U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

37–978 PDF 2009

STRAIGHTENING OUT THE MORTGAGE MESS: 

HOW CAN WE PROTECT HOME OWNERSHIP 

AND PROVIDE RELIEF TO CONSUMERS IN FINANCIAL DISTRESS? (PART I) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 25, 2007 

Serial No. 110–159 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

LINDA T. SA ́ NCHEZ, California, Chairwoman 

JOHN CONYERS, JR., Michigan 

HANK JOHNSON, Georgia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

STEVE COHEN, Tennessee 

CHRIS CANNON, Utah 

JIM JORDAN, Ohio 

RIC KELLER, Florida 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

SEPTEMBER 25, 2007 

Page 

OPENING STATEMENTS 

The Honorable Linda T. Sa ́nchez, a Representative in Congress from the 

State of California, and Chairwoman, Subcommittee on Commercial and 

Administrative Law ............................................................................................. 1 

The Honorable Chris Cannon, a Representative in Congress from the State 

of Utah, and Ranking Member, Subcommittee on Commercial and Administrative Law ........................................................................................................... 2 

The Honorable Hank Johnson, a Representative in Congress from the State 

of Georgia, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 4 

The Honorable Tom Feeney, a Representative in Congress from the State 

of Florida, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 4 

WITNESSES 

The Honorable Marilyn Morgan, United States Bankruptcy Court, Northern 

District of California, San Jose, CA 

Oral Testimony ..................................................................................................... 7 

Prepared Statement ............................................................................................. 9 

The Honorable Steve Bartlett, The Financial Services Roundtable, Washington, DC 

Oral Testimony ..................................................................................................... 11 

Prepared Statement ............................................................................................. 13 

Eric Stein, Esquire, President, Center for Community Self-Help, Durham, 

NC, on behalf of the Center for Responsible Lending 

Oral Testimony ..................................................................................................... 19 

Prepared Statement ............................................................................................. 21 

John Rao, Esquire, National Consumer Law Center, Inc., Boston, MA, on 

behalf of the National Association of Consumer Bankruptcy Attorneys 

Oral Testimony ..................................................................................................... 47 

Prepared Statement ............................................................................................. 49 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, Chairman, Committee on the 

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 6 

(1) 

STRAIGHTENING OUT THE MORTGAGE MESS: 

HOW CAN WE PROTECT HOME OWNERSHIP 

AND PROVIDE RELIEF TO CONSUMERS IN 

FINANCIAL DISTRESS? 

TUESDAY, SEPTEMBER 25, 2007 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 3:53 p.m., in room 

2237, Rayburn House Office Building, the Honorable Linda 

Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Sa ́nchez, Johnson, Lofgren, Watt, Cannon, Feeney, and Franks. 

Staff present: Susan Jensen, Majority Counsel; Zachary Somers, 

Minority Counsel; and Adam Russell, Majority Professional Staff 

Member. 

Ms. SA ́ NCHEZ. Okay. This hearing of the Committee on the Judiciary, Subcommittee on Commercial and Administrative Law will 

now come to order. And I will recognize myself for a short statement. 

The skyrocketing foreclosure numbers are a sobering reminder of 

this Nation’s growing mortgage crisis. What was once a small problem attributed to economically struggling areas is quickly becoming 

a national phenomenon. 

In 2006, there were 1.2 million foreclosures in the United States, 

representing an increase of 42 percent over the prior year. And this 

year’s numbers are looking even worse. Last month’s foreclosures 

were 115 percent greater than those reported for August in 2006. 

It is estimated that, between this year and next year, there will be a whopping $400 billion worth of mortgage defaults. As many 

as 2 million households may be at risk of losing their homes to 

foreclosure, a rate approaching that of the Great Depression. And 

economic conditions will worsen, given the fact that a substantial 

portion of subprime mortgages will reset their interest rates in the 

coming months. 

We are in the middle of a mortgage meltdown. Falling real estate 

prices and a substantial change in the ease of obtaining loans are 

making it more difficult for overstressed homeowners to either refinance their way out of trouble or simply sell their homes. We need 

2 

to act quickly to shift the balance of power between borrowers and 

lenders. The question is how? 

I was very pleased to join my colleague from North Carolina, 

Brad Miller, last week as an original co-sponsor of the Emergency 

Home Ownership and Mortgage Equity Protection Act of 2007. This 

measure goes to the very heart of the problem—protecting homeowners so desperate that they must file bankruptcy. H.R. 3609 allows, for the first time in nearly 30 years, a debtor in a chapter 

13 case to reorganized his or her home mortgage obligations, just 

like any other debt. And unlike some proposals, it provides guidance to the courts in terms of how this restructuring may be done. 

This legislation provides an important exception to the mandatory requirement that consumers receive credit counseling before 

they file for bankruptcy relief. The bill excuses a chapter 13 debtor 

from this requirement, if he or she submits to the court a certification that a foreclosure action has been commenced against the 

debtor’s home. And this legislation provides important protections 

against lenders assessing excessive fees and hidden charges against 

chapter 13 debtors, who are trying to save their homes from foreclosure. 

The Emergency Home Ownership and Mortgage Equity Protection Act is a measured response to the mortgage crisis, and one 

that I strongly support. I look forward to working with my colleagues on this Subcommittee, as well as the full Committee, to 

move this bill and explore other necessary reform. 

It is my hope that today’s hearing will provide an opportunity for 

us to gain a better understanding of the causes and possible solutions to the mortgage mess facing consumers and our economy. Accordingly, I look very much forward to today’s hearing and to receiving the testimony from all of our witnesses. 

At this time, I would now like to recognize my colleague, Mr. 

Cannon, the distinguished Ranking Member of the Subcommittee, 

for his opening remarks. 

Mr. CANNON. Thank you, Madame Chair. 

Home ownership has been one of the primary ways that American families have built wealth. Even during the rapid growth of 

the stock market in the 1990’s, real estate continued to eclipse 

stocks as a share of most households’ portfolios. In recent years, 

subprime lending has increasingly become a part of the mortgage 

industry, allowing even more families to build wealth through 

home ownership. 

Subprime lending has greatly expanded the pool of credit available to borrowers who, for a number of reasons, would otherwise 

be denied credit. Subprime lending has benefited a great number 

of borrowers—borrowers who otherwise would not have been able 

to achieve the dream of home ownership. 

The benefits of subprime lending have not come without their 

negatives, of course, which is why we are here today. It appears 

that we are currently facing two problems. One, how to help homeowners avoid foreclosure and stay in their homes; and two, how to 

store liquidity and stability to the full mortgage market and other 

credit markets. 

Several legislative proposals have been made that claim to fix 

the first problem through amendments to the bankruptcy code. IniVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
3 

tial analysis suggests, however, that these proposals will not only 

serve to exacerbate the second problem. Significantly changing 

chapter 13 as it applies to home mortgages has the potential to restrain the flow of capital in the home lending market. 

Reducing liquidity will not only have a broad influence on the 

housing market in general, but it will reduce the availability of 

credit to Americans that desperately need it. In other words, it appears that the proposals being floated to help consumers may actually have the opposite effect. This is because allowing mortgages to 

be modified or rendered unsecured through bankruptcy will make 

it far more difficult to originate or sell mortgages in the secondary 

market. 

The proposed changes to the code introduce substantial risks 

that the terms of loans will be changed in unpredictable ways. Accordingly, lenders will be forced to increase the costs of mortgages 

to reflect the additional risk. 

As groups such as the U.S. Chamber of Commerce and the National Association of Homebuilders have pointed out, these problems would reduce liquidity and make it harder for Americans to 

obtain a new mortgage or refinance their existing mortgage—the 

exact opposite of what the mortgage market needs now. 

While it makes common sense to help families save their homes, 

these proposals may have the exact opposite effect. And they may 

make it difficult for families to purchase homes in the future. The 

proposals that have been circulated thus far have little to do with 

helping families facing default on their mortgages because of 

subprime loans. The proposals have not targeted the problem. For 

example, seven of 11 provisions of Senator Durbin’s Helping Families Save their Homes Act have nothing to do with mortgage finance. And those provisions that do deal with mortgage finance applied to all mortgages, not just true subprime loans made to marginal borrowers. 

We are committed to working to make sure that American families are able to weather the current downturn and the problems associated with subprime mortgages. Members of the minority are 

working in a bipartisan fashion on Committees on both sides of the 

Capitol to craft solutions to the mortgage crisis. 

But whatever solutions we come up with, we must remember 

that broad legislation aimed at the primary residence exception in 

chapter 13 affects not only those borrowers facing default from rising interest rates on subprime loans, but future prime and 

subprime borrowers as well. Reform of the primary residence exception does not occur in a vacuum. We must resist the urge to 

place the cost of the downturn on the backs of the lenders, simply 

because they are easy targets. No one questions that they share the 

blame. However, saddling lenders with the cost will merely cause 

lenders to shift that cost to future borrowers in the form of higher 

risk premiums. 

I look forward to the testimony today and hope that the witnesses will keep in mind that this issue, like other issues in bankruptcy, involves the balancing of many competing interests. I hope 

the witnesses can help shed light on where we should strike the 

balance regarding the primary residence exception, or whether the 

proper balance has already been struck. 

4 

Thank you, Madame Chair. And I yield back. 

Ms. SA ́ NCHEZ. Thank you. I thank the gentleman for his statement. But now, at this time, I would like to recognize Mr. Johnson 

for his opening statement. 

Mr. JOHNSON. Thank you, Madame Chairwoman. Madame Chair, 

the cornerstone of the American dream has always been to own a 

home. Some versions of the dream feature a white picket fence and 

two-car garage. Some may have a large yard with a swing set and 

toys scattered around. But whatever the dream entails, and sometimes it can be a condominium or a town home, but whatever that 

dream entails, it always features home ownership. 

And that dream now is quickly vanishing and becoming a nightmare for many people who have turned to subprime loans to obtain 

that goal. And many people have not just turned to them, they 

have been steered into them. What was once a niche product, 

subprime loans have taken a significant share now of the mortgage 

market. Combined with lax practices, lack of monitoring, aggressive marketing and disproportionate targeting, these loans have 

mushroomed into a mortgage crisis that has not only reverberated 

in this country, but also in the international markets. 

This hearing comes at a time, Madame Chair, when the State of 

Georgia, where I hail from, has experienced the second highest rate 

of home mortgage foreclosures in the country, with one out of every 

299 homes being reclaimed by the lender. The ripple effect of Georgia’s foreclosure rate has not only affected home and resale values, 

but even school enrollment, which threatens the budgets of school 

systems. 

In a recent article in the Atlanta Journal-Constitution, about 

10,000 fewer students than expected enrolled in Atlanta’s school 

system this year. When there are maybe up to 2 million households 

in our Nation on the verge of losing their homes this year, it is imperative that Congress steps in. I plan to offer legislation that 

would eliminate some of these onerous provisions of the bankruptcy 

law that only act as another hurdle to receiving relief. 

But I thank the Chairwoman for holding this hearing to find 

some relief for those under the weight of subprime mortgages— 

those families who are being crushed under the weight of these 

subprime mortgages. The Administration has taken credit for putting more families in homes. But if Congress doesn’t step in right 

away, many will soon face the streets. 

Thank you, Madame Chair. And I yield back. 

Ms. SA ́ NCHEZ. I thank the gentleman for his opening statement. 

And the gentleman from Florida, Mr. Feeney, is recognized for 

his opening statement. 

Mr. FEENEY. I thank the Chairwoman. And I don’t think there 

is anybody that doesn’t have sympathy for a homeowner that has 

been devastated, either by the subprime loans and teaser rates, or 

because their home has lost value, or because they lost their job, 

perhaps through no fault of their own—maybe a health reason. 

And in America, the way we do it is to give people a second chance. 

And so I support bankruptcy opportunities for relief. 

But I also want to make sure the law of unintended consequences doesn’t hurt a lot more people than we are trying to 

help. The primary cause of the housing bubble is excess liquidity 

5 

and the fact that there were very little checks at the table for a 

lot of closings going on. 

Virtually everybody at a closing table makes money, whether a 

good loan is made or not. The attorney that closes the loan—the 

surveyor gets paid. The appraiser gets paid. The real estate agent 

gets paid. The mortgage broker gets paid. Lots of other people get 

paid. And ultimately the two people affected are the people that 

hold the loan when it’s—by the way, typically the bank and the 

original lender gets paid, because they have repackaged the loan 

into the secondary market. 

So it is whoever ends up with the loan that is affected. And I 

don’t feel bad for any of those people particularly. They, in return 

for high returns on capital investments, took risks. I feel terribly 

bad for homeowners that, in some cases, were sucked into loans 

that they simply could not afford. I think we all share a lot of those 

sentiments. 

But let me warn you where we are in the housing market today. 

I used to close a lot of real estate loans. I used to represent some 

real estate developers, builders, homeowners, buyers, purchasers. 

Liquidity has dried up. It is making it very difficult to sell a home, 

unless you happen to be fortunate to have huge amounts of equity 

in your home. When liquidity dries up, it means that there are 

fewer home purchasers available, because there are fewer dollars 

available to make loans. 

The market has over-corrected. What used to be too loose with 

capital now is too tight in many places. And you are going to see 

the market, in and of itself, require higher down payments, tougher 

credit checks, more restrictions on the people that they tend to loan 

to, and higher interest rates—certainly a lot fewer teaser rates. 

If you add, at a time of tough, tight liquidity in the housing market, another risk to the lender—that is that a bankruptcy judge is 

going to come in and to take away some of their secured equity, 

which is what some of these proposals do—you are going to affect 

not just the homeowners that are worried about foreclosure today. 

You are going to affect every homeowner out there that would like 

to one day sell their home, or a second home, or an investment 

property. And you are going to affect every potential buyer out 

there by making it more difficult for them to get credit. 

The market is correcting itself. In fact, it is probably over-corrected. And when you add a huge risk to a lender on top of the burdens that the lending community is already suffering, you potentially will elongate the period of time before the housing market becomes stable again. You may throw states like Florida, and perhaps the country, into a recession. And you may infect other parts 

of the American market with a depression. 

So let us be careful that the horses slow down. The free money 

ride in the mortgage loan market has stopped. And it is over-corrected. The horse is barely walking or moving now. If you are going 

to shoot it, just be aware of what you are doing is the only advice 

I have to my colleagues. 

And with that, I will yield back the balance of my time. 

Ms. SA ́ NCHEZ. Thank the gentleman. 

In the interest of time, I am going to say that, without objection, 

other Members’ opening statements will be included in the record. 

6 

Without objection, the Chair will be authorized to declare a recess 

of the hearing at any point. 

[The prepared statement of Mr. Conyers follows:] 

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

I don’t think there is any doubt that we are in the middle of a major economic 

crisis that will undoubtedly worsen over the next year or longer. This mortgage 

mess, as the title of today’s hearing aptly notes, is jeopardizing the financial stability of American families across our Nation. 

Just last week the Administration, which initially tried to downplay this crisis, 

finally acknowledged that 500,000 homeowners—one-quarter of the two million 

Americans who have subprime mortgages scheduled to reset to higher interest rates 

over the next 18 months—were likely to lose their houses. 

Sadly, there’s another statistic we must acknowledge. According to the Congressional Research Service, subprime loans are disproportionately used by the elderly 

and members of minority groups. And, even more disturbing, there is evidence that 

‘‘minorities who could qualify for cheaper prime loans are sometimes borrowing in 

the more expensive subprime market.’’ If there is any doubt about that, you are 

more than welcome to visit Wayne County, Michigan, which earlier this year had 

the highest rate of home foreclosures among all other major metropolitan areas in 

the United States. In fact, the state of Michigan ranked fourth highest in the Nation 

in the number of foreclosure filings last month. 

Today’s hearing will undoubtedly shed some light on such important issues as to 

how did we got into this mess and who is to blame. But, I really hope this hearing 

will yield real and immediate solutions to this crisis. I will suggest at least three. 

First, a homeowner in financial distress should be able to use bankruptcy to reorganize all of his or her debts. There is absolutely no reason to retain the current 

prohibition that prevents Chapter 13 debtors from modifying their home mortgages 

as part of a repayment plan. 

Second, we should establish a homestead exemption floor for debtors over 55. 

Without this protection, many elderly debtors cannot use bankruptcy to save their 

homes if the equity in their homes—often representing their entire life savings— 

exceeds the low homestead exemptions allowed in some states. 

Third, we should eliminate the various pitfalls and onerous requirements created 

as a result of the 2005 Amendments to the Bankruptcy Code. As we have heard at 

hearings held earlier this year, many of these new requirements simply serve as 

‘‘gotchas’’ to catch the unwary and ill-advised consumer debtor. 

Home ownership is one of the most important goals that all Americans should be 

able to aspire to in this Nation. That goal, however, is under siege right now and 

we need to act immediately. 

Ms. SA ́ NCHEZ. I now would like to recognize the gentle lady from 

California, Ms. Lofgren, who wanted the honor of introducing our 

first witness. 

Ms. LOFGREN. Thank you, Madame Chairwoman. It is indeed an 

honor to introduce our first witness, the Honorable Marilyn Morgan. Judge Morgan was appointed on June 16, 1988, to the United 

States Bankruptcy Court in the Northern District of California. 

She is a frequent participant in programs sponsored by the Bankruptcy and Commercial Law Section of the Santa Clara County Bar 

Association, the Bay Area Bankruptcy Forum, the California Bankruptcy Forum and the National Association of Bankruptcy Trustees. 

Judge Morgan is a member of the National Conference of Bankruptcy Judges. And on a personal note, I have known Judge Morgan since the mid-1970’s, before either one of us held a public office. We volunteered together on many county bar association committees. And she was known at that time as one of the most skilled 

lawyers in our bar association—known as really a scholar, someone 

7 

with integrity and a hard worker. And that reputation has carried 

forward to the bench. 

She is respected nationwide for her expertise in bankruptcy. And 

it is just a delight to see Marilyn Morgan here today. And I thank 

the gentle lady for allowing me to introduce my friend. 

Ms. SA ́ NCHEZ. Thank you. 

And welcome Judge Morgan. 

Our second witness is former Congressman Steve Bartlett. Mr. 

Bartlett is the president of Financial Services Roundtable. He 

served as a Member of Congress for the Third District of Texas 

from 1983 to 1991, and as mayor of Dallas, Texas from 1991 to 

1995. I will admit that this is the second time that Congressman 

Bartlett has testified before this Subcommittee during this congressional session. So we welcome you back. The first was during the 

bankruptcy oversight hearing. It is good to have you again with us. 

And we appreciate your time in coming. 

Our third witness is Mr. Eric Stein. Mr. Stein is president of the 

Center for Community Self-Help, a non-profit community development lender. And he serves as chief operating officer for Self-Help 

and its affiliates. He was formerly the executive director of CASA, 

a non-profit organization that develops housing for primarily homeless persons with disabilities. Prior to CASA, Mr. Stein worked for 

Congressman David Price. 

Welcome. 

And our final witness is Mr. John Rao. Mr. Rao is an attorney 

with the National Consumer Law Center, Incorporated. He focuses 

on consumer credit and bankruptcy issues and has served as a panelist and instructor at numerous bankruptcy and consumer law 

trainings and conferences. Before coming to NCLC, Mr. Rao served 

as a managing attorney of Rhode Island Legal Services and headed 

the program’s consumer unit. 

And I want to welcome you all today to the Subcommittee. Without objection, your written statements in their entirety will be 

placed into the record. And we are going to ask that you limit your 

oral remarks to 5 minutes. 

For those of you who have not testified before Congress before, 

there is a lighting system. It will turn green when you are to begin 

your testimony. Four minutes into your testimony, you will get the 

yellow warning light. At the end of the 5 minutes, you will get the 

red light, letting you know that your time has expired. If you are 

mid-sentence, we would just ask you to complete your thought, so 

that we could move on to our next witness. 

After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions subject to 

the 5-minute rule. At this time, I would invite Judge Morgan to 

please proceed with her testimony. 

TESTIMONY OF THE HONORABLE MARILYN MORGAN, UNITED 

STATES BANKRUPTCY COURT, NORTHERN DISTRICT OF 

CALIFORNIA, SAN JOSE, CA 

Judge MORGAN. Chairwoman, Zoe Lofgren, and Members of the 

Subcommittee, I very much appreciate the opportunity to appear 

before you today on this most important subject. And I also appreVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
8 

ciate the significant thought that clearly all of you have put into 

the subject. 

My jurisdiction covers Silicon Valley. This economic engine and 

its high housing costs is very different from the other end of my 

jurisdiction, Salinas, which is the salad bowl of the United States. 

It has a large population of farm workers. 

In the nearly 30 years that I have worked with the Bankruptcy 

Code, I have seen many different industries go through economic 

downturns that have resulted in the filing of bankruptcies by large 

numbers of consumers. This is the first time in my memory, however, where the framework of the Bankruptcy Code provides no 

remedy for those in the most critical economic distress—those facing the imminent foreclosure of their homes. 

In preparation for my testimony, I was able to meet with about 

a dozen lawyers from Salinas and San Jose, who are on the front 

lines, grappling with the issues you are considering. I asked them 

about the willingness of home lenders to modify loan terms to enable their clients, the distressed homeowners, to save their homes 

from foreclosure. 

They told me that, in contrast to the talk about voluntary forbearance, the reality is that lenders have been unwilling to offer 

workouts to these debtors. They tell me that homeowners don’t return phone calls. Or they keep debtors and attorneys hanging 

around for an answer, while a foreclosure sale date approaches. 

Among the attorneys that I spoke with, not one could report a single meaningful workout with a home lender. 

I heard many heartbreaking stories, though, when I talked with 

these attorneys. I heard about hard-working Americans with real 

emotional investments in their homes and in the American way of 

life. I heard that these people have lost hope. Worse, because of the 

strong family culture in many of these ethnic communities, whole 

families—the aunts, the uncles, the grandparents—are being financially tapped out in an effort to save a home from foreclosure. I 

heard about grown men crying in their attorneys’ offices. 

Every week, I hold a court calendar where lenders seek authority 

to proceed with foreclosures. This calendar historically has been actively contested with lawyers and their clients going through the 

emotional experience of fighting to save a family home, and trying 

to come up with a plan to cure the defaults. Now, however—and 

this has been true for the past 6 months—90 percent of these motions go unopposed by debtors; because there is no remedy available in my court. And there is no hope for these homeowners. 

Too many homeowners find that, even if they could cure the default, they can’t afford the terms of the loan going forward because 

of the steep increase in the interest rate or other changes in the 

terms of the loan. Congress is in a unique position to alter this reality. And I believe you can do so with a very narrowly targeted 

change to the Bankruptcy Code that will help families avoid foreclosure. 

As others have pointed out, under the Bankruptcy Code, a mortgage on the debtor’s residence is the only debt that the bankruptcy 

courts cannot modify. And the home is the only asset that can’t be 

protected. The Bankruptcy Code already provides relief for those 

whose loans on investment properties or on second homes have gotVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
9 

ten them into financial trouble. But this relief doesn’t extend to the 

working and middle-class families who are seeking to protect their 

residences. 

The mortgage market today is very different than it was in 1978, 

when this provision was included in the Bankruptcy Code. Through 

the 1970’s and the early 1980’s—and you all probably remember 

this—fixed interest rate loans, with relatively low loan-to-value ratios, were the rule. Today’s mortgage market is dominated by these 

so-called exploding ARMs, where monthly payment increases and 

double within a year or two, even as interest rates and the overall 

economy remain constant. These loans have left many borrowers 

with payments they cannot afford and mortgages that exceed the 

value of their homes. 

One question I have to ask myself is what the impact of the proposed changes will be on the courts. Clearly there are a lot of abusive loans in my jurisdiction. And if Congress enacts this legislation, there will be a lot of work to be done. On the other hand, 

bankruptcy judges are trained to value property. And we are 

trained to determine appropriate interest rates. This is what we do. 

I don’t like to think that we are unpredictable. I think that, if 

you implement this proposed legislation in a way that allows us— 

if you give us clear standards in the legislation, our job is easier. 

And the process will be more efficient. The results will be more 

predictable for both lenders and borrowers. I think that your legislation can be consistent with the types of roles that we fulfill and 

will help improve the system. 

Let me say that, speaking for myself, it bothers me to see a 

wrong without a remedy, and to work within a legal system that 

is not responding to the needs of the community. As judges, all we 

have is time. It is just a question of understanding our priorities. 

And we look to you to help establish those priorities. 

Ms. SA ́ NCHEZ. Judge Morgan—— 

Judge MORGAN. Thank you. 

Ms. SA ́ NCHEZ. Regrettably, your time has expired. 

Judge MORGAN. Thank you. I am sorry. 

[The prepared statement of Judge Morgan follows:] 

PREPARED STATEMENT OF THE HONORABLE MARILYN MORGAN

Chairwoman Sa ́nchez, Ranking Member Cannon, and Members of the Subcommittee, I am honored to have the opportunity to address you on this most important subject. 

My name is Marilyn Morgan. I have served as a bankruptcy judge seated in San 

Jose, California for the past 19 years. My jurisdiction covers Silicon Valley, with its 

economic engine and high housing costs, and Salinas, the salad bowl for the nation, 

with its large population of migrant farm workers. 

In the nearly thirty years that I have worked with the Bankruptcy Code, I have 

seen many different industries go through economic downturns that have resulted 

in the filing of bankruptcies by large numbers of consumers. This is the first time 

in my memory, however, where the framework of the Bankruptcy Code provides no 

remedy for those in the most critical economic distress—those facing the imminent 

foreclosure of their homes. 

Nationwide, the home foreclosure rate doubled in the last year. And, according to 

statistics reported by RealtyTrac (an Irvine, CA real estate company), California’s 

foreclosure rate is now second only to Nevada’s. California’s foreclosure filing rate 

in August 2007 reached one in every 224 households—twice the national average. 

This is a 363 percent increase from the same month a year before. In the semi-rural 

counties where I sit (San Benito, Monterey, and Santa Cruz), there are currently 

more than 1,350 homes in the process of foreclosure, and close to 800 that were reVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
10 

cently sold in foreclosure. In Santa Clara County, where San Jose is situated, nearly 

4,000 homes are currently in foreclosure, and nearly 1,000 recently were sold in 

foreclosure. This is only the tip of the iceberg. As others have documented, the foreclosure problem is likely to get worse very soon. 

A look at the bankruptcy filings for the same community shows a significant increase. In August 2007, there were 413 bankruptcy filings in the San Jose Division—the highest number of bankruptcy filings since the Bankruptcy Abuse Protection and Consumer Protection Act went into effect in October 2005. But clearly, the 

thousands of homeowners facing foreclosure are not filing for bankruptcy protection 

because the Bankruptcy Code provides no remedy. 

In preparation for my testimony before you, I met with a dozen lawyers from Salinas who are on the front lines grappling with the issues you are considering today. 

I asked them about the willingness of home lenders to modify loan terms to enable 

distressed homeowners to save their homes from foreclosure. They told me that, in 

contrast to the ‘‘talk’’ about voluntary forbearance, the reality is that lenders have 

been unwilling to offer workouts to debtors who are losing their homes. Home lenders either don’t return phone calls at all, or they keep debtors and their attorneys 

hanging without an answer as the foreclosure sale date fast approaches. Among the 

attorneys I spoke with, not one could report a single meaningful workout with a 

home lender. 

I heard many heartbreaking stories when I talked with the attorneys. Hard-working Americans with a real emotional investment in their homes and the ‘‘American 

way of life’’ have lost hope. Because of the strong family culture in many ethnic communities, whole families are being financially tapped out in an effort to save a home 

from foreclosure. I heard of grown men crying in their attorneys’ offices. 

And, while some home foreclosures are due to purchases with 100 percent+ financing, many others are losing homes they have owned for years. Some of these 

debtors refinanced their homes in order to pay off credit cards or make home repairs. The fine-print and confusing mortgage loan provisions are beyond the comprehension of many borrowers. The attorneys I met with described many instances 

in which loan brokers had ‘‘explained away’’ homeowners’ questions about how the 

payments on a new loan would work with reassuring but misleading statements 

that any payment or interest rate increases noted on the paperwork would be avoided in the future. 

Every week, I hold a court calendar where lenders seek authority to proceed with 

foreclosures. This calendar historically has been actively contested, with lawyers 

and their clients going through the emotional experience of fighting to save the family home and come up with a plan to cure a default. Now, however, ninety percent 

of the motions to foreclose go unopposed by the debtors, because there is no remedy 

available in my court and no hope for the homeowners. Too many homeowners find 

that even if they could cure the default, they can’t afford the terms of the loan going 

forward because of the steep increase in the interest rate or other changes in the 

terms of the loan. 

One such case involved an elderly couple who were persuaded to refinance the 

residence they had owned for many years in order to replace all their windows— 

a not uncommon situation affecting older homeowners who have been subjected to 

aggressive marketing pitches. The thousands of dollars for windows and high origination fees significantly increased their mortgage. To the homeowners, it looked like 

a very good deal because their monthly payments even went down a little bit. What 

they didn’t understand was that the decreased payments were based on negative 

amortization, resulting in the mortgage actually increasing rather than being paid 

down over time. In order to just keep even with the interest, the monthly payment 

was almost twice the negatively amortized payment—and well beyond their financial capability. With falling home values, they cannot refinance their home. Because 

of the current bar in Chapter 13 to the restructuring of home mortgages, this couple 

has no remedy to prevent the loss of their home. 

Congress is in the position to alter this reality. You can do so with a narrowly 

targeted change to the Bankruptcy Code that will help families avoid foreclosure. 

As others have previously pointed out to this Subcommittee, under the Bankruptcy Code a mortgage on the debtor’s residence is the only debt that the bankruptcy courts cannot modify, and the home is the only asset that cannot be protected in this way. The Bankruptcy Code does provide relief for those whose loans 

on investment properties or second homes have gotten them into financial trouble, 

but this relief does not extend to the working and middle-class families who are 

seeking to protect their residences. 

The mortgage market today is very different than it was in 1978, when this provision was inserted in the Bankruptcy Code. Throughout the 1970s and early 1980s, 

fixed interest rate loans with relatively low loan-to-value ratios were the rule. SubVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
11 

prime lending has increased significantly in recent years, and today’s mortgage market is dominated by so-called ‘‘exploding’’ ARMs, where monthly payment increases 

can double within a year or two, even as interest rates in the overall economy remain constant. These loans have left many borrowers with payments they cannot 

afford and mortgages that exceed the value of their homes. 

Without being able to restructure these debts, borrowers cannot save their homes 

and get back on their feet financially. If Congress addresses this serious problem 

by enacting legislation to permit Chapter 13 debtors to modify mortgages on their 

primary residence, many thousands of homeowners throughout the nation may be 

able to avoid the loss of their homes. It is my experience that a home is the largest 

and most important asset a family has, and the mortgage loan is the family’s largest 

single debt. The exclusion of the principal residence from modification prevents 

bankruptcy protection from reaching where it is needed most. 

One question I have to ask myself is what the impact of the proposed changes 

will be on the courts. Clearly, there are a lot of abusive loans in my community and 

if Congress enacts this legislation, there will be a lot of work to be done. On the 

other hand, bankruptcy judges are trained to value property and to determine appropriate interest rates. This is what we do. Implementing the proposed legislation 

will be consistent with the scope of our current duties. And, if clear standards are 

provided in the legislation, our job will be easier, the process more efficient, and the 

results more predictable for both lenders and borrowers. 

Speaking for myself, it bothers me to see a wrong without a remedy and to work 

within a legal system that is not responding to the needs of the community. As 

judges, all we have is time. It’s just a question of understanding our priorities, and 

we look to you to establish those. 

In closing, let me say that I appreciate the opportunity to testify before you today. 

I am happy to answer any questions you may have. 

Ms. SA ́ NCHEZ. It goes very quickly. Thank you for your testimony. 

At this time, I would like to invite Mr. Bartlett to present his 

testimony. 

TESTIMONY OF THE HONORABLE STEVE BARTLETT, 

THE FINANCIAL SERVICES ROUNDTABLE, WASHINGTON, DC 

Mr. BARTLETT. Madame Chair, and Ranking Member Cannon, 

and Members of the Subcommittee, my name is Steve Bartlett. I 

am president of Financial Services Roundtable, which represents 

about 100 companies that have 65 percent of the residential mortgages that are made in this country. 

The topic of the hearing today, it seems to me, is not about mere 

technical points of bankruptcy law. In reality, I think that this 

hearing is about whether Congress would consider converting secured debt into unsecured debt through well-intentioned changes, 

but I think disruptive changes, in the bankruptcy process. 

Such an action would not only not help homeowners, but would 

in fact make things much worse for today’s homeowners and, more 

importantly, for millions of future borrowers, who could be frozen 

out of the opportunity to buy homes themselves. Those with less 

than perfect credit would be priced out of home ownership. And 

even those with perfect credit would pay higher rates. 

Let me hasten to say that I do appreciate the good intentions of 

the Chair and Members of the Subcommittee. I realize that this is 

a difficult time we are experiencing. And there is a tendency to 

want to do something. But unfortunately, opening the bankruptcy 

law to convert secured debt to unsecured debt would do more harm 

than good. 

Now, the good news is that there is some good news on the home 

mortgage front, although admittedly it doesn’t always feel like it. 

Beginning in early summer of 2007, our lenders began conVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
12 

centrated efforts to call, to reach out, to call every single borrower 

in the subprime mortgage prior to a reset, and to help borrowers 

and to modify those loans on an unprecedented scale. Now, this is 

the end of September. And that began to be happening in an aggressive way in June. 

Also, chapter 13 is working to save homes. It has been estimated 

that chapter 13 is successful in stopping foreclosures in some 97 

percent of the cases. And that is with the current law. 

So my testimony today will focus on five items. First, I wanted 

to share with you affirmative steps that lenders are taking at this 

time to contact borrowers and modify home mortgages. Second, I 

will describe an industry initiative called HOPE. I actually brought 

the chart that has provided the opportunity for free counseling to 

over 120,000 homeowners so far—about half of those with significant outcomes being able to keep their homes. 

Third, I will discuss developments in the securitization industry 

that also brings some good news. Again, recent developments—and 

I have entered some of those into the record—to provide some 

needed flexibility to modify the home mortgages. Fourth, some evidence that indicates that chapter 13 is in its current form is a very 

successful law. And last, I will address some of the specific bankruptcy proposals in the recently introduced legislation. 

Madame Chair, let me state that I have 5 minutes to do all that. 

So most of that will be in my written testimony, which is submitted 

for the record. 

Ms. SA ́ NCHEZ. Certainly. 

Mr. BARTLETT. Let me start with Roundtable member companies. 

I will tell you today that every single company that I represent— 

there are some 65 percent of the market—are actively working to 

contact their borrowers, particularly with those facing adjustable 

rate mortgages, resets. 

We are calling every single subprime borrower, every single one, 

writing them letters. Some of our companies are actually going to 

their—door to door, if they can’t reach them, to try to reach those 

borrowers before the reset. Some of our companies are starting 6 

months before the reset. And they all start 60 days before the 

reset. 

And they are offering forbearance. They are offering loan modification. And they are offering to work with the borrower in some 

way to try to modify to meet the current income. It doesn’t always 

work, because foreclosures and inability to make your payment is 

due to a lot of factors. But it is working in about half of the cases 

of the people that we can reach. One of my messages today is to 

everyone that you talk with, please invite them to contact their 

lender or contact our independent counselors; because the worse solution is a foreclosure. And it can be prevented in virtually every 

single case. 

I do take note of Judge Morgan’s testimony, meeting with a 

group of attorneys. And let me state that some of that is perhaps 

dated information. Some of it is because of the nature of people 

that have then stopped talking with their lenders or never did. And 

they reached their attorneys. But I do offer, to any of those attorneys or others, to call me directly, to call our organization, to call 

this number. And we will work with them. 

13 

For those borrowers who are unable to make their mortgage payments, and where refinancing is not an option, lenders have adopted loss mitigation efforts to help them avoid foreclosure in every 

single case, to include forbearance agreements, loan modifications, 

enhanced counseling programs, reduced payment amounts, lowering interest rates, and extending the terms of the loans to 

subprime borrowers. 

Madame Chair, I will submit the balance of my testimony for the 

record and be prepared for questions on any of the testimony. 

Thank you. 

[The prepared statement of Mr. Bartlett follows:] 

PREPARED STATEMENT OF THE HONORABLE STEVE BARTLETT

Good morning Madam Chair, Congressman Cannon and Members of the Subcommittee. I am Steve Bartlett, President and CEO of The Financial Services 

Roundtable. I appreciate the opportunity to testify before the Subcommittee today. 

The topic of this hearing is not about mere technical points of bankruptcy law. 

In reality, this hearing is about whether Congress will consider converting secured 

debt into unsecured debt through changes in the bankruptcy process. Such an action 

would not only NOT help homeowners, but would in fact make things much worse 

both for today’s homeowners, but, more importantly, for future borrowers. Those 

with less than perfect credit would be priced out of homeownership, and even those 

with perfect credit would pay higher rates. 

Let me hasten to say I do appreciate the good intentions of the Chair and members of the Subcommittee. I realize that with the difficult time we are experiencing, 

there is a tendency to want to do something. Unfortunately, opening the bankruptcy 

law to convert secured debt to unsecured does a lot more harm than good. 

The good news is there is good news on the home mortgage front. Companies are 

reaching out to help borrowers in trouble on an unprecedented scale. And Chapter 

13 is working to save homes. According to one prominent bankruptcy practitioner 

who represents homeowners, Chapter 13 is successful in stopping foreclosures in 

97% of cases. This means Chapter 13 is highly successful. I am reminded of the old 

adage, ‘‘if it isn’t broken, don’t fix it.’’ 

My testimony today will focus on five items. First, I will discuss affirmative steps 

lenders are taking at this time to contact borrowers facing interest rate resets. Next, 

I will describe an industry initiative called HOPE that has provided the opportunity 

for free counseling to over 120,000 homeowners, often with significant successful 

outcomes. Third, I will discuss developments in the securitization industry that will 

create much-needed flexibility to modify mortgage loans. Fourth, I will simply cite 

some evidence that indicate Chapter 13 in its current form is a very successful program which should be continued. And finally, I will address some of the specific 

bankruptcy proposals in the recently-introduced legislation, HR 3609. 

The Roundtable, through our Housing Policy Council which represents over 65 

percent of originated mortgages in the United States, has not been sitting idly by 

as some borrowers have begun to face difficulties. We have been working to develop 

proactive strategies to prevent foreclosures. We believe that no one wins from a foreclosure. 

There is not much positive in the press about subprime mortgages and foreclosures. Hopefully, the Fed’s recent decision to cut interest rates may eventually 

lessen the credit crunch and help homeowners facing interest rate resets later this 

year. But I would like to share some more immediate good news. 

Because Roundtable member companies, and all responsible lenders, want customers to be successful, major national lenders and servicers are actively working 

to contact their borrowers, particularly those facing adjustable rate mortgage resets. 

In addition, we are helping our customers through a national partnership with 

NeighborWorks(r) America and the Homeownership Preservation Foundation. It is 

estimated that about 50 percent of homeowners facing foreclosure never contact 

their lender. Our members are trying to overcome that challenge through active efforts to reach out to their borrowers. Our members are aggressively adopting new 

programs and products to address the specific difficulties subprime borrowers may 

have, with a particular focus on those with adjustable rate mortgages in this challenging interest rate environment and the slowing housing market. 

Our members are taking action to offer options before a borrower is in default 

that are designed to ensure that borrowers are in the best possible position to anVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
14 

1 As of September 2007, the national partners of this program are: American General Financial Services, a member of AIG, Inc.; Bank of America; Barrett Burke LLP; Citigroup; Countrywide Home Loans; EMC Mortgage; Fannie Mae; Freddie Mac; GE Money; GMAC ResCap; Housing Policy Council; HSBC—North America; JPMorgan Chase; LaSalle Bank; Mortgage Bankers 

Association; National City Mortgage Co.; Ocwen Loan Servicing, LLC; Option One Mortgage; 

State Farm Insurance; SunTrust Banks, Inc.; Washington Mutual; and Wells Fargo Home Mortgage. 

ticipate and manage the challenges they may face with upcoming payment adjustments. 

These actions include proactively contacting borrowers through a variety of channels—direct mail, email, interactive websites, inbound and outbound calling up to 

six months in advance of rate adjustments—to let them know of affordable refinance 

opportunities or of mutually agreeable payment plans that will keep borrowers in 

their homes. 

For those borrowers who are unable to make their mortgage payments and where 

refinancing is not an option, lenders have adopted loss mitigation efforts to help 

them avoid foreclosure. These efforts include forbearance agreements of varying 

lengths (up to 12 months in some cases), loan modifications, enhanced counseling 

programs and increased staffing to assist customers. With regard to loan modifications, lenders are reducing payment amounts, lowering interest rates and/or extending the terms of the loans held by subprime borrowers. 

For those borrowers who are reluctant to contact their lender or are just not 

aware of the options open to them, industry participants, led by the member companies of the Roundtable’s Housing Policy Council, have formed a national foreclosure 

prevention partnership with NeighborWorks(r) America and the Homeownership 

Preservation Foundation, to reach out to these homeowners in trouble and offering 

them help. 

This national partnership is based on the successful Chicago Homeownership 

Preservation Initiative (HOPI), an innovative partnership between the City of Chicago, the Federal Reserve Bank of Chicago, the Neighborhood Housing Services of 

Chicago, the Homeownership Preservation Foundation and several lenders who 

worked together to tackle the city’s foreclosures. By all measurements, this program 

has been a success. In the year of the program, over homeowners 4,000 in the Chicago test market received counseling, over 1,300 families avoided foreclosure, and 

the program resulted in $267 million in collective savings for the City of Chicago, 

its homeowners and HOPI lender partners. We have expanded these successes on 

a national scale. 

Building on the successful Chicago HOPI program, the Housing Policy Council 

and fifteen of its member companies have partnered with Fannie Mae, Freddie Mac, 

the Mortgage Bankers Association, other lenders, and respected national non-profits, NeighborWorks America and the Homeownership Preservation Foundation, in 

a national foreclosure prevention campaign.1 All participants are united in the goal 

of helping homeowners avoid foreclosure whenever possible. Through this new and 

innovative program, our member companies are taking exceptional measures to help 

any homeowner who is experiencing a financial crisis and potential foreclosure. 

Free phone counseling is available, which can be reached by dialing the Homeownership Preservation Foundation’s hotline, 888-995-HOPE. Every counselor is an 

independent specialist in foreclosure prevention, certified by the Department of 

Housing and Urban Development. When it is appropriate, the counselor acts as an 

intermediary on behalf of the homeowner, contacting their lender and discussing options available. Free in-person counseling is also available through local 

NeighborWorks affiliates. The hotline is now available in all 50 states and Puerto 

Rico and bilingual services are available. In June 2007, the Ad Council introduced 

a new campaign promoting the Homeowners’ Hope hotline in television, radio and 

print advertisements. The tag line of the campaign is a message I cannot emphasize 

enough: if you are in financial difficulty, call the hotline for help because ‘‘nothing 

is worse than doing nothing.’’ 

In 2006, over 48,000 homeowners called the HOPE Hotline while in 2007, counselors have already fielded over 80,000 calls from at-risk homeowners, with almost 

40,000 of those completing counseling. The average daily call volume in August was 

1600. Nearly half of those counseled have avoided foreclosure either through a loan 

modification or pre-foreclosure home sale. That is, over 120,000 Americans have had 

the opportunity for free counseling and about 60,000 borrowers have been able to 

stop a foreclosure. The Homeownership Preservation Foundation is seeing some significant trends in callers from July and August that I would like to share with you: 

• More callers are reaching out earlier. 23% are less than 30 days late at the 

time of contact (up from 14% in Q1 and 21% in Q2). The earlier the borrower 

15 

reaches out, the more options available. This is a positive trend potentially 

attributable to the national Ad Council campaign. 

• More homeowners with ARM products are calling. Those with an ARM product is up to 44%, (up from 34% in Q1 and 40% in Q2). Of all the homeowners 

counseled in July and August, 31% had ARMs at 8% or higher interest rate 

(up from 24% in Q1 and 30% in Q2). 34% of those counseled have fixed rate 

products. 

• California is the state with the highest call volume, accounting for 15% of 

calls. In August, 8600 Californian homeowners called the hotline. Other 

states with high call volume include Ohio (11% of calls), Georgia (9.5% of 

calls), Florida (7.3% of calls), and New York (5.9% of calls). 

Now I want to share with you some good news in the securitization area. One of 

the most exciting developments in the field of mortgage lending has been the growth 

of mortgage-backed securities. Mortgages are now routinely pooled and sold to buyers who rely on the income stream from borrowers. This has provided for the regeneration of capital to permit lenders to make additional mortgage loans to even more 

aspiring homeowners. Because of the secondary markets, the capital markets have 

been making a much larger pool of capital for home mortgages. But if enacted, HR 

3609 could have a de-stabilizing effect on the mortgage markets, which are now begging to stabilize. 

But there was a problem. Market actors in the securitization process were not as 

well-equipped as we should have been to handle a downturn. Earlier this year, the 

Roundtable worked with the holders of mortgage-backed securities to allow for loan 

modifications for distressed customers in a way that is best for everyone. By June, 

2007, the American Securitization Forum created guidance to encourage companies 

that service mortgages which have been sold into the secondary market to modify 

loans to prevent foreclosure. Now servicers can speak for investors and permit loan 

modification. Under this guidance, servicers are permitted to reduce principal in 

some cases. I would ask consent that a June, 2007 Statement of Principles related 

to loan modifications be entered into the record. The lesson here is that mortgage 

servicers and the holders of mortgage-backed securities see the problems facing 

some American homeowners and have responded by offering flexibility and demonstrating a willingness to work with borrowers. As this Statement of Principles becomes more widely adopted in the marketplace, we should expect more and more 

homeowners with subprime mortgages to get needed relief. 

I hope all that I have described dispels the misperception that lenders actually 

want to foreclose. The exact opposite is true; responsible lenders wish to avoid foreclosure. Foreclosure is a losing proposition for all parties: the borrower, the neighborhood, and the lender. Lenders lose money in a foreclosure and they also lose a 

customer; responsible lenders want customers for life who can benefit from other 

services and products they offer. 

Chapter 13 as it currently stands is an effective government program. One prominent Chicago bankruptcy lawyer argues on his website that Chapter 13 is effective 

at staving off foreclosure for 97% of all cases. And since the 2005 reform law, the 

percentage of Chapter 13 cases has jumped to around 35–40% of all consumer cases. 

Another prominent bankruptcy attorney described Chapter 13 as a ‘‘lifeline’’ and is 

‘‘the best way to save a home.’’ And a February, 2007 study financially supported 

by the Federal Reserve Bank of Philadelphia notes that 80% of Chapter 13 filers 

have a plan confirmed by a judge, even though some portion of these debtors will 

not complete the plan for one reason or another. 

Finally, I want to address proposals to change bankruptcy law as it relates to 

mortgages. Radical, risky reforms to bankruptcy will have the devastating effect of 

increasing risk for lenders to an unacceptably high level. HR 3609 contains a provision that could have this detrimental impact. Section 3 of the bill would authorize 

bankruptcy judges to unilaterally reduce the loan amount of any mortgage and convert part of the mortgage to an unsecured status. It is important to note that this 

applies to all mortgages, even prime, fixed-rate loans that are fully current. This 

will force mortgage lenders to charge much higher interest rates for all types of 

mortgage loans. This will dry up credit for many Americans who may not be able 

to afford these higher rates. 

If courts can simply reduce the value of collateral, a mortgage loan can effectively 

become unsecured and lenders will offer interest rates that more closely resemble 

the much higher interest rates for unsecured loans. Such greatly increased costs will 

fall hardest on lower income borrowers seeking to purchase a home. And these increased costs will make it hard for young families to afford a first home. 

Allowing for wholesale, involuntary revisions to mortgage loans by bankruptcy 

judges will likely also harm the secondary market for mortgage loans. As I menVerDate Aug 31 2005 11:47 Feb 19, 2009 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 H:\WORK\COMM\092507\37978.000 HJUD1 PsN: 37978
16 

tioned earlier, the industry is working hard to create flexibility for borrowers. As 

we all know, the secondary market is a crucial source of liquidity, permitting mortgage lenders access to funds to make new loans to more Americans pursuing the 

dream of homeownership. Bankruptcy law revisions must not have the effect, even 

if unintended, of reducing liquidity that flows from the secondary market. 

Similarly, it would be highly unwise for Congress to give bankruptcy judges unlimited discretion to effectively re-amortize loans. Section 4 of HR 3609 could do just 

that by stretching payments to mortgage lenders over an even longer period of time. 

As with converting secured debt to unsecured debt, this proposal would increase 

risks, chill the secondary market and result in fewer mortgages and higher interest 

rates. Again, low and middle income Americans would be the big losers in this scenario. 

In the short term, there is a real possibility that the voluntary work-out programs 

currently being used and expanded could be disrupted if Chapter 13 were modified 

to give bankruptcy judges unlimited discretion to modify loans. After all, if a borrower—any borrower, even a solvent borrower who is current on a prime and fixedrate loan—can simply file for bankruptcy and a judge could re-write almost all aspects of the loan—as HR 3609 proposes to do—there is a greatly reduced incentive 

to work things out with a lender. 

Finally, I am truly mystified by the idea that Congress would exempt homeowners 

from counseling as a pre-condition for filing bankruptcy. As our HOPE projects 

shows, counseling can help save homes. It us therefore counterintuitive to remove 

the counseling requirement for homeowners as Section 5 of HR 3609 would do. I 

urge the Subcommittee not to deprive homeowners of the financial training and education that comes with high quality counseling. 

Madam Chair, Chapter 13 has worked well at saving homes while preserving access to mortgage credit and paying unsecured lenders after satisfying secured debt. 

I recognize that you have the best of intentions. But converting secured debt into 

unsecured debt will make things worse. With due respect, HR 3609 is a step toward 

higher interest rates and higher fees and lower rates of homeownership. We stand 

ready to discuss how Congress might help in the face of the credit crunch, but we 

are compelled to oppose changes in bankruptcy law that undermine the very foundation of low-cost secured lending. As I have stated earlier, mortgage lenders and 

servicers are working hard to help borrowers. We have a hotline with free counseling that is working. The financial services industry is looking to avoid foreclosures and create positive outcomes for both borrowers and lenders. Thank you for 

inviting me to testify. I look forward to your questions. 

17 

ATTACHMENT 


SB-1.eps
18 


SB-2.eps
19 

Ms. SA ́ NCHEZ. I appreciate your testimony, Mr. Bartlett. And 

thank you very much for staying within the 5-minute rule. 

At this time, I would invite Mr. Stein to present his testimony. 

TESTIMONY OF ERIC STEIN, ESQUIRE, PRESIDENT, CENTER 

FOR COMMUNITY SELF-HELP, DURHAM, NC, ON BEHALF OF 

THE CENTER FOR RESPONSIBLE LENDING 

Mr. STEIN. Madame Chairwoman Sa ́nchez, Ranking Member 

Cannon, Members of the Subcommittee, thank you for inviting me 

and holding this hearing. 

My day job is as a lender. I am chief operating officer of SelfHelp, which has done $5 billion worth of financing to 55,000 families across the country—primarily home ownership. Our losses 

have been less than 1 percent. I am also affiliated with Center for 

Responsible Lending, which is an affiliate of Self-Help, which is a 

non-profit research and policy organization. 

Clearly, subprime foreclosures have triggered a national crisis. 

We believe it is primarily through reckless lending that 2.2 million 

families, without a healthy intervention, lose their home to foreclosure. The decreases in property values are the greatest since the 

Great Depression. 

One hundred lenders have gone out of business. Entire neighborhoods have lost value. These 2.2 million who are going to lose their 

home, that affects everybody around them. And their wealth will 

be reduced by $265 billion. So it is not just the people affected by 

losing their home. It is all their neighbors as well. 

As a lender, our strong experience has been that people will do 

practically anything to save their home. And that is why our loan 

loss rates are so low, if the loan is a reasonable one. However, in 

today’s environment, there are simply few options for borrowers. 

Four million borrowers are in subprime exploding ARMs—as 

Judge Morgan was talking about—that are scheduled to reset. And 

what are they going to do? They are not going to be able to afford 

the payments, which are going to jump up by 40 percent. Interest 

rates are going to go from 8 percent to 12 percent. No one can afford that. 

So what are their options? They were sold these loans, because 

the lenders said oh, don’t worry about the interest rate, we will refinance you. But that option is rapidly disappearing. As property 

values fall, prepayment penalties keep them from doing it. And 

lenders go away. 

The second option would be to sell the house, which is frequently 

an option. But oftentimes it doesn’t provide enough money to pay 

back the loan. So you are left with two choices, and only two. One 

is loan modification, that Congressman Bartlett was talking about; 

and the second is foreclosure. 

Bankruptcy, one would think, would be the option of last resort 

for people, but it really is practically useless for these situations. 

While it is true that it stops foreclosure, that is only for a month 

or so, because the judge can’t modify the home debt. And that is 

the thing that is causing the financial problem. The lender can 

come in and object. And within a month, generally speaking, the 

foreclosure will proceed. So it stops it, but not for long. 

20 

And the data shows that servicers, in fact, are not modifying 

loans in substantial numbers. Moody’s had a report that was just 

issued last week where they surveyed servicers representing 80 

percent of the market and found that most of those services, only 

1 percent of the loans were modified that reset in January, April 

and July of this past year—only 1 percent. 

So if modifications aren’t happening, and there are a lot of reasons why that doesn’t happen, that leaves foreclosure. And that is 

why First American CoreLogic said that up to half of the 450,000 

families scheduled to have resets in the next 3 months will lose 

their home to foreclosure. 

There is only one solution. And that is this tweak to the Bankruptcy Code. That is the only solution. As a lender, it is not like 

the first thing that came to mind was oh, let us go change the 

Bankruptcy Code. But we went through all the alternatives 

through a process of elimination. There is nothing else. This is it. 

I think it is important to mention that we are not going back to 

the 2005 act. This goes back to 1978. 2005 was trying to move people into payment plans in chapter 13. And all we are saying is let 

us make those payment plans have some effect, because right now 

they are not effective. Investors and speculators can use this provision to have their—can have their loans modified in bankruptcy. 

Let us let middle-class homeowners have that same right. 

Bankruptcy law is like a life preserver. We are reserving it for 

the strongest swimmers, while hundreds of thousands of families 

drown. We believe that 600,000 families will have their homes 

saved if this provision is implemented. It won’t happen all at once. 

And the beauty of it is that most of them won’t even have to file 

bankruptcy, because one reason that lenders aren’t modifying is 

they are scared of being sued by different classes of investors who 

are affected differentially. And if bankruptcy is a fallback, then 

that is a good defense against the lawsuit. That will save $72.5 billion for neighbors. It is a win-win for lenders. 

What I would say—and borrowers and the economy, is that this 

is already unsecured debt we are talking about. It is unsecured 

now, because it is over the value of the house. If the lender were 

to foreclosure, they would not get the full value of the loan. They 

would only get—in fact, they get less than what we are talking 

about. We are talking about the fair market value. We should look 

at whether liquidation value is the more appropriate standard. 

But they are going to get less in foreclosure. Neighbors aren’t 

going to see their houses decline. Taxpayers won’t have to pay a 

dime. Neighbors will be helped, and the economy will be helped. It 

is a much greater risk to the economy with all these foreclosures 

than this little change that would affect only about 1 percent of 

mortgages outstanding. 

For 15 years until 1993, in four circuits, this strip-down provision 

was adopted. And there was no problem with the housing market 

at that time. All other assets classes can be modified now from 

1978 until today. And the markets work fine. And I think it will 

in this case too. 

Thank you. 

[The prepared statement of Mr. Stein follows:] 

21 

PREPARED STATEMENT OF ERIC STEIN


ES-1.eps
22 


ES-2.eps
23 


ES-3.eps
24 


ES-4.eps
25 


ES-5.eps
26 


ES-6.eps
27 


ES-7.eps
28 


ES-8.eps
29 


ES-9.eps
30 


ES-10.eps
31 


ES-11.eps
32 


ES-12.eps
33 


ES-13.eps
34 


ES-14.eps
35 


ES-15.eps
36 


ES-16.eps
37 


ES-17.eps
38 


ES-18.eps
39 


ES-19.eps
40 


ES-20.eps
41 


ES-21.eps
42 


ES-22.eps
43 


ES-23.eps
44 


ES-24.eps
45 


ES-25.eps
46 


ES-26.eps
47 

Ms. SA ́ NCHEZ. Thank you very much, Mr. Stein. I appreciate your 

testimony. And at this time, I would invite Mr. Rao to begin his 

testimony. 

TESTIMONY OF JOHN RAO, ESQUIRE, NATIONAL CONSUMER 

LAW CENTER, INC., BOSTON, MA, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS 

Mr. RAO. Madame Chair, Ranking Member Cannon and Members of the Subcommittee, thank you for inviting me to testify 

today regarding solutions to the foreclosure crisis. I testify here 

today on behalf of the low-income clients of the National Consumer 

Law Center, as well as on behalf of the National Association of 

Consumer Bankruptcy Attorneys. 

A fundamental goal of chapter 13 bankruptcy has always been to 

provide an opportunity for consumers to repay their obligations. 

Unfortunately, this has become exceedingly difficult in recent 

years, for homeowners, because our bankruptcy laws have not kept 

pace with the enormous change in the mortgage marketplace that 

has occurred since those laws were first enacted over 30 years ago. 

New nontraditional loan products have challenged the ability of 

hard-working families who have fallen on difficult times to use 

chapter 13 to save their homes. 

The most effective tool for saving homes from foreclosure, which 

Congress provided for consumers when chapter 13 was enacted, is 

the right to cure defaults. It has long played an important role, because consumers often need more than the 6 to 8 months repayment plans that many lenders have been willing to offer to get current on a default. I personally have helped many borrowers save 

their homes using the chapter 13 right to cure and have witnessed 

the incredible joy, pride and release these individuals experience 

when they are able to turn things around and to preserve their 

home ownership dream. 

Widely discussed and well-documented changes in the mortgage 

marketplace over the past 20 years have eroded the viability of the 

chapter 13 safety net for homeowners in foreclosure. There has 

been great growing concern, from those on the front lines, including 

housing counselors, legal services office, bankruptcy attorneys and 

other attorneys, who assist homeowners in foreclosure, that options 

for curing a mortgage default, whether under chapter 13 or under 

voluntary repayment plans, have become increasingly inadequate 

for helping homeowners with high-cost loans, especially with those 

loans that did not give proper consideration to the homeowners’ 

ability to pay. 

Sadly, the problems have really become more acute in recent 

years, because of the widespread use in the subprime market of 

nontraditional loan products, such as hybrid ARMs. In my written 

testimony, I provide examples of the affects of rate adjustments 

under these loans. Even under the more conservative examples I 

use, it is evident that such rates and changing payment amounts 

can cause serious affordability problems for many homeowners who 

live paycheck to paycheck and do not have the flexibility to make 

adjustments to their household expenses. 

48 

For a consumer who is in chapter 13, there is even less flexibility, because the consumer’s disposable income based on his or 

her expenses is fixed at the time the plan is confirmed and must 

be paid to the trustee to satisfy the creditors’ claims. In effect, 

every dollar the family earns is accounted for. And whatever small 

cushion they family may have in their budget will cover only minimal additional expenses. A change in mortgage payment over $500 

during the 3 to 5 years of a plan, or as much as $700 if there was 

a teaser rate in the loan, can be more than the average family 

spends on their entire food budget in a given month. 

Simply put, the traditional tools of the bankruptcy system to 

help consumers in foreclosure are no longer adequate. The right to 

cure provision does not permit the homeowners to change the timing of installment payments or the amounts. And bankruptcy 

courts are currently powerless to prevent payment increases under 

ARMs during the 3 to 5 years of a plan. 

There is a way to make chapter 13 as viable today in helping 

consumers as it was in comparative terms to when it was first enacted. It does not involve a major rewrite of our bankruptcy laws. 

In fact, the solution is already in the Bankruptcy Code for chapter 

11, 12 and 13 provisions. 

A targeted solution would involve two changes. First, permit 

mortgages on residences to be modified during a chapter 13. There 

is no longer any justification for the special protection afforded to 

home mortgage lenders added in 1978. This special protection 

should be eliminated, so working families have the same right to 

modify loans as corporate debtors have for commercial loans, and 

wealthy individuals for investment properties and family farmers 

for all kinds of loans. 

Second, permit reamortization of the modified loan. Modification 

by itself does not fully address the problem based on the current 

structure of the Code. That is because the modified secured claim 

needs to be paid during the plan. And there really needs to be a 

way to address the long-term effect of the plan. Thank you, Madame Chair. 

[The prepared statement of Mr. Rao follows:] 

49 

PREPARED STATEMENT OF JOHN RAO


JR-1.eps
50 


JR-2.eps
51 


JR-3.eps
52 


JR-4.eps
53 


JR-5.eps
54 


JR-6.eps
55 


JR-7.eps
56 


JR-8.eps
57 


JR-9.eps
58 


JR-10.eps
59 


JR-11.eps
60 


JR-12.eps
61 


JR-13.eps
62 


JR-14.eps
63 


JR-15.eps
64 


JR-16.eps
65 


JR-17.eps
66 


JR-18.eps
67 


JR-19.eps
68 


JR-20.eps
69 


JR-21.eps
70 


JR-22.eps
71 


JR-23.eps
72 

Ms. SA ́ NCHEZ. Thank you, Mr. Rao. Your time has expired. 

We will now begin our round of questioning. And I will begin by 

recognizing myself for 5 minutes. 

Judge Morgan, in your written testimony, you indicate that Congress should enact legislation to change chapter 13 of the Bankruptcy Code, so that bankruptcy courts can modify the mortgage on 

the debtor’s primary residence. What standards for implementing 

this change would make your job easier, make the process more efficient, and give more predictable results for both the lenders and 

the borrowers? 

Judge MORGAN. We need your help setting standards, so that we 

have a formula that would allow us to set interest rates, particularly, appropriately. I think that the legislation that I have seen 

does make suggestions that appear to me to be appropriate and 

would be very helpful in creating that kind of predictability, so that 

I can say to the people in the audience: It is not the judge who is 

stripping down the loan. It is Congress that has determined that 

this is the appropriate standard to use. 

So in all honesty, that would be the approach that I would take. 

And I would hope that you would give us very firm standards. 

Ms. SA ́ NCHEZ. Thank you. If bankruptcy judges are given the authority to order easier terms for borrowers, should borrowers who 

were subject to predatory lending be treated differently than those 

borrowers who knowingly entered into those risky mortgage agreements? 

Judge MORGAN. Okay. One thing that you all probably need to 

be reminded of is the fact that there is a good faith standard for 

chapter 13. And so I wouldn’t expect that we would see people filing cases that were not acting in good faith. Moreover, there are 

some very stringent rules for chapter 13 that would be applicable 

to whoever is filing. And it is the kind of thing that people wouldn’t 

voluntarily want to subject themselves to. 

Ms. SA ́ NCHEZ. Great. I thank you for your answers. 

Mr. Bartlett, the current provisions of chapter 13 allow borrowers who are wealthy enough to own two homes or speculators 

whose investments have gone bad to obtain relief from the mortgages on their vacation or investment homes. Yet the Bankruptcy 

Code prohibits chapter 13 debtors from modifying their home mortgage for their primary residence. 

Do you think it is fair that, under current law, owners of vacation or investment homes are entitled to special protections that 

are not available to mostly low-wealth and middle-class families 

that own only a primary residence? 

Mr. BARTLETT. Good question, Madame Chair. I don’t think it is 

right that security for vacation homes or second homes should be 

also exempted and then allow a judge to withdraw the security or 

alter the security in any way. Congress chose to do that some years 

ago. 

I would point out that the result of that is that vacation home 

mortgages are harder to get. They have tougher conditions. And 

the rates are higher. So that is one of the reasons that they cost 

more, and they are harder to get, is because a bankruptcy can put 

the security aside. The same would happen in the primary market, 

if we eliminated secured debt. 

73 

Ms. SA ́ NCHEZ. But do you agree that it seems fundamentally unfair not to allow people—— 

Mr. BARTLETT. I think it is unfair. And I think it also is disruptive to the market. And if the Committee wished to eliminate the 

ability of a bankruptcy court to set aside the security for a primary 

residence, that would be a good thing to do. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Stein, it has been argued that, if a mortgage loan can be 

modified or rendered unsecure during bankruptcy, it will be far 

more difficult to originate or sell mortgages in the secondary market. As a result, it has often been argued that the cost of mortgages 

would have to increase to reflect this additional risk. How would 

you respond to that argument? 

Mr. STEIN. I honestly don’t understand how it would hurt the 

market, because what we are talking about are borrowers how are 

going to face foreclosure if they don’t do bankruptcy. As Judge Morgan said, why would somebody subject themselves to the strict expenditure requirements if they could otherwise pay their mortgage 

without it? 

So lenders are going to get hurt worse, because they are going 

to get foreclosure value. And secondly, other property values are 

going to decrease with foreclosure, if people stay in the homes and 

the property be kept up. Thirdly, we have experience from that. So 

what I am saying is I don’t see a secondary market problem. From 

1978 to 1993, there was no problem in the 4th Circuit that allowed 

strip-downs at that time. 

And I don’t see—I have never heard the pricing of vacation 

homes debt or investment property is to be affected by the bankruptcy change. I think it has more to do with the risk inherent in 

someone’s non-primary residence. And finally, all other secured 

debts have vital markets now. And finally, we are only talking 

about 1 percent of the total loans. So I just do not see a secondary 

market impact to this. 

Ms. SA ́ NCHEZ. Great. I appreciate that. And last question, which 

I am going to get in under time. Opponents of Government intervention into the mortgage crisis have argued that borrowers and 

lenders should be penalized for entering into these risky mortgage 

agreements. How would you respond to that argument? 

Ms. SA ́ NCHEZ. Well, I think that Chairman Greenspan just said 

in Newsweek that most mortgages were sold and not bought recently. If I had to decide, okay, I want a loan that the interest rate 

will skyrocket in 2 years, I can’t get out of it for 2 years, because 

of a prepayment penalty. These loans were sold and not bought. 

Everybody trusts somebody when they get a mortgage. When I got 

a mortgage out of law school, I trusted the person who was giving 

it to me, because I didn’t understand it. These people just trusted 

the wrong people. 

And the final point I would make is that we are not just talking 

about the borrowers, we are talking about all their neighbors. If 

there are vacant boarded-up houses on your block, you are going 

to be in a lot of trouble in your house. 

Ms. SA ́ NCHEZ. Thank you. 

My time has expired. I will recognize our distinguished Ranking 

Member, Mr. Cannon, for his 5 minutes of questions. 

74 

Mr. CANNON. Thank you, Madame Chair. This is really actually 

a very, very complicated issue. And I appreciate everybody’s perspective on the panel. I just can’t help but say, Mr. Stein, that I 

never trusted a mortgage lender. But I have been in the situation 

where I could afford that, even—you know, a house is a big enough 

investment that I have gone to that extent. 

But we have a market here with a bunch of people who have 

been sold a bill of goods. I think that is really, frankly, that is in 

many, many cases the problem. And that has happened because of 

other changes in our financial markets. 

But there are a lot of questions about this bill. But let me, Judge 

Morgan, just ask you. I think the bill that we are looking at, or at 

least the one that has been introduced by Senator Durbin, allows 

the judge to reset the mortgage for 30 years, and then has guidance based upon interest rates. I think it is the published yields 

on mortgage loans, the most recently published yield, plus a premium for risk, whatever that might be. And then, frankly, I don’t 

think that premium for risk is such a concern. You are going to 

have something there. And something is better than the standard 

rate. 

But that locks a lot of money up for a very long period of time. 

In a volatile market, where you go up and down, maybe people refinance. But if interest rates go up, then a lender is stuck for up to 

30 more years. Is there a way to deal with this issue in a shorter 

time frame, say 1 year or 2 or 3-year extension, or some period, 

maybe it is 5 years, so that a person with credit problems can get 

back on his feet, continue to make payments, get credit in place 

and then go back to the credit markets to either get a new loan 

that he can afford for the long-term, or perhaps sell his house. 

And Mr. Bartlett, it seemed to me that the one thing we don’t 

want are a whole raft of repossessions and forced sales on the market that blow value away. Is there someplace where the industry, 

the lending industry can agree on a shorter term context for 

redoing mortgages? 

Judge Morgan? 

Judge MORGAN. Yes. Well, there are many ways that lenders 

structure loans. And there is a whole breadth of ways that you 

could recommend to the courts that will you look at this problem. 

On the other hand, when a lender gave the loan, it was generally 

a 30-year loan. It may have reset and moved up. But it was generally a 30-year loan. I think that if it was a 15-year loan, you 

would want the court to do the same thing as the original 15-year 

loan. 

Mr. CANNON. I think the current bill allows for the judge to set 

30 years from the time of filing. So even if it was a 15-year loan, 

I think, the way it reads, it could become a 30-year loan. 

Judge MORGAN. Okay. Actually I have seen proposed legislation 

that offered it, both from the commencement of the loan and perhaps, I don’t remember seeing it—— 

Mr. CANNON. Let us talk about a guy who walks in. As a judge, 

what do you think would work best for the whole system, including 

the debtor that is before you? Can we do it with a relatively shorter 

term, so that he has his options for a period of time? 

75 

Judge MORGAN. Representative Cannon, it is not my role to 

make policy. And so I am going to defer on that to these people 

who maybe can speak to you better. It is really just my role to enforce the law that you give me. 

Mr. CANNON. And it is a very hard thing to do, I will grant you, 

especially under these circumstances. But as a judge, if you were 

asking for the ability to do something here, and it is in the context 

of bills that have filed, which you are not responsible for. 

But I am wondering, as we talked about it from a policy point 

of view, does 5 years, or is there some period of time that would 

give you the discretion to do something, so that people could keep 

their houses, where you maintain order in the economy. We don’t 

foreclose on too many houses and give people a chance. Is that 

something that you think would solve the problem? Or do we need 

to give you 30 years of discretion? 

Judge MORGAN. No, I don’t think you need 30 years of discretion, 

necessarily. But I don’t have a crystal ball. And I really don’t feel 

qualified to answer the question for you. 

Mr. CANNON. I guess the real concern is going to be on the part 

of Mr. Bartlett and those who are supporting him. Bartlett, what 

do you think? 

Mr. BARTLETT. Congressman, first of all, I think it is true generally and specifically in this case that the other body’s proposed 

legislation is far worse that this body’s proposed legislation. But I 

am a creature of this body from history. So I will say that, on the 

foreclosure, a foreclosure is the absolute worst outcome for everyone—worst for the borrower. It is worst for the neighborhood, worst 

for the city, and worst for the lenders. 

We do everything we can to avoid that, including paying for this 

gladly, by the way, inviting independent counselors, 120,000 counseling sessions. We are now running at the rate of 1,600 a day, 

which is huge. And we will modify the loans. We will work with 

the borrower to provide a solution. Introducing bankruptcy court 

into it would stop that process or at least slow down the process. 

Mr. CANNON. Before I run out of time, if you are doing 1,600 a 

day—Madame Chair, may I ask a question? 

Ms. SA ́ NCHEZ. I will allow you to finish up your question. And I 

will allow the response. 

Mr. CANNON. That has got to be nearly everybody out there. That 

is a big portion of people that are in trouble with their mortgages. 

Mr. BARTLETT. We invite all—there are actually more, unfortunately. We are advertising. We have a national ad council campaign, if you haven’t seen it, in which the tag line is: There is nothing worse than doing nothing. So we are doing everything we can 

to invite, to bring, to cause borrowers to call us. We put them up 

with an independent counselor, a certified counselor by HUD, and 

provide a counseling session. And then we transfer them directly, 

with the counselor still on the line, to the lender. 

The difficulty has been that borrowers oftentimes don’t want to 

call. And they are embarrassed. And it is difficult to reach them. 

But once we reach them, we can avoid a foreclosure in virtually 

every case. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

76 

At this time I will recognize the gentleman from Georgia, Mr. 

Johnson, for his 5 minutes of questions. 

Mr. JOHNSON. Thank you. 

This would be directed to anyone on the panel. What forces in 

the finance industry have contributed to the current mortgage crisis? 

Mr. STEIN. I think Mr. Feeney had it right that the way that our 

mortgage market is structured, that people got paid. And they 

weren’t paid based on how the loan performed. That used to be the 

case. You would walk into your savings and loan. And the person 

who made the loan was responsible for the ultimate losses. So they 

cared whether you made your mortgage payments or not. 

But with the rise of mortgage brokers, with lenders who sell the 

loans off, with rating agencies that get paid when the securities are 

rated, with the investment banks that get paid when the mortgages are sliced and diced and securitized, and then the ultimate 

investor who may be in Europe or Asia or somewhere like that— 

every party along there gets paid and therefore succeeds, as soon 

as the loan is made, no matter how bad. 

And the only ones that bear the cost are ultimately the holders 

at the lower tranches, the investors, who are just now realizing 

what it was they invested in. I think most didn’t realize—and then 

the homeowner. And so I think that we have a mortgage system 

which has been great at bringing liquidity in. But it has not been 

good about making sure that liquidity serves the long-term purpose 

of home ownership. 

And if you think about it, a loan where the interest rate is set 

to explode after 2 years makes no sense, if you are worried about 

someone staying in a home for 30 years. 

Mr. BARTLETT. I concur with that, with both gentlemen. I think 

it has been a perfect storm. And it has not been very pretty. I do 

want to say—and this doesn’t necessarily make us all feel better— 

but remember that the subprime market was developed to increase 

the home ownership among—in the affordable market; because too 

many people had been frozen out of the home ownership for too 

long. And when I was in Congress, also mayor, I saw that too 

much. 

So 85 percent of the subprime loans are good loans. And the borrowers are paying them back and can pay them back, and will continue to. That other 15 percent is way too high. And we have got 

a problem that we have to deal with. So the causes have been a 

combination of the marketplace and making bad loans, of underwriting standards that were, at best, sloppy, bad credit decisions 

on behalf of both lenders and also borrowers, sometimes just loss 

of income though. There are traditional reasons that people can’t 

make their mortgages. Sometimes it is loss of income or medical 

emergency. 

The securities market today, in the nonconforming area, is frozen. There is no mortgage-backed securities market today. So that 

also contributes. 

We believe that, beginning in about January of this year, the underwriting standards that we submitted to regulators, and they 

adopted as guidance, has essentially established strong, good underwriting standards for good credit decisions going forward. So it 

77 

is the old ones that we are dealing with, and we are dealing with 

them—— 

Mr. JOHNSON. And these old underwriting standards, or lack 

thereof, have resulted in a crisis that confronts our economy here 

in this country, with people losing their homes, rendering secured 

assets unsecured at this point. I guess what would be the worst 

thing to happen? 

Would it be for this amendment to the Bankruptcy Act allowing 

the bankruptcy court to change the interest rates on mortgages 

that have already threatened the homeowner with foreclosure, thus 

potentially becoming unsecured. What would be worse? That kind 

of scenario or just a simple glut of mortgage company owned property that they were unable to sell in a over-glutted market, with 

homes sitting on a shelf. Which would be worse? 

Mr. BARTLETT. Fair question, Congressman. We can choose a better way, which is to let the lenders modify the loans that they are 

doing now, provide forbearance, work it through. 

Mr. JOHNSON. Well, I mean sometimes, though, those lenders are 

not as aggressive about working those situations out as possible, 

because it hurts their securities that have gone down the line. 

Mr. BARTLETT. One of the things in my testimony is that beginning in July, we reached an agreement with the securities industry 

to eliminate that as a problem. But candidly, that was a problem 

up until June or July. And I put in the record, the principles that 

we got adopted. It is a complicated problem. 

My concern about this approach is that it will make the problem 

better by further freezing up the market and then denying credit 

to millions of borrowers for the next 10 years. 

Mr. JOHNSON. Well, now as I see it, you are forced with a dilemma: either have all of this inventory of unsold property that is 

unsecured and nonperforming, or to have consumers able to get out 

from under onerous and oftentimes unfair upticks in their interest 

rates that don’t bear any relationship on their ability to pay. 

Mr. BARTLETT. And we choose the second course. And we believe 

that that can be done and is being done today without removing 

our security in the bankruptcy court. 

Ms. SA ́ NCHEZ. The time of the gentleman from Georgia has expired. At this time, I would recognize the gentleman from Arizona, 

Mr. Franks, for any questions he many have. 

Mr. FRANKS. Well, thank you, Madame Chair. 

One of the challenges that occurs to me that has been at the core 

of this potential meltdown—I mean, it has impacted the country 

significantly. And if it spills over into commercial paper, I am concerned that it could have a very significant impact on their Nation’s economy. 

And as I understand, the primary challenge has been that those 

who were people that measured the borrowers’ credit, those who 

were the ones that measured the worth of the property, or that 

were the ones that estimated the property’s worth—that there was 

sort of a cross-pollenization there with some of those who were securing the loan in the first place. And that the motivation was to 

try to qualify lenders that really weren’t qualified, or to try to ascribe value to a property that was perhaps not as much as it 

78 

should have been, and also to not have the kind of meticulous scrutiny of the income of the particular borrower. 

And I am of the conviction that that which gets rewarded gets 

done. And the reward here was to do all the wrong things for the 

subprime borrower. And so I am wondering if any of you believe 

that there is any advantage or any favorable consideration of a bill 

or a policy that would separate those entities and not allow the intrinsic—I am not sure what you would call it—conflict of interest. 

I hate to use that term. It is probably at the very core of where 

we are right now. 

I mean, I saw, in the meltdown in 1986, the tax laws changed. 

And what happened was a lot of the S&Ls were heavily invested 

in commercial properties and second properties. When the tax laws 

changed, it adversely changed the status of those properties, and 

those portfolios were devalued sometimes 40 percent to 50 percent, 

which would just about break any S&L. And that was something 

Government did here. And I am wondering if Government hasn’t 

failed to make sure that we have a separation of powers, as it 

were, in the lending process. 

Ms. Morgan, I will ask you to comment on that first, if you have 

been able to divine what I am saying at all here. 

Judge MORGAN. I do understand. And with respect to regulation 

outside of my field, I don’t know that I have a suggestion. It strikes 

me that perhaps Mr. Stein is the best person to respond. 

Mr. FRANKS. Mr. Stein, I think she has got a good idea. 

Mr. STEIN. I agree with you that a large problem has been that 

the incentive’s not been aligned between the person making the 

loan and the person receiving the loan. And I think that that is a 

problem. I mean, I think in the Financial Services Committee, they 

are talking about duties that originators would have to the borrower that currently don’t exist. I mean, a mortgage broker has no 

duty to put the borrower in the best loan, or to give them even a 

good loan—none at all. And so I think that that should be looked 

at. And I think that is a significant cause of the current crisis. 

Mr. RAO. Congressman, can I also add that one of the—in addition to the questions you asked about conflict of interest, there is 

also the question of the current situation in which these loans are 

transferred to different entities, and they are securitized. And I 

think one thing, a step, that would help is to make sure that all 

of the parties that are involved in the transaction, at all ends, are 

responsible for the bad acts of the originating lender. 

Mr. FRANKS. I am glad you were able to put it better than I was. 

But I think in the bottom line, that is what happened. Those that 

were securing these loans or procuring them, as it were, were not 

doing it for themselves. They were the middle person that really 

didn’t care what happened to either the borrower or the lender. 

And when you have a large resale of these loans that are packaged 

and then sold off to institutions and ultimately backed up, perhaps 

by large measure commercial paper down the road, think that that 

is the challenge. 

So I guess my last question here is this. Do you think we have 

seen the end of this? I mean, with Government having to essentially subsidize and back up this process to try to let the industry 

stabilize itself or—I should say not just the industry, but the whole 

79 

process stabilize itself—it seems to me this has some pretty significant future implications. And I am wondering what your own predictions are, and what we can do while there is still time, if it is 

possible. 

Mr. STEIN. About 4 million of these loans are still scheduled to 

reset. So we have not seen even the beginning of the problem—— 

Mr. FRANKS. About a year. 

Mr. STEIN. A lot of—for the next year and a half, I would say. 

Mr. FRANKS. Pretty frightening. 

Mr. BARTLETT. Madame Chair, if I could take 30 seconds. 

Ms. SA ́ NCHEZ. Certainly. 

Mr. BARTLETT. The pipeline will continue until mid-to third quarter of 2008. And that is a real problem. That is why we are calling 

every single borrower without exception to try to reset the loans. 

After that, though, the pipeline is not getting fuller. The national 

standards, the strong underwriting standards, are now in place. 

And so we are not adding to the problem from here. So the problem 

will stay about where it is, maybe get worse for the next year. And 

then it will start to work its way out. 

Ms. SA ́ NCHEZ. The time of the gentleman—— 

Mr. FRANKS. Madame Chair, is there anyone on the panel that 

suggests legislation to change this cross-pollenization I talked 

about? 

Ms. SA ́ NCHEZ. Not to my knowledge. The time of the gentleman 

has expired. I understand that Judge Morgan has a plane that she 

must catch. So I will thank and excuse her. 

Good luck in catching that flight. 

And we will continue with our round of questioning. 

Again, thank you for your testimony. And safe travel. 

Judge MORGAN. Thank you. 

Ms. SA ́ NCHEZ. I know that flight well. 

At this time, I would like to recognize Ms. Lofgren for her 5 minutes of questions. 

Ms. LOFGREN. Thank you. 

And I guess I will see you at home, Judge Morgan. I will ask my 

question of you at home relative to the statute and the exigent circumstances. It surprises me that courts—I am inclined to think we 

need to change the Act, the 1978 Act. But pending foreclosure not 

being a sufficient exigent circumstance to merit deferral of the 

counseling requirement, does the bench have the right under the 

current law to find a foreclosure to be an exigent circumstance 

under the current act? Or do we really need to change the law on 

that as well do you think? 

Judge MORGAN. We are really only able to avoid counseling in 

very, very limited circumstances. It is much stricter than simply 

just a foreclosure. 

Ms. LOFGREN. So we need to address that. 

Judge MORGAN. This is an area that I think is somewhat noncontroversial. I don’t know that even Mr. Bartlett would disagree 

with—— 

Ms. LOFGREN. Well, thank you very much. 

Judge MORGAN. Okay. Thank you so much. 

Ms. LOFGREN. I have some questions for the other witnesses. I 

was actually thinking about—you know, it is interesting, I actually 

80 

worked on the 1978 Act. Don Edwards, then the chair of the what 

was called Subcommittee 4 that had jurisdiction over bankruptcy, 

and Allan A. Parker, who was the general counsel—and I actually 

e-mailed Allan as I was sitting here. And I think why did we do 

this? You know? I can’t recall what the rationale was in 1978. Certainly there was not a lot of discussion that I remember on how 

to preclude mortgages from reorganizations. 

And I think it may have been that the whole market was so different. But it seems to me a mistake on several levels to not 

change the law. Number one, just equitable issues. Number two— 

I guess this is a question. There has been a concern expressed, and 

I think we need to be mindful of the impact of whatever we do on 

liquidity and the ability to affect the market. 

But it seems to me, in most States—in, for example, California— 

we are an anti-deficiency State. And so if somebody—you just walk 

away from that mortgage, and what we have got now in California 

are homes that are now valued more than the market. And so you 

have got banks ending up with this, they are eating it anyhow. It 

is a loss for the banks. But it is also a loss for the individual. So 

I don’t see how the ability to restructure is actually going to be 

worse than the current situation. That is question number one. 

And question number two, I guess, really is, does anybody else 

remember what the 1978 Act rationale was? I have been searching 

the memory bank. But I am not coming up with it. So whoever can 

answer those—— 

Mr. STEIN. Congresswoman, I wonder if I can address those. On 

the first issue, I agree with you completely that I think that the 

proposal to modify the chapter 13 provisions in the way that we 

suggest really goes to the very heart of loss mitigation policy, 

which the lending community has embraced at this point. It really 

would turn a nonperforming loan into a profitable asset and would 

preserve for lenders much of the value of the original obligation. So 

I think you are absolutely right, especially in States like California, 

where the option for the lender is that it really is just an asset that 

is only good for its liquidation value. This actually would return 

more than that. 

As far as the reasoning for the 1978 addition for the protection 

for mortgage lenders, very little actual direct legislative history. In 

my testimony, I included a decision which goes through, looks at 

very carefully. The only thing I would say is that it was a time 

when interest rates were going up. 

Ms. LOFGREN. Well, maybe what I will do is, when Allan Parker 

e-mails me back, I will share the answer with the Committee. And 

I would just like to—as I have listened—I mean, we have got a 

very significant problem on our hands as a country. And I think 

it is important that we act. I recall my grandparents in the Great 

Depression had a little house that they built. And every house on 

the block was going to be lost. And the banks went and said if you 

could just pay the interest, they wouldn’t take the house, because 

they didn’t want any more houses. 

You can’t really do that now, because of the securitization of 

these mortgage instruments. And I think, in some ways, the bankruptcy courts could fill in for what the banks themselves did in the 

Great Depression in this country. So I see the light is on, and my 

81 

time is up. And I haven’t had a chance to let everyone answer. But 

perhaps we can get the answers in writing. I don’t want to abuse 

the time. 

Ms. SA ́ NCHEZ. Thank you. 

The time of the gentle lady has expired. At this time, I would 

like to recognize one of the original co-sponsors of the proposed legislation and the very distinguished Member from North Carolina, 

Mr. Watt, for his 5 minutes of questions. 

Mr. WATT. Thank you, Madame Chair. 

Mr. Lofgren actually didn’t get an answer to the question that 

I wanted to try to get an answer to, which was the historical justification for this. I have searched. And it didn’t seem to me to 

make a lot of sense. I have some theories, I guess. If you were 

quickly selling home mortgage loans in situations where 

securitizers were not regularly looking at the terms of the loans, 

I guess it makes sense. 

But other commercial loans are securitized and spun off, and 

securitizers are obligated to look more closely at those. So I think 

this is one of those situations where we need to incentivize 

securitizers to have a higher level of vigilance about what it is they 

are buying. 

I think—at least Mr. Bartlett and Mr. Stein know that I probably spend as much time on this issue between the Judiciary Committee and the Financial Services Committee as most anybody. 

And it seems to me that this is a rational request. And if there is 

a justification for not doing it permanently, we need to look at at 

least doing it temporarily. And I am not sure that I understand 

that there would be a justification for not doing it permanently. 

In fact, one of the reasons that I signed on to the Miller bill is 

that they approach that he was using seemed to me to be the most 

reasonable approach. And so I guess I would use part of my time 

to invite Mr. Bartlett to please take a closer look at the Miller bill, 

the House bill, which doesn’t have a lot of the provisions that I understand—I don’t know if Senator Durbin has even introduced his 

bill. 

It was in proposal form at the time that we were looking at it 

and had a number of provisions in it that went beyond the bill that 

I joined, with the Chair of this Subcommittee, and Congressman 

Miller and Congressman Frank and a number of other people, who 

were thinking that this was a reasonable step. So I hope that the 

lender community will take a closer look at that bill and perhaps 

give us some very constructive suggestions about how it may be implemented. 

So there seems to be a great deal of disparity between what Mr. 

Bartlett is saying about what lenders are doing, and what Mr. 

Stein and Judge Morgan were saying about willingness. Can you 

give me any backup information about what is happening in the 

market about willingness of lenders to re-look at these outstanding 

loans? What is your justification that it is not taking place, when 

Mr. Bartlett seems to be saying that it is taking place at record 

rates? 

Mr. STEIN. As I mentioned, Moody’s looked at loans serviced by 

80 percent of the industry and found only 1 percent of loans, postreset, were being modified. Counseling agency—Consumer Credit 

82 

Counseling in California—who sees 1,000 cases a month, said lenders are simply not modifying loans where the problem is the rate 

reset. If it is a temporary income problem, like a loss of job, they 

are. But if it is a rate rest which is causing the problem, he said 

lenders are uniformly not modifying loans. It is just not happening. 

Mr. WATT. I just give my personal experience. I finally did get 

a letter last week, after I had refinanced out of the loan, offering 

to reset my rate. Now, I had already taken the step to get out of 

the adjustable rate loan. So maybe it is just beginning to trigger 

in that lenders are finding this to be in their interests. 

But I hope that the lender community will look at the bill that 

we have introduced. And let us roll up our sleeves and try to solve 

this problem. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

I want to thank all of the witnesses for their testimony today. 

Without objection, Members will have 5 legislative days to submit 

any additional written questions, which we will forward to the witnesses and ask that you answer as promptly as you can, so that 

they can be made a part of the record. Without objection, the 

record will remain open for 5 legislative days for the submission of 

any other additional materials. 

Again, I want to thank everybody for their time and patience. 

This hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 5:08 p.m., the Subcommittee was adjourned.] 

Æ