chapter 11.\24\
---------------------------------------------------------------------------
\24\Id. at 5.
Thus, it is clear that the argument that ``allowing cram-
down in Chapter 12 has not had negative effects and therefore
we should extend cram-down to mortgages on principal residences
in Chapter 13'' is incorrect. According to the Clinton
Agriculture Department, Chapter 12 has increased borrowing
costs especially for marginal borrowers and encouraged farmers
that otherwise did not need to file for bankruptcy to file.
3. Subprime and non-traditional loans
In the last Congress, this Committee favorably reported
H.R. 3609, a bill that provided for bankruptcy modification of
principal residence mortgages, with a manager's amendment that
limited the bill to subprime and non-traditional loans. Members
of the majority rejected this limitation at the mark-up of H.R.
200 because they asserted that the crisis has now spread beyond
subprime and non-traditional loans. The foreclosure numbers,
however, do not bear this argument out.
According to the Mortgage Bankers Association, there are
currently 52 million mortgage loans. Of these 52 million loans,
approximately 34 million are prime fixed-rate mortgages, 7
million are prime adjustable-rate mortgages (ARMs), 3 million
are subprime fixed-rate mortgages, 3 million are subprime ARMs,
and 5 million are FHA/VA loans. Thus, the majority of these
loans are prime-fixed rate mortgages and the vast majority of
these loans are not subprime.
The Mortgage Bankers Association data on foreclosures
started indicates for these loan types that foreclosures were
started in the third quarter of 2008 for: 0.34% of prime fixed-
rate mortgages, 1.77% of prime ARMs, 2.23% of subprime fixed-
rate mortgages, 6.47% of subprime ARMs, and 0.95% of FHA/VA
loans. Thus, the worst performing loans are subprime fixed-rate
and subprime adjustable-rate mortgages. The 34 million prime-
fixed rate mortgages, which account for 65 percent of all
existing mortgages, are only seeing foreclosure starts at
0.34%. FHA/VA loans are also seeing foreclosure starts at less
than 1%. Yet, both prime and FHA/VA mortgages would be eligible
for bankruptcy modification if H.R. 200 is enacted.
Given the relatively low percentage of foreclosure starts
among prime and FHA/VA loans, it would seem that limiting this
bill to subprime and non-traditional loans is a more than
reasonable limitation. When one considers the above-discussed
costs imposed by this bill and the moral hazard associated with
it, there seems to be little reason not to limit the coverage
to what are still the most problematic loans.
CONCLUSION
Allowing for modification of principal residence mortgages
in bankruptcy comes with too many attendant costs and the
failure rate of Chapter 13 bankruptcies is much too high for it
to be considered a practical approach to stopping foreclosures.
Proponents of H.R. 200 assert that everything else has been
tried and that nothing has worked to put an end to the
foreclosure crisis. They assert that allowing bankruptcy
mortgage modification is the linchpin to effective foreclosure
relief. However, there are many better alternatives that have
yet to be tried--alternatives that do not present the parade of
horribles and hundreds of billions of dollars of downside risk
threatened by this cram-down bill. The Congress and the
Executive Branch must try these alternatives before rushing to
bankruptcy as the answer. And, if in the end bankruptcy relief
must be an option, it must be crafted along the lines of the
rejected Republican amendments from the mark-up of H.R. 200, so
that it is narrowly targeted at the loans at the heart of the
current crisis.
Lamar Smith.
F. James Sensenbrenner, Jr.
Howard Coble.
Elton Gallegly.
Bob Goodlatte.
Daniel E. Lungren.
Darrell E. Issa.
J. Randy Forbes.
Steve King.
Trent Franks.
Louie Gohmert.
Jim Jordan.
Ted Poe.
Jason Chaffetz.
Tom Rooney.
Gregg Harper.