myself for a short statement today the sub could maybe continue as examination of the ramifications of the home foreclosure crisis this time will focus on the role of the lending industry both in contributing to the crisis and then in mitigating its effects this  hearing is certainly not intended to be an attack on the lending industry but rather as a chance for the subcommittee to offer constructive criticism of some of the industry's past and current practices and service practices or can better serve its customers which who are our constituents the american citizens i represent memphis tennessee which is sixty percent african american memphis also has among the highest foreclosure rates in the nation and african american to homeowners have been particularly hard hit me homeowners were targets of aggressive marketing of sub prime mortgage loans according to many observers many such loans were the principal cause not only of the home foreclosure crisis but also the nation's continuing economic troubles baltimore maryland shares many demographics similarities with memphis including roughly the same percentage african american population baltimore like memphis is facing a particular severe home foreclosure crisis with african american homeowners bearing the disproportionate brunt of such foreclosures therefore i was intrigued when i learned of the lawsuit filed by the city of baltimore against one of the nation's largest mortgage lenders wells fargo this suit alleges that wells fargo deliberately steered african americans to high cost subprime mortgage products even in cases where the borrower would have qualified for a traditional prom loan these are very troubling allegations this phenomena referred to as reverse redlining is illegal and a perversion of the  increasing homeownership among traditionally disadvantaged groups at this point memphis has been seriously considering filing a lawsuit similar to baltimore's shelby county which includes memphis and memphis is the county seat there of has already authorized the filing of such a lawsuit in addition recent media reports have suggesting a growing frustration on the part of judges nationwide with improper documentation and port minister practices on the part of mortgage servers this improper documentation or handling of records often impedes voluntary loan modification efforts and in some instances ownership of a note on a mortgage and the attendant legal right to foreclose on a home have been called into question we will examine the experience of financially troubled homeowners and their interactions with servicers in their attempts to seek a meaningful modification of their mortgage terms the voluntary system apparently has not been working and that's quite unfortunate how welcome our witnesses look forward to their testimony and i will now recognize my colleague mr frank the distinguished ranking member of the subcommittee for his opening remarks well thank you mr chairman and welcome back everyone mr chairman the title of today's hearing is the role of the lending industry in the home foreclosure crisis and i think that no one here doubts that the lending industry has had a role in that crisis lenders made irresponsible in writing underwriting decisions for many of the loans that are currently distressed and lenders and services probably could have done more at the outset of the crisis to modify troubled mortgages to make them more affordable however i am concerned that if we focus only on the rule of the lending industry we will be missing the major part of the problem will fail to acknowledge that the lending industry is not the only culpable party in this crisis there are certainly plenty of blame to go around including to the federal government itself so the community reinvest encouraged and sometimes almost coerced the underwriting of questionable loans that said we need to find solutions and the lending industry unquestionably has a role to play in getting us out of our current predicament but many aspects of this crisis unemployment falling home values are simply outside of the lending industry's control so while i look forward to the witness's testimony regarding what additional steps the lending industry can make  to help stem foreclosures we must be mindful that not all of the solutions or the blame rests with the lenders what's more as we continue to search for solutions to this crisis there is one so called solution that i hope we can avoid and that's bankruptcy cramdown allowing bankruptcy courts to modify home mortgages will have adverse consequences for all providing a little real relief to distressed borrowers bankruptcy cram down will invariably lead to higher interest rates and less generous battering terms for all borrowers and i think borrowers and i think that will especially hit the very hardest those at the lowest income  levels where over the given that the unemployment has been a driving factor behind most foreclosures and that those who do not have regular income may not filed under chapter thirteen bankruptcy cramdown will do nothing for those most in need of relief those being the unemployed combine the unemployed with speculators another large second segment who would be helped by cram down and one quickly realizes that cram down will really do nothing to help the vast majority of facing foreclosure there's no reason to enact cram down legislation with its attendant high costs when it will only produce modest results at very best furthermore we must not forget the cram down will not only impact lenders but investors as well these investors include in large part pension funds representing the retirement save of millions of americans we should not pass the cost of irresponsible borrowing and lending off on current and future retirees i understand the cram down is not the focus of this hearing but because of this subcommittee's your stiction i feel that every time we can examine the foreclosure crisis we are really revisiting cramdown the  senate put cram down to rest earlier this year and i hope that we can leave it there and i look forward to the witness's testimony and hope they have some positive suggestions for actions the lending industry can take to help alleviate the foreclosure crisis and with that mr chairman i yield back crammed was mentioned before i wish i could say i wasn't going to mention that until you mentioned mr ranking member but i probably would have anyway that the house passed our provision and cram down is such a tacky term isn't it i mean what we're talking about is giving the bankruptcy judge the same authority to review property matters that come before him on everything but houses homeowners so no good and so all we're asking the judge to do and fortunately we have a very remember the court here is to look at it and see if if it's if the people that are the mortgage oars are worthy of having the mortgage rewritten the terms extended the interest rate may be reduce d the note itself lowered and and it's not mandatory it would be discretionary what's wrong with that and i love the president's diplomacy and saying this is a deep recession we're in a depression two hundred every single day in wayne county i was used to say one hundred twenty seven a day now it's two hundred enter the process of being foreclosed on for failure to to be doing quit in their mortgage payments now this committee is had six hearings on this subject six this is the seventh and i commend  all of the members especially my dear friend from virginia mr trent franks for his protests of patience and and making us stick to the proposition and prove what it is we're doing is in the best interest of all the people losing their homes in my area and in his and across the country he's concerned about that just wants to do it right and so he's making sure that we do it right and if we don't he doesn't hesitate to tell us about it but but all of this started with the prime mortgage meltdown this is what created it and the mel that was created from this member's point of view because of the fact that people were enticed into more get contractual agreements in which when they said there would be an adjustable rate mortgage they didn't know that adjustable meant and many didn't know how soon would kick in sometimes it was years sometimes it was months but it was it was always and then sometimes it was a big increase that everybody knew including the people that gave them the mortgage that they could never ever sustain it but now what about this what about the people that were paying their mortgage and chrysler corporation announced they were going to close down the the hamtramck plant in my district and everybody goes white collar and and you lose your income which leads to you becoming delinquent in your mortgage but you also lose your health care benefits and your pension to tell people that two hundred new people i could in my county every day new they'll be two and they're more tomorrow they'll be two hundred more friday that too bad the bankruptcy court can't do anything about it and so i'm just moderating the problem through voluntary and volunteer ism hasn't been working as a matter of fewer and fewer people each month work into any agreement but worse than that the people that do work into agreement frequently fall off the wagon because they don't have the money so they end up getting socked anyway so  servicers are bad guys or these are not evil people there was a contract overseeing somebody says is when you signed it didn't your buddy  and mrs jones didn't you didn't know that this was in there these provisions we didn't make them up that was that was the terms of the agreement that we got you a mortgage for your dream house everybody knows to own a home in america is the standard that's that's the gold standard we want everybody to be homeowners at one time to choice had the record of more working people owning homes than in any other city in the country that's when the automobile industry was booming and people ordinary working people were able to do that but there's been some the good sense in what the services do and by the way after the mortgage is executed the bank wells fargo sells it the somebody else and guess what somebody else sells it to somebody else and then they bundle them up and they infuse not only the american financial system but these things travelled around the world in every financial system in europe and prior and latin america and that's what created the problem that brought us to i exclude from that the people that were catching hell before there was a sub prime mortgage you know there were some people losing their omes and jobs before this thing hit big time and so no i don't think anybody is here to to criticize unduly the servicers the people who ended up getting all this but i do think they've done some things that they shouldn't have done and i do think they did some things wrong and i do think that the bankruptcy judges we came within six votes seven votes of getting a bill that would go before the president now i'm working on trent franks because i know  concern he's going to be one of those that might reconsider his vote if we have no lives hearing properly to the side as to his satisfaction in the chairman's you make two votes thank you mr chairman without objection the other members opening statements will be included in the record like to thank all of the witnesses for participating in today's hearing without objection your written statement be placed on the record and we die a skewed look at your or marks to five minutes there's a lighting system the kind of tells you what your time is green means you're within the first four yellow you're on your last and by a read you should have finished quickly nobody seems to pay attention to it i hope you will be the first panel that  does after you've presented your testimony subcommittee members be permitted ask questions also subject to the five minute limitation we might have votes come up and if we do will recess and will come back our first witness is judge elizabeth magner judge magner was sworn in on september the night nine nine of two thousand and five and prior to that was in private practice with let me and kalar her and then with her own twenty three years in private practice judge magner specialized areas of bankruptcy foreclosures seizures and other commercial litigation matters she has a broad range of experience for representing and presiding over matters concerning debtors creditors trustees and committees thank you for being here judge magner and we thank you congressman cohen ranking member franks and congressman conyers and the other members of the subcommittee i have appreciate this opportunity to speak to you about the home mortgage crisis obviously i'm just one of three hundred and thirty bankruptcy judges in the united states but i hope my observations may be of some assistance to you the historic model of a lender originating and then holding a mortgage loan has been lost perhaps forever while the change in this practice has created tremendous opportunities for consumers we also know that it had its dark side in the form of predatory lending and shoddy underwriting but more devastating to consumers and the economy than either of these issues is another largely untold issue the inaccurate accounting of lines the building of land for sale often to special purpose trusts with far flung investor owners has resulted in the rapid rise of the mortgage servicing industry more and more of the owners or the holders of  are not typical financial institutions with the ability to minister a lime third party line servicing companies still that need these companies bid for the right to service millions of lines in order to keep costs low they rely on sophisticated computer software that handles virtually every aspect of one's administer eisen with disturbing regularity however these programs have improperly applied line payments interrogation of the terms of notes and mortgages fail to recognize and honor the terms of plans of reorganizations and court orders and falsely place consumers into foreclosure the amounts claimed on proof of client and in the oceans for relief are very often wrong by more than trifling amount because there's no standard software platform for managing alone no industry excepted format for reporting nor uniform set of guidelines for administration in consistencies and one administration are rampant and can vary even on one loan from year to year as servicers change in addition to these issues the records of one servicing company probably will not interface with those of others as a note holder changes servicers perhaps as often as every year the historical information alone may be lost  unintelligible this creates an obvious and serious problem when a line balances question or needs to be verified as amazing as this might sound the fact is that most national servicers cannot produce a simple spreadsheet which shows the lines history without the ability to examine the lens amortization in a quick and clear format answering a question regarding the amount produces an almost insurmountable barrier to consumers when a consumer filed for bankruptcy relief his home is probably already in foreclosure determining the amount of the debt due as credible to his plans feasibility mortgage lenders routinely fail to produce the most basic of information necessary to validate their balances and checks the cost and fees assessed at least one study has found that forty percent of all priests of claim check did not attach a copy of the note or the mortgage even though that's required by banks bankruptcy rule three thousand and one of greater concern to me is the absence of an accounting for the line typically either before or after a bankruptcy a lender will advise the debtor that a fee or charge has been placed on their account because of those bars can become quickly confused when they make a payment and much to their surprise the notice still past due if the longest sixty days past due significant charges are usually incurred again this is without notice or detail making it even harder such as corporate advances or prior service or fees finding out any detail on this is an arduous task in my experience it takes four to six hearings and over four months of time a national service in company to reduce a single line history or the documents to support third party charges on the account over eighty percent of the lenders who appear before the scuse me the borrowers who appear before me make less than forty thousand dollars per year they simply don't have the financial resources to force through litigation the documents they need to assess the accuracy of the loans they are being asked to pay so they tend to accept the priests of climb without any challenge whatsoever but why am i so concerned about the accuracy of the priests of climb or if they correct i'm afraid to tell you my concern is no in every trial i have presided over payments first to fees and costs will always result in additional fees and costs assessed against of our or as well as well as additional accrued interest it simply math after a bankruptcy is filed post addition payments are commonly applied against pre sition costs instalments and undisclosed post addition charges contrary to the terms of plans or court orders or routinely i'm sorry i've gone over my time chairman i'll stop now and if there are any further questions i'll go  for the baltimore city lot of department baltimore maryland the city has fall lawsuits against wells fargo alleging the banks lending practices discriminated against minority borrowers further alleges the banks lending practices led to a wave of foreclosures that are reduced city tax revenues and increased it my pleasure to testify baltimore's a case study of the damage that has befallen cities in the absence of federal regulation in particular lax enforcement of the fair housing act relaxation of banking regulation and federal preemption of states ability to regulate has created in the environment in which racially discriminatory predatory lending has florists baltimore a majority african american city chairman cohen point about much like memphis is currently contending with the economic fallout one of the city's strategies for staunching the damage that predatory lending has caused is litigation against the wrong practice of drawing a boundary around minority neighborhood and saying we're not going to prime credit in that boundary reverse redlining is saying we're going to target that same neighborhood for predatory lending for high cost the high interest rate on favorable loans shapers of the fair housing act smartly designed it so that cities could sue directly would have standing to sue but it was always envisioned that the federal government would play a leading role in enforcement of the act and in the recent past it has not done that like other american cities with large nonwhite population baltimore is particularly vulnerable to predatory lending and this vulnerability is caused by two related factors one is a history of redlining of denying credit to certain communities and the other is racial segregation patterns in housing so that those communities that have been denied are those those people who've been denied credit in the past are geographically concentrated and so very easily targeted by abusive lenders as our history of redlining and racial segregation would predict beginning in the late one nine hundred ninety s baltimore became the target of predatory lending and this fact is reflected in a wave of foreclosures since the year two thousand we've had over thirty three thousand foreclosure filings homes that are subject to closure filing home mortgage disclosure act data reveals racial disparities in wells fargo's lending practices and wells fargo has been the biggest lender in baltimore city since two thousand as documented in our amended complaint in two thousand and six wells fargo made high cost loans to sixty five percent of its african american borrowers compared to only fifteen percent of white borrowers in the city and wells fargo foreclosure rates are four times higher in african american neighborhoods than they are in white neighborhoods high level employees of wells fargo have come forward to testify to the economic incentive structure at wells fargo that encouraged and rewarded employees hands steering steering african american borrowers into unfavorable loans and they described practices of steering even borrowers who qualified for prime steering them into subprime assuring borrowers that prepayment penalties could be waived when they could not be waived assuring them that they were getting a fixed rate loan when they were getting a variable rate loan or that they would be able to refinance before the adjustable adjustment rate would kick in and they were also encouraged to take more equity out of their home or not to document their income even though they were salaried employees with w two of all of their income and the purpose of encouraging the borrowers to not do those things was that the lenders knew the brokers knew the agents knew that this would cause the loan to flip to sub prime from prime and they would make much higher commissions and the company would make much higher profits when that happens when people are locked into mortgages they cannot afford it's very predictable they'll fall behind and foreclosure will often  results and this has caused baltimore great damage cult secor foundation estimates that in two thousand and six alone the city lost forty one point nine million dollars in tax revenue we've increased code enforcement as well as fire and police and all of our efforts to nurture our neighborhoods have urban renaissance are being washed down the drain the legal claims in the facts and figures concerning the reading stuff as well and thank you so much you're the two best witnesses we've had no the whole time i've been chair but we do only have four minutes to run about and so we've got about i think i've been told four votes and so that theoretically is give or take thirty minutes the committee will now come back into session and thank the witnesses for their continued attendance our third witness professor james mason joseph yes i was  to somehow got diverted into acting professor mason this is social pressure finance elegies department of finance and a senior fellow at the wharton school of corporate finance financial intermediation financial history monetary economic spokesman issues related both to theory and public policy and do you know where that he ducked boxes what bugs the state job to give to the political organization they never found the deduct box he would not tell them on his deathbed so with that recognized always looking for the day the box thank you for being here professor mason we now recognize you for your testimony thank you i will add that to my palette of huey long stories of which i have several but that's a new one but thank you chairman ranking member franks and members of the subcommittee for allowing me to testify today the reasons for the limited success private modifications to date lie in the realities of the mortgage crisis the same realities that could hinder the relevance of judicial modifications first many residents of homes today could never afford amortizing loan and still cannot do so today second a significant proportion of chapter thirteen repayment plans have historically failed and third allowing bankruptcy judges to modify mortgage debt may cause other perverse incentives among both lenders and borrowers the sad fact is a significant number of ours can't afford any amortizing mortgage in the last several years substantial numbers of consumers borrowed money they could not afford to repay the extent to which those loans were outside any reasonable bounds of affordability however is still not widely understood the problem is that while the industry created the loans in a process that labeled them quote unquote prime or true or all today many loans were nothing of the sort within the industry many of the loans that are distressed today were known as quote unquote prime or all day acknowledging that the loans qualified for their monikers only on the basis of copious quantities of scissors white out and as he says tape all in the name of the democratization of credit and expanding homeownership pursuant to federal policy the question then becomes what can reasonably be expected of modification judicial or otherwise prior to the crisis i reported that some forty to fifty percent of modified loans re defaulted within two years of modification and for further background on that i urge you to see the accompanying working paper that i have included to be entered into the record of course those results are from the benign economic period prior to the crisis we're already seeing evidence of far worse performance in the crisis with one year redefault pushing above seventy percent a similar dynamic is common in chapter thirteen repayment plans the two thousand and eight report of statistics required by the bankruptcy abuse prevention and consumer protection act of two thousand and five reported that of one hundred thirteen thousand two hundred  eighty nine chapter thirteen cases dismissed in two thousand and eight forty eight thousand and eighty one of those or just over forty two percent were dismissed for quote unquote failure to make repayments on your plan moreover chapter thirteen plan failures are related to economic difficulty just like private modifications the ninth circuit of eastern california federal court district experience a fifty one percent failure rate in making payment on their plans in two thousand and eight while the eleventh circuit in northern florida experienced a fifty nine percent rate and the eleventh circuit of central florida experienced a sixty two percent rate when economic conditions are known to dominate judicial and legal arrangements in determining foreclosure outcomes we shouldn't rely centrally upon modification policy judicial or private to alleviate economic difficulties or declining home prices that being said private modifications are proceeding apace treasury recently reported that servicers initiated two hundred thirty thousand trial modifications in the month of july alone more than the total of one hundred eighteen thousand chapter thirteen bankruptcy cases reported for the whole of two thousand and eight and so it seems that private modifications are extracting the lion's share of policy effects market already and the judicial modification can contribute relatively little to the mortgage market and economic recovery regarding the subject of cram down since it was introduced in opening remarks there's a substantial pret that changes to the bankruptcy code can create perverse incentives recent bankruptcy reforms produced unanticipated effects that are only now be felten mortgage defaults it's now widely understood that the two thousand and five bankruptcy reform made escaping debts through bankruptcy less attractive by increasing the cost of filing and forcing some high income debtors to repay from bankruptcy income but because many consumers are hyperbolic discounters making bankruptcy law less debtor friendly did not solve the problem of consumers borrowing too much the reason is that when less debt is discharged in bankruptcy lending becomes more profitable and lenders increase the supply of credit along with low interest rates therefore the increased credit supply became a powerful incentive to lend and borrow but one that had predictable and predicted results in the credit crisis now more perverse incentives can reasonably be expected to arise from judicial modification the reason is the bifurcation of debt secured by real assets can be exploited in ways that other assets cannot if a court bifurcates a claim on an automobile loan for instance the automobile is not expected to ever be worth more than the current market value established by the court for real estate though even in today's market conditions perhaps especially in today's market conditions the value of the collateral can be expected to grow in the future modifications of allowed perhaps should be limited to a shared appreciation mortgage paradigm that can reduce the opportunity for bankrupt  arbitrage in summary from an economic perspective reducing the supply of loans while maintaining consumer demand will lead to credit rationing in which lenders refused to lend to borrowers perrie's and other than credit quality credit supply shortfalls along with an estimated thirty billion dollars price tag of the actual cost of mortgage lending in the industry from cram down will then drag out financial sector recovery beyond that which can otherwise reasonably be expected major changes to property rights like any changes to legal precedent are inherently economically destabilizing there exists a substantial city of literature on the economic inefficiency of discretionary policy relative to well designed and well articulated rules hence without fox might have been too difficult chinese bandits no but the reasons for the bank holiday that stemmed the new orleans banking panic more relevant  well they needed a holiday something they could point to to close the banking system just for a day to alleviate deposit or panics they couldn't think of anything that happened on that day so he would told them to look back in the history books and find something anything they could commemorate so they found that this was the day that the u s broke economic diplomatic ties with germany prior to world war one whom you had your holiday was an especially attractive from the perspective of the german immigrants  this issue which is now affecting so many americans in although in our area of upstate new york we do not have the numbers thankfully for city troy still there are record numbers of foreclosures in our area and i think to look at this problem one must also take the an historical perspective prior to the one nine hundred ninety s the great majority of loans to purchase homes were made by local banks and credit unions the officers of these institutions usually sir for many years were knowledgeable about the community and often about the borrower who was seeking the home mortgage is a borrower face financial distress he could contact that bank officer who certainly knew the property and the community and often knew the bar or to work out a loan may be accomplished by the following payments lowering the interest rate or entering into a forbearance agreement if that was not feasible the bank might arrange a deed in lieu of foreclosure which would allow the borrower to surrender the property in full satisfaction of the debt and not suffer the damaging effect of a foreclosure on his credit record beginning in the one nine hundred ninety s and being in continuing to the present the mortgage lender and or mortgage chesney's are not local banks or credit unions for the most part but rather large commercial institutions such as wells fargo walkover the bank of america g m ac citi mortgage etc at these lenders for better or ill there's often a high turnover of personnel at times no loan officers present as the mortgage loan is obtained through a broker and there's no contact with the representative of the bank of the lender usually the lender does not have an office in the locality hence communication is primarily over the phone and occasionally over the internet my clients  often complained that there is no one to listen to their problem it is common for the borrower to provide copious financial information to the lender in trying to do work out only to wait weeks or months for response for a loan modification request during this time however the lender may very well be proceeding with a foreclosure action or responsible person who foresees a job loss or on come financial crisis and it was never missed a payment we receive no response on a loan modification request from a lender it is the policy of nearly every major lender that i've been involved with not to discuss loan modification until the borrower is at least three payments in arrears like to illustrate this for these frustrations for the borrowers with a particular case a retired woman in her seventy's with a solid pension from her work in municipal government requested a loan modification the home had been in her family for many years practically her entire life she filed and confirmed a chapter thirteen bankruptcy case but still is soon realized that she would need mortgage relief to make her request for modification litton loan servicing request of the usual pay stubs bank statements a financial statement after reviewing the information an offer was made to reduce the interest rate from seven and a half percent to six and a half with the missed payments being added to the principal the principal therefore was increased by twenty three thousand dollars and maturity date was extended the monthly payment including escrow however remained at twenty two twenty nine point zero five therefore she received no relief she's a senior citizen with a fixed income just tried to enter into further dialogue but her telephone calls were not returned she enlisted the assistance of a local housing agency neighborhood works but the agency has received no response in our in the district where i do practice we do have a program which has been instituted rather recently and is shows some signs of success that is the program institute in the southern district of new york bankruptcy courts for loss mitigation judge cecilia morris says champion this program and it applies only to individuals only to their residences is not it is of a voluntary nature but it does push both parties to sit down and talk either the debt or the creditor may make a request for a loan my if occasion the judg loss mitigation the judge may then enter the order for loss mitigation which would then require the parties to talk it will require the debtor to provide the information requested by the lender and on the other side of the table to require the lender to announce a contact person someone who the debtor debtors attorney can speak with also the court has to hold a status conference just to see if there is going to be some some progress in this negotiation i have seen where some of these have succeeded at least certainly in the short term where lenders have agreed to reduce interest rates or extend out one even reducing to two percent since the program began in february of two thousand and nine there's been two hundred fifty two requests for loss mitigation one hundred ninety two orders approving the last mitigation so there is appears to be something that this may very may very well work it's probably a little too early to tell because we don't know how it's going to work long term but it does relieve the frustration of the borrower in that the borrower now has somebody to speak with and someone who will respond thank you thank you sir now we will begin our series of questions  and i will start and first i'd like to ask the honorable judge mangere here on our fourth anniversary after four years in the federal bench in a career as a litigator i guess a practicing lawyer and a graduate do you think you would be capable of modifying mortgages to the benefit of society if such a bill was passed giving you that authority ye litigator before i took the bench i did commercial lending organizations for companies typically cram downs are used for commercial lending purposes for often millions even billions of dollars are reduced or otherwise reworked in loans so that was something that i did on a regular basis in private practice what i suspect what happened in the bankruptcy context if a cramdown were allowed to judges is that just in the core as in the commercial context the bar would take a view of their judges and how they ruled after two or three times and there would be a paradigm that would establish what the value of the real estate was and what the acceptable terms of the market might be lawyers tend to look at precedent when making decisions and negotiating so i suspect you would not see how still litigation on the issue if you really want to know the truth of the matter i do however agree with professor mason and also with congressman franks that the benefits of cramdown may be fairly limited in bankruptcy i have  had the opportunity to view about twenty thousand cases in the last four years i was not a consumer practitioner before i got on the bench and most instances the values of the property in louisiana are not tremendously different than they were when the loans were taken out i know there are other parts of the country where that may be the case but louisiana isn't one of them the interest rates are also not tremendously high usually in the eight percent range you might save a percent on a cram down maybe so i'd agree with professor mason that the reason why for example the voluntary reworked or the cram downs might not work are really coming from the same place the bar were simply can't afford the one there are people who don't have income or have too little income to pay for their debt i actually think that what i chose to talk about and why i chose to talk about it which is the counting  method would have a greater impact on both borrowers in and outside of bankruptcy because it would allow borrowers to quickly determine where their default might lie to give it to either their council or some other community organization to help them figure out what could be done and that would have a greater impact on more loans reduce costs to lenders and also help borrowers now have to tell you congressman condit these thoughts are modification facial modification on the i will agree with you as well that grand judicial modifications are generally just good business as well from the lenders perspective when the lenders in a situation where they're about to foreclose all they're going to get is the value of the collateral and that's essentially what you're doing in a bankruptcy you're valuing the collateral and you're saying that's what you're going to pay that and frankly the value in a bankruptcy is going to be higher than in foreclosure because with foreclosure you have considerable c s remarketing expenses and management that occurs after the foreclosure so most lenders would normally rework a loan or agree to a reduction through a judicial modification because it makes good economic sense it's the same paradigm that works in commercial lending the problem that i see with the voluntary programs and the reason they don't do that in bankruptcy is that most of the ones are owned by trusts and the trusts are held by investors that are far flung all over the globe and what happens is when the servicer or the trustee tries to get permission to modify the loan they can't get it they can't get the votes from the owners so they're caught so the way one thing that would help is if judges could modify the lines they couldn't ask and give that lender permission if you will cover to make the business deal that makes sense i have lender stand in front of me and says i can't agree to it sort of like would you make me do it that happens i mean it happened so if you gave judges the right to make it happen i suspect most lenders would be doing it willingly anyway because it doesn't make a lot of sense for them to go to foreclosure but if they were going to willing to do it willingly wouldn't the voluntary provisions that we encourage be successful and they're not they're not typically successful you're right there are the voluntary modifications are reviewed in my experience again based on credit worthiness let's face it people in bankruptcy are not credit worthy and it doesn't take a rocket scientist to understand that so they don't meet the paradigms of the the voluntary we organizational refinancing anecdotally i checked with the lending community before i came out here very council as well as the nature debtor council to see what their experiences were with the voluntary program and to a person they said basically basi very few lines going through and they all said it's because the borrowers in bankruptcy are not credit worthy this gets back to what my statement was is they can't afford the loan in the first slice or chapter thirteen affords them the kind of relief that they need as an aside the reduction of the loan if there is a significant value drop or if you can extend the lines terms a lot of these lines you know mr right and congressman franks and if you know where it is some of these lines were made with five year billings and when a debtor is facing a ballooning in five years and they can't refinance that's a huge problem a judge could judicially modify a mortgage by extending the term to just a normal fifteen year or twenty year wow that would have a good that would have a positive impact on borrowers lenders can't get that permission oftentimes because they don't have owners who can give it to them so that's something to consider when you're looking at judicial modifications thank you and the red light is for me i'm sorry no problem that's my hour now recognize the ranking member mr franks thank you mr chairman mr chairman i know that these are challenging issues to discuss because i especially want to tell the the chairman of this committee of the full committee that appreciated so many of the remarks that he made because i i want him to know what i think he does because i know that he's coming from the heart of wanting to do the best that he can for those that are having a hard time and i again if i were in every way that i know how to identify with i truly believe that that is the goal here to try to make it work for everyone  the challenge of course that divides us is that i have come to a sincere conclusion that to force mortgage ors those who loan overall impact will cause many of those who otherwise could get a loan not to be able to get one i think it will hurt the poor in the long run i want to say even though i know there's some fundamental disparity between judge wagner's judge magner forgive me position and my i was very touched by her testimony just now because she may come to some different include conclusions but i can just sincerity just exudes and she said something that i was completely unaware of and that is that one of the dynamics in all of this is that sometimes when maybe a full agreement could be reached between a lender and a borrower they can't get ahold of the of the people that quote own the loan to be able to make that agreement that's something this committee ought to be able to address because that may be one of the most affective things that we could do here in the big picture and is something that you know i'm sure it doesn't shock all of you that i didn't know that but it was something that this committee member was completely unaware of as it being a major dynamic but it makes sense because most banks as she said so eloquently don't want to go through the expense even if all their care if they don't care about the the lender at all they don't want to go through the expense of the full foreclosure if they can find a viable alternative for both people and it is difficult to weigh the best existing system for them to try to reach that and we need to take out some of those roadblocks that the judge told us about here to facilitate that more because i am convinced that if the more that government forces a chang contract law and that's what a mortgage is that in the long run it causes people to lose confidence in those things and that that has some ramifications that are hard for us to really fully appreciate in a setting like this so i'm through philosophizing here but i hope that the committee will to look at that i wanted to ask professor mason maybe just a general question first and i'm back on my original point that i think government is a big  culprit in all of this i think that we try to in a genuine interest of trying to promote homeownership we pressured a lot of the lenders to make loans that were sound and i just like professor mason that would you give me some idea of what you think in terms of the genesis of this problem the subprime loans what part is the government to blame in the beginning of all of it what did we do to help catalyze this question in my opinion the government expected too much out of homeownership policy isn't enough to have the highest homeownership rates in the world possibly but we kept pushing against homeownership rates in order to i don't know what the goal was was it a hundred percent homeownership rate we know in economics from the one nine hundred seventy s i don't know how many of you are well trained in economics to remember these lessons from macro and  unemployment for what we thought was a social good but when we pushed unemployment down too far all we got out of it was more inflation because we had to come to a realization that there's a natural rate of unemployment there are some people that just aren't working for whatever reason and to try to push them into jobs direct anomic policy merely fueled inflation for those that were working because for whatever reason these people whether because of frictions between jobs other reasons were just on employed and there wasn't a lot we could do a about it in the same vein we're never going to have one hundred percent homeownership so what is the natural rate of homeownership sixty five percent sixty two percent i don't know exactly what that is but i would say that we probably shot way above that with the origination practices and national homeownership policy that this particular quote i'll try to get as accurate as i can from hundred ninety six version of the national homeownership initiative that sticks in my mind that sought to get people into homes and by relieving the historical constraints on homeownership of having enough money to make a downpayment or even having enough income to make the monthly payments to me that sounds like that policy is really only going one direction and it's direction it went but there's an important  aspect i want to draw out of your comments and also to judge magners comments about the investors who own the loans and it draws upon something you said mr frank that incentives are aligned all the way from the owner of the loans who does want to realize value for modification and then maximize the value of those loans all the way through to the homeowner but what's missing is actually in the middle of that relationship between the investor and the homeowner as a service or and federal policy to date has embedded a friction in the service or relationship on both sides with respect to the investor and the homeowner is maintaining an inefficiency in today's market the investor has the contractual right to replace the service or with someone who can do a really good job but since modification is new and there's no data collected on it and no data given to the investor to see if the service is doing a good job the  investor can't tell if the servicers actually do a good job at modifying or if they're trying to maximize their own stake in the deal or some conflict of interest and so you have to all terms and securitizations that require the service or to buy the lo the investor mr chairman the chairman of the committee suggested that he might be able to get my vote on a bill and i would suggest to you that if a bill that dealt with some of the problems that professor mason said and also that the judge magner said related to making sure that the lenders were able to give a borrower an immediate accounting and clarify those are the kind of things that a right wing nut like me could support so that thank you let me let me before i recognize the distinguished chairman the ranking member has hit upon what is probably the real issue here on the issue of judicial modifications that if you allow judicial modifications will it hurt the poor in that it will take away the incentive for the lending industry to make money available to them because their contracts could be changed in a bankruptcy court and so professor my site ask you since we allow for the courts to modify the terms on the purchase of secondary homes cation homes yachts airplanes and things like that happened as happened to the lending industry willingness to loan money to people to buy yachts and airplanes and secondary homes etc since they can be modified has there been a big change in the industry's desire to loan money there has been but not necessarily recently i have to say i'm not a expert in the deeper history of bankruptcy reforms as bankruptcy law has changed across time and the economic effects of those reforms although there is research into that that could be pointed to be happy to look at that later if you'd like i would like to correct one possible misconception magners perspective just based upon my view of the lending space and she made a point that borrowers in bankruptcy are not credit worthy and i think it's very important to introduce from the industry perspective the very credit worthy in fact this is part of what drove the subprime lending revolution because they can't declare bankruptcy again and so if you get a substantial amount of their debt reduced in bankruptcy which reo realigns their finances and then you can give them a very high interest rate loan they're very credit worthy and they can't go bankrupt on you again but this is an impediment that i urge you to think about of from the borrowers perspective with respect to judicial another thirty percent then they have their judicial modification locked into the twenty percent and they don't have a chance to go back i didn't intend to open pandora's box but since it's opened  judge would you like one minute for rebuttal i guess ok this is where professor mason and i are going to disagree when i say credit worthy i mean worthy of getting a loan not credit worthy in other words we go out and you don't owe anybody else anything so we can charge you more interest credit worthy means could you get a new one to me i don't believe debtors are credit worthy in any real sense of the word i don't think that's a novel or radical view  debts they don't come in and debt that home prices are going to go up or down more or less so maybe this is the time to file to get the better deal that really is beyond their ability to understand they can't pay their mortgage the foreclosure that's why they file they don't file before they're in foreclosure and after the house is gone they don't file i mean it's a very it's almost a process it's really in the lenders hands not they are i don't think that  what the professor is saying about the credit worthiness or the effect on the poor is really a correct i mean from my perspective and it is it is you know really from my perspective is correct for the most part people lenders have to always assuming that a borrower is going to go into default there's a certain percentage that they count on and based on a borrowers credit scores and their income when they make the loan they make that determination at the time the line is made the fact that alone might be it's not something that i think would affect the credit the credit markets because what happens is they figure that's all they're going to get in foreclosure anyway if the loan defaults and they have to go to foreclosure they're going to get the value of the collateral and probably a lot less because of the the foreclosure and as we discussed the administrative expenses so i don't see the fact that there be a judicial modification is something that the lending community when it looks on the macro level i would say would make credit on available they already are experiencing that they're just experiencing in a different way thank you now the distinguished chairman mr conyers recognize for five minutes or longer thanks so much observation observation i'd like to make is actually on a comment that congressman franks made earlier that he believes or he he suspects that the community reinvestment act may have been part of the fuel meltdown and i would disagree with that thought i think the community reinvestment act did put pressure on lenders to loan in under served communities and it was in response to this practice of  redlining that we had been experiencing this country for decades at that point and the pressure was to properly underwrite loans in these communities and i think it's because of the economic  huge profits to be made through these newly available subprime products through you know the new software that was developed in the late one nine hundred ninety in which borrowers with out prime credit rating we could now be able to assess what their ability to repay loans would be with much more accuracy and that then made it possible for lenders to lend to borrowers without perfect credit rating without prime credit rating and so then we saw the profusion of the prime products and that was all good i think it made it possible for people to own homes who couldn't own homes if it if loans were only available to prop people with prime credit rating and where the but where the problem came in was in abuses of those products and that's what we're seeing in the wells fargo's we have these two high level ex employees of wells fargo who have come forward and said that the economic you know they worked on commission and you made more money putting a borrower into a sub prime loan then you did putting them into a prime loan and there was no oversight on the practice and so loan officers routinely put on sophisticated borrowers into subprime products at much higher interest rates and paying initiation fees and points up front which is very profitable to the company but really just said that it's advantageous to the  borrower and yes there were borrowers who never should have been given loans at all and you had to underwriting mechanism to figure that out but they didn't really care whether the borrower could pay or not because they were going to be selling the loans on the secondary market and not face the risk so i would say the problem was in a failure of oversight not in encouraging or requiring borrowers lenders to lend in under served communities  with the judge generally agree with those comment i would congressman conyers i think that the real problem with the sub prime industry was what sangrias at the indicated is the is the disconnection between those that originate and those that hold the lines so you really get shoddy underwriting when you don't really care what happens to align and that if you if you put in some sort of mechanism maybe not necessary for financial institutions that originate but for these other lenders who are not financial institutions many of them were not so that they have to rejuvenate and hold for some period of time you might force the type of underwriting that would avoid these problems that's i really think it's an underwriting issue well i thank you and we were all impressed with your opening statement because it came out of an experience to being a judge and  it really gave us a new window on this this is the seventh hearing and i'm pleased with the trent franks comments about improving communication mortgage or tries to contact somebody they're close they're out of business you can't find it find them anymore and so i'd like to ask unanimous consent to put in the new york times over fifteen two thousand and seven study finds disparities in mortgages by race a covert seventeen two thousand so in black and white new york times and then may sixteenth two thousand and nine minorities affected most as new york foreclosures rise without objection they will be entered in the record and if i may be granted just a few more minutes mr chairman i wanted everyone to know that we're going to get copies not only to members about a lady she represented who was two payments behind she got foreclosed on i don't know if she was evicted first and then foreclosed on or  what but the house was foreclosed by country by country why then sold it this hurts fannie to fannie mae and fannie mae so the property to an investor for eight hundred dollars  do case by case i mean i don't know and you have a very obvious stamina for this sort of thing but to get up and go into work every day in either a lot of us or a court room and hear these incredible tales of exploitation frequently minority purchase who of course haven't read a mortgage contract is really something professor mason i am happy five you know the story i think that the credit comp the credit card companies for about ten years had been trying to tighten up bankruptcies make it harder for people to get into bankruptcy and maybe my colleagues on the other side voted in the negative on that bill too not sure but i did it for the simple reason that it was adverse to the interests of people who are in financial difficulty it made bankruptcy tougher on individuals and the credit card companies had been lobbying on this for years and they finally were able to put together a majority and it was i remember one part of the hearings chairman co when the they were talking about single mothers or people that had a divorce situation they were tough on i mean you couldn't you couldn't get any relief for the mother and kids there was nothing there for them it was just a mean spirited bill all the way around and  i had oh here it is i had all these reasons that the bill tilt the playing field in favor of credit cards companies at the expense of struggling families it was tough on small businesses for sure and most many of us are very concerned about that it increased the cost of bankruptcy  and it did nothing to hold irresponsible lenders accounting accountable for their actions so that in my own way of taking hearing number seven that this bankruptcy judge has shown a new light on this unregulated part of the financial were that we keep going over and it's very hard you know there are exotic instruments there are some there are some practices that there aren't even any laws were never written for them we  hadn't even known about them and i'd invite your comments as i conclude professor mason my comments are to be taken really in the spirit of trying to get to the important aspect or most powerful aspects of the law and i do take into  was characterized as debilitating arbitrage bankruptcy choosing your time to file but judge manners correct you often can't choose a time to file is when you get shocked by a divorce or medical debt or something like that  but i also don't want people to get hurt because bankruptcy is as currently constructed something that you do get one shot at and if things get worse then you could lock yourself out and so i think both sides deserve to be considered here but in the sense of going back to some of the securitization arrangements and where where the meat is so to speak  it's important for me to point out that it's overly simplistic to think of the problem as just one where the originator doesn't care so much about the loan or the performance of the loan because they'll be selling it on  actually worse than that i think about chairman conyers you get to sell something to me and i promise that i'll pay you well perhaps i should take the other side of th neither side very good quite honestly perhaps i should take both sides agree to sell something to my right hand and my left hand will pay for that say fifty dollars a month for the next thirty years so my right hand gets to value that fifty dollars a month for the next thirty years no doesn't obviously have the money but just like we teach in finance one i want to can affect that valuation by choosing a different discount rate or really i might not go the whole thirty years monthly payments i might go twenty or twenty five or ten or five and my right hand gets to choose that time period to how many months i pay fifty dollars a month in order to effect  valuation my right hand gets to report this as a corporate entity as income today and the c e o s of my right hand get to use that calculation in calculating their bonuses this year  cash has come here this is called gain on sale accounting this is been a plague of the securitization industry well acknowledge since the mid one nine hundred ninety s but the accounting standards won't let the industry get rid of this even though certain well managed companies have wanted to in fact we've gone the other direction with policy requiring other companies to do the same kind of valuation calling it mark to market accounting and expanding it across the financial marketplace  the wrong direction to go where adding insult to injury here not only do you get to sell the loan you get to call it whatever value you want and record that as income today that's really bad we have a very perverse incentives in the system could use some realignment i'm convinced that some very targeted legislation many of the deep problems we have today without broad strokes but it does take  expertise in the area to get those those few touch points that have the most dramatic effect and i think probably the same is and could be consideration for judicial this is this testimony by this waiting till two thousand and twelve and he thanks you this testimony has been quite interesting and like many members were trying to do a number of things at once but all of it that i've heard has been engaging and i appreciate you all come here to testify run some things across random thoughts that is accumulate as i'm listening to the testimony one of them is in some data that's been handed to me by statuses mortgage delinquency rates are at nine point one two percent and unemployment now is nine point seven percent i think the count the real unemployed in america probably approaches twenty million if you add the unemployed along with those that no longer qualified as unemployed probably actually exceeds twenty million loan modifications are up one hundred seventy two percent from  that's an interesting piece of data that doesn't necessarily correlate with some of the things we've talked about here but i inject that into the dialogue as a level of optimism that the lenders really are working i think to try to avoid having to go before the honorable judge magner and so that would be one of those observations another one as i as i listen to misandrist testimony racially segregated patterns of housing i want to come back to this i just lay that out there racially predatory lending another phrase four times higher foreclosure rates and minority versus in minority communities i believe is a phrase compared to white communities that's that's quite that's arresting to hear that data and then the testimony that i'm convinced does exist in amongst probably more lenders and i am aware that there's misinformation there that is a appears to be a pattern in the lending community so i lay this out so that you know that at least i was listening to parts of this but i'd like to take you back and i'll go first i'm a sangria and i know how long you've been involved in this particular trade but you recall when lent when redlining first became an issue as you could be old enough but i ask you if you do recall that redlining and i and i reject the idea of drawing lines around neighborhoods declaring them to be minorities and refusing to loan money in those neighborhoods about i reject the concept but i'm wondering what are the root causes of how we got here for this testimony today how we got here economically so we had the community reinvestment act that was a design to reduce or hopefully eliminate redlining bad loans in neighborhoods where the asset value was and sustained then we then we had a number of other things but the secondary markets got stronger fannie mae and freddie mac began taking on these mortgages and people began taking their margins out of these mortgages on the front end so they weren't invested in the long term performance of that mortgage loan then we have  situation and that's come up with us and within the last year this phrase too big to fail banks that are too big to be allowed to fail to be more precise and now we have boards of directors that are so so remote that borrowers can't identify who they owe the money to in order negotiate some terms so what has to happen with blocks of mortgages and large boards of directors that are making huge decisions in places like new york and  then let cetera so then i look back and i think there are other subsets of these kind of negotiations that took place rewards for those who could broker these  subprime loans sometimes but other loans are misrepresented other times and i'm thinking in particular of acorn and i'm wondering if this angry if you do you have a an engagement or involvement with acorn and what would be your view of how acorn might have been involved in these problems that i've strung out here do they fit into that chain somewhere that i need to understand i don't really know that much about acorn and  real activists are sort of plague that city hall the whole demonstrations there pretty frequently well i mean i'm just looking back at somebody needed to broker these loans going into these neighborhoods that were red lined in order for the banks to qualify and i think we're pretty confident here that acorn was involved in negotiating or setting that up i mean i just remember reading news articles on it so i just take it back to those the racially segregated housing the racial predatory lending that's going on the four times higher foreclosure rates that data and can you tell me has that been adjusted for in common jobs or is it just simply is race the only factor involved or has it been corrected for the other factors there's several studies that have been done that had access to fica scores and credit rating agency data that have concluded that correcting for credit r conclusions abt associates did a study for the casey foundation including baltimore city i think it was twelve cities across the country in baltimore with one of the cities studied and baltimore the conclusion for baltimore was the refinance except the statement there four times higher after they were corrected for other factors or before before where we survived a motion to dismiss in the wells fargo litigation and now we are commencing discovery so we have not had access to wells fargo's loan document which would include credit rating so if we don't know what it would be after it's corrected it's it's an alarming figure but at all isn't that stark if one corrected it for the other factors involved that's probably true we're basing that four times rate based on home mortgage disclosure act data which is publicly available and does not include credit risk and that's one of the measures that the years against wells fargo's predatory mortgage lending and that's how they describe it there are a number of articles like that it's taken place in des moines too but i want to i want to make this point and i'll do a just suppose just suppose there had never been a community reinvestment act  just suppose we found another way to put competition into those cities it needed to have a better practice of mortgage lending what if we had small community banks that were investing in those communities even though their real estate wasn't worth as much as a neighboring real estate what if they were loaning a percentage on the asset value what if they were actually evaluating the ability of the people that were getting the mortgage to pay back the loan wouldn't real estate values have dropped down to a point where the people that were ready to buy those houses could actually afford them and then when we have banks that have gotten too big to fail and i mean too big to be allowed to fail and they're getting bigger and bigger and we've bailed out big banks and we have fewer banks now we lost three thousand banks in america in the eighty's during what we call the farm crisis where i come from if we lost three thousand banks in america today it truly would be a financial crisis because the banks have gotten so much bigger with all the mergers they've gotten more impersonal and they're not serving the inner city the way they did and they're not smart serving the small communities as well as they did either and i would suggest that we've tried to fix things at the national level and write rules because we had a moral of horns to redlining and we want everybody to own a home as much as we can but i take the testimony of professor mason that probably there's a limit to the number of people just like there is done employment and so i'm going to suggest that we take a look at how we create more competition in the free market and how we let these values go to where they can actually be sustained by the people that that will buy the homes and that our will that can that have the ability to perform on those loans and those mortgages and i'm going to suggest that we maybe got our hands in here too much from the federal level and i think it's diminished their free market component of this and i think it's hurt a lot of people in the inner city and across the country if we keep going the direction we're going we're going to end up with just a few great big banks that are ever more personal that we have to get more regulation to if we really believe in adam smith's invisible hand we ought to inject more free market into this and probably less regulation so that the lenders can go into those communities and make a profit and but do so at a level that is going to be useful for the people that are living there and then they can build themselves up on the american dream and go out and build a mansion and i can buy the house that they live in this chairman i yield back and i thank you for your indulgence thank you the gentleman's time has expired i would now like to recognize the ranking member for a special extraordinary super bowl oh dear request let's say and thank you mr chairman in addition to second in mr king's the comments i calls spreading the virus that was in the new york post on october thirteenth two thousand and eight and one being a committee on oversight and government reform reports of july seventh two thousand  and one called the independent policy report the causes of the mortgage meltdown by stanley liebowitz october third two thousand and eight without objection they will be admitted into the record as are any other requests for admission