```

[House Report 111-19]
[From the U.S. Government Publishing Office]

111th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     111-19

======================================================================

 
      HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY ACT OF 2009

                                _______
                                

 February 24, 2009.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

    Mr. Conyers, from the Committee on the Judiciary, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 200]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on the Judiciary, to whom was referred the bill 
(H.R. 200) to amend title 11 of the United States Code with 
respect to modification of certain mortgages on principal 
residences, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
The Amendment....................................................     2
Purpose and Summary..............................................     4
Background and Need for the Legislation..........................     5
Hearings.........................................................    24
Committee Consideration..........................................    24
Committee Votes..................................................    24
Committee Oversight Findings.....................................    29
New Budget Authority and Tax Expenditures........................    30
Congressional Budget Office Cost Estimate........................    30
Performance Goals and Objectives.................................    34
Constitutional Authority Statement...............................    34
Advisory on Earmarks.............................................    34
Section-by-Section Analysis......................................    35
Changes in Existing Law Made by the Bill, as Reported............    38
Minority Views...................................................    44

                             The Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Helping Families Save Their Homes in 
Bankruptcy Act of 2009''.

SEC. 2. ELIGIBILITY FOR RELIEF.

    Section 109 of title 11, United States Code, is amended--
            (1) by adding at the end of subsection (e) the following: 
        ``For purposes of this subsection, the computation of debts 
        shall not include the secured or unsecured portions of--
            ``(1) debts secured by the debtor's principal residence if 
        the current value of such residence is less than the secured 
        debt limit; or
            ``(2) debts secured or formerly secured by real property 
        that was the debtor's principal residence that was sold in 
        foreclosure or that the debtor surrendered to the creditor if 
        the current value of such real property is less than the 
        secured debt limit.'', and
            (2) by adding at the end of subsection (h) the following:
    ``(5) The requirements of paragraph (1) shall not apply in a case 
under chapter 13 with respect to a debtor who submits to the court a 
certification that the debtor has received notice that the holder of a 
claim secured by the debtor's principal residence may commence a 
foreclosure on the debtor's principal residence.''.

SEC. 3. PROHIBITING CLAIMS ARISING FROM VIOLATIONS OF THE TRUTH IN 
                    LENDING ACT.

    Section 502(b) of title 11, United States Code, is amended--
            (1) in paragraph (8) by striking ``or'' at the end,
            (2) in paragraph (9) by striking the period at the end and 
        inserting ``; or'', and
            (3) by adding at the end the following:
            ``(10) the claim for a loan secured by a security interest 
        in the debtor's principal residence is subject to a remedy for 
        rescission under the Truth in Lending Act notwithstanding the 
        prior entry of a foreclosure judgment, except that nothing in 
        this paragraph shall be construed to modify, impair, or 
        supersede any other right of the debtor.''.

SEC. 4. AUTHORITY TO MODIFY CERTAIN MORTGAGES.

    Section 1322 of title 11, United States Code, is amended--
            (1) in subsection (b)--
                    (A) by redesignating paragraph (11) as paragraph 
                (12),
                    (B) in paragraph (10) by striking ``and'' at the 
                end, and
                    (C) by inserting after paragraph (10) the 
                following:
            ``(11) notwithstanding paragraph (2) and otherwise 
        applicable nonbankruptcy law, with respect to a claim for a 
        loan originated before the effective date of this paragraph and 
        secured by a security interest in the debtor's principal 
        residence that is the subject of a notice that a foreclosure 
        may be commenced with respect to such loan, modify the rights 
        of the holder of such claim (and the rights of the holder of 
        any claim secured by a subordinate security interest in such 
        residence)--
                    ``(A) by providing for payment of the amount of the 
                allowed secured claim as determined under section 
                506(a)(1);
                    ``(B) if any applicable rate of interest is 
                adjustable under the terms of such security interest by 
                prohibiting, reducing, or delaying adjustments to such 
                rate of interest applicable on and after the date of 
                filing of the plan;
                    ``(C) by modifying the terms and conditions of such 
                loan--
                            ``(i) to extend the repayment period for a 
                        period that is no longer than the longer of 40 
                        years (reduced by the period for which such 
                        loan has been outstanding) or the remaining 
                        term of such loan, beginning on the date of the 
                        order for relief under this chapter; and
                            ``(ii) to provide for the payment of 
                        interest accruing after the date of the order 
                        for relief under this chapter at a fixed annual 
                        rate equal to the currently applicable average 
                        prime offer rate as of the date of the order 
                        for relief under this chapter, corresponding to 
                        the repayment term determined under the 
                        preceding paragraph, as published by the 
                        Federal Financial Institutions Examination 
                        Council in its table entitled `Average Prime 
                        Offer Rates--Fixed', plus a reasonable premium 
                        for risk; and
                    ``(D) by providing for payments of such modified 
                loan directly to the holder of the claim; and'', and
            (2) by adding at the end the following:
    ``(g) A claim may be reduced under subsection (b)(11)(A) only on 
the condition that if the debtor sells the principal residence securing 
such claim, before receiving a discharge under this chapter and 
receives net proceeds from the sale of such residence, then the debtor 
agrees to pay to such holder--
            ``(1) if such residence is sold in the 1st year occurring 
        after the effective date of the plan, 80 percent of the amount 
        of the difference between the sales price and the amount of 
        such claim (plus costs of sale and improvements), but not to 
        exceed the amount of the allowed secured claim determined as if 
        such claim had not been reduced under such subsection;
            ``(2) if such residence is sold in the 2d year occurring 
        after the effective date of the plan, 60 percent of the amount 
        of the difference between the sales price and the amount of 
        such claim (plus costs of sale and improvements), but not to 
        exceed the amount of the allowed secured claim determined as if 
        such claim had not been reduced under such subsection;
            ``(3) if such residence is sold in the 3d year occurring 
        after the effective date of the plan, 40 percent of the amount 
        of the difference between the sales price and the amount of 
        such claim (plus costs of sale and improvements), but not to 
        exceed the amount of the allowed secured claim determined as if 
        such claim had not been reduced under such subsection; and
            ``(4) if such residence is sold in the 4th year occurring 
        after the effective date of the plan, 20 percent of the amount 
        of the difference between the sales price and the amount of 
        such claim (plus costs of sale and improvements), but not to 
        exceed the amount of the allowed secured claim determined as if 
        such claim had not been reduced under such subsection.
    ``(h) With respect to a claim of the kind described in subsection 
(b)(11), the plan may not contain a modification under the authority of 
subsection (b)(11)--
            ``(1) in a case commenced under this chapter after the 
        expiration of the 15-day period beginning on the effective date 
        of this subsection, unless--
                    ``(A) the debtor certifies that the debtor 
                attempted, not less than 15 days before the 
                commencement of the case, to contact the holder of such 
                claim (or the entity collecting payments on behalf of 
                such holder) regarding modification of the loan that is 
                the subject of such claim; or
                    ``(B) a foreclosure sale is scheduled to occur on a 
                date in the 30-day period beginning on the date the 
                case is commenced; and
            ``(2) in any other case pending under this chapter, unless 
        the debtor certifies that the debtor attempted to contact the 
        holder of such claim (or the entity collecting payments on 
        behalf of such holder) regarding modification of the loan that 
        is the subject of such claim, before--
                    ``(A) filing a plan under section 1321 that 
                contains a modification under the authority of 
                subsection (b)(11); or
                    ``(B) modifying a plan under section 1323 or 1329 
                to contain a modification under the authority of 
                subsection (b)(11).''.

SEC. 5. COMBATING EXCESSIVE FEES.

    Section 1322(c) of title 11, United States Code, is amended--
            (1) in paragraph (1) by striking ``and'' at the end,
            (2) in paragraph (2) by striking the period at the end and 
        inserting a semicolon, and
            (3) by adding at the end the following:
            ``(3) the debtor, the debtor's property, and property of 
        the estate are not liable for a fee, cost, or charge that is 
        incurred while the case is pending and arises from a debt that 
        is secured by the debtor's principal residence except to the 
        extent that--
                    ``(A) the holder of the claim for such debt files 
                with the court (annually or, in order to permit filing 
                consistent with clause (ii), at such more frequent 
                periodicity as the court determines necessary) notice 
                of such fee, cost, or charge before the earlier of--
                            ``(i) 1 year after such fee, cost, or 
                        charge is incurred; or
                            ``(ii) 60 days before the closing of the 
                        case; and
                    ``(B) such fee, cost, or charge--
                            ``(i) is lawful under applicable 
                        nonbankruptcy law, reasonable, and provided for 
                        in the applicable security agreement; and
                            ``(ii) is secured by property the value of 
                        which is greater than the amount of such claim, 
                        including such fee, cost, or charge;
            ``(4) the failure of a party to give notice described in 
        paragraph (3) shall be deemed a waiver of any claim for fees, 
        costs, or charges described in paragraph (3) for all purposes, 
        and any attempt to collect such fees, costs, or charges shall 
        constitute a violation of section 524(a)(2) or, if the 
        violation occurs before the date of discharge, of section 
        362(a); and
            ``(5) a plan may provide for the waiver of any prepayment 
        penalty on a claim secured by the debtor's principal 
        residence.''.

SEC. 6. CONFIRMATION OF PLAN.

    Section 1325(a) of title 11, United States Code, is amended--
            (1) in paragraph (8) by striking ``and'' at the end,
            (2) in paragraph (9) by striking the period at the end and 
        inserting a semicolon, and
            (3) by inserting after paragraph (9) the following:
            ``(10) notwithstanding subclause (I) of paragraph 
        (5)(B)(i), whenever the plan modifies a claim in accordance 
        with section 1322(b)(11), the plan provides that the holder of 
        such claim retain the lien until the later of--
                    ``(A) the payment of such holder's allowed secured 
                claim; or
                    ``(B) discharge under section 1328; and
            ``(11) whenever the plan modifies a claim in accordance 
        with section 1322(b)(11), the court finds that such 
        modification is in good faith and that the debtor did not 
        obtain the extension, renewal, or refinancing of credit that 
        gives rise to a modified claim by the debtor's material 
        misrepresentation, false pretenses, or actual fraud.''.

SEC. 7. DISCHARGE.

    Section 1328 of title 11, United States Code, is amended--
            (1) in subsection (a)--
                    (A) by inserting ``(other than payments to holders 
                of claims whose rights are modified under section 
                1322(b)(11))'' after ``paid'', and
                    (B) in paragraph (1) by inserting ``or, to the 
                extent of the unpaid portion of an allowed secured 
                claim, provided for in section 1322(b)(11)'' after 
                ``1322(b)(5)'', and
            (2) in subsection (c)(1) by inserting ``or, to the extent 
        of the unpaid portion of an allowed secured claim, provided for 
        in section 1322(b)(11)'' after ``1322(b)(5)''.

SEC. 8. RULE OF CONSTRUCTION.

     Nothing in this Act or the amendments made by this Act shall be 
construed to modify any obligation of the Federal Housing 
Administration, the Veterans Administration, or the Department of 
Agriculture under a contract that guarantees or insures the payment of 
any part of a loan secured by a security interest in a principal 
residence.

SEC. 9. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.

    (a) Effective Date.--Except as provided in subsection (b), this Act 
and the amendments made by this Act shall take effect on the date of 
the enactment of this Act.
    (b) Application of Amendments.--The amendments made by this Act 
shall apply with respect to cases commenced under title 11 of the 
United States Code before, on, or after the date of the enactment of 
this Act.

                          Purpose and Summary

    Our Nation is currently experiencing a mortgage foreclosure 
crisis unprecedented since the Great Depression. It is severely 
harming neighborhoods, communities, and the United States 
economy as a whole. Our economic recovery depends upon 
stabilizing the housing sector; and this requires more 
effective measures to stem the flood of foreclosures.
    Voluntary loan modification efforts have not been enough. 
Enabling bankruptcy courts to implement economically 
appropriate loan modifications where the parties are unwilling 
or unable to do so can have an impact on a sufficient scale and 
time frame to meaningfully address the foreclosure crisis. H.R. 
200, the ``Helping Families Save Their Homes in Bankruptcy Act 
of 2009,'' gives the bankruptcy courts this ability, 
eliminating the anomaly in current law that prohibits judicial 
modification of primary residence mortgages.

                Background and Need for the Legislation

                               BACKGROUND

The Current Foreclosure Crisis
            An Overview
    Home foreclosures today are at an all-time high, and they 
are ``poised to accelerate as the country's recession 
deepens,'' according to industry data released in December 
2008.\1\ During 2008, more than 2.3 million homes were in 
foreclosure,\2\ with one in ten Americans falling behind on 
their mortgage payments or facing foreclosure during the third 
quarter of that year.\3\ Compared to 2006, the number of 
properties in foreclosure during 2008 rose by 225 percent.\4\ 
Mortgage foreclosures during 2007 through 2008 are estimated to 
have resulted in ``a whopping $400 billion worth of defaults 
and $100 billion in losses to investors in mortgage 
securities.''\5\ The foreclosure rate is ``approaching heights 
not seen since the Great Depression.''\6\
---------------------------------------------------------------------------
    \1\Renae Merle, Mortgage Troubles Rise to Record Level, Wash. Post, 
Dec. 6, 2008 (reporting on data supplied by the Mortgage Bankers 
Association).
    \2\Press Release, RealtyTrac, Foreclosure Activity Increases 81 
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than 
2.3 Million Properties Reported (Jan. 15, 2009), at http://
www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; see also Helping 
Families Save Their Homes: The Role of Bankruptcy Law: Hearing Before 
the S. Comm. on the Judiciary, 110th Cong. (2008) (testimony of Michael 
D. Calhoun, President, Center for Responsible Lending). (``Using recent 
data from the Mortgage Bankers Association, we calculate that 
foreclosures on all types of mortgages are occurring at an annual rate 
of 2.3 million.'').
    \3\Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to 
Record, Bloomberg.com (Dec. 5, 2008), at http://www.bloomberg.com/apps/
news?pid=20601087&sid=a37uyBrX6dvY&refer=worldwide.
    \4\Press Release, RealtyTrac, Foreclosure Activity Increases 81 
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than 
2.3 Million Properties Reported (Jan. 15, 2009), at http://
www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; In 2006, there 
were 1.2 million foreclosures in the United States, representing an 
increase of 42 percent over the prior year. Nelson D. Schwartz, Can the 
Mortgage Crisis Swallow a Town?, N.Y. Times, Sept. 4, 2007
    \5\Mark Zandi, Op-ed, The Mortgage Mess, Boston Globe, July 22, 
2007. Similarly, the Center for Responsible Lending, estimated that 20 
percent of subprime home loans made between 2005 and 2006 could end in 
foreclosure. Geraldine Fabrikant, After Foreclosure, a Big Tax Bill 
From the I.R.S., N.Y. Times, Aug. 20, 2007. In 2007, up to 2 million 
households were at risk of losing their homes through foreclosure. See, 
e.g., Steve Lohr, Loan by Loan, the Making of a Credit Squeeze, N.Y. 
Times, Aug. 19, 2007, at 1 Bus. Sec.; Evolution of an Economic Crisis? 
The Subprime Lending Disaster and the Threat to the Broader Economy: 
Hearing Before the Joint Economic Committee, 110th Cong. (2007) 
(prepared testimony of Martin Eakes, CEO of the Center for Responsible 
Lending) (citing a range of projected foreclosures with the highest at 
1.7 million); Roger Lowenstein, Subprime Time--How Did Homeownership 
Become So Rickety, N.Y. Times Magazine, Sept. 2, 2007, at 11.
    \6\Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, 
N.Y. Times, Sept. 4, 2007.
---------------------------------------------------------------------------
    Certain parts of the Nation are experiencing this crisis 
more intensely than others. For example, more than 7 percent of 
housing units in Nevada received at least one foreclosure 
notice in 2008.\7\ Other top foreclosure States for 2008 were 
Florida, California, Colorado, Michigan, Ohio, Georgia, 
Illinois, and New Jersey.\8\ In the City of Detroit, an average 
of 126 foreclosures are occurring every day.\9\
---------------------------------------------------------------------------
    \7\Press Release, RealtyTrac, Foreclosure Activity Increases 81 
Percent in 2008--Nearly 3.2 Million Foreclosure Filings on More Than 
2.3 Million Properties Reported (Jan. 15, 2009).
    \8\Id.
    \9\Helping Families Save Their Homes in Bankruptcy Act of 2009 and 
Emergency Homeownership and Equity Protection Act: Hearing on H.R. 200 
and H.R. 225 Before the H. Comm. on the Judiciary, 111th Cong. (2009) 
(testimony of Matthew Mason, Assistant Director, UAW-GM Legal Services 
Plan).
---------------------------------------------------------------------------
    The glut of foreclosures has adversely affected new home 
sales, and has depressed home values generally. Last year, 
Federal Reserve Chairman Ben Bernanke acknowledged that 
``housing starts and new home sales have both fallen by about 
50 percent from their respective peaks.''\10\ And, as The Wall 
Street Journal reported in October 2008, ``The relentless slide 
in home prices has left nearly one in six U.S. homeowners owing 
more on a mortgage than the home is worth, raising the 
possibility of a rise in defaults--the very misfortune that 
touched off the credit crisis last year.''\11\ The Journal 
explained that more foreclosures are likely ``because it is 
hard for borrowers in financial trouble to refinance or sell 
their homes and pay off their mortgage if their debt exceeds 
the home's value.''\12\
---------------------------------------------------------------------------
    \10\Federal Reserve Chairman Ben S. Bernanke, Speech at the Women 
in Housing and Finance and Exchequer Club Joint Luncheon, Washington, 
DC (Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm; see, e.g., Brian Louis, Paulson Mortgage Plan 
Surfaces Too Late to Stem Housing Slide, Bloomberg.com (Dec. 7, 2007) 
(reporting 48 percent drop in new home sales since 2005).
    \11\James R. Hagerty & Ruth Simon, Housing Pain Gauge: Nearly 1 in 
6 Owners ``Under Water''--More Defaults and Foreclosures Are Likely as 
Borrowers with Greater Debt Than Value in Their Homes Are Put in a 
Tight Spot, Wall St. J., Oct. 8, 2008, at A5.
    \12\Id.
---------------------------------------------------------------------------
    Home values nationwide have fallen an average of 19% from 
their peak in 2006, and this ``price plunge has wiped out 
trillions of dollars in home equity.''\13\ And some predict 
that home values ``may take decades to return to the heights of 
2\1/2\ years ago.''\14\
---------------------------------------------------------------------------
    \13\Dennis Cauchon, Why Home Values May Take Decades To Recover, 
U.S.A. Today, Dec. 12, 2008, at 1A; see also Bob Willis & Shobhana 
Chandra, U.S. Economy: Home Prices Fall at Near-Depression Pace, 
Bloomberg.com (Dec. 23, 2008) (``Sales of single-family houses in the 
U.S. dropped in November [2008] by the most in two decades and resale 
prices collapsed at a pace reminiscent of the Great Depression, dashing 
hopes that the market was close to a bottom.''); Shobhana Chandra, U.S. 
Home Resales Fall; Prices Drop by Record 13.2%, Bloomberg.com (Dec. 23, 
2008); Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to 
Record, Bloomberg.com (Dec. 5, 2008) (reporting that the median home 
price in the fourth quarter of 2008 will be 19% lower from the record 
in 2006's second quarter, according to a November 24, 2008 forecast by 
Fannie Mae, the world's largest mortgage buyer).
    \14\Dennis Cauchon, Why Home Values May Take Decades To Recover--
Some See 2006 as `Lifetime' Peak in Prices, USA Today, Dec. 12, 2008, 
at 1A.
---------------------------------------------------------------------------
    As enormous as the losses to date have been, projections of 
what lies ahead appear to be even more dire.\15\ Some 
economists fear ``the tide of foreclosures'' may become ``self-
perpetuating.''\16\ As Susan Wachter, a real estate finance 
professor at the Wharton School of the University of 
Pennsylvania, explained, ``In the market that we have in front 
of us, prices decline and supply increases, driving prices down 
further. The worst case is not a recession but a housing 
depression.''\17\ She projects that ``foreclosures and tight 
credit could send home prices falling to the point that 
millions of families and thousands of banks are thrust into 
insolvency.''\18\
---------------------------------------------------------------------------
    \15\See, e.g., Vikas Bajaj, Home Prices Seem Far From Bottom, N.Y. 
Times, Oct. 16, 2008, at A1 (reporting that the ``American housing 
market . . . is far from hitting bottom'').
    \16\David M. Herszenhorn & Vikas Bajaj, Tricky Task of Offering Aid 
to Homeowners, N.Y. Times, Apr. 6, 2008.
    \17\Id.
    \18\Dennis Cauchon, Why Home Values May Take Decades To Recover, 
U.S.A. Today, Dec. 12, 2008, at 1A.
---------------------------------------------------------------------------
    Credit Suisse estimates that there may be more than eight 
million foreclosures over the next 4 years in the United 
States, accounting for 16 percent of all mortgages, including 
59 percent of all subprime mortgages and more than 11 percent 
of all other mortgages, including Alt-A, option ARMS, and even 
prime mortgages.\19\ If the Nation were to experience a severe 
recession, Credit Suisse estimates that the number could rise 
to 10.2 million foreclosures.\20\ This new forecast from Credit 
Suisse is up sharply from the two to six million foreclosure 
range cited in previous estimates from industry sources.\21\ 
And this is in addition to the 1.2 million homes estimated to 
have been already lost to foreclosure.\22\ Fannie Mae predicts 
that there may not be a turnaround until 2010, and that the 
current crisis and ``its effect on the housing market will be a 
drag on the entire U.S. economy.''\23\
---------------------------------------------------------------------------
    \19\Rod Dubitsky, et al., Foreclosure Update: over 8 million 
foreclosures expected, Credit Suisse, Fixed Income Research, Dec. 4, 
2008. In 2007, Moody's Economy.com Chief Economist Mark Zandi estimated 
that approximately 2.8 million loan defaults will occur in 2008 and 
2009, although ``[n]ot all will end in foreclosure.'' ``Of these,'' he 
stated, ``1.9 million homeowners will go through the entire foreclosure 
process and ultimately lose their homes.'' The Looming Foreclosure 
Crisis: How To Help Families Save Their Homes: Hearing Before the S. 
Comm. on the Judiciary, 110th Cong. (2007) (prepared testimony of Mark 
Zandi, Chief Economist, Moody's Economy.com).
    \20\Id.; cf. Helping Families Save Their Homes: The Role of 
Bankruptcy Law: Hearing Before the S. Comm. on the Judiciary, 110th 
Cong. (2008) (testimony of Michael D. Calhoun, President, Center for 
Responsible Lending) (estimating that 6.5 million homes, i.e., ``one in 
eight homes with outstanding mortgages, will be lost to foreclosre over 
the next 5 years,'' according to industry data).
    \21\In the spring of 2008, ``industry analysts estimated that as 
many as three million subprime mortgages could end up in foreclosure 
over the next several years.'' Edmond L. Andrews, Relief for Homeowners 
Is Given to a Relative Few, N.Y. Times, Mar. 4, 2008.
    \22\Center for Responsible Lending, Loan Foreclosures & 
Delinquencies vs. Lender Workouts, Sept. 2008.
    \23\Fannie Mae: No Home Market Rebound Till 2010, Detroit News, 
Jan. 8, 2008.
---------------------------------------------------------------------------
    Initially, the foreclosure crisis was driven by defaults on 
subprime mortgages. In 2007, analysts correctly predicted that 
the ``worst lay ahead''\24\ in that many subprime borrowers 
would face 40 percent or greater increases in their monthly 
mortgage payments once their initial `teaser' rates expire and 
their fixed interest rates reset into higher-rate variable 
rates.\25\ It is estimated that 65 percent of subprime loans 
originated in 2007 will end up in default, compared with 45 
percent of those originated in 2006.\26\
---------------------------------------------------------------------------
    \24\Evolution of an Economic Crisis? The Subprime Lending Disaster 
and the Threat to the Broader Economy: Hearing Before the Joint 
Economic Committee, 110th Cong. (2007) (prepared testimony of Martin 
Eakes, CEO of the Center for Responsible Lending); see, e.g., Op ed., 
Jack Kemp, Bringing Bankruptcy Home, L.A. Times, Jan. 18, 2008 (``It is 
clear that sub-prime loan foreclosures are only going to get worse.''); 
Edmund L. Andrews, In Washington, Measuring a Lifeline, N.Y. Times, 
Aug. 28, 2007 (```This is really just the beginning,' said Karen 
Weaver, global director for securitization research at Deutsche Bank. 
`There's a big wave of defaults coming over the next 12 to 18 
months.''').
    \25\Evolution of an Economic Crisis? The Subprime Lending Disaster 
and the Threat to the Broader Economy: Hearing Before the Joint 
Economic Committee, 110th Cong. (2007) (prepared testimony of Martin 
Eakes, CEO of the Center for Responsible Lending); see, e.g., Edmund L. 
Andrews, In Washington, Measuring a Lifeline, N.Y. Times, Aug. 28, 2007 
(``Deutsche Bank estimates that $400 billion in subprime loans are 
scheduled for rate increases of 30 percent or more by the end of 2008).
    \26\ Ruth Simon, Mortgages Made in 2007 Go Bad at Rapid Clip, +Wall 
St. J., Aug. 7, 2008.
---------------------------------------------------------------------------
    But prime mortgages originated in 2007 are also expected to 
go bad at a greater rate than those from 2006. An analysis 
prepared in August 2008 for The Wall Street Journal revealed 
that 0.91 percent of prime mortgages from 2007 were seriously 
delinquent--either in foreclosure or at least 90 days past 
due--after 12 months. The equivalent figure for 2006 prime 
mortgages was just 0.33 percent in the first year.\27\
---------------------------------------------------------------------------
    \27\Id.
---------------------------------------------------------------------------
    The spike in unemployment is certainly augmenting the 
mortgage foreclosure crisis.\28\ Last year, nearly 2.6 million 
jobs were lost, with three-quarters of these losses occurring 
in the final 4 months of the year.\29\ Job loss not only makes 
it hard for homeowners to keep up with payments on existing 
mortgages; it also makes it hard for homeowners with adjustable 
rate mortgages to refinance at an more affordable fixed 
rate.\30\
---------------------------------------------------------------------------
    \28\Stephanie Armour, Job Cuts Adding to Growing Number of Housing 
Defaults, U.S.A. Today, Dec. 15, 2008, at 1A.
    \29\Letter from Gerald M. Howard, President & Chief Executive 
Officer, National Association of Home Builders, to Members of Congress 
(Jan. 14, 2009) (on file with the Committee).
    \30\Id. (````Many people have adjustable-rate mortgages that they 
were planning on refinancing,' says Elena Rivkin Franz, a real estate 
lawyer in the San Francisco area. `Unfortunately, if you don't have a 
steady stream of income, you can't get a refinance, or at least an 
affordable one.''').
---------------------------------------------------------------------------
    The societal and economic costs of home foreclosures are 
not only devastating to the families that directly experience 
them. Foreclosures depress home values across entire 
communities. A single foreclosure ``could impose direct costs 
on local government agencies totaling more than $34,000.''\31\ 
Federal Reserve Chairman Ben Bernanke noted, ``At the level of 
the individual community, increases in foreclosed-upon and 
vacant properties tend to reduce house prices in the local 
area, affecting other homeowners and municipal tax bases.''\32\ 
As a consequence of nearby foreclosures on subprime loans, 
forty million homeowners will see their property values decline 
as by more than $350 billion.\33\ And these are just the 
effects of subprime foreclosures; foreclosures on prime and 
``Alt-A'' loans will push the losses much higher.
---------------------------------------------------------------------------
    \31\William C. Apgar et al., The Municipal Cost of Foreclosures: A 
Chicago Case Study, Homeonwership Preservation Foundation Housing 
Finance Policy Research Paper No. 2005-1, at 1 (Feb. 27, 2005).
    \32\Ben Bernanke, Federal Reserve Chairman, Remarks at the 
Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by 
Bloomberg.com, available at http://www.bloomberg.com/apps/
news?pid=20601068&sid=apeU.0IaETdM&refer=economy).
    \33\See Center for Responsible Lending, Updated Projections of 
Subprime Foreclosures in the United States and Their Impact on Home 
Values and Communities, Aug. 2008, available at http://
www.responsiblelending.org/pdfs/updated-foreclosure-and-spillover-
brief-8-18.pdf.
---------------------------------------------------------------------------
    Chairman Bernanke further noted, ``At the national level, 
the rise in expected foreclosures could add significantly to 
the inventory of vacant unsold homes--already at more than 2 
million units at the end of 2007--thereby putting further 
pressure on house prices and housing construction.''\34\ In 
fact, the National Association of Realtors estimates that 35 to 
40 percent of resold homes nationwide were distressed 
assets.\35\ And, as Moody's Economy.com Chief Economist Mark 
Zandi observed, ``All indications are that we have a long way 
to go before the housing market stabilizes.''\36\ In light of 
the tight credit market and the reluctance of Americans to 
purchase a home when they expect prices to keep falling, he 
added, ``It's about as bad a market as you can get.''\37\
---------------------------------------------------------------------------
    \34\Ben Bernanke, Chairman, Federal Reserve, Remarks at the 
Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by 
Bloomberg.com, available at http://www.bloomberg.com/apps/
news?pid=20601068&sid=apeU.0IaETdM&refer=economy).
    \35\Catherine Rampell, Housing Resales Rose 5.5% in September, N.Y. 
Times, Oct. 24, 2008, at B7.
    \36\Id.
    \37\Id.
---------------------------------------------------------------------------
    In the 18 months since the Judiciary Committee first began 
exploring the foreclosure crisis, solutions offered by the 
industry and the Federal Government have failed to address the 
problem, and may have exacerbated it. Voluntary solutions from 
the industry have fallen far short of what is necessary to 
contain the problem. The urgency of more potent government 
intervention could not be overstated. As FDIC chairman Sheila 
Bair recently testified, ``We are behind the curve. . . . We 
are falling behind. . . . [W]e need to act and we need to act 
quickly and we need to act dramatically.''\38\
---------------------------------------------------------------------------
    \38\Vikas Bajaj, U.S. Vows More Help for Homeowners, N.Y. Times, 
Oct. 24, 2008 (Chairman Bair was testifying about an FDIC proposal to 
use Federal loan guarantees to encourage servicers to voluntarily 
modify failing loans).
---------------------------------------------------------------------------
Origins of the Crisis
    Starting in the 1990's and then surging up through 2006, 
millions of subprime\39\ and nontraditional\40\ mortgages were 
issued. According to the U.S. Treasury Department, there were 
fewer than one million of these mortgages in 2000; today there 
are an estimated six million of them,\41\ at an approximate 
value of $1 trillion.\42\
---------------------------------------------------------------------------
    \39\A ``subprime mortgage'' is typically considered to be a 
security interest in the borrower's home that secures a debt for a loan 
that has an annual percentage rate that is higher than that of a 
conventional 30-year mortgage. See, e.g., H.R. 3519, the Mortgage 
Reform and Anti-Predatory Lending Act of 2007, 110th Cong. (2007).
    \40\A ``nontraditional mortgage'' is typically defined as a 
security interest in the debtor's principal residence that secures a 
debt for a loan that at any period during the term of the loan provides 
for the deferral of the payment of principal or interest by permitting 
periodic payments that do not cover the full amount of interest due or 
that cover only the interest rate. The definition does not include a 
home equity line of credit that is in a subordinate loan position or a 
reverse mortgage. Interagency Guidance on Nontraditional Mortgage 
Product Risks--Final Guidance, 71 Fed. Reg. 58609-18 (Oct. 4, 2006), at 
http://www.fdic.gov/regulations/laws/federal/2006/06noticeFINAL.html.
    \41\Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the 
NYC Subprime Lending and Foreclosure Summit, Dec. 12, 2007.
    \42\Id.
---------------------------------------------------------------------------
    As a result of these mortgages, homeownership rates ``among 
minorities increased to new highs.''\43\ The Congressional 
Research Services found, however, that subprime mortgages were 
``disproportionately used by the elderly and members of 
minority groups,'' and that there is some evidence that 
minorities who could have qualified for cheaper prime loans 
instead borrowed in the more expensive subprime market.''\44\
---------------------------------------------------------------------------
    \43\Id.
    \44\Edward Vincent Murphy, Congressional Research Report to 
Congress, Subprime Mortgages: Primer on Current Lending and Foreclosure 
Issues, RL33930, at 3 (Mar. 19, 2007).
---------------------------------------------------------------------------
    These mortgages were also often marketed to people with 
``credit scores high enough to qualify for conventional loans 
with far better terms,'' according to an analysis prepared for 
The Wall Street Journal.\45\ In 2005, the peak year of the 
subprime mortgage boom, ``borrowers with such credit scores got 
more than half--55%--of all subprime mortgages that were 
ultimately packaged into securities for sale to 
investors[.]''\46\ As The Wall Street Journal observed, ``The 
surprisingly high number of subprime loans among more credit-
worthy borrowers shows how far such mortgages have spread into 
the economy--including middle-class and wealthy communities 
where they once were scarce.''\47\
---------------------------------------------------------------------------
    \45\Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very 
Credit-Worthy, Wall. St. J., Dec. 3, 2007, at A1.
    \46\Id.
    \47\Id.
---------------------------------------------------------------------------
    Losses started in the subprime market, where the most 
common loan marketed during the past 4 years was a highly risky 
loan called a hybrid adjustable-rate mortgage (ARM), often 
known as a 2/28 or 3/27 because the interest rate is fixed for 
either two or 3 years, and then is adjustable typically every 6 
months for the balance of the 30-year term. There are three 
particularly problematic aspects of this type of loan: (1) the 
rate increases, often sharply, at the end of the initial 
period, and often without regard to whether interest rates in 
the economy stay the same or even decline; (2), lenders 
typically made these loans with the understanding that the 
borrower could not afford the rate increase, and will be 
required to refinance before the rate reset; and (3) 
refinancing before reset entails the payment of a substantial 
``prepayment'' penalty, which typically equals three to 4 
percent of the loan balance.\48\
---------------------------------------------------------------------------
    \48\Additionally, subprime lenders generally did not escrow for 
taxes and insurance as prime lenders do, which left many families 
reeling when those bills came due. This practice gives the borrower the 
impression that the payment is affordable when, in fact, there are 
significant additional costs. A study by the Home Ownership 
Preservation Initiative in Chicago found that for as many as one in 
seven low-income borrowers facing difficulty in managing their mortgage 
payments, the lack of escrow of tax and insurance payments were a 
contributing factor. Partnership Lessons and Results: Three Year Final 
Report, Home Ownership Preservation Initiative, at 31 (July 17, 2006), 
at http://www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf
---------------------------------------------------------------------------
    Federal Reserve Chairman Ben Bernanke in January 2008 noted 
that ``poor underwriting and, in some cases, fraud and abusive 
practices contributed to the high rates of delinquency that we 
are now seeing in the subprime ARM market.''\49\ He explained, 
``[T]he more fundamental reason for the sharp deterioration in 
credit quality was the flawed premise on which much subprime 
ARM lending was based: that house prices would continue to rise 
rapidly.''\50\ He continued:
---------------------------------------------------------------------------
    \49\Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women 
in Housing and Finance and Exchequer Club Joint Luncheon, Washington, 
DC (Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm
    \50\Id.

          When house prices were increasing at double-digit 
        rates, subprime ARM borrowers were able to build equity 
        in their homes during the period in which they paid a 
        (relatively) low introductory (or ``teaser'') rate on 
        their mortgages. Once sufficient equity had been 
        accumulated, borrowers were often able to refinance, 
        avoiding the increased payments associated with the 
        reset in the rate on the original mortgages. However, 
        when declining affordability finally began to take its 
        toll on the demand for homes and thus on house prices, 
        borrowers could no longer rely on home-price 
        appreciation to build equity; they were accordingly 
        unable to refinance and found themselves locked into 
        their subprime ARM contracts. Many of these borrowers 
        found it difficult to make payments at even the 
        introductory rate, much less at the higher post-
        adjustment rate. The result, as I have already noted, 
        has been rising delinquencies and foreclosures, which 
        will have adverse effects for communities and the 
        broader economy as well as for the borrowers 
        themselves.\51\
---------------------------------------------------------------------------
    \51\Id.

    It appears that many borrowers who are losing their homes 
to foreclosure could have qualified for more affordable, 
conventional loans. A study for The Wall Street Journal found 
that of the subprime loans originated in 2006 that were 
packaged into securities and sold to investors, 61 percent 
``went to people with credit scores high enough to often 
qualify for conventional [i.e., prime] loans with far better 
terms.''\52\ Financial incentives encouraged mortgage brokers 
and lenders to aggressively market highly risky exploding ARM 
loans instead of the sustainable loans for which borrowers 
qualified.\53\ As former Federal Reserve Chairman Alan 
Greenspan explained:
---------------------------------------------------------------------------
    \52\Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very 
Credit-Worthy As Housing Boomed, Industry Pushed Loans To a Broader 
Market, Wall St. J., Dec. 3, 2007, at A1.
    \53\Mortgage brokers play a key role in today's mortgage market. 
According to the Mortgage Bankers Association, mortgage brokers in 2006 
originated 45 percent of all mortgages, and 71 percent of subprime 
loans. See Mortgage Bankers Association, Research Data Notes: 
Residential Mortgage Origination Channels (Sept. 2006).

          The big demand was not so much on the part of the 
        borrowers as it was on the part of the suppliers who 
        were giving loans which really most people couldn't 
        afford. We created something which was unsustainable. 
        And it eventually broke. If it weren't for 
        securitization, the subprime loan market would have 
        been very significantly less than it is in size.\54\
---------------------------------------------------------------------------
    \54\Jon Meacham & Daniel Gross, The Oracle Reveals All--Did the Fed 
Cause the Real-Estate Bubble To Burst? Are We Entering a Recession? And 
Who Should Be Our Next President? A Candid Conversation., Newsweek, 
Sept. 24, 2007, at 32, 33. Similarly, Federal Reserve Chairman Ben 
Bernanke outlined the need for further analysis:

      The recent developments in U.S. and foreign financial 
      markets will stimulate considerable review and analysis in 
      the months and years to come. Around the world, 
      legislatures, regulators, supervisors, accounting boards, 
      central banks, and others with responsibility for oversight 
      of the financial system are already hard at work trying to 
      distill the lessons to be drawn from this experience and 
      their implications for policy. Many in the private sector, 
      including banks, credit-rating agencies, and the investment 
      community, are likewise actively reviewing and responding 
      to these developments. Some of the areas that will draw 
      scrutiny are the appropriate use of credit ratings by 
      investors, banks, and supervisors; the need for enterprise-
      wide, better-integrated risk-management techniques in large 
      financial institutions; the appropriateness of accounting 
      rules governing asset valuation and the use of off-balance-
      sheet vehicles; and weaknesses in the originate-to-
      distribute model and in the design of structured credit 
      products, among many others. In the longer term, the 
      response of the public and private sectors to this 
---------------------------------------------------------------------------
      experience should help create a stronger financial system.

Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women in 
Housing and Finance and Exchequer Club Joint Luncheon, Washington, D.C. 
(Jan. 10, 2008), at http://www.federalreserve.gov/newsevents/speech/
bernanke20080110a.htm.
Impact of the Crisis
            Impact on Home Values Nationwide
    In 2007, Mark Zandi, chief economist of Moody's 
Economy.com, correctly predicted that ``[e]xisting home prices 
may fall as much as 15 percent by 2009 from their peak'' in 
2006\55\ and that the ``fallout'' would hit nearly all of 
us.\56\ He explained:
---------------------------------------------------------------------------
    \55\Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem 
Housing Slide, Bloomberg.com (Dec. 7, 2007).
    \56\Mark Zandi, Op-ed, The Mortgage Mess, Boston Globe, July 22, 
2007.

          First, home values will sink. Loans will be tougher 
        to get, meaning fewer families will qualify for 
        mortgages. Foreclosure sales will put more properties 
        on the market at steep discounts. Less housing demand 
        and more supply add up to lower prices.
          Homeowners will find it more difficult to tap the 
        equity in their homes for cash via home-equity loans or 
        cash-out refinancing. Such lending is already fading 
        quickly.
          On the other side of the coin are investors who chose 
        the riskier flavors of the new mortgage securities and 
        now face big losses. If that sounds like someone else's 
        problem, think again. Lots of pension plans that manage 
        the savings of millions of ordinary workers and 
        retirees have invested in hedge funds in recent years. 
        Many of those funds are exposed.\57\
---------------------------------------------------------------------------
    \57\Id.

    Depressed economic conditions in an area can further 
depress the housing market there. According to the Mortgage 
Bankers Association, ``[H]eavy job losses in the Midwest states 
of Ohio, Michigan and Indiana and the collapse of previously 
booming housing markets in California, Florida, Nevada and 
Arizona'' exacerbated the foreclosure rates in these areas.\58\ 
In Michigan, for example, where several major manufacturers 
have filed for bankruptcy, unemployment rates have spiked. 
Representative John Dingell (D-MI) has noted the ``vicious 
cycle'' as homes in affected communities depreciate in value, 
are foreclosed upon, and left to decay, with little hope of 
attracting new buyers.\59\
---------------------------------------------------------------------------
    \58\Martin Crutsinger, New Mortgage Foreclosures Set Record, 
Yahoo!Finance--Associated Press, Sept. 6, 2007, at http://
www.washingtonpost.com/wp-dyn/content/article/2007/09/06/
AR2007090601677_2.html.
    \59\Erika Lovley, Mortgage Meltdown Leads to Lost Jobs in Arizona, 
Politico, Sept. 5, 2007, at 12.
---------------------------------------------------------------------------
            Impact on Communities
    Not only is foreclosure in neither the homeowner's nor the 
lender's interest; it also adversely affects entire 
neighborhoods and communities. As Treasury Secretary Paulson 
noted, ``Foreclosure is to no one's benefit.''\60\ He 
acknowledged, for example, ``estimates that mortgage investors 
lose 40 to 50 percent on their investment if it goes into 
foreclosure.''\61\ The damage of foreclosure, he noted, is 
``not limited only to those who lose their homes'' as ``[homes 
in foreclosure can pose costs for whole neighborhoods, as crime 
goes up and property values decline.''\62\ Another Treasury 
Department official observed, ``Concentrated foreclosures drive 
down property values and undermine the financial stability of 
families, communities and ultimately our economy.''\63\ 
Economists and the mortgage lending industry agree.\64\
---------------------------------------------------------------------------
    \60\Paul Krugman, Op-ed, Henry Paulson's Priorities, N.Y. Times, 
Dec. 10, 2007 (quoting U.S. Treasury Secretary Henry Paulson).
    \61\Id.
    \62\Henry Paulson, Secretary, U.S. Treasury, Remarks on Actions 
Taken and Actions Needed in U.S. Mortgage Markets at the Office of 
Thrift Supervision National Housing Forum (Dec. 3, 2007).
    \63\Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the 
NYC Subprime Lending and Foreclosure Summit, Dec. 12, 2007.
    \64\See, e.g., Carolyn Said, Modified Mortgages: Lenders Talking, 
Then Balking, San Francisco Chronicle, Sept. 13, 2007 (reporting that a 
Mortgage Bankers Association representative acknowledged that a 
``foreclosure can cost the lender from 20 to 40 percent of the loan 
balance''); Mark Zandi, A Step Behind, Moody's Economy.com, Dec. 13, 
2007 (noting that ``[e]ven in less stressed times, homes in foreclosure 
sell at a 20% to 30% discount to prevailing market values, driving down 
surrounding house prices'').
---------------------------------------------------------------------------
    The rising incidence of foreclosures is also having broader 
societal impacts. While municipal tax revenues fall, greater 
demands for fire and police protection are presented by 
abandoned properties that become havens for arson, drug use, 
and prostitution. According to a study commissioned by the 
Homeownership Preservation Foundation of Minneapolis, various 
costs incurred by government agencies responding to 
foreclosures in Chicago and Cook County, Illinois amounted to 
$34,199 for each foreclosure.\65\
---------------------------------------------------------------------------
    \65\William C. Apgar et al., The Municipal Cost of Foreclosures: A 
Chicago Case Study, Homeonwership Preservation Foundation Housing 
Finance Policy Research Paper No. 2005-1, at 1 (Feb. 27, 2005).
---------------------------------------------------------------------------
    The City of Baltimore has filed a Federal suit against 
Wells Fargo for allegedly predatory subprime lending practices 
targeting African American residents.\66\ Among other relief, 
Baltimore is seeking damages for the increased l costs it has 
incurred for fire, police, and other services as a result of 
home mortgage foreclosures.\67\
---------------------------------------------------------------------------
    \66\Gretchen Morgenson, Baltimore Is Suing Bank Over Foreclosure 
Crisis, N.Y. Times, Jan. 8, 2008.
    \67\Id.
---------------------------------------------------------------------------
    The growing foreclosure crisis has confronted suburban law 
enforcement officials with an unfamiliar challenge: policing 
empty houses. As evictions mount and houses remain vacant for 
months or even years, these properties become havens for 
squatters, vandals, thieves, partying teenagers, and worse.\68\ 
In some areas, police officers are targeting vacant houses for 
regular patrols, using maps of foreclosed properties as guides, 
while working with community watch groups to identify trouble 
spots.
---------------------------------------------------------------------------
    \68\Jonathan Mummolo & Bill Brubaker, As Foreclosed Homes Empty, 
Crime Arrives, Wash. Post, Apr. 27, 2008, at A1.
---------------------------------------------------------------------------
    A joint study by the Georgia Institute of Technology and 
the Woodstock Institute showed that when the foreclosure rate 
increases 1 percentage point, neighborhood violent crime rises 
2.33 percent.\69\ As one of the study's researchers explained, 
``The key here is the concentration of those foreclosures at a 
neighborhood level. When you have more than one foreclosure in 
a few block area, that's when you start to think about the 
effects on property values and the effects on crime.''\70\
---------------------------------------------------------------------------
    \69\J.W. Elphinstone, Foreclosures, Vacancies and Crime--The Surge 
in Defaults on Risky Mortgages is Having a Ripple Effect in Some 
Cities, Portland Press Herald--Maine Sunday Telegram, Nov. 14, 2007.
    \70\Id.
---------------------------------------------------------------------------
    Home foreclosure has brought increased criminal activity 
into middle class neighborhoods such as the historic Westview 
neighborhood of Atlanta, Georgia, where 22 of the 85 bungalows 
in were vacant in 2007 as the result of foreclosure and 
mortgage fraud, and ``house fires, prostitution, vandals and 
burglaries'' have terrorized the remaining residents.\71\ 
Similarly, a subdivision near Sacramento, California that 
``sprouted 10,000 homes in 4 years'' now has many homes that 
``stand empty, weeds overtaking lawns, signs lining the street: 
`Bank Repo,' `For Rent,' `No trespassing--bank owned property.' 
A typical home's value has dropped from about $570,000 to the 
low $400,000's.''\72\ The remaining ``homeowners are fighting 
what typically have been considered inner city problems of 
gangs, drugs, theft and graffiti.''\73\
---------------------------------------------------------------------------
    \71\Id.
    \72\Id.
    \73\Id.
---------------------------------------------------------------------------
            Impact on Women and Minorities
    Women and minorities have been particularly impacted by the 
foreclosure crisis. The New York Times reported that for each 
of the past 4 years, more than half the foreclosures in a 
Baltimore neighborhood were homes owned primarily by women.\74\ 
Nationwide, women are 32 percent more likely to have received 
subprime loans than men, according to the Consumer Federation 
of America.\75\ African-American and Latino borrowers likewise 
appear to have been disproportionately marketed subprime 
mortgages.\76\ For instance, lending data for 2005 show that 
more than half of African-American borrowers, and four out of 
ten Latino mortgage borrowers, received loans that were higher-
cost, an indicator of subprime status.\77\
---------------------------------------------------------------------------
    \74\John Leland, Baltimore Finds Subprime Crisis Snags Women, N.Y. 
Times, Jan. 15, 2008.
    \75\Id.
    \76\Susan Schmidt & Maurice Tamman, Housing Push for Hispanics 
Spawns Wave of Foreclosures, Wall St. J., Jan. 5, 2009.
    \77\Id.
---------------------------------------------------------------------------
    Compared with their white counterparts, African American 
and Latino borrowers were more than 30 percent more likely to 
receive a higher rate on many types of loans, even after 
accounting for differences in risk, according to a 2006 report 
from the Center for Responsible Lending, a research and policy 
nonprofit.\78\ As Wade Henderson, President and Chief Executive 
Officer of the Leadership Conference on Civil Rights, observed, 
``It has long been clear to our groups that America has a 
separate and unequal lending system, and that African American, 
Latino and other minority consumers disproportionately secure 
credit from an unscrupulous and unregulated lending 
market.''\79\
---------------------------------------------------------------------------
    \78\Debbie Gruenstein et al., Unfair Lending: The Effect of Race 
and Ethnicity on the Price of Subprime Mortgages, Center for 
Responsible Lending, at 3 (May 31, 2006).
    \79\Ending Mortgage Abuse: Safe Guarding Homebuyers: Hearing Before 
the Subcomm. on Housing, Transportation, and Community Development of 
the S. Comm. on Banking, Housing, and Urban Affairs, 110th Cong. (2007) 
(testimony of Wade Henderson, President and Chief Executive Officer, 
the Leadership Conference on Civil Rights).
---------------------------------------------------------------------------
            Impact on Older Americans
    Although senior citizens have long been considered among 
the most frugal and resistant to incurring debt, changing 
economic conditions--particularly declining pension and 
investment income and rising costs for basic expenses such as 
prescription drugs, health care, and utilities--have made it 
difficult for many to make ends meet on fixed incomes. Some of 
these ``cash-poor'' but ``equity-rich'' seniors used the equity 
in their homes to help meet medical and living expenses, and in 
the process were targeted by unscrupulous subprime mortgage 
lenders. These unwary borrowers received subprime refinance 
loans with low initial teaser rates that were not properly 
underwritten. Now, as those teaser rates expire and are 
replaced with escalating higher rates, some seniors, including 
many who owned their homes outright just a few years ago, are 
now finding that they simply cannot afford to stay in their 
homes, and are facing the nightmare of foreclosure.
    Analysts at the American Association of Retired Persons 
(AARP) have found that ``Americans age 50 and over represent 
about 28 percent of all delinquencies and foreclosures in the 
current crisis.''\80\ That translates into a full 684,000 
Americans age 50 and over who were either delinquent or in 
foreclosure at the end of 2007; about 50,000 were actually in 
foreclosure or had already lost their homes. The analysis 
concludes that ``older Americans appear particularly vulnerable 
to house price declines and subprime loans.''\81\
---------------------------------------------------------------------------
    \80\AARP Public Policy Institute, ``A First Look at Older Americans 
and the Mortgage Crisis,'' Insight on the Issues (Sept. 2008).
    \81\Id.
---------------------------------------------------------------------------
    Having a subprime loan is associated with a higher 
delinquency and foreclosure rate among all age groups. 
Nevertheless, AARP states that the impact of subprime lending 
appears to be disproportionately harder on older Americans. 
Homeowners under age 50 with subprime loans are 13 times more 
likely to be in foreclosure than those with prime loans. At age 
50, the number jumps to 17 times more likely to be in 
foreclosure.\82\
---------------------------------------------------------------------------
    \82\Emily Brandon, Study: Falling Housing Prices are Jeopardizing 
Retirement Security, U.S. News & World Rep., Sept. 22, 2008.
---------------------------------------------------------------------------
    Why seniors fall into this debt trap is aptly explained in 
the following news report:

          ``All my clients tell the same story; it's almost 
        like a script,'' said Donna Dougherty, a staff attorney 
        with Queens Legal Services for the Elderly. Typically, 
        a homeowner falls behind on taxes, a credit card bill 
        or is hit with an unexpected medical bill. As a result, 
        he or she ends up on a list of homeowners in debt or 
        with a less than perfect credit score, but with 
        substantial home equity. That's when the phone calls 
        begin. ``When somebody calls out of the blue and says 
        `We'll help you so you don't lose your home,' it's 
        almost like a white knight showing up,'' says 
        Dougherty. ``Seniors are absolutely one of the key 
        targeted groups.''\83\
---------------------------------------------------------------------------
    \83\Joseph Huff-Hannon, Facing Foreclosure: Brooklyn Retiree on 
Verge of Losing Home as Subprime Lenders Target Cash-Poor Black 
Seniors, Independent, Apr. 25, 2008, at http://www.indypendent.org/
2008/04/25/facing-foreclosure/

    An analysis of more than 4,000 loans by Ameriquest Mortgage 
conducted by the Seattle Times found that one in three 
borrowers in King County, Washington was aged 50 or older and 
one in seven was 60 or older when they took out a mortgage with 
the lender.\84\ Nearly all of the borrowers already owned their 
homes. As a case in point, the Seattle Times reported on a 93-
year-old woman who ``took out a high-cost, high-interest 
mortgage against her home of more than four decades'' that went 
into foreclosure within months.\85\ It also examined the case 
of a 79-year-old janitor, who obtained ten subprime 
refinancings over 9 years after the death of her husband. As a 
result of these refinancings, the homeowner's mortgage debt 
swelled from $32,000 in 1998 to $382,000 in 2005.\86\
---------------------------------------------------------------------------
    \84\Susan Kelleher & Justin Mayo, Homeowners in Debt, Seniors Prime 
Targets of Riskiest Loans, Seattle Times, Dec. 17, 2007.
    \85\Id.
    \86\Id.
---------------------------------------------------------------------------
    Although losing a home to foreclosure is a disaster no 
matter what the homeowner's age is, it is an overwhelming 
catastrophe for older people. According to the Public Policy 
Institute, seniors ``rely on their homes both for shelter and 
as a retirement asset,'' and therefore ``[l]osing a home 
jeopardizes long-term financial security, with limited time to 
recover.''\87\ AARP reports that the problem of older 
households and foreclosures is likely to grow, as homeowners 
increasingly carry mortgage debt in their retirement years. In 
2007, 53 percent of all owners with a head of household age 50 
or older had a mortgage, up from 34 percent just two decades 
ago.\88\
---------------------------------------------------------------------------
    \87\Foreclosures Hit Older Americans; 28% of Affected Homeowners 
Are Age 50 and Up, Associated Press, Sept. 19, 2008 (quoting Susan 
Reinhard, Senior Vice President, Public Policy Institute).
    \88\William Apgar, Joint Center for Housing Studies, Harvard 
University, presentation at AARP Forum, Sept. 19, 2008.
---------------------------------------------------------------------------
            Impact on Renters
    Across the country, thousands of renters have become 
innocent victims of the foreclosure crisis. They have been 
forced to move because the owner of the property was in 
foreclosure. Security deposits have been lost, and lives turned 
upside-down, as people scramble to find a new place to live on 
short notice.
    Almost 15 million renters--40 percent of all renters 
nationwide--live in single-family homes, townhouses, condos or 
duplexes, according to U.S. Census data.\89\ While there are no 
national figures on foreclosure-related evictions, these types 
of rental properties have been vulnerable to foreclosure 
because they tend to be owned by small investors. In most 
States, when a bank forecloses on a landlord, the tenant has no 
guarantee of being allowed to stay in the property. In 
addition, neither the lender nor the landlord has any legal 
obligation to inform the tenant of the foreclosure. As a 
result, it is common for the renter to first learn of the 
foreclosure when he or she is being told to vacate the property 
within a few days or weeks.
---------------------------------------------------------------------------
    \89\Doug Guthrie, Renters caught in foreclosure meltdown, Detroit 
News, Oct. 17, 2008.
---------------------------------------------------------------------------
    Although the data are incomplete on the number of renters 
who are evicted due to foreclosure, the National Low Income 
Housing Coalition estimates that as many as 40 percent of the 
families who have or could lose their homes due to foreclosure 
are renters.\90\ These individuals are unlikely to get their 
security deposits returned, and they will also incur unforeseen 
expenses to relocate to new rental housing. And if they live 
paycheck to paycheck with no savings to rely on in emergencies, 
they are at high risk of joining the ranks of America's 
homeless.
---------------------------------------------------------------------------
    \90\Letter from Coalition to Protect Renters in the Foreclosure 
Crisis to House Speaker Nancy Pelosi et al. (Oct. 21, 2008), at http://
www.nlihc.org/doc/House-letter-on-renter-assistance-in-stimulus.pdf.
---------------------------------------------------------------------------
    As the Coalition explains, ``Foreclosure usually means 
eviction for renters. Because renters as a group have lower 
incomes than homeowners and because most renters who are 
evicted due to foreclosure never get their security deposits 
back, they face a period of housing instability at the very 
least and many are at risk of homelessness.''\91\ Catholic 
Charities USA, the Nation's largest network of social services 
agencies, concurs. It notes, ``Foreclosure is causing a 
significant increase in homelessness within our network all 
across the country.''\92\
---------------------------------------------------------------------------
    \91\Press Release, National Low Income Housing Coalition, Renters 
Make Up 45% of Households Whose Homes Are in Foreclosure in Four New 
England States (May 7, 2008), at http://www.utahhousing.org/documents/
NLIHC-Letterhead-templat-2008-good3.pdf.
    \92\Steve Brandt & Warren Wolfe, Wave of Foreclosures Hits Renters, 
Star Trib.--Minneapolis-St. Paul, Oct. 29, 2007 (quoting Jane Stensen, 
Senior Director for Human Services, Catholic Charities USA).
---------------------------------------------------------------------------
            Impact on the Financial Marketplace--Both Here and Abroad
    Turmoil in the mortgage industry has had a domino effect on 
the financial marketplace and lending community generally. 
Since 2006, at least 100 mortgage companies have halted 
operations or sought buyers.\93\ With respect to the financial 
marketplace, the Treasury Department's Under Secretary for 
Domestic Finance, in testimony before the House Financial 
Services Committee, explained:
---------------------------------------------------------------------------
    \93\Rick Green, Lehman Shuts Unit; Toll of Lenders Tops 100: 
Subprime Scorecard, Bloomberg.com, Sept. 18, 2007.

          The uncertainty regarding both the future prospects 
        of these mortgage-backed securities and the 
        methodologies the credit rating agencies used to rate 
        these securities compelled investors to reassess the 
        risk of these securities and subsequently reassess 
        price. Given the uncertainty of the underlying credit 
        and cash flows, few buyers were willing to risk their 
        capital. Valuation became extremely difficult as a no-
        bid environment seized certain segments of the market. 
        This reappraisal has spread across the credit market 
        spectrum, first affecting residential-mortgage backed 
        securities and then spreading to other asset classes, 
        and, particularly, securitized products. Spreads have 
        widened and a lack of liquidity has affected these 
        other asset classes. The financing of buy-out 
        transactions has been challenged as higher risk premia 
        resurfaced after a long period of favorable conditions. 
        Volatility has increased, from Treasury bills to the 
        stock markets.
                              ----------                              

          In early August [2007], this uncertainty began to 
        spread to the asset-backed commercial paper market, 
        typically a very liquid market. . . . Subsequently, 
        banks became increasingly concerned about their own 
        liquidity in view of the possibility that they might 
        have to provide backup for commercial paper and take 
        other assets onto their balance sheets. In response to 
        such developments, the Federal Reserve took several 
        measures to increase liquidity and promote the orderly 
        functioning of financial markets.\94\
---------------------------------------------------------------------------
    \94\Recent Events in the Credit and Mortgage Markets and Possible 
Implications for U.S. Consumers and the Global Economy: Hearing Before 
the H. Comm. on Financial Services, 110th Cong. (2007) (statement of 
Robert Steel, Treasury Department Under Secretary for Domestic 
Finance).

These measures included making additional reserves available to 
the Nation's banking system and lowering the interest discount 
rate, among other actions.\95\ The mortgage crisis has had 
international ramifications and has been blamed for causing ``a 
global credit crunch.''\96\
---------------------------------------------------------------------------
    \95\Id.
    \96\Eric Pfanner, British Mortgage Lender Is Offered Emergency 
Loan, N.Y. Times, Sept. 14, 2007.
---------------------------------------------------------------------------
    Hedge funds pool invested money to buy and sell stocks, 
bonds, and many other assets, with the prospect of yielding 
high returns, but based on risky investment strategies.\97\ 
Hedge fund investment is limited by law to the very wealthy 
``who are presumed to be capable of understanding the risks and 
bearing the losses of financial speculation.''\98\ Attracted by 
high returns, institutional investors, such as pension funds 
and university endowments, are placing more of their money in 
hedge funds.\99\ And as hedge funds invested in the risky 
subprime mortgage market,\100\ some high-profile funds incurred 
major losses, and several have filed for bankruptcy.\101\ As a 
result, ``rank-and-file workers, retirees, and others may be 
unwittingly exposed to hedge fund losses.''\102\ Thus, the 
mortgage crisis not only has had ripple effects throughout 
financial markets, but it has also undermined the economic 
security of many working-class Americans.
---------------------------------------------------------------------------
    \97\Mark Jickling, Hedge Funds: Should They Be Regulated, 
Congressional Research Service Report for Congress, at 1 (July 2, 
2007). Studies find that the mortality rate for hedge funds is about 
20% per year and that the average life span is about 3 years.
    \98\Mark Jickling & Alison A. Raab, Hedge Fund Failures, 
Congressional Research Service Report for Congress, summary (Aug. 1, 
2007). Hedge funds are open to ``accredited investors,'' defined as 
those with over $1 million in assets. Id.
    \99\Id.
    \100\Nara Der Hovanesian & Matthew Goldstein, The Mortgage Mess 
Spreads, Business Week, Mar. 7, 2007.
    \101\See, e.g., Bear Stearns Hedge Funds File for Bankruptcy, 
Associated Press, Aug. 1, 2007; Alex Markels, Taking Credit's 
Temperature--Risky Home Lonas Run a Fever, and the Market Prays It 
Doesn't Spread, U.S. News & World Report, July 23/30, 2007, at 37 
(``Several hedge funds, which used hundreds of millions of dollars in 
investor capital to borrow billions more for big bets on subprime-
backed debt, have been shut down or needed bailing out.''). For 
example, two Bear Stearns hedge funds heavily invested in bonds backed 
by home loans recently collapsed and filed for bankruptcy protection on 
July 31, 2007 under chapter 15 of the Bankruptcy Code. Bear Stearns 
Hedge Funds File for Bankruptcy, Associated Press, Aug. 1, 2007. The 
funds filed for chapter 15 (which pertains to transnational 
insolvencies) because they are registered in the Cayman Islands. Id.
    \102\Mark Jickling & Alison A. Raab, Hedge Fund Failures, 
Congressional Research Service Report for Congress, summary (Aug. 1, 
2007). Hedge funds are open to ``accredited investors,'' defined as 
those with over $1 million in assets. Id.
---------------------------------------------------------------------------
            Impact on Secondary Mortgages and Other Industries
    Still others are concerned about the spillover effects of 
the foreclosure crisis into other areas.\103\ As BusinessWeek 
explained:
---------------------------------------------------------------------------
    \103\Mara Der Hovanesian, The Home Equity Crisis Ahead--Even Banks 
that Dodged the Subprime Bullet Face Losses from Loans Based on Homes 
Now at Risk, BusinessWeek, Jan. 16, 2008.

          What's more, there's little that can be done to 
        prevent the pain from the deterioration of this $850 
        billion market. A lender on a mortgage has the first 
        claim on the underlying property. In the case of 
        foreclosure, it can sell the property and recoup some 
        money. The bank with the home-equity piece has no such 
        collateral and is usually out the money. ``The home-
        equity lender is going to get hosed,'' says Amy Crews 
        Cutts, deputy chief economist at mortgage giant Freddie 
        Mac[.]\104\
---------------------------------------------------------------------------
    \104\Id.; see, e.g., Marc Labonte, Would a Housing Crash Cause a 
Recession?, Congressional Research Report for Congress, RL34244 (Nov. 
7, 2007).

    Various industries involved in the housing market have been 
adversely affected. Last November, pending home sales in the 
United States ``fell to the lowest level on record,'' according 
to the National Association of Home Builders.\105\ At a 2007 
hearing before the House Financial Services Committee, the 
Association testified that its ``members and their customers 
have been significantly impacted by the mortgage upheaval and 
there is deep concern that the dislocations in the financing 
markets will increase the depth and length of the housing 
downturn.''\106\ In addition, ``many people in the retail real 
estate industry are bracing themselves for a slowdown in 
spending as the subprime mortgage crisis and the decline in 
housing values continue to send ripples through the 
economy.''\107\
---------------------------------------------------------------------------
    \105\Legislative and Regulatory Options for Minimizing and 
Mitigating Mortgage Foreclosures: Hearing Before the H. Comm. on 
Financial Services, 110th Cong. (2007) (prepared testimony submitted by 
the National Association of Home Builders).
    \106\Id.
    \107\Terry Pristin, Shopping Centers Begin to Feel Ripples of 
Housing's Ills, N.Y. Times, Sept. 12, 2007, at C6.
---------------------------------------------------------------------------
    Some assert that the ``fundamental problem with housing is 
oversupply.''\108\ Economist Mark Zandi correctly predicted in 
2007 that even if interest rates were frozen on one fifth of 
2006 subprime loans resetting in 2008, existing home prices 
could fall by as much as 15 percent.\109\ Others cite 
Americans' pessimism itself as the cause. As the Chief 
Executive Officer of Toll Brothers, Inc., the Nation's largest 
luxury home builder, explained, ``Right now I think it takes a 
brave soul to buy a home because there's so much chatter about 
housing prices dropping. . . . As soon as that fear leaves the 
market and we have some kind of equilibrium, we'll be back on 
top.''\110\ Still others blame the complexity of the 
securitization process and the reluctance of mortgage servicers 
(entities that collect mortgage payments on behalf of 
investors) to enter into loan modifications because they fear 
being sued by mortgage investors.\111\ Some critics questioned 
whether the Paulson Plan was ``intended to achieve real 
results.''\112\
---------------------------------------------------------------------------
    \108\Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem 
Housing Slide, Bloomberg.com (Dec. 7, 2007) (quoting Nicolas Retsinas, 
Director of Harvard University's Joint Center for Housing Studies).
    \109\Id. (citing Mark Zandi, Chief Economist, Moody's Economy.com).
    \110\Id. (quoting Robert Toll, Chief Executive Officer, Toll 
Brothers, Inc.). The article also noted that Toll Brothers, Inc. has 
``lost about $5 billion of market value since July 2005, when new home 
sales peaked in the U.S.'' Id.
    \111\See, e.g., Editorial, Show Us the Mortgage Relief, N.Y. Times, 
Dec. 9, 2007.
    \112\Op. Ed., Paul Krugman, Henry Paulson's Priorities, N.Y. Times, 
Dec. 10, 2007.
---------------------------------------------------------------------------

                        NEED FOR THE LEGISLATION

Responses to the Mortgage Foreclosure Crisis Have Been Inadequate To 
        Date
            Overview
    As of 2008, 30 percent of families holding recent subprime 
mortgages owed more on their mortgage than their home was 
worth.\113\ These families are at an increased risk of 
foreclosure because ``negative equity'' precludes the homeowner 
from selling, refinancing, or getting a home equity loan or 
other mechanism for weathering short-term financial 
difficulty.\114\
---------------------------------------------------------------------------
    \113\Edmund Andrews, Relief for Homeowners is Given to a Relative 
Few, N.Y. Times, Mar. 4, 2008 (loans originated in 2005 and 2006).
    \114\Kristopher Gerardi et al., Subprime Outcomes: Risky Mortgages, 
Homeownership Experiences, and Foreclosures, Federal Reserve Bank of 
Boston Working Papers, No 07-15 (Dec. 3, 2007) at 3-4.
---------------------------------------------------------------------------
    Regulators and economists are increasingly cautioning that 
loan balances must be reduced to avoid unnecessary foreclosures 
that will further damage the economy.\115\ Federal Reserve 
Chairman Ben Bernanke observed in March 2008:
---------------------------------------------------------------------------
    \115\See also Edmund L. Andrews, Fed Chief Urges Breaks for Some 
Home Borrowers, N.Y. Times, Mar. 4, 2008; John Brinsley, Bernanke Call 
for Mortgage Forgiveness Puts Pressure on Paulson, Bloomberg.com (Mar. 
5, 2008); Phil Izzo, Housing Market Has Further to Fall, Wall St. J., 
Mar. 13, 2008 (``Last week, Federal Reserve Chairman Ben Bernanke 
suggested that lenders could aid struggling homeowners by reducing 
their principal--the sum of money they borrowed--to lessen the 
likelihood of foreclosure. Some 71% of respondents [i.e., economists 
surveyed by the New York Times] agreed with the suggestion. '').

        [T]he current housing difficulties differ from those in 
        the past, largely because of the pervasiveness of 
        negative equity positions. With low or negative equity, 
        as I have mentioned, a stressed borrower has less 
        ability (because there is no home equity to tap) and 
        less financial incentive to try to remain in the home. 
        In this environment, principal reductions that restore 
        some equity for the homeowner may be a relatively more 
        effective means of avoiding delinquency and 
        foreclosure.\116\
---------------------------------------------------------------------------
    \116\Ben S. Bernanke, Chairman, Federal Reserve, Speech at the 
Independent Community Bankers of America Annual Convention (Mar. 4, 
2008).

    Notwithstanding industry leaders' public endorsements of 
these principles, support for loan modifications from the Bush 
Administration,\117\ exhortations by Federal banking agencies 
and the Conference of State Banking Supervisors,\118\ and 
voluntary efforts by lenders and servicers have resulted in a 
minimal number of viable loan modifications. In December 2008, 
Secretary of Housing and Urban Development Steve Preston 
acknowledged that the ``centerpiece of the Federal Government's 
effort to help struggling homeowners has been a failure.''\119\ 
The problems are two-fold: too few people are in foreclosure 
prevention programs; and of those who are being reached for 
loan modifications, too few are getting sustainable new terms.
---------------------------------------------------------------------------
    \117\ Press Release, Office of the White House, Aug. 31, 2007. See 
also the Interagency Statement on Loss Mitigation Strategies for 
Servicers of Residential Mortgages, at http://www.federalreserve.gov/
newsevents/press/bcreg/20070904a.htm (encouraging lenders to address 
subprime hybrid ARM resets by pursuing ``appropriate loss mitigation 
strategies designed to preserve homeownership. . . . Appropriate loss 
mitigation strategies may include, for example, loan modifications, 
deferral of payments, or a reduction of principal.'').
    \118\Statement on Loss Mitigation Strategies for Servicers of 
Residential Mortgages http://www.federalreserve.gov/boarddocs/
srletters/2007/SR0716.htm.
    \119\Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure, 
+Wash. Post, Dec. 17, 2008, at A1.
---------------------------------------------------------------------------
    An empirical study released in August 2008 examined 
negotiated mortgage modifications based on data compiled from 
monthly servicer remittance reports from July 2007 through June 
2008, found ``that while the number of modifications rose 
rapidly during the crisis, mortgage modifications in the 
aggregate are not reducing subprime mortgage debt.''\120\ Of 
even greater significance, the study found that these 
modifications ``rarely if ever reduced principal debt, and in 
many cases increased the debt.''\121\ In addition, ``many 
modifications actually increased the monthly payment.''\122\ As 
Sheila Bair, Chair of the Federal Deposit Insurance 
Corporation, remarked, ``Why there's been such a political 
focus on making sure we're not unduly helping borrowers but 
then we're providing all this massive assistance at the 
institutional level, I don't understanding it. . . . It's been 
a frustration for me.''\123\
---------------------------------------------------------------------------
    \120\Alan M. White, Abstract, Rewriting Contracts, Wholesale: Data 
on Voluntary Mortgage Modifications from 2007 and 2008 Remittance 
Reports (Aug. 2008), at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1259538
    \121\Id.
    \122\Id.
    \123\Id.
---------------------------------------------------------------------------
    Last fall, the State Foreclosure Prevention Working Group, 
comprised of State attorneys general and State banking 
regulators, issued its third in a series of reports looking at 
the state of foreclosures in this country. Key findings include 
the following: (1) nearly eight out of ten seriously delinquent 
homeowners are not on track for any loss mitigation outcome, 
down from seven in ten in previous reports; (2) new efforts to 
prevent foreclosures are on the decline, despite a temporary 
increase in loan modifications through the second quarter of 
2008; and (3) one out of five loan modifications made in the 
past year is currently delinquent.\124\
---------------------------------------------------------------------------
    \124\State Foreclosure Prevention Working Group Reports, Analysis 
of Subprime Mortgage Servicing Performance, Data Report No. 3, Sept. 
2008, at http://www.csbs.org/Content/NavigationMenu/Home/
SFPWGReport3.pdf.
---------------------------------------------------------------------------
    Of the various types of modifications that lenders have 
provided, the second largest category of modification actually 
increased the homeowner's monthly mortgage payments.\125\ These 
figures include modifications done by the Hope Now Alliance, 
the program convened by the Treasury Department to encourage 
loan modification. As acknowledged by the vice chair of 
Washington Mutual, who helped run the program, many of the 
homeowners who have sought assistance from Hope Now ``will not 
receive long-term relief and could ultimately face higher total 
costs.''\126\ Chairman Bernanke noted that loan modifications 
involving ``reductions of principal balance have been quite 
rare.''\127\
---------------------------------------------------------------------------
    \125\Rod Dubitsky et al., Subprime Loan Modifications Update, 
Credit Suisse Fixed Income Research (Oct. 1, 2008) at 2.
    \126\David Cho & Renae Merle, Merits of New Mortgage Aid Are 
Debate--Critics Say Treasury Plan Won't Bring Long-Term Relief, Wash. 
Post, Mar. 4, 2008 (citing remarks of Bill Longbrake, senior policy 
adviser for the Financial Services Roundtable and vice chair of 
Washington Mutual).
    \127\Ben S. Bernanke, Chairman, Federal Reserve, Speech at the 
Independent Community Bankers of America Annual Convention (Mar. 4, 
2008).
---------------------------------------------------------------------------
    Professor Alan White of Valparaiso University School of Law 
examined the modifications that are taking place and concluded 
that ``we are going backwards'' and that ``voluntary 
modifications are putting people underwater more than they 
already are[.]''\128\ The result is that there is a high level 
of defaults after a modification. Specifically, Professor White 
found that less than 10 percent of the time do the voluntary 
programs result in a reduced principal loan balance, with more 
than half of modifications capitalizing unpaid interest and 
fees into larger and more drawn-out debt on the back end of the 
mortgage ; and only about a third of voluntary mortgage 
modifications reduce monthly payment burdens for homeowners, 
with nearly half actually saddling distressed homeowners with 
increased payments under the modifications.\129\
---------------------------------------------------------------------------
    \128\Kate Berry, Early Read Finds Many Loan Mods Falling Short, Am. 
Banker, Nov. 24, 2008.
    \129\Alan White, Rewriting Contracts, Wholesale: Data on Voluntary 
Mortgage Modifications From 2007 and 2008 Remittance Reports, at http:/
/ssrn.com/abstract=1259538; Alan M. White, Deleveraging the American 
Homeowner: The Failure of 2008 Voluntary Mortgage Contract 
Modifications, __ Conn. L. Rev. __ (forthcoming 2009) (reporting on 
updated data)
---------------------------------------------------------------------------
    There are a number of reasons why voluntary loss mitigation 
cannot keep up with demand. One reason is that the way 
servicers are compensated by lenders often creates a bias for 
moving forward with foreclosure rather than engaging in 
foreclosure prevention. As reported in Inside B&C Lending, 
``Servicers are generally dis-incented to do loan modifications 
because they don't get paid for them but they do get paid for 
foreclosures.''\130\ So even when a loan modification would 
better serve investors and homeowners, some loan servicers have 
an undue economic incentive to proceed to foreclosure. As one 
expert explained:
---------------------------------------------------------------------------
    \130\Inside Mortgage Finance Reprints, Subprime Debt Outstanding 
Falls, Servicers Pushed on Loan Mods (Nov. 16, 2007) (quoting Karen 
Weaver, a managing director and global head of securitization research 
at Deutsche Bank Securities).

          One problem is that servicers are compensated for 
        their costs of foreclosing, but not for their costs of 
        renegotiating. Another problem is that servicers impose 
        fees when debtors pay late or default, and the 
        servicing contracts allow them to keep the fees if they 
        can be collected. Since renegotiating a mortgage often 
        involves giving up these fees, they give servicers an 
        additional incentive to foreclose rather than 
        negotiate. Thus most mortgage servicing contracts are 
        unsuited to dealing with the housing crisis.\131\
---------------------------------------------------------------------------
    \131\Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, 
and the Mortgage, National Bureau of Economic Research Working Paper 
No. 14549, at 14-15 (Dec. 2008); see also Alan M. White, Deleveraging 
the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract 
Modifications, __ Conn. L. Rev. __ (2009) (forthcoming) (``No single 
servicer or group of servicers, however, has any economic incentive to 
organize a pause in foreclosures or an organized deleveraging program 
to benefit the group.'').

    Even when servicers do want to engage in effective loss 
mitigation, they face other structural obstacles. One major 
obstacle is the number of homes that have more than one 
mortgage or lien against them. Between one-third and one-half 
of the homes purchased in 2006 with subprime mortgages have 
second mortgages,\132\ and many other homeowners have open home 
equity lines of credit secured by their home. The holder of the 
first mortgage will generally not want to provide modifications 
that would simply free up the homeowner's resources to make 
payments on a formerly worthless junior lien, nor to modify a 
loan where there is a second mortgage in default.\133\ Second 
mortgage holders ``have the right to prevent refinancing or 
renegotiation of first mortgages unless the second mortgage is 
paid off.''\134\ As Credit Suisse reports, ``It is often 
difficult, if not impossible, to force a second-lien holder to 
take the pain prior to a first-lien holder when it comes to 
modifications,'' thereby dooming the effort.\135\
---------------------------------------------------------------------------
    \132\Credit Suisse, Mortgage Liquidity du Jour: Underestimated No 
More, at 5 (Mar. 12, 2007).
    \133\Jody Shenn, `Piggyback' Mortgages May Cut Modifications, Fed 
Says, Bloomberg.com (Dec. 30, 2008) (reporting on Federal Reserve study 
that attempts ``to loosen terms on hundreds of thousands of delinquent 
home loans may be hindered by so-called piggyback second mortgages that 
gained popularity during the U.S. housing boom'').
    \134\Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, 
and the Mortgage, National Bureau of Economic Research Working Paper 
No. 14549, at 15 (Dec. 2008).
    \135\Ivy Zelman et al., Credit Suisse, Subprime Loan Modifications 
Update, at 8 (Oct. 1, 2008).
---------------------------------------------------------------------------
    Another structural obstacle is posed by securitization. 
When servicing securitized loans, servicers are bound by the 
terms of the agreement with investors, known as a ``pooling and 
servicing agreement'' (PSA), which may limit what they can do 
by way of modification. For example, some PSAs limit the number 
or percentage of loans in a pool that can be modified.\136\ 
Moreover, even if the PSA is not a problem, most modifications 
will have differing impacts on different groups of investors; 
for example, a change in interest rate may impact different 
investors than a waiver of a prepayment penalty. Servicers may 
decline to enter into a modification out of fear of an investor 
lawsuit. As Federal Reserve Chairman Ben Bernanke explained:
---------------------------------------------------------------------------
    \136\See Credit Suisse, The Day After Tomorrow: Payment Shock and 
Loan Modifications (Apr. 5, 2007) (noting specific examples of PSAs 
with various modification restrictions, including 5% by balance, 5% by 
loan count, limits on frequency, and limits on interest rate).

          Unfortunately, even though workouts may often be the 
        best economic alternative, mortgage securitization and 
        the constraints faced by servicers may make such 
        workouts less likely. For example, trusts vary in the 
        type and scope of modifications that are explicitly 
        permitted, and these differences raise operational 
        compliance costs and litigation risks. Thus, servicers 
        may not pursue workout options that are in the 
        collective interests of investors and borrowers. Some 
        progress has been made (for example, through 
        clarification of accounting rules) in reducing the 
        disincentive for servicers to undertake economically 
        sensible workouts. However, the barriers to, and 
        disincentives for, workouts by servicers remain serious 
        problems that need to part of current discussions about 
        how to reduce preventable foreclosures.\137\
---------------------------------------------------------------------------
    \137\Ben S. Bernanke, Chairman, Federal Reserve, Remarks to the 
Independent Community Bankers of American Annual Conference (Mar. 4, 
2008).

    The necessity of government action also is gaining 
recognition among Wall Street leaders. A senior economic 
advisor at UBS Investment Bank has observed that ``when markets 
fail, lenders and borrowers need some sort of regulatory and 
legislative framework within which to manage problems, rather 
than be forced to act in the chaos of the moment.''\138\ 
Moreover, as former Federal Reserve Board Vice Chairman Alan 
Blinder recently noted, the fact that most of the mortgages at 
issue have been securitized and sold to investors across the 
globe ``bolsters the case for government intervention rather 
than undermining it. After all, how do you renegotiate terms of 
a mortgage when the borrower and the lender don't even know 
each other's names?''\139\
---------------------------------------------------------------------------
    \138\George Magnus, Large-scale Action Is Needed To Tackle the 
Credit Crisis, Financial Times, Apr. 8, 2008.
    \139\Alan S. Blinder, From the New Deal, a Way Out of a Mess, N.Y. 
Times (Feb. 24, 2008).
---------------------------------------------------------------------------
Judicial Modification of Mortgages
    A mechanism for enabling a court to break the deadlock and 
provide an economically rational solution that avoids 
foreclosure and nets the lender at least as much as would be 
recovered through a foreclosure sale is needed.
            Current Bankruptcy Law
    While the fallout from the subprime mortgage ``extends from 
hedge fund managers to rank-and-file investors,'' the ``most 
personally punishing setback is a family losing its 
home.''\140\ In an effort to forestall a foreclosure sale, a 
borrower may resort to filing for bankruptcy relief, which 
stays most creditor collection attempts, including foreclosure 
sales, at least for a period of time.\141\ Such protection--
known as the automatic stay--is limited, however. If the debtor 
does not cure the default leading to the foreclosure, i.e., pay 
the arrearages due under the mortgage, and remain current on 
all future payments, the mortgage lender can obtain a court 
order terminating the automatic stay and thereby allow the 
foreclosure sale to proceed.\142\
---------------------------------------------------------------------------
    \140\Steve Lohr, Loan by Loan, the Making of a Credit Squeeze, N.Y. 
Times, Aug. 19, 2007, at 1 Bus. Sec.
    \141\11 U.S.C. Sec. 362(a) (2008).
    \142\11 U.S.C. Sec. 362(d) (2008). Typically, the basis for 
granting relief from the automatic stay is that the mortgagee lacks 
``adequate protection.'' 11 U.S.C. Sec. Sec. 361, 362(d)(1) (2008).
---------------------------------------------------------------------------
    For most consumers facing a foreclosure sale who want to 
retain their homes, chapter 13 of the Bankruptcy Code\143\ 
provides some modicum of protection. In the context of a 
chapter 13 repayment plan, a debtor may cure a default under a 
mortgage ``within a reasonable time,'' providing the debtor 
remains current on his or her post-petition mortgage 
payments.\144\ While this ability to cure a default under a 
residential mortgage is valuable, chapter 13 does not protect a 
consumer debtor from having to pay escalating interest costs 
and hidden fees that are often involved in subprime mortgage 
agreements.
---------------------------------------------------------------------------
    \143\Chapter 13 is a form of bankruptcy relief by which a debtor, 
in exchange for retaining possession of his or her assets, proposes a 
repayment plan pursuant to which the debtor devotes all of his or her 
disposable income for a period of up to 5 years. Creditors in a chapter 
13 case must receive under the plan at least as much as they would 
receive if the case was converted to chapter 7 for liquidation.
    \144\11 U.S.C. Sec. 1322(b)(5) (2008).
---------------------------------------------------------------------------
    It should be noted that, while a chapter 13 debtor may 
modify the rights of most other types of secured or unsecured 
creditors in the context of a chapter 13 repayment plan,\145\ 
the current law expressly prohibits a chapter 13 debtor from 
modifying the rights of a creditor secured ``only by a security 
interest in real property that is the debtor's principal 
residence.''\146\ Not only does this treat principal residences 
less favorably than second homes, vacation homes, and other 
properties. Curiously, if the mortgage lender also has a 
security interest in other property of the debtor--so that the 
debt is not secured only by a security interest in the debtor's 
principal residence--the prohibition on modifying the mortgage 
terms does not apply.
---------------------------------------------------------------------------
    \145\As a result of an amendment to the bankruptcy law in 2005, a 
purchase money security interest in a motor vehicle acquired for the 
debtor's personal use may not be bifurcated if the debt was incurred 
during the 910-day period preceding the bankruptcy filing. The same 
prohibition applies to a claim secured by anything else of value if the 
debtor incurred the debt within 1 year of the bankruptcy filing. 11 
U.S.C. Sec. 1325(a) (2008).
    \146\11 U.S.C. Sec. 1322(b)(2) (2008).
---------------------------------------------------------------------------
    The Supreme Court has held that this exception to a chapter 
13's ability to modify the rights of creditors applies even if 
the mortgagee is undersecured.\147\ Thus, if a chapter 13 
debtor owes $300,000 on a mortgage for a home that is worth 
less than $200,000, he or she must repay the entire amount in 
order to keep his or her home, even though the maximum that the 
mortgage lender would receive upon foreclosure is the home's 
value--i.e., $200,000--less the costs of foreclosure.
---------------------------------------------------------------------------
    \147\Nobelman v. American Sav. Bank, 508 U.S. 324 (1993).
---------------------------------------------------------------------------

                                Hearings

    The Committee on the Judiciary held 1 day of hearings on 
H.R. 200, the ``Helping Families Save Their Homes in Bankruptcy 
Act of 2009,'' and H.R. 225, the ``Emergency Homeownership and 
Equity Protection Act,'' on January 22, 2009. Testimony was 
received from Representative Brad Miller (D-NC); Representative 
Jim Marshall (D-GA); David M. Certner, Legislative Policy 
Director, American Association of Retired Persons; Adam J. 
Levitin, Associate Professor of Law, Georgetown University Law 
Center; Christopher J. Mayer, Senior Vice Dean, Columbia 
Business School; and Matthew Mason, Esq., Assistant Director, 
UAW-GM Legal Services Plan.

                        Committee Consideration

    On January 27, 2009, the Committee met in open session and 
ordered the bill, H.R. 200 favorably reported with an 
amendment, by a rollcall vote of 21 to 15, a quorum being 
present.

                            Committee Votes

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
following rollcall votes occurred during the Committee's 
consideration of H.R. 200.
    1. An amendment by Mr. Smith: (1) specifying that a claim 
for a loan secured by a security interest in the debtor's 
principal residence may be modified in certain specified 
respects to the extent necessary so that the monthly mortgage 
payment is not less than 31 percent and not more than 38 
percent of the debtor's current monthly income; and (2) 
providing that if the claim has been modified to an amount 
below the original principal of the loan pursuant to section 
1322(b)(11)(A) and the residence is sold, transferred or 
refinanced during the term of the plan, the plan requires the 
debtor to enter into an enforceable agreement with the holder 
that it is entitled to receive, in addition to the unpaid 
portion of the allowed secured claim, the net proceeds of the 
sale or the amount of the allowed unsecured claim, whichever is 
less. Defeated 14 to 20.

                                                 ROLLCALL NO. 1
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................
Mr. Boucher.....................................................
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Mr. Pierluisi...................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................
Ms. Baldwin.....................................................                              X
Mr. Gonzalez....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Ms. Sanchez.....................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Maffei......................................................                              X
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................              X
Mr. Goodlatte...................................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Lungren.....................................................              X
Mr. Issa........................................................              X
Mr. Forbes......................................................
Mr. King........................................................              X
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
Mr. Poe.........................................................              X
Mr. Chaffetz....................................................              X
Mr. Rooney......................................................
Mr. Harper......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             14              20
----------------------------------------------------------------------------------------------------------------

    2. An amendment by Mr. Franks limiting the legislation to: 
(1) mortgages originated in the period beginning January 1, 
2004 through December 31, 2007 and (2) to cases commenced in 
the 3-year period beginning on the Act's date of enactment. 
Defeated 15 to 20.

                                                 ROLLCALL NO. 2
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................                              X
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Mr. Pierluisi...................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Gonzalez....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Ms. Sanchez.....................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Maffei......................................................
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................              X
Mr. Goodlatte...................................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................              X
Mr. Gallegly....................................................              X
Mr. Lungren.....................................................              X
Mr. Issa........................................................              X
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
Mr. Poe.........................................................              X
Mr. Chaffetz....................................................              X
Mr. Rooney......................................................
Mr. Harper......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             15              20
----------------------------------------------------------------------------------------------------------------

    3. An amendment by Mr. Forbes: (1) deleting the exception 
to the mandatory pre-filing credit counseling requirement in 
the Amendment in the Nature of a Substitute; and (2) requiring 
the court to find, as a condition of confirmation, that the 
debtor did not obtain the extension, renewal, or refinancing of 
credit that gives rise to a modified claim by 
misrepresentation, false pretenses, or actual fraud. Defeated 
12 to 20.

                                                 ROLLCALL NO. 3
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................
Mr. Nadler......................................................                              X
Mr. Scott.......................................................                              X
Mr. Watt........................................................
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Mr. Pierluisi...................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Gonzalez....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Ms. Sanchez.....................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Maffei......................................................                              X
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................              X
Mr. Goodlatte...................................................              X
Mr. Sensenbrenner, Jr...........................................
Mr. Coble.......................................................
Mr. Gallegly....................................................              X
Mr. Lungren.....................................................              X
Mr. Issa........................................................              X
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Franks......................................................
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
Mr. Poe.........................................................              X
Mr. Chaffetz....................................................              X
Mr. Rooney......................................................
Mr. Harper......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             12              20
----------------------------------------------------------------------------------------------------------------

    4. An amendment by Mr. King requiring the court to find, as 
a condition of confirmation, that the debtor did not obtain the 
extension, renewal, or refinancing of credit that gives rise to 
a modified claim by the debtor's material misrepresentation, 
false pretenses, or actual fraud. Approved 21 to 3.

                                                 ROLLCALL NO. 4
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott.......................................................              X
Mr. Watt........................................................
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................
Ms. Waters......................................................
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................              X
Mr. Cohen.......................................................              X
Mr. Johnson.....................................................              X
Mr. Pierluisi...................................................              X
Mr. Gutierrez...................................................
Mr. Sherman.....................................................
Ms. Baldwin.....................................................              X
Mr. Gonzalez....................................................              X
Mr. Weiner......................................................              X
Mr. Schiff......................................................              X
Ms. Sanchez.....................................................
Ms. Wasserman Schultz...........................................              X
Mr. Maffei......................................................              X
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................              X
Mr. Goodlatte...................................................              X
Mr. Sensenbrenner, Jr...........................................
Mr. Coble.......................................................
Mr. Gallegly....................................................
Mr. Lungren.....................................................
Mr. Issa........................................................
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Franks......................................................
Mr. Gohmert.....................................................
Mr. Jordan......................................................              X
Mr. Poe.........................................................              X
Mr. Chaffetz....................................................              X
Mr. Rooney......................................................              X
Mr. Harper......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             21               3
----------------------------------------------------------------------------------------------------------------

    5. An amendment by Mr. Jordan revising the legislation to 
apply to nontraditional and subprime mortgages, as defined in 
the amendment. Defeated 14 to 20.

                                                 ROLLCALL NO. 5
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................                              X
Mr. Berman......................................................                              X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott.......................................................                              X
Mr. Watt........................................................
Ms. Lofgren.....................................................                              X
Ms. Jackson Lee.................................................                              X
Ms. Waters......................................................                              X
Mr. Delahunt....................................................                              X
Mr. Wexler......................................................                              X
Mr. Cohen.......................................................                              X
Mr. Johnson.....................................................                              X
Mr. Pierluisi...................................................                              X
Mr. Gutierrez...................................................                              X
Mr. Sherman.....................................................                              X
Ms. Baldwin.....................................................                              X
Mr. Gonzalez....................................................                              X
Mr. Weiner......................................................                              X
Mr. Schiff......................................................                              X
Ms. Sanchez.....................................................                              X
Ms. Wasserman Schultz...........................................                              X
Mr. Maffei......................................................                              X
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................              X
Mr. Goodlatte...................................................              X
Mr. Sensenbrenner, Jr...........................................              X
Mr. Coble.......................................................
Mr. Gallegly....................................................              X
Mr. Lungren.....................................................              X
Mr. Issa........................................................
Mr. Forbes......................................................              X
Mr. King........................................................              X
Mr. Franks......................................................              X
Mr. Gohmert.....................................................              X
Mr. Jordan......................................................              X
Mr. Poe.........................................................              X
Mr. Chaffetz....................................................              X
Mr. Rooney......................................................              X
Mr. Harper......................................................              X
                                                                 -----------------------------------------------
    Total.......................................................             14              20
----------------------------------------------------------------------------------------------------------------

    6. Motion to report H.R. 200 favorably, as amended. Passed 
21 to 15.

                                                 ROLLCALL NO. 6
----------------------------------------------------------------------------------------------------------------
                                                                       Ayes            Nays           Present
----------------------------------------------------------------------------------------------------------------
Mr. Conyers, Jr., Chairman......................................              X
Mr. Berman......................................................              X
Mr. Boucher.....................................................
Mr. Nadler......................................................
Mr. Scott.......................................................              X
Mr. Watt........................................................              X
Ms. Lofgren.....................................................              X
Ms. Jackson Lee.................................................              X
Ms. Waters......................................................              X
Mr. Delahunt....................................................              X
Mr. Wexler......................................................              X
Mr. Cohen.......................................................              X
Mr. Johnson.....................................................              X
Mr. Pierluisi...................................................              X
Mr. Gutierrez...................................................              X
Mr. Sherman.....................................................              X
Ms. Baldwin.....................................................              X
Mr. Gonzalez....................................................              X
Mr. Weiner......................................................              X
Mr. Schiff......................................................              X
Ms. Sanchez.....................................................              X
Ms. Wasserman Schultz...........................................              X
Mr. Maffei......................................................              X
[Vacant]........................................................
Mr. Smith, Ranking Member.......................................                              X
Mr. Goodlatte...................................................                              X
Mr. Sensenbrenner, Jr...........................................                              X
Mr. Coble.......................................................
Mr. Gallegly....................................................                              X
Mr. Lungren.....................................................                              X
Mr. Issa........................................................                              X
Mr. Forbes......................................................                              X
Mr. King........................................................                              X
Mr. Franks......................................................                              X
Mr. Gohmert.....................................................                              X
Mr. Jordan......................................................                              X
Mr. Poe.........................................................                              X
Mr. Chaffetz....................................................                              X
Mr. Rooney......................................................                              X
Mr. Harper......................................................                              X
                                                                 -----------------------------------------------
    Total.......................................................             21              15
----------------------------------------------------------------------------------------------------------------

                      Committee Oversight Findings

    In compliance with clause 3(c)(1) of rule XIII of the Rules 
of the House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated in the 
descriptive portions of this report.

               New Budget Authority and Tax Expenditures

    Clause 3(c)(2) of rule XIII of the Rules of the House of 
Representatives is inapplicable because this legislation does 
not provide new budgetary authority or increased tax 
expenditures.

               Congressional Budget Office Cost Estimate

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, the Committee sets forth, with 
respect to the bill, H.R. 200, the following estimate and 
comparison prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act of 
1974. The Committee notes that one statement in the CBO letter 
might be misconstrued. Its statement that ``H.R. 200 would not 
apply to debtors with loans guaranteed by the Federal Housing 
Administration, the Department of Veterans Affairs, or the 
Department of Agriculture'' incorrectly describes the rule of 
construction in section 8 of the bill. As explained in the 
section-by-section analysis in this report, the rule of 
construction merely provides that the obligations of the FHA, 
the VA, and USDA under their mortgage loan guarantee programs 
are unaffected by the bill. All types of mortgage loans that 
otherwise meet the terms of the bill, including those backed by 
the aforementioned guarantee or insurance programs, are covered 
by the bill. The Statement in the CBO letter should be read 
consistent with the Committee's intent, as reflected in the 
section-by-section analysis and this paragraph.

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 23, 2009.
Hon. John Conyers, Jr., Chairman,
Committee on the Judiciary,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 200, the Helping 
Families Save Their Homes in Bankruptcy Act of 2009.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Leigh Angres.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                  Director.

    Enclosure.
H.R. 200--Helping Families Save Their Homes in Bankruptcy Act of 2009.
    Summary: H.R. 200 would authorize bankruptcy courts to 
modify the terms of some mortgages on principal residences 
during Chapter 13 bankruptcy proceedings. CBO estimates that 
enacting H.R. 200 would reduce direct spending (in the form of 
increased offsetting receipts) by $31 million over the 2009-
2019 period and increase revenues by $23 million over the same 
time period, thus reducing future budget deficits over this 
period by a total of $54 million. Based on information provided 
by the Administrative Office of the United States Courts 
(AOUSC), CBO estimates that any additional discretionary costs 
to adjudicate more bankruptcy cases would not be significant; 
such costs would be subject to the availability of appropriated 
funds. The judiciary currently spends about $900 million a year 
for all bankruptcy activities.
    The effects on direct spending over the 2009-2013 and 2009-
2018 periods are relevant for enforcing the House's pay-as-you-
go rule under the current budget resolution. CBO estimates that 
enacting H.R. 200 would reduce direct spending by $26 million 
over the 2009-2013 period and by $31 million over the 2009-2018 
period. Enacting H.R 200 would increase revenues by $18 million 
over the 2009-2013 period and $23 million over the 2009-2018 
period.
    H.R. 200 would impose intergovernmental and private-sector 
mandates, as defined in the Unfunded Mandates Reform Act 
(UMRA), on certain creditors, including state and local pension 
funds and housing agencies. Because of uncertainty about the 
number of bankruptcy plans that would be modified as a result 
of this legislation and how those changes would affect holders 
of secured claims, CBO cannot determine whether the aggregate 
cost of complying with the mandates would exceed the annual 
thresholds for
    intergovernmental or private-sector mandates ($69 million 
in 2009 and $139 million in 2009, respectively, adjusted 
annually for inflation).
    Estimated cost to the Federal Government: The costs of this 
legislation fall within budget function 750 (administration of 
justice.)

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By Fiscal Year, in Millions of Dollars--
                                                            --------------------------------------------------------------------------------------------
                                                                                                                                           2009-   2009-
                                                              2009   2010   2011   2012   2013   2014   2015   2016   2017   2018   2019   2014    2019
--------------------------------------------------------------------------------------------------------------------------------------------------------

CHANGES IN DIRECT SPENDING

Estimated Budget Authority                                      -4     -9     -6     -4     -3     -1     -1     -1     -1     -1      *     -27     -31
                     Estimated Outlays                          -4     -9     -6     -4     -3     -1     -1     -1     -1     -1      *     -27     -31

CHANGES IN REVENUES

Estimated Revenues                                               3      6      4      3      2      1      1      1      1      1      *      19      23
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: * = less than $500,000.

    Basis of estimate: For this estimate, CBO assumes that H.R. 
200 will be enacted near the middle of fiscal year 2009.
    H.R. 200 would allow bankruptcy courts to modify the terms 
of some mortgages for a primary residence during Chapter 13 
bankruptcy proceedings. (This type of bankruptcy, often 
referred to as ``reorganization,'' involves a repayment plan 
that sets forth how debts will be settled.) Under current law, 
Chapter 13 halts mortgage foreclosure proceedings, thus giving 
homeowners an opportunity to restructure their financial 
arrangements. Bankruptcy courts can establish a payment plan 
for overdue mortgage payments on primary residences but cannot 
change the amount, timing, or interest rate terms of mortgage 
payments. In 2008, about 354,000 cases were filed for Chapter 
13 bankruptcy, a 14 percent increase over the number filed in 
2007.
    H.R. 200 would apply to Chapter 13 cases filed before, on, 
or after the date of enactment, but would limit which debtors 
would qualify for a loan modification under the bill. First, 
the debtor's mortgage would have to be initiated prior to the 
effective date of the bill and subject to a notice of 
foreclosure. Second, H.R. 200 would not apply to debtors with 
loans guaranteed by the Federal Housing Administration, the 
Department of Veterans Affairs, or the Department of 
Agriculture.
    Finally, the bill would require debtors to inquire about 
loan modifications with their mortgage servicer. Specifically, 
after the 15-day period beginning on the date of enactment, a 
mortgage modification may be proposed under Chapter 13 only if 
the debtor attempted to contact the mortgage servicer regarding 
a loan modification at least 15 days before filing for 
bankruptcy relief (this rule would not apply in cases where a 
foreclosure sale is scheduled to occur within 30 days of the 
date of the bankruptcy filing). For pending Chapter 13 cases, 
the debtor would have to certify that the debtor attempted to 
contact the mortgage holder about a loan modification. The bill 
would expand Chapter 13 eligibility by excluding home mortgage 
debt when determining if the debtor qualifies to file for 
Chapter 13, under certain circumstances.
    The bill also would constrain the debtor's profit from a 
home sale in certain cases. H.R. 200 would require a debtor to 
share the net proceeds of a home sale with the lender, if the 
sale occurs within the first 4 years of the debtor completing a 
Chapter 13 plan. The amount the lender would receive would be 
80 percent of the net profit in the first year, and then 
decline to 20 percent by the fourth year.
    Impact on Bankruptcy Filings. Bankruptcy filings fluctuate 
over time and are dependent on economic trends and personal 
financial conditions. Between 1987 and 2008, Chapter 13 filings 
have ranged from a low of 140,000 in 1987 to a high of 470,000 
in 2003. The primary reason that individuals file for Chapter 
13 is to forestall foreclosure on their home--over 96 percent 
of Chapter 13 filers are homeowners and 70 percent of filers 
propose a plan to repay overdue mortgage payments. Because of 
the high number of foreclosures expected over the next several 
years (several million, based on information provided by the 
Center for Responsible Lending), CBO expects that bankruptcy 
filings will substantially increase in the near term--without 
enactment of H.R. 200. Under current law, based on information 
provided by the AOUSC, CBO estimates that Chapter 13 filings 
are likely to increase to almost 400,000 in 2009, a 13 percent 
increase over the number in 2008.
    Economists and bankruptcy experts have found that the 
greater the financial benefit gained from filing for 
bankruptcy, the greater the likelihood a household will file. 
CBO expects that the financial benefit to filing under the bill 
would be greater than under current law. Based on an analysis 
of similar proposals to allow loan modification in Chapter 13, 
CBO estimates that over one million households would benefit 
financially from filing for Chapter 13 bankruptcy under the 
bill.
    Studies analyzing household's decision to file for 
bankruptcy indicate that of those households that could realize 
a financial benefit from filing for bankruptcy, only a fraction 
actually make the decision to file. Of the over one million 
households that could benefit from filing for bankruptcy under 
the legislation in the next few years, we estimate that about 
350,000 additional households would file for bankruptcy over 
the 2009-2019 period, with about two-thirds of those filings 
occurring within the first 3 years after enactment.
    The number of additional bankruptcy filings that would 
occur under the bill is, however, very uncertain. Some 
bankruptcy experts believe that filings would not increase 
substantially under H.R. 200 because the current fees and legal 
costs associated with filing for bankruptcy are high; the 
Government Accountability Office (GAO) reports that the median 
cost for filing Chapter 13 bankruptcy is $3,000. In the short 
term, new filings also might be limited by the supply of 
experienced bankruptcy lawyers who can handle additional 
filings. Further, some industry specialists maintain that the 
bill would encourage voluntary modification of mortgages 
outside of bankruptcy because many mortgage holders would 
prefer to work out their own arrangements rather than be 
subject to those imposed by a bankruptcy court. Other experts, 
however, contend that Chapter 13 filings would increase 
significantly as legal, tax, accounting, and payment concerns 
would deter voluntary modifications. Accordingly, debtors might 
view Chapter 13 modification as the best option for retaining 
their homes. Finally, whether significant numbers of debtors 
would be driven to seek bankruptcy protection by the prospect 
of mortgage relief might ultimately depend on how bankruptcy 
courts responded to the new authority that would be provided by 
H.R. 200.
    Budgetary Impact of Additional Bankruptcy Filings. 
Additional filings would increase collections of bankruptcy 
fees. Those fees ($235 per Chapter 13 filing) are distributed 
among several government entities. About half of the amount 
collected is used to cover the judiciary's and U.S. Trustees' 
added costs and thus has no net effect on Federal spending. A 
portion of those filing fees, however, is recorded as an 
offsetting receipt (a credit against direct spending) in the 
Federal budget and deposited into a special fund in the 
Treasury; those amounts are not available for spending unless 
provided in an appropriation act. CBO estimates that enacting 
the legislation would increase such offsetting receipts by $31 
million over the 2009-2019 period.
    Revenues. Another portion of Chapter 13 filing fees is 
deposited into the general fund of the Treasury and recorded as 
increased revenues. CBO estimates that enacting H.R. 200 would 
increase such revenues from additional Chapter 13 filing fees 
by $23 million over the 2009-2019 period.
    Potential Budgetary Impact on the Government-Sponsored 
Enterprises for Housing. Enacting H.R. 200 could affect the 
value of the financial instruments (mortgages and mortgage-
backed securities) held or guaranteed by the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac)). These government-sponsored 
enterprises (GSEs) were placed in conservatorship in 2008 and 
are under the direct control of the Federal Government. CBO 
considers the GSEs' operations to be part of the Federal 
budget. Enacting H.R. 200 could change the value of those 
financial instruments and thus affect the Federal budget. It is 
unclear, however, whether enactment of the legislation would 
increase or decrease future costs for the GSEs.
    Losses resulting from mortgages held by the GSEs are 
shouldered by those entities. Modifying loans in bankruptcy 
might be more or less costly compared to foreclosure and would 
depend on future house prices, the length of time needed to 
sell foreclosed properties, the terms of potential mortgage 
modifications, the likelihood of re-default for modified loans, 
and the amount mortgage payments might be reduced in the 
bankruptcy process. Similar uncertainty exists for the impact 
of H.R. 200 on the value of mortgage-backed securities 
guaranteed and held by the GSEs.
    Intergovernmental and private-sector impact: H.R. 200 would 
impose intergovernmental and private-sector mandates, as 
defined in UMRA, on certain creditors, including state and 
local pension funds and housing agencies. The bill would allow 
bankruptcy judges to modify the rights of holders of certain 
claims on mortgage debt by making changes to the terms of home 
mortgage agreements during bankruptcy proceedings. Under 
current law, bankruptcy judges are prohibited from changing the 
terms of loans for primary residences. The bill also would 
require such claimholders to file timely notice with the court 
before adding fees, costs, or charges while a bankruptcy case 
is pending.
    The costs of those mandates would depend on the number of 
mortgage agreements that judges would choose to modify and how 
those changes would affect the value of secured claims. The 
amount recovered by a claimholder through a bankruptcy 
proceeding relative to the amount that could be recovered 
through foreclosure would vary depending on market conditions. 
In some cases, claimholders might not incur any additional 
costs. Because of those uncertainties, CBO cannot determine 
whether the aggregate cost of complying with the mandates in 
the bill would exceed the annual thresholds for 
intergovernmental or private-sector mandates ($69 million in 
2009 and $139 million in 2009, respectively, adjusted annually 
for inflation).
    Estimate prepared by: Federal Costs: Leigh Angres; Impact 
on state, local, and tribal governments: Melissa Merrell; 
Impact on the private sector: Paige Piper/Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                    Performance Goals and Objectives

    The Committee states that pursuant to clause 3(c)(4) of 
rule XIII of the Rules of the House of Representatives, H.R. 
200 will authorize judicial modification of a mortgage secured 
only by a homeowner's principle residence in a chapter 13 
bankruptcy case, under certain circumstances, so that such 
mortgage will be more affordable for an eligible homeowner.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in article I, section 8, clause 4 of the 
Constitution.

                          Advisory on Earmarks

    In accordance with clause 9 of rule XXI of the Rules of the 
House of Representatives, H.R. 200 does not contain any 
congressional earmarks, limited tax benefits, or limited tariff 
benefits as defined in clause 9(d), 9(e), or 9(f) of Rule XXI.

                      Section-by-Section Analysis

    The following discussion describes the bill as reported by 
the Committee.
    Sec. 1. Short Title. Section 1 sets forth the short title 
of the bill as the ``Helping Families Save Their Homes in 
Bankruptcy Act of 2009.''
    Sec. 2. Eligibility for Relief. Bankruptcy Code section 
109(e) sets forth secured and unsecured debt limits to 
establish a debtor's eligibility for relief under chapter 13. 
Section 2 of the bill amends section 109(e) to provide that the 
computation of debts does not include the secured or unsecured 
portions of debts secured by the debtor's principal residence, 
under two alternative circumstances. The first is if the 
current value of the debtor's principal residence is less than 
the secured debt limit specified in section 109(e). The second 
is if the debtor's principal residence was sold in foreclosure 
or the debtor surrendered it and its current value is less than 
the secured debt limit specified in section 109(e).
    In addition, section 2 of the bill amends Bankruptcy Code 
section 109(h) to waive the mandatory requirement that a debtor 
have received credit counseling prior to filing for bankruptcy 
relief, under certain circumstances. The waiver applies in a 
chapter 13 case where the debtor certifies to the court as to 
having received notice that the holder of a claim secured by 
the debtor's principal residence may commence (or has 
commenced) a foreclosure proceeding against such residence.
    Sec. 3. Prohibiting Claims Arising from Violations of the 
Truth in Lending Act. Under the Truth in Lending Act, a 
mortgage borrower has a right of rescission with respect to a 
mortgage secured by his or her residence, under certain 
circumstances.\148\ Bankruptcy Code section 502(b) enumerates 
various claims of creditors that are not entitled to payment in 
a bankruptcy case, subject to certain exceptions. Section 3 of 
the bill amends Bankruptcy Code section 502(b) to provide that 
a claim secured by an interest in the debtor's principal 
residence is not entitled to payment in a bankruptcy case to 
the extent that such claim is subject to a remedy for 
rescission under the Truth in Lending Act, notwithstanding the 
prior entry of a foreclosure judgment. In addition, section 3 
of the bill specifies that it shall not be construed to modify, 
impair, or supersede any other right of the debtor.
---------------------------------------------------------------------------
    \148\15 U.S.C. Sec. 1635 (2008).
---------------------------------------------------------------------------
    Sec. 4. Authority to Modify Certain Mortgages. Under 
Bankruptcy Code section 1322(b)(2), a chapter 13 plan may not 
modify the terms of a mortgage secured solely by real property 
that is the debtor's principal residence. Section 4 amends 
Bankruptcy Code section 1322(b) to create a limited exception 
to this prohibition. The exception only applies to a mortgage 
that: (1) originated before the effective date of this Act; and 
(2) is the subject of a notice that a foreclosure may be (or 
has been) commenced with respect to such mortgage.
    In addition, the debtor must certify pursuant to new 
section 1322(h) that he or she attempted--not less than 15 days 
before filing for bankruptcy relief--to contact the mortgage 
lender (or the entity collecting payments on the lender's 
behalf) regarding modification of the mortgage. This 
requirement does not apply if the foreclosure sale is scheduled 
to occur within 30 days of the date on which the debtor files 
for bankruptcy relief. If the chapter 13 case is pending at the 
time the new section 1322(h) becomes effective, then the debtor 
must certify that he or she attempted to contact the mortgage 
lender or entity collecting payments on its behalf regarding 
modification of the mortgage before either: (1) filing a plan 
under Bankruptcy Code section 1321 that contains a modification 
pursuant to new section 1322(b)(11); or (2) modifying a plan 
under Bankruptcy Code section 1323 or section 1329 to contain a 
modification pursuant to new section 1322(b)(11).
    Under new section 1322(b)(11), the debtor may propose a 
plan modifying the rights of the mortgage lender (and the 
rights of the holder of any claim secured by a subordinate 
security interest in the residence) in several respects. It is 
important to note that the intent of new section 1322(b)(11) is 
permissive. Accordingly, a chapter 13 debtor may propose a plan 
that includes any or all types of modification authorized under 
section 1322(b)(11).
    First, the plan may provide for payment of the amount of 
the allowed secured claim as determined under Bankruptcy Code 
section 506(a)(1). Second, the plan may prohibit, reduce, or 
delay any adjustable interest rate applicable on and after the 
date of the filing of the plan. Third, it may extend the 
repayment period of the mortgage for up to 40 years (reduced by 
the period for which the mortgage has been outstanding), or the 
remaining term of the mortgage beginning on the date of the 
order for relief under chapter 13, whichever is longer.
    Fourth, the plan may provide for the payment of interest at 
a fixed annual rate equal to the currently applicable average 
prime offer rate as of the date of the order for relief under 
chapter 13, as determined pursuant to specified criteria. The 
rate must correspond to the repayment term determined under new 
section 1322(b)(11)(C)(I) as published by the Federal Financial 
Institutions Examination Council in its table entitled, 
``Average Prime Offer Rates--Fixed.'' In addition, the rate 
must include a reasonable premium for risk.
    Fifth, the plan may provide for payments of such modified 
mortgage directly to the mortgage lender. The reference in new 
section 1322(b)(11)(D) to ``holder of the claim'' is intended 
to include a servicer of such mortgage for such holder.
    New section 1322(g) provides that a mortgage may be reduced 
under new section 1322(b)(11)(A) only on the condition that if 
the debtor sells the principal residence securing the claim 
before the debtor receives a discharge under chapter 13, the 
debtor agrees to pay from the net proceeds of such sale a 
portion of those proceeds to the mortgage lender. If the 
residence is sold in the first year following the effective 
date of the chapter 13 plan, the lender is to receive 80 
percent of the amount of the difference between the sales price 
and the amount of the lender's claim (plus costs of sale and 
improvements); this amount cannot exceed, however, the amount 
of the allowed secured claim determined as if it had not been 
reduced under the new section 1322(b)(11)(A). If the residence 
is sold in the second year following the effective date of the 
chapter 13 plan, then the applicable percentage is 60 percent. 
If the residence is sold in the third year following the 
effective date of the chapter 13 plan, then the applicable 
percentage is 40 percent. And if the residence is sold in the 
fourth year following the effective date of the chapter 13 
plan, then the applicable percentage is 20 percent. It is the 
intent of the Committee that if the unsecured portion of the 
mortgagee's claim is partially paid under this provision, it 
should be reconsidered under Bankruptcy Code section 502(j) and 
reduced accordingly.
    Sec. 5. Combating Excessive Fees. Section 5 of the bill 
amends Bankruptcy Code section 1322(c) to provide that the 
debtor, the debtor's property, and property of the bankruptcy 
estate are not liable for any fee, cost, or charge incurred 
while the chapter 13 case is pending and that arises from a 
claim for debt secured by the debtor's principal residence, 
unless the holder of the claim complies with certain 
requirements. It is the Committee's intent that the reference 
in this provision to a fee, cost, or charge include an increase 
in any applicable rate of interest for such claim, as well as 
to a change in escrow account payments.
    The requirements with which the holder of the claim must 
comply are the following: First, the claimant must file with 
the court an annual notice of the fee, cost, or charge (or on a 
more frequent basis as the court determines), within 1 year 
after the fee, cost, or charge was incurred or 60 days before 
the case is closed, whichever is earlier. Failure to give the 
required notice is deemed to be a waiver by the holder of any 
claim for the fees, costs, or charges, for all purposes. Then 
any attempt to collect them constitutes a violation of the 
Bankruptcy Code's discharge injunction under section 524(a)(2) 
and the automatic stay under section 362(a), whichever is 
applicable.
    Second, the fee, cost, or charge must be lawful under 
applicable nonbankruptcy law, reasonable, and provided for in 
the applicable security agreement. Third, the value of the 
debtor's principal residence must be greater than the amount of 
the claim, including the fee, cost, or charge.
    Section 5 of the bill further provides that a chapter 13 
plan may waive any prepayment penalty on a claim secured by the 
debtor's principal residence.
    Sec. 6. Confirmation of Plan. Bankruptcy Code section 
1325(a) sets forth the mandatory criteria for confirmation of a 
chapter 13 plan. Section 6 of the bill amends section 1325(a) 
to provide certain protections for a creditor whose rights are 
modified under new section 1322(b)(11).
    Section 6 imposes three new conditions for confirmation 
where the plan modifies a claim under new section 1322(b)(11). 
First, the plan must require that the creditor retain its lien 
until the later of when the claim (as modified) is paid or the 
debtor obtains a discharge. Second, the court must find that 
the modification under section 1322(b)(11) is in good faith. 
Third, the court must find that the debtor did not obtain the 
extension, renewal, or refinancing of credit that gives rise to 
a modified claim by the debtor's material misrepresentation, 
false pretenses, or actual fraud.
    Sec. 7. Discharge. Bankruptcy Code section 1328 sets forth 
the requirements by which a chapter 13 debtor may obtain a 
discharge, and the scope of such discharge. Section 7 of the 
bill amends section 1328(a) to clarify that the unpaid portion 
of an allowed secured claim modified under new section 
1322(b)(11) is not discharged.
    Sec. 8. Rule of Construction. Section 8 provides that 
nothing in the Act or the amendments made by it may be 
construed to modify any obligation of the Federal Housing 
Administration, the Veterans Administration, or the Department 
of Agriculture under a contract that guarantees or insures the 
payment of any part of a loan secured by an interest in a 
principal residence.
    Sec. 9. Effective Date; Application of Amendments. Section 
9(a) provides that the Act and the amendments made by it, 
except as provided in subsection (b), take effect on the Act's 
date of enactment. Section 9(b) provides that the amendments 
made by the Act apply only to cases commenced under title 11 of 
the United States Code before, on, or after the Act's date of 
enactment.

         Changes in Existing Law Made by the Bill, as Reported

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

                      TITLE 11, UNITED STATES CODE

           *       *       *       *       *       *       *
CHAPTER 1--GENERAL PROVISIONS

           *       *       *       *       *       *       *

Sec. 109. Who may be a debtor

    (a) * * *

           *       *       *       *       *       *       *

    (e) Only an individual with regular income that owes, on 
the date of the filing of the petition, noncontingent, 
liquidated, unsecured debts of less than $250,000 and 
noncontingent, liquidated, secured debts of less than $750,000, 
or an individual with regular income and such individual's 
spouse, except a stockbroker or a commodity broker, that owe, 
on the date of the filing of the petition, noncontingent, 
liquidated, unsecured debts that aggregate less than $250,000 
and noncontingent, liquidated, secured debts of less than 
$750,000 may be a debtor under chapter 13 of this title. For 
purposes of this subsection, the computation of debts shall not 
include the secured or unsecured portions of--
            (1) debts secured by the debtor's principal 
        residence if the current value of such residence is 
        less than the secured debt limit; or
            (2) debts secured or formerly secured by real 
        property that was the debtor's principal residence that 
        was sold in foreclosure or that the debtor surrendered 
        to the creditor if the current value of such real 
        property is less than the secured debt limit.

           *       *       *       *       *       *       *

    (h)(1) * * *

           *       *       *       *       *       *       *

    (5) The requirements of paragraph (1) shall not apply in a 
case under chapter 13 with respect to a debtor who submits to 
the court a certification that the debtor has received notice 
that the holder of a claim secured by the debtor's principal 
residence may commence a foreclosure on the debtor's principal 
residence.

           *       *       *       *       *       *       *

CHAPTER 5--CREDITORS, THE DEBTOR, AND THE ESTATE

           *       *       *       *       *       *       *

SUBCHAPTER I--CREDITORS AND CLAIMS

           *       *       *       *       *       *       *

Sec. 502. Allowance of claims or interests

    (a) * * *
    (b) Except as provided in subsections (e)(2), (f), (g), (h) 
and (i) of this section, if such objection to a claim is made, 
the court, after notice and a hearing, shall determine the 
amount of such claim in lawful currency of the United States as 
of the date of the filing of the petition, and shall allow such 
claim in such amount, except to the extent that--
            (1) * * *

           *       *       *       *       *       *       *

            (8) such claim results from a reduction, due to 
        late payment, in the amount of an otherwise applicable 
        credit available to the debtor in connection with an 
        employment tax on wages, salaries, or commissions 
        earned from the debtor; [or]
            (9) proof of such claim is not timely filed, except 
        to the extent tardily filed as permitted under 
        paragraph (1), (2), or (3) of section 726(a) of this 
        title or under the Federal Rules of Bankruptcy 
        Procedure, except that a claim of a governmental unit 
        shall be timely filed if it is filed before 180 days 
        after the date of the order for relief or such later 
        time as the Federal Rules of Bankruptcy Procedure may 
        provide, and except that in a case under chapter 13, a 
        claim of a governmental unit for a tax with respect to 
        a return filed under section 1308 shall be timely if 
        the claim is filed on or before the date that is 60 
        days after the date on which such return was filed as 
        required[.]; or
            (10) the claim for a loan secured by a security 
        interest in the debtor's principal residence is subject 
        to a remedy for rescission under the Truth in Lending 
        Act notwithstanding the prior entry of a foreclosure 
        judgment, except that nothing in this paragraph shall 
        be construed to modify, impair, or supersede any other 
        right of the debtor.

           *       *       *       *       *       *       *

CHAPTER 13--ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME

           *       *       *       *       *       *       *

SUBCHAPTER II--THE PLAN

           *       *       *       *       *       *       *

Sec. 1322. Contents of plan

    (a) * * *
    (b) Subject to subsections (a) and (c) of this section, the 
plan may--
            (1) * * *

           *       *       *       *       *       *       *

            (10) provide for the payment of interest accruing 
        after the date of the filing of the petition on 
        unsecured claims that are nondischargeable under 
        section 1328(a), except that such interest may be paid 
        only to the extent that the debtor has disposable 
        income available to pay such interest after making 
        provision for full payment of all allowed claims; [and]
            (11) notwithstanding paragraph (2) and otherwise 
        applicable nonbankruptcy law, with respect to a claim 
        for a loan originated before the effective date of this 
        paragraph and secured by a security interest in the 
        debtor's principal residence that is the subject of a 
        notice that a foreclosure may be commenced with respect 
        to such loan, modify the rights of the holder of such 
        claim (and the rights of the holder of any claim 
        secured by a subordinate security interest in such 
        residence)--
                    (A) by providing for payment of the amount 
                of the allowed secured claim as determined 
                under section 506(a)(1);
                    (B) if any applicable rate of interest is 
                adjustable under the terms of such security 
                interest by prohibiting, reducing, or delaying 
                adjustments to such rate of interest applicable 
                on and after the date of filing of the plan;
                    (C) by modifying the terms and conditions 
                of such loan--
                            (i) to extend the repayment period 
                        for a period that is no longer than the 
                        longer of 40 years (reduced by the 
                        period for which such loan has been 
                        outstanding) or the remaining term of 
                        such loan, beginning on the date of the 
                        order for relief under this chapter; 
                        and
                            (ii) to provide for the payment of 
                        interest accruing after the date of the 
                        order for relief under this chapter at 
                        a fixed annual rate equal to the 
                        currently applicable average prime 
                        offer rate as of the date of the order 
                        for relief under this chapter, 
                        corresponding to the repayment term 
                        determined under the preceding 
                        paragraph, as published by the Federal 
                        Financial Institutions Examination 
                        Council in its table entitled ``Average 
                        Prime Offer Rates--Fixed'', plus a 
                        reasonable premium for risk; and
                    (D) by providing for payments of such 
                modified loan directly to the holder of the 
                claim; and
            [(11)] (12) include any other appropriate provision 
        not inconsistent with this title.
    (c) Notwithstanding subsection (b)(2) and applicable 
nonbankruptcy law--
            (1) a default with respect to, or that gave rise 
        to, a lien on the debtor's principal residence may be 
        cured under paragraph (3) or (5) of subsection (b) 
        until such residence is sold at a foreclosure sale that 
        is conducted in accordance with applicable 
        nonbankruptcy law; [and]
            (2) in a case in which the last payment on the 
        original payment schedule for a claim secured only by a 
        security interest in real property that is the debtor's 
        principal residence is due before the date on which the 
        final payment under the plan is due, the plan may 
        provide for the payment of the claim as modified 
        pursuant to section 1325(a)(5) of this title[.];
            (3) the debtor, the debtor's property, and property 
        of the estate are not liable for a fee, cost, or charge 
        that is incurred while the case is pending and arises 
        from a debt that is secured by the debtor's principal 
        residence except to the extent that--
                    (A) the holder of the claim for such debt 
                files with the court (annually or, in order to 
                permit filing consistent with clause (ii), at 
                such more frequent periodicity as the court 
                determines necessary) notice of such fee, cost, 
                or charge before the earlier of--
                            (i) 1 year after such fee, cost, or 
                        charge is incurred; or
                            (ii) 60 days before the closing of 
                        the case; and
                    (B) such fee, cost, or charge--
                            (i) is lawful under applicable 
                        nonbankruptcy law, reasonable, and 
                        provided for in the applicable security 
                        agreement; and
                            (ii) is secured by property the 
                        value of which is greater than the 
                        amount of such claim, including such 
                        fee, cost, or charge;
            (4) the failure of a party to give notice described 
        in paragraph (3) shall be deemed a waiver of any claim 
        for fees, costs, or charges described in paragraph (3) 
        for all purposes, and any attempt to collect such fees, 
        costs, or charges shall constitute a violation of 
        section 524(a)(2) or, if the violation occurs before 
        the date of discharge, of section 362(a); and
            (5) a plan may provide for the waiver of any 
        prepayment penalty on a claim secured by the debtor's 
        principal residence.

           *       *       *       *       *       *       *

    (g) A claim may be reduced under subsection (b)(11)(A) only 
on the condition that if the debtor sells the principal 
residence securing such claim, before receiving a discharge 
under this chapter and receives net proceeds from the sale of 
such residence, then the debtor agrees to pay to such holder--
            (1) if such residence is sold in the 1st year 
        occurring after the effective date of the plan, 80 
        percent of the amount of the difference between the 
        sales price and the amount of such claim (plus costs of 
        sale and improvements), but not to exceed the amount of 
        the allowed secured claim determined as if such claim 
        had not been reduced under such subsection;
            (2) if such residence is sold in the 2d year 
        occurring after the effective date of the plan, 60 
        percent of the amount of the difference between the 
        sales price and the amount of such claim (plus costs of 
        sale and improvements), but not to exceed the amount of 
        the allowed secured claim determined as if such claim 
        had not been reduced under such subsection;
            (3) if such residence is sold in the 3d year 
        occurring after the effective date of the plan, 40 
        percent of the amount of the difference between the 
        sales price and the amount of such claim (plus costs of 
        sale and improvements), but not to exceed the amount of 
        the allowed secured claim determined as if such claim 
        had not been reduced under such subsection; and
            (4) if such residence is sold in the 4th year 
        occurring after the effective date of the plan, 20 
        percent of the amount of the difference between the 
        sales price and the amount of such claim (plus costs of 
        sale and improvements), but not to exceed the amount of 
        the allowed secured claim determined as if such claim 
        had not been reduced under such subsection.
    (h) With respect to a claim of the kind described in 
subsection (b)(11), the plan may not contain a modification 
under the authority of subsection (b)(11)--
            (1) in a case commenced under this chapter after 
        the expiration of the 15-day period beginning on the 
        effective date of this subsection, unless--
                    (A) the debtor certifies that the debtor 
                attempted, not less than 15 days before the 
                commencement of the case, to contact the holder 
                of such claim (or the entity collecting 
                payments on behalf of such holder) regarding 
                modification of the loan that is the subject of 
                such claim; or
                    (B) a foreclosure sale is scheduled to 
                occur on a date in the 30-day period beginning 
                on the date the case is commenced; and
            (2) in any other case pending under this chapter, 
        unless the debtor certifies that the debtor attempted 
        to contact the holder of such claim (or the entity 
        collecting payments on behalf of such holder) regarding 
        modification of the loan that is the subject of such 
        claim, before--
                    (A) filing a plan under section 1321 that 
                contains a modification under the authority of 
                subsection (b)(11); or
                    (B) modifying a plan under section 1323 or 
                1329 to contain a modification under the 
                authority of subsection (b)(11).

           *       *       *       *       *       *       *

Sec. 1325. Confirmation of plan

    (a) Except as provided in subsection (b), the court shall 
confirm a plan if--
            (1) * * *

           *       *       *       *       *       *       *

            (8) the debtor has paid all amounts that are 
        required to be paid under a domestic support obligation 
        and that first become payable after the date of the 
        filing of the petition if the debtor is required by a 
        judicial or administrative order, or by statute, to pay 
        such domestic support obligation; [and]
            (9) the debtor has filed all applicable Federal, 
        State, and local tax returns as required by section 
        1308[.];
            (10) notwithstanding subclause (I) of paragraph 
        (5)(B)(i), whenever the plan modifies a claim in 
        accordance with section 1322(b)(11), the plan provides 
        that the holder of such claim retain the lien until the 
        later of--
                    (A) the payment of such holder's allowed 
                secured claim; or
                    (B) discharge under section 1328; and
            (11) whenever the plan modifies a claim in 
        accordance with section 1322(b)(11), the court finds 
        that such modification is in good faith and that the 
        debtor did not obtain the extension, renewal, or 
        refinancing of credit that gives rise to a modified 
        claim by the debtor's material misrepresentation, false 
        pretenses, or actual fraud.

           *       *       *       *       *       *       *

Sec. 1328. Discharge

    (a) Subject to subsection (d), as soon as practicable after 
completion by the debtor of all payments under the plan, and in 
the case of a debtor who is required by a judicial or 
administrative order, or by statute, to pay a domestic support 
obligation, after such debtor certifies that all amounts 
payable under such order or such statute that are due on or 
before the date of the certification (including amounts due 
before the petition was filed, but only to the extent provided 
for by the plan) have been paid (other than payments to holders 
of claims whose rights are modified under section 1322(b)(11)), 
unless the court approves a written waiver of discharge 
executed by the debtor after the order for relief under this 
chapter, the court shall grant the debtor a discharge of all 
debts provided for by the plan or disallowed under section 502 
of this title, except any debt--
            (1) provided for under section 1322(b)(5) or, to 
        the extent of the unpaid portion of an allowed secured 
        claim, provided for in section 1322(b)(11);

           *       *       *       *       *       *       *

    (c) A discharge granted under subsection (b) of this 
section discharges the debtor from all unsecured debts provided 
for by the plan or disallowed under section 502 of this title, 
except any debt--
            (1) provided for under section 1322(b)(5) or, to 
        the extent of the unpaid portion of an allowed secured 
        claim, provided for in section 1322(b)(11) of this 
        title; or

           *       *       *       *       *       *       *

                             Minority Views

                              INTRODUCTION

    The ongoing crisis in the U.S. home mortgage market has 
roiled, not just the U.S. housing market, but the very 
frameworks of our national and international financial systems. 
Several solutions have been suggested to address the crisis. To 
date, these measures have not remedied enough troubled loans to 
restore order to the market. It is urgent that we find more 
effective solutions, and that we apply them promptly.
    H.R. 200, however, is not one of the solutions that will 
solve the problem. H.R. 200 seeks to address the crisis by 
suspending the laws of economics--rather than by faithfully 
observing them, applying them, and thereby curing our ill 
economy. The bill fails to solve the problems in a host of 
ways. Rather than reduce risk to stimulate credit, it increases 
the risks associated with existing principal residence 
mortgages, exposing them for the first time to modification in 
bankruptcy. Once this dangerous precedent is set, it will be 
easier for Congress to allow for bankruptcy modification of 
principal residence mortgages in the future. What is more, 
lenders will be forced to increase the interest rates they 
charge in order to account for the potential risk that 
borrowers file for bankruptcy and loans are modified by the 
courts. With increased borrowing costs to account for risk, 
future housing affordability will be reduced, which could make 
homeownership more difficult in the future and push home prices 
even lower.
    Making matters still worse, H.R. 200 seeks to stem the 
current wave of foreclosures, not by targeting the subprime and 
nontraditional loans driving the crisis, but by 
indiscriminately sweeping all types of mortgages into 
bankruptcy. This blunderbuss-approach inevitably will dilute 
the bill's effectiveness and inject moral hazard into consumer 
decisions regarding whether to seek voluntary loan 
modifications, enter bankruptcy, or attempt through other means 
to resolve their financial distress. What will be the result? 
Almost certainly, it will be an avalanche of unnecessary 
bankruptcy filings that will overwhelm the bankruptcy courts 
and needlessly drag millions upon millions of dollars in 
petitioners' non-mortgage debt into bankruptcy. And because 
bankruptcy will permanently damage the petitioner's credit for 
years to come, allowing bankruptcy filings in these cases may 
do more serious long-term injury to the finances of the 
borrowers who seek to take advantage of this provision than 
other potential solutions.
    More ominous still, the bill threatens to prompt a new wave 
of capital-reserve hoarding by banks. As bankruptcy courts 
modify mortgages, banks will have to increase their capital 
reserves to account for the impact mortgage write-downs in 
bankruptcy have on the market values of mortgage-backed 
securities. Increased capital reserves means decreased lending 
of all types. Thus, the bill threatens, not to solve the 
crisis, but merely to trigger a repeat of the near financial 
meltdown the country experienced in the fall of 2008--a 
financial earthquake that precipitated the expenditure of 
hundreds of billions of taxpayer dollars. We must not tempt a 
repeat of that experience.
    These are but a few of the most prominent ways in which 
H.R. 200, by ignoring economic realities, will only make the 
mortgage crisis and the broader economic crisis facing the 
country deeper, wider and longer. In committee, Republicans 
promoted alternative measures that could have helped to stem 
foreclosures and close the gap in voluntary mortgage workouts 
in harmony with fundamental economic principles. At mark-up, 
Republicans offered amendments that would at least have 
substantially narrowed the focus of this bill, so that it would 
have made bankruptcy modification available only on the loans 
that provoked the crisis, and only in ways that would have 
minimized collateral damage to the economy. All of these 
proposals were rejected by the majority. Committee Republicans 
therefore cannot support this legislation.

            EXPERT OPINIONS ON PRIMARY RESIDENCE MORTGAGES 
                             IN BANKRUPTCY

 LDepartment of Housing and Urban Development: ``The 
Department is concerned about the effects of legislative 
proposals, such as S.61 and H.R. 200, that would remove the 
special status for principal residences. . . . Having the 
option of cramdown would increase the attractiveness of Chapter 
13 filings versus working directly with lenders to find an 
appropriate loss mitigation workout plan. . . . It is the 
Department's conclusion that S. 61 and H.R. 200 create a 
fundamental change in the quality and value of residential real 
estate as collateral for a mortgage loan. It is this 
uncertainty that will lead to higher mortgage costs for most 
borrowers.''

 LProfessor Christopher Mayer, Columbia Business 
School: ``But proposals to change the Bankruptcy Code are 
deeply problematic. . . . These proposals would raise future 
borrowing costs and could encourage solvent borrowers to miss 
payments (a form of moral hazard). The financial crisis would 
be much worse if fifty-two million borrowers, who are now 
current, attempt to invalidate their mortgages. Equally 
important, proposals to change the Code could dramatically 
increase bankruptcy-filing rates. . . . Thus, proposed reforms 
could push millions of borrowers into bankruptcy, delaying the 
resolution of the current crisis for years. Finally, bankruptcy 
reform is a blunt tool: it applies a one-size-fits-all approach 
to loan modification, and it would impact all mortgages, 
including the majority of outstanding loans now owned by Fannie 
Mae and Freddie Mac.''

 LProfessor Todd Zywicki, George Mason University 
School of Law: ``Amending the Bankruptcy Code to permit 
modification of home mortgages must appear especially tempting 
as a political matter because it doesn't appear to require 
further expenditure of public funds, thus it appears to be 
`free' to Washington. Allowing mortgage modification will 
provide a windfall for some troubled homeowners, but its costs 
will be borne by aspiring future homeowners and any American 
who uses credit of any kind, from car loans to credit cards. 
The ripple effects could deepen the troubles the currently 
roiling America's consumer credit markets. Finally, because of 
the federal takeover of Fannie Mae and Freddie Mac, the losses 
incurred in bankruptcy may eventually come back to the 
taxpayers anyway.''

 LProfessor Mark Scarberry, Pepperdine University 
School of Law: ``Changing the risk characteristics of home 
mortgages retroactively in this way not only would likely 
depress further the value of the existing home mortgages. 
Increased risk would mean increased interest rates to 
compensate for the risk, and denial of mortgage credit to some 
who presently would qualify under appropriate underwriting 
standards. There also would be a shadow cast on the 
trustworthiness of American mortgage-backed securities. The 
implications are disturbing given that such securities are held 
worldwide by investors who count on the protection of property 
and contract rights under American law.''

 LBarclays Capital: ``Losses from bankruptcy cramdowns 
could be significantly larger than servicer-driven 
modifications. Moral hazard and the potential for high plan 
failure rates could further increase losses and charge-offs 
without stemming foreclosures or accelerating a housing 
recovery. Bankruptcy filings could double or more, increasing 
credit card charge-offs by 2-4pp. We fear a massive sell-off 
that would worsen valuations, threatening further balance sheet 
write-downs.''

 LJulian Mann, First Pacific Advisors: ``A proposed 
change to bankruptcy law to allow judges to reduce homeowners' 
mortgages may boost the capital needs of banks and insurers by 
hundreds of billions of dollars. . . . The loss of mortgage-
bond payments because of bankruptcy changes would require 
financial institutions to mark down more securities to market 
values. . . . [T]he proposed changes would raise the cost of 
loans and cause foreign investors to flee American debt 
creating doubt about U.S. contracts. . . . [M]any borrowers 
will end up defaulting on debt reworked by bankruptcy judges.''

 LUBS Investment Research: ``[T]he proposal to allow 
primary residence cramdowns, if passed in its current form, 
would likely have dire consequences--resulting in a sizable 
wave of new bankruptcy filings. . . . The compilation of 
[impacts of the legislation] is likely to put further strain on 
the financial system, increase losses, decrease the 
availability of credit and increase risk premiums for mortgages 
and consumer debt.''

 LJustice Stevens, Nobelman v. American Savings Bank: 
``At first blush it seems somewhat strange that the Bankruptcy 
Code should provide less protection to an individual's interest 
in retaining possession of his or her home than of other 
assets. The anomaly is, however, explained by the legislative 
history indicating that favorable treatment of residential 
mortgagees was intended to encourage the flow of capital into 
the home lending market.''

                               BACKGROUND

A. Primary Residence Exception
    Section 1322(b)(2) of the Bankruptcy Code provides that a 
Chapter 13 bankruptcy plan may: ``modify the rights of holders 
of secured claims, other than a claim secured only by a 
security interest in real property that is the debtor's 
principal residence.''\1\ This important exception means that 
home mortgages may not be modified in bankruptcy and that the 
original contract between the borrower and the lender must be 
maintained.
---------------------------------------------------------------------------
    \1\11 U.S.C. Sec. 1322(b) (emphasis added); accord 11 U.S.C. 
Sec. 1123(b)(5) (for Chapter 11 bankruptcies).
---------------------------------------------------------------------------
    While this limitation may seem to be an unwarranted 
anomaly, Justice Stevens explained the importance of the 
exception in Nobelman v. American Savings Bank:\2\
---------------------------------------------------------------------------
    \2\Nobelman v. American Savings Bank, 508 U.S. 324 (1993).

        At first blush it seems somewhat strange that the 
        Bankruptcy Code should provide less protection to an 
        individual's interest in retaining possession of his or 
        her home than of other assets. The anomaly is, however, 
        explained by the legislative history indicating that 
        favorable treatment of residential mortgagees was 
        intended to encourage the flow of capital into the home 
        lending market.\3\
---------------------------------------------------------------------------
    \3\Id. at 332 (Stevens, J. concurring).

    The legislative history of the primary residence exception 
buttresses Justice Stevens' explanation in Nobelman. Under 
Chapter XIII of the Bankruptcy Act of 1898, the statutory 
predecessor of the current Chapter 13, an individual wage 
earner's reorganization plan could not ``deal with'' (i.e. 
modify or otherwise affect) the rights of a creditor holding a 
claim secured by real property.\4\ In 1978, when Congress set 
about updating the Bankruptcy Act of 1898, it had the 
opportunity to eliminate that exception, but specifically chose 
not to do so.\5\
---------------------------------------------------------------------------
    \4\Bankruptcy Act of 1898, Pub. Law No. 61, 30 Stat. 544-66 
(repealed 1978), Sec. 606(1)).
    \5\Grubbs v. Houston First American Savings Association, 730 F.2d 
236 (5th Cir. 1984), and Matter of Clark, 738 F.2d 869 (7th Cir. 1984), 
contain summaries of the legislative history of section 1322 of the 
Bankruptcy Code.
---------------------------------------------------------------------------
    As originally proposed, the House version of section 1322 
of the Bankruptcy Code entirely eliminated this rule. The 
Senate version, on the other hand, preserved the real estate 
protection afforded under the 1898 Act. Edward J. Kulick, who 
testified before the Senate Judiciary Committee's Subcommittee 
on Improvements in the Judicial Machinery, pointed out that 
reducing a mortgagee's secured claim to the actual present 
value of the real property would have a dramatically negative 
impact on the mortgage industry.\6\ In discussing the 
residential mortgage market, he testified that the proposed 
House version of section 1322 (which would have allowed cram-
down) would have a decidedly negative impact on the 
availability of home mortgage funds, especially when the 
financial resources of an individual home buyer were not 
particularly strong. He proposed the carved out anti-
modification language that is presently in section 1322 of the 
Code.
---------------------------------------------------------------------------
    \6\Bankruptcy Reform Act of 1978: Hearings Before the Subcommittee 
on Improvements to the Judicial Machinery, S. Comm. on the Judiciary, 
95th Cong. 702-14 (1977) (testimony of Edward J. Kulick).
---------------------------------------------------------------------------
    Thus, the anti-modification (anti-cramdown) protection that 
is afforded to home mortgage lenders under section 1322 and 
Nobelman has its roots in the Bankruptcy Act of 1898. In 1978, 
a compromise was reached when the mortgage industry agreed to 
permit limited modification of the rights of home mortgage 
lenders under section 1325 of the Code. This compromise was 
reached because the home mortgage industry, which performed a 
valuable public service through the making of loans, needed 
special protection against modification.\7\ The intent of 
section 1322(b)(2) of the Code was to preserve the availability 
of residential mortgage funding for individuals of modest 
means.
---------------------------------------------------------------------------
    \7\Grubbs, 730 F.2d at 246.
---------------------------------------------------------------------------
    The protections afforded home mortgage lenders in Chapter 
13 were, in 1994, extended to Chapter 11 cases as well. In 
1994, 11 U.S.C. Sec. 1123(b)(5) was amended so that it too 
states that secured claims can be modified ``other than a claim 
secured only by a security interest in real property that is 
the debtor's principal residence.''
B. Foreclosure Crisis
    The problem now challenging financial markets and the 
economy stems from historically low interest rates that 
encouraged millions of Americans to refinance their fixed rate 
mortgages or to purchase new homes. The lower interest rates 
meant that buyers could afford larger mortgages. Effectively, a 
bidding war broke out that raised the price of homes; higher 
prices limited the number of potential buyers. In response, the 
mortgage industry developed new products that allowed otherwise 
unqualified individuals (by income, assets, and/or credit 
history) to receive loans to buy or refinance a house. These 
same products also allowed creditworthy households to buy more 
expensive houses or to refinance their current houses to obtain 
cash for other uses.
    Many borrowers took out riskier mortgage instruments, 
referred to as ``subprime'' loans. In recent years, subprime 
loans have come to account for an ever larger share of the 
mortgage finance market. By 2005, they accounted for about 20 
percent of all outstanding mortgages, up from just 5 percent in 
1994. Among the several distinct types of subprime loans on the 
market, the one causing considerable concern is the subprime 
hybrid called ``2/28'' or ``3/27,'' which allows borrowers a 
low monthly payment during the first two to three years, but 
then resets to a higher interest rate and payment for the 
remaining 28 or 27 years, respectively. As these interest rates 
reset, many borrowers have been unable to meet the higher 
payment. As a result, defaults and foreclosures are rising.
    The foreclosure crisis is the result of borrowers, lenders, 
brokers and investors all getting caught up in the ``irrational 
exuberance'' of the rising market:

         LBrokers eager to earn fees sought out 
        previously under-served, less-qualified borrowers.

         LLenders competing for business relaxed 
        underwriting standards, and shifted credit risk to Wall 
        Street by selling pools of loans to issuers of 
        mortgage-backed securities.

         LBorrowers exploited lax underwriting 
        standards: many overstated their incomes, borrowing 
        more than they could reasonably expect to repay and 
        purchasing more expensive homes than they could truly 
        afford. Many borrowers put down very small downpayments 
        on the assumption that rising prices would build equity 
        in their homes. Some even gambled on being able to buy 
        and ``flip'' an investment property before introductory 
        rates ended.

         LWall Street eagerly securitized millions of 
        loans, unconcerned about loan quality as long as there 
        were buyers for the securities, which increased the 
        capital available to lenders to keep the cycle going.

    Also contributing to the creation of the crisis and the 
encouragement of lax underwriting standards was the purchasing 
and insuring of non-traditional and subprime loans by Freddie 
Mac and Fannie Mae (``GSEs''). For example, in 1992, when 
Congress imposed an affordable housing mission on the GSEs, the 
Department of Housing and Urban Development issued regulations 
that required them to make affordable housing more plentiful. 
In order to meet HUD's requirements and to keep their support 
in Congress, the GSEs began purchasing and insuring more and 
more subprime and non-traditional loans. This ready-market for 
mortgages at the GSEs spurred on the easy lending and lax 
underwriting that led to the housing bubble.
    When this housing bubble burst, the result was and has 
continued to be a foreclosure crisis. Currently, approximately 
four million homeowners are delinquent on their mortgages and 
another twelve to fifteen million are underwater on their 
loans, owing more on their mortgage than their house is worth. 
According to Case and Shiller/S&P, housing prices dropped about 
18 percent last year. Declining housing prices and lax 
underwriting standards when loans were written led to 2.25 
million foreclosures being started last year according to the 
Federal Reserve and projections for another 1.7 million 
foreclosure starts this year.

                               DISCUSSION

A. Proponents' Rationale
    Those lawmakers and advocacy groups pushing for reforms to 
the Bankruptcy Code are doing so because they believe that 
other options will not be an adequate avenue to keeping 
borrowers in their homes. In general, a borrower in default on 
his loan may:

         Lrepay the loan, curing the default;

         Lrefinance the loan to a loan with a lower 
        interest rate and thus a lower monthly payment;

         Ltry to work with the lender to restructure 
        the mortgage to bring his monthly obligations in line 
        with his ability to pay;

         Lif the home's market value is greater than 
        the loan balance, the borrower is likely to sell it 
        himself; or

         Lif the loan balance is greater than the 
        home's value, let the lender pursue foreclosure.

    The two best two options, refinancing and loan 
modification, are, according to advocacy groups, often not 
available to subprime borrowers facing default. Refinancing at 
a lower interest rate is often not available because the 
borrower either cannot qualify or because the value of the 
house has dropped so that the house is currently mortgaged for 
more than its worth. Loan modification or loan workout is often 
not an option because: the borrower is unable to determine who 
the actual holder of the mortgage note is; mortgage servicers 
who are not the mortgage holders are scared that modifying a 
mortgage may make them legally liable to the mortgage holder; 
servicers are overwhelmed with requests for modification; or 
the borrower does not qualify for modification under the 
lender's policies.
    Advocacy groups also assert that no one wins in a 
foreclosure and thus bankruptcy reform is the best option for 
everyone. They argue that a foreclosure can cost a lender from 
20 to 40 percent of the loan balance, and that lenders should 
prefer to have a performing loan (albeit adjusted through 
bankruptcy) than have a vacant property in a slow market. 
Overall, advocacy groups' basic claim is that the proposed 
bankruptcy reform would be better than foreclosure in terms of 
cost to lenders, but at least with bankruptcy reform borrowers 
would get to stay in their homes. Moreover, supporters assert 
that houses around a home that is foreclosed lose value; thus 
avoiding foreclosure is a benefit to surrounding homes.
B. Consequences of Enacting H.R. 200
    Proponents of H.R. 200 have sold the bill as the 
``costless'' solution to the foreclosure crisis because it does 
not require any upfront government spending. In this regard, 
H.R. 200 appears to be particularly appealing legislation. 
However, this bill is far from costless. On the contrary, H.R. 
200 is deeply flawed and will create costs for taxpayers and 
future borrowers. Moreover, it will send ripple effects through 
the credit markets, the housing market, and the bankruptcy 
system.
            1. Cost to future borrowers
    Some of the largest costs this bill will impose will be 
borne by future homeowners and current homeowners who seek to 
refinance in the future. Allowing home mortgages to be re-
written in bankruptcy will significantly increase the risks 
associated with mortgage lending thus increasing the costs of 
lending. Those costs will be passed on to the borrower. In 
fact, the lending industry contends that this legislation would 
raise interest rates by as much as two full percentage points 
on a primary residence mortgage. Moreover, lenders would be 
forced to require higher down-payments or mortgage insurance 
for all primary residence mortgages--requirements that would 
most affect low- and middle-income families. As a result, 
instead of actually helping families affected by the subprime 
crisis, this legislation threatens to do no more than swap the 
victims.
    Indeed, at today's interest rates, a prime borrower with a 
30-year fixed rate loan of $300,000 at 6% interest would pay 
$1,799 per month in principal and interest. If mortgage 
bankruptcy legislation is enacted, the Mortgage Bankers 
Association estimates that holding the economy, interest rates, 
borrower's credit, etc. constant, the rate for the same loan 
could go up to as much as 8%, leading to a monthly payment of 
$2,201, an annual increase of $4,824 and more than $144,000 
over the life of the loan.
    One does not have to take the Mortgage Bankers 
Association's word on the effects of the bill. In testimony 
before this Committee, Christopher Mayer, Senior Vice Dean and 
Paul Milstein Professor of Real Estate at Columbia Business 
School, confirmed that costs will increase if this legislation 
is enacted. According to Professor Mayer, ``empirical evidence 
suggests that if mortgages are subject to strip-down in 
bankruptcy, the cost of future credit will rise as lenders 
incorporate this new risk into their lending decisions.''\8\ 
Additionally, Professor Mayer testified that ``[b]ankruptcy 
reform would increase borrowing costs further, resulting in 
even less borrowing and likely further reduce demand for 
housing.''\9\
---------------------------------------------------------------------------
    \8\H.R. 200, ``Helping Families Save Their Homes in Bankruptcy'': 
Hearing Before the H. Comm. on the Judiciary, 111th Cong. (2009) 
(testimony of Christopher J. Mayer, Senior Vice Dean, Columbia Business 
School).
    \9\Id.
---------------------------------------------------------------------------
    Proponents of the bill have argued that because the 
manager's amendment limits the bill to existing mortgages, this 
bill will not impose costs on future borrowers. This argument 
is inaccurate for several reasons. First, the costs of writing 
down a loan because of bankruptcy must be borne by someone. 
That cost cannot be passed on to current borrowers, because 
their loans have already been consummated. Thus, the costs of 
write-downs will have to be passed on to future borrowers. 
Second, once the precedent has been set, it will be much easier 
for Congress to allow for modification of principal residence 
mortgages in the future, as has been done in the past with 
Chapter 12 of the Bankruptcy Code, which started off as a 
temporary section and was eventually made permanent. The 
uncertainty over whether this new bankruptcy modification will 
be extended in the future or made permanent will become a 
factor that lenders will price into their loans. Finally, if 
mortgage-backed securities investors are hit with massive 
write-downs on top of the write-downs they are already taking, 
those investors will be less likely to put capital back into 
the market in the future or will seek higher premiums before 
they invest. Less capital or higher premiums will lead to 
higher borrowing costs.
            2. Cost to taxpayers
    The exposure to taxpayers from non-performing mortgages is 
very large. The outstanding debt and mortgage guarantees from 
Freddie Mac and Fannie Mae (``GSEs'') are in excess of $5 
trillion. Additionally, the Federal Housing Administration 
(FHA) has hundreds of billions of dollars in loans at risk and 
the Federal Deposit Insurance Corp. (FDIC) has billions more 
from loan guarantees through takeovers of Indy Mac, Washington 
Mutual, and other failed lenders. The government also has 
guarantees for debt from loans to AIG, Citigroup, and Bank of 
America. Moreover, the Federal Reserve has risks from former 
Bear Sterns securities and other securities it now holds as 
collateral. This exposure would be compounded if the federal 
government creates a ``bad bank'' to purchase and manage 
troubled assets.
    Because of this exposure, allowing bankruptcy modification 
of principal residence home mortgages would be costly to the 
federal government and the taxpayers. For example, when a 
mortgage that has been packaged into a mortgage-backed security 
guaranteed by the GSEs is modified in bankruptcy, the value of 
the mortgage is negatively affected. The GSEs would realize a 
loss on the guarantee, and those losses flow through to the 
federal government in its role as conservator of those 
institutions and thus to taxpayers. In addition, prior to the 
enactment of the ``Emergency Economic Stabilization Act'' 
(which created the Troubled Asset Relief Program, or ``TARP'') 
and recent actions by the Federal Reserve, it was private 
sector parties owning mortgage-backed securities that would 
bear any losses resulting from cram downs. However, under TARP 
the federal government can buy troubled loans and mortgage-
backed securities. The government has also guaranteed against 
losses from some large financial institutions. Bankruptcy 
modification of this debt and mortgage-backed securities would 
trigger massive losses for the federal government and 
taxpayers.
            3. FHA/VA lending programs
    The FHA and the Department of Veterans Affairs (VA) have 
programs that make affordable, low down-payment loans possible, 
by providing lenders insurance against non-payment by 
borrowers. This insurance, however, does not cover losses due 
to bankruptcy cram-down. Moreover, FHA/VA servicers could 
endure losses on FHA/VA loans if they are required to advance 
principal and interest payments on the original, pre-bankruptcy 
modified loan balance, rather than on the reduced amount. 
Therefore, reducing the principal through bankruptcy cram-down 
would cause devastating financial losses to FHA/VA lenders. 
Without the protection of government insurance, lenders will be 
driven away from offering low down payment FHA/VA loans, 
especially at low interest rates. Instead lenders will either 
move to higher down payment loan programs which offer more 
protection against cram-down risk or exit FHA/VA lending 
altogether. In either case, cram-down will reduce the 
availability and increase the cost of low down payment loans. 
As an assistant deputy secretary of Housing and Urban 
Development recently testified, ``any legislation in this area 
would likely create a powerful disincentive to doing business 
with FHA and [the Government National Mortgage 
Association.]''\10\
---------------------------------------------------------------------------
    \10\FHA Oversight of Loan Originators: Hearing Before the H. Comm. 
on Financial Services, 111th Cong. (2009) (testimony of Philip Murray, 
Deputy Assistant Secretary for Single Family Housing, Department of 
Housing and Urban Development).
---------------------------------------------------------------------------
    The outcome to which the HUD official testified is 
particularly bad considering that FHA/VA loans are not the 
problem. While foreclosure rates for other types of loans have 
skyrocketed over the past year, foreclosure rates for FHA/VA 
loans have remained low and stable. This stability is due in 
large part to robust FHA/VA foreclosure-prevention and loan-
modification programs. In fact, FHA loans have less than one-
third of the foreclosure rate of subprime loans and VA 
foreclosure rates are even lower.
    The manager's amendment attempted, but failed, to deal with 
the FHA/VA insurance problem. The manager's amendment inserted 
a non-binding rule of construction designed to exempt FHA/VA 
loans from cram-down. However, it is unclear how this rule 
would even work--the changes H.R. 200 makes to section 1322(b) 
do not exempt FHA/VA loans but the courts are directed to 
interpret the statute as if they are exempted. Such an approach 
to exempting FHA/VA loans is highly questionable, and thus the 
FHA/VA insurance problem remains despite the manager's 
amendment to H.R. 200.
            4. Bank write-downs
    Recent analysis of the proposals to allow bankruptcy courts 
to modify principal residence home mortgages concludes that the 
write-downs associated with allowing bankruptcy modification 
could require banks to increase their capital reserves by 
hundreds of billions of dollars. This is because there is 
language in the prospectuses of many mortgage-backed securities 
that would cause bankruptcy losses to be shared among all 
securities holders, even those that hold AAA rated bonds.\11\ 
Indeed, according to Standard & Poor's, because bankruptcy 
carve-outs ``were not initially sized for the change in law the 
proposed legislation contemplates,''\12\ it can be expected 
that ``increases in bankruptcy losses could, in short order, 
result in principal losses being allocated to the senior-most 
certificates.''\13\
---------------------------------------------------------------------------
    \11\According to Standard & Poor's Ratings Direct, ``[w]hile losses 
resulting from loan modifications outside of bankruptcy are allocated 
according to the rules governing traditional credit losses, losses from 
bankruptcy principal write-downs and other judicial modifications to 
the secured lien may be allocated in certain transactions to all of the 
securities pro rata after the transaction reaches a minimum threshold 
of bankruptcy losses.'' Standard & Poor's, The Potential Effect of 
Proposed Bankruptcy ``Cram-Down'' Legislation on U.S. RMBS , Ratings 
Direct, January 30, 2009, at 4.
    \12\Id. at 9.
    \13\Id. at 4.
---------------------------------------------------------------------------
    In instances where the loss is shared by AAA bonds, 
according to J.P. Morgan, ``rating agencies may downgrade a 
significant amount of AAA securities to below investment 
grade.''\14\ More bank write-downs will result if securities 
are downgraded below AAA. According to Julian Mann of First 
Pacific Advisors, the ``loss of mortgage-bond payments because 
of the bankruptcy changes would require financial firms to mark 
down more securities to market values.''\15\ As J.P. Morgan 
analysis of the situation explains,
---------------------------------------------------------------------------
    \14\J.P. Morgan, Securitized Products Weekly, January 23, 2009, at 
11.
    \15\Jody Shenn, Bankruptcy Bill May Hurt Banks on Mortgage-Bond 
Quirk, Bloomberg, Jan. 21, 2009, http://www.bloomberg.com/apps/
news?pid=20601009&sid=abIxZqXis96s.

        This means that assets will need to be marked-to-
        market, with losses hitting income. An even larger 
        issue is around risk based capital weightings. For 
        example, AAA securities have a 20% weighting, while BB 
        has a 200% weighting. This means that banks and 
        insurance companies could be required to hold 10 times 
        more capital (or more if downgraded below BB), even 
        though non-bankruptcy related loss scenarios show 
        minimal risk of loss to the AAA.\16\
---------------------------------------------------------------------------
    \16\J.P. Morgan, supra note 14, at 11.

    The Treasury Department, through the TARP, and the Federal 
Reserve have spent the past few months trying to infuse capital 
into banks. Write-downs related to this bankruptcy legislation 
would be counter-productive and could threaten to undo their 
efforts or require them to infuse more capital into the banking 
system.
            5. Increased bankruptcy filings will lead to delay, less 
                    oversight
    Some experts believe that bankruptcy filings could double 
or triple as a result of this legislation. Currently, about 
80,000 Americans file for bankruptcy each month--a rate that is 
just shy of the roughly 100,000 house per month foreclosure 
rate. Recent numbers indicate that some 4 million homeowners 
are currently delinquent on their mortgages and some 12-15 
million homeowners are underwater on their mortgages. A surge 
in bankruptcy filings could result if even a fraction of these 
homeowners file for bankruptcy in order to reduce their 
interest rates or cram-down the principal owing on their homes.
    It does not appear that the bankruptcy courts, the U.S. 
Trustees program, or Chapter 13 trustees could effectively 
handle an increased volume of cases over a short period of 
time. Thus, a dramatic surge in filings related to this bill 
could lead to delayed resolution of the crisis and less 
oversight of bankruptcy cases.
    In terms of bankruptcy judges, enactment of H.R. 200 will 
increase the burden on court dockets. This increased burden 
will come in the form of the large number of new Chapter 13 
filings and the adjudication of issues of first impression that 
H.R. 200 will create. For example, in section 4 of H.R. 200, 
the phrase ``notice that a foreclosure may commence'' raises 
legal and factual questions: does a call or letter from a 
lender stating that if the late mortgage payments are not made 
the bank may begin the foreclosure process suffice, or does the 
borrower actually have to receive notice that the bank has 
begun the foreclosure process. Additionally, most cases will 
raise disputes regarding the value of the home and the 
appropriate ``reasonable premium for risk'' to apply.
    H.R. 200 will also place increased burdens on the United 
States Trustees. United States Trustees appoint and oversee 
private Chapter 13 trustees, enforce fraud and abuse provisions 
of the Bankruptcy Code, and litigate important legal issues 
arising in bankruptcy cases. It may not be possible for the 
U.S. Trustees to maintain their current level of oversight of 
the bankruptcy system with the increased Chapter 13 
bankruptcies that will be filed if H.R. 200 is enacted.
    Also affected by an increase in Chapter 13 filings would be 
the private Chapter 13 trustees, who are the backbone of the 
Chapter 13 system; they administer the Chapter 13 plan, assess 
the viability of the debtor's proposed repayment plan, collect 
funds from the debtor, and distribute proceeds to creditors. 
Allowing modification of principal residence home mortgages 
will necessarily increase the workload for Chapter 13 trustees. 
A steep increase in Chapter 13 filings may quickly overwhelm 
trustees who are not adequately staffed to process the 
increased caseload.
    In sum, the increased filings after enactment of H.R. 200 
will make it harder for the Chapter 13 system to function, 
leading to either a much slower process, decreased oversight of 
the system, or some combination thereof. The goal of 
foreclosure relief should be to resolve this crisis as quickly 
as possible. It does not appear, however, that the bankruptcy 
system is the route to a quick resolution of the crisis.
            6. Failure rate in bankruptcy
    Approximately two-thirds of all Chapter 13 bankruptcies 
terminate before being completed. These failures to complete 
the Chapter 13 plan leave the homeowners liable for their 
mortgage debt and creditors in a much worse position relative 
to having addressed the problem at the time of the bankruptcy 
filing. With the likelihood that a Chapter 13 plan will fail, 
allowing bankruptcy modifications may only delay a resolution 
of the foreclosure crisis. Some suggest that allowing 
modification will increase the success rate; however, any 
increase would have to be significant to make bankruptcy 
modification even moderately successful at addressing the 
foreclosure crisis. The 57 percent failure rate for Chapter 12 
bankruptcies, in which cram-down is currently allowed, suggests 
that the failure rate for Chapter 13 bankruptcies will still be 
significant even if H.R. 200 is enacted.\17\
---------------------------------------------------------------------------
    \17\A recent study by the Office of the Comptroller of the Currency 
found that more than 50 percent of borrowers that receive a loan 
modification missed at least one payment in the six months after the 
lender modified their loans.
---------------------------------------------------------------------------
            7. Moral hazard and bankruptcy abuse
    H.R. 200 presents incentives to file for bankruptcy that 
could lead to borrowers opting for bankruptcy rather than loan 
modifications and could create moral hazard leading many 
borrowers to abuse the system. First, in terms of loan 
modifications, borrowers may have little incentive to accept 
non-bankruptcy loan modification programs when they can 
petition a bankruptcy court to have their mortgage crammed-down 
to the fair market value. Cram-down gives the borrower a 
permanent reduction in the outstanding mortgage debt. When 
housing prices rise, as they eventually will, the borrower 
enjoys the appreciation.\18\ With this possibility out there, 
borrowers would have a strong incentive to reject a lender 
offered modification proposal and either hold out for a better 
deal or file for bankruptcy.
---------------------------------------------------------------------------
    \18\The manager's amendment put some limitations on this, allowing 
for some lender recapture if the house is sold within five years of 
completion of the Chapter 13 plan.
---------------------------------------------------------------------------
    In addition to the problems this bill may create with 
regard to loan modifications, enactment of H.R. 200 could lead 
to the possibility that borrowers will abuse the bankruptcy 
system to take advantage of incentives to filing for bankruptcy 
created by the bill. These incentives have not existed in the 
past as ``[t]raditionally, the ability to modify consumer debt 
was limited to depreciating assets like cars and boats, thus 
this temptation for strategic behavior was mitigated because 
borrowers had little prospect of profiting because the property 
was unlikely to increase in value in the future.''\19\
---------------------------------------------------------------------------
    \19\H.R. 200, ``Helping Families Save Their Homes in Bankruptcy'': 
Hearing Before the H. Comm. on the Judiciary, 111th Cong. (2009) 
(written testimony of Todd J. Zywicki, Professor, George Mason 
University School of Law).
---------------------------------------------------------------------------
    Currently, approximately 50 million borrowers are paying 
their mortgages on time; however, roughly a third of these 
borrowers owe more on their mortgage than their house is worth. 
For these borrowers who are underwater on their mortgages, the 
otherwise unappealing prospect of filing for bankruptcy may 
become an attractive option once cram-down of mortgage 
principal is made possible. As Professor Mayer has pointed out, 
``[w]hile many commentators have downplayed this argument as 
scare tactics, it is not hard to envision late night TV 
advertisements informing homeowners that they no longer need to 
make their mortgage payments and yet could still remain in 
their home.''\20\
---------------------------------------------------------------------------
    \20\Mayer, supra note 8.
---------------------------------------------------------------------------
    Proponents of H.R. 200 have asserted that the concern over 
negative impact on credit scores will prevent borrowers from 
abusing the system. However, the fact that many borrowers are 
walking away from underwater mortgages, allowing those homes to 
be foreclosed, when delinquency and foreclosure also negatively 
impact one's credit score, undercuts this argument. The chance 
to reduce principal by tens or even hundreds of thousands of 
dollars in some cases, to re-write the interest rate, and 
extend the maturity date of a mortgage may encourage many 
borrowers to go into bankruptcy despite the adverse impact on 
their credit score.
            8. Nothing will stop future Congresses from applying cram-
                    down more broadly
    The manager's amendment to H.R. 200 limits the bill to 
existing mortgages; however, once the precedent has been set, 
it will be much easier for Congress to provide for modification 
of principal residence mortgages in the future. Indeed, if the 
past is a prologue, it should be expected that this is exactly 
what will happen. Chapter 12 of the Bankruptcy Code provides 
the perfect example. The Chapter 12 family farmer bankruptcy 
provisions were originally enacted in 1986 with a seven-year 
sunset. In 1993, that sunset was extended by five years and was 
subsequently extended multiple times, with only a brief lapse, 
until Chapter 12 was made permanent in 2005.
    Because of the history of Chapter 12 and of other sunsets 
that are later extended, once the principal residence exemption 
is lifted, even if for only existing mortgages, the risk exists 
that this limited opening will be broadened in the future. 
Lenders will price mortgages for this risk accordingly.
C. Republican Amendments
    At the January 27, 2009, markup of H.R. 200, Republican 
members of the Committee offered five amendments. With the 
exception of an amendment offered by Mr. King, all Republican 
amendments were defeated on party-line votes.
    Smith Amendment: Ranking Member Smith offered an amendment 
that would have required courts to apply a three-step process, 
modeled after that employed by the Federal Deposit Insurance 
Corporation (FDIC), when altering mortgages to keep monthly 
mortgage payments between 31 percent and 38 percent of a 
homeowner's current monthly income. Also similar to the FDIC 
approach, the Smith Amendment would have required debtors to 
agree to equity recapture for lenders if the debtor sells the 
house for a profit after an equity cramdown. Mr. Smith's 
amendment was defeated on a 14 to 20 party-line vote.
    Franks Amendment: Mr. Franks offered an amendment that 
would have limited the bill to loans originated between January 
1, 2004 and December 31, 2007, the time-frame during which many 
of the most problematic loans were made. Additionally, Mr. 
Franks' amendment would have limited the bill's provisions to 
bankruptcies filed within three years of the date of enactment. 
Mr. Franks' amendment was defeated on a 15 to 20 party-line 
vote.
    Forbes Amendment: Mr. Forbes offered an amendment that 
would have maintained the requirement that those debtors that 
receive mortgage modifications go through credit counseling. 
The amendment also would have precluded debtors that made 
misrepresentations or committed actual fraud from modifying 
their mortgages in bankruptcy. Mr. Forbes' amendment was 
defeated on a 12 to 20 party-line vote.
    King Amendment: Mr. King offered an amendment to prohibit 
debtors who obtained or refinanced their loans based on 
material misrepresentations, false pretenses, or actual fraud 
from being able to modify their mortgages in bankruptcy. Mr. 
King's amendment was agreed to on a 21 to 3 vote.
    Jordan Amendment: Mr. Jordan offered an amendment to limit 
bankruptcy mortgage modification to subprime and non-
traditional loans--the two types of loans at the heart of this 
crisis. Such a limitation was included in the version of the 
mortgage bankruptcy bill reported out of this Committee in the 
last Congress (H.R. 3609, 110th Cong.). Mr. Jordan's amendment 
was defeated on a 14 to 20 party-line vote.
D. Answers to Majority's Rationale for Rejecting Republican Amendments
    As discussed above, at the markup Republicans offered five 
amendments aimed at narrowing the scope of the bill to those 
loans that are at the heart of the foreclosure crisis. In 
arguing against supporting Republican amendments, members of 
the majority made several arguments. These arguments are 
incorrect or miss the mark. Below are responses to the 
majority's principal arguments:
            1. Vacation homes, second homes, and other secured debt in 
                    bankruptcy
    Throughout the debate over mortgage bankruptcy legislation 
in this and the last Congress, the argument has been repeatedly 
made that this legislation is not extraordinary because the 
Bankruptcy Code already permits the modification of other forms 
of secured debt in bankruptcy. As attractive this argument may 
be, it is simply not the case.
    Under the current provisions of Chapter 13, if a secured 
creditor's lien is crammed-down, the entire amount of the 
secured claim (after the cram-down) plus interest must be paid 
off during the three-to-five year duration of the Chapter 13 
plan. For example, were a Chapter 13 debtor to submit a plan 
that proposed to cram-down a mortgage on a vacation home from 
$450,000 to $400,000, that plan would have to provide for the 
payment of the entire $400,000 in three-to-five years in equal 
monthly installments. Accordingly, as a practical matter, a 
debtor cannot cram-down a first mortgage on a vacation home, 
because the payments needed to pay off even the crammed-down 
amount over three-to-five years will be too large. In the 
unlikely circumstance that a debtor could afford such large 
payments, that debtor would be undeserving of bankruptcy 
relief.
    Under H.R. 200, however, a debtor could pay off a crammed-
down home mortgage over a period that could be in excess of 
thirty years. Thus, H.R. 200 makes cram-down feasible for home 
mortgages--treating home mortgages much differently than 
mortgages on vacation homes and other investment property. 
Moreover, the interest rate to which the holder of the home 
mortgage would be entitled for the thirty-plus year period 
would be set by the court rather than by the mortgage 
contract.\21\ Conversely, when other secured creditors' liens 
are crammed-down in Chapter 13, the liens are subject to a 
court-determined interest rate for no more than five years and 
cannot be required to wait longer to be paid.
---------------------------------------------------------------------------
    \21\The bankruptcy judge could set the interest rate at ``a fixed 
annual percentage rate, in an amount equal to the then most recently 
published annual yield on conventional mortgages . . . plus a 
reasonable premium for risk.''
---------------------------------------------------------------------------
    Furthermore, since enactment of the 2005 amendments to the 
Bankruptcy Code, in many instances, limitations have been 
placed on the ability to cram-down the claims of secured 
creditors in Chapter 13. For instance, auto loans are only 
subject to cram-down if the loan was made more than 910 days 
(roughly two and half years) prior to filing for bankruptcy. 
Thus, H.R. 200 moves home mortgages from receiving special 
protection aimed at encouraging the flow of capital into the 
home mortgage market, to being treated less favorably than most 
other secured consumer debts, including debts for depreciating 
assets like automobiles.
            2. Family farms in Chapter 12
    Proponents of H.R. 200 have pointed to the family farmer 
provisions of Chapter 12, which allow for cram-down, in support 
of their argument that principal residence mortgage 
modifications should be allowed in Chapter 13. Reference to 
Chapter 12, however, does not support their argument.
    First, analogizing Chapter 12 to allowing home mortgage 
modification in Chapter 13 is particularly inapt because, as a 
practical matter, Chapter 13 filings dwarf Chapter 12 filings. 
In the twelve-month period ending in June 2008 there were 
344,421 Chapter 13 filings compared to only 314 Chapter 12 
filings.
    Second, during the Clinton administration the Department of 
Agriculture concluded that Chapter 12 ``may have substantially 
increased costs for farm businesses.''\22\ According to that 
study,
---------------------------------------------------------------------------
    \22\U.S. Department of Agriculture, Do Farmers Need a Separate 
Chapter in the Bankruptcy Code?, at 3 (1997).

        A conservative estimate of the incremental impact of 
        Chapter 12 over Chapter 11 is that it raises indirect 
        bankruptcy costs by about a fourth. To offset the costs 
        Chapter 12 imposes on creditors, interest rates to farm 
        borrowers will rise 0.25-1.0 percent on average. Much 
        higher costs will be borne by financially weaker farm 
        borrowers, either in the form of increased interest or 
        other charges, or in their inability to obtain loans at 
        any price.\23\
---------------------------------------------------------------------------
    \23\Id.

---------------------------------------------------------------------------
Moreover, the study also found that,

        The major marginal effect of Chapter 12 is to encourage 
        both inefficient farmers who would otherwise liquidate 
        and efficient farmers who would otherwise continue 
        their operations at greater expense to reorganize their 
        businesses under the protection of bankruptcy. These 
        provisions increase direct bankruptcy costs by 
        encouraging bankruptcy filings by some farmers who 
        would not otherwise have done so. They also increase 
        indirect costs by increasing the number of farmers who 
        choose to reorganize inefficient farms. This impact 
        could be mitigated by allowing lenders the option of 
        recapturing writedowns in secured debt if asset values 
        recover. Such an option exists under Chapter 11.\24\
---------------------------------------------------------------------------
    \24\Id. at 5.

    Thus, it is clear that the argument that ``allowing cram-
down in Chapter 12 has not had negative effects and therefore 
we should extend cram-down to mortgages on principal residences 
in Chapter 13'' is incorrect. According to the Clinton 
Agriculture Department, Chapter 12 has increased borrowing 
costs especially for marginal borrowers and encouraged farmers 
that otherwise did not need to file for bankruptcy to file.
            3. Subprime and non-traditional loans
    In the last Congress, this Committee favorably reported 
H.R. 3609, a bill that provided for bankruptcy modification of 
principal residence mortgages, with a manager's amendment that 
limited the bill to subprime and non-traditional loans. Members 
of the majority rejected this limitation at the mark-up of H.R. 
200 because they asserted that the crisis has now spread beyond 
subprime and non-traditional loans. The foreclosure numbers, 
however, do not bear this argument out.
    According to the Mortgage Bankers Association, there are 
currently 52 million mortgage loans. Of these 52 million loans, 
approximately 34 million are prime fixed-rate mortgages, 7 
million are prime adjustable-rate mortgages (ARMs), 3 million 
are subprime fixed-rate mortgages, 3 million are subprime ARMs, 
and 5 million are FHA/VA loans. Thus, the majority of these 
loans are prime-fixed rate mortgages and the vast majority of 
these loans are not subprime.
    The Mortgage Bankers Association data on foreclosures 
started indicates for these loan types that foreclosures were 
started in the third quarter of 2008 for: 0.34% of prime fixed-
rate mortgages, 1.77% of prime ARMs, 2.23% of subprime fixed-
rate mortgages, 6.47% of subprime ARMs, and 0.95% of FHA/VA 
loans. Thus, the worst performing loans are subprime fixed-rate 
and subprime adjustable-rate mortgages. The 34 million prime-
fixed rate mortgages, which account for 65 percent of all 
existing mortgages, are only seeing foreclosure starts at 
0.34%. FHA/VA loans are also seeing foreclosure starts at less 
than 1%. Yet, both prime and FHA/VA mortgages would be eligible 
for bankruptcy modification if H.R. 200 is enacted.
    Given the relatively low percentage of foreclosure starts 
among prime and FHA/VA loans, it would seem that limiting this 
bill to subprime and non-traditional loans is a more than 
reasonable limitation. When one considers the above-discussed 
costs imposed by this bill and the moral hazard associated with 
it, there seems to be little reason not to limit the coverage 
to what are still the most problematic loans.

                               CONCLUSION

    Allowing for modification of principal residence mortgages 
in bankruptcy comes with too many attendant costs and the 
failure rate of Chapter 13 bankruptcies is much too high for it 
to be considered a practical approach to stopping foreclosures. 
Proponents of H.R. 200 assert that everything else has been 
tried and that nothing has worked to put an end to the 
foreclosure crisis. They assert that allowing bankruptcy 
mortgage modification is the linchpin to effective foreclosure 
relief. However, there are many better alternatives that have 
yet to be tried--alternatives that do not present the parade of 
horribles and hundreds of billions of dollars of downside risk 
threatened by this cram-down bill. The Congress and the 
Executive Branch must try these alternatives before rushing to 
bankruptcy as the answer. And, if in the end bankruptcy relief 
must be an option, it must be crafted along the lines of the 
rejected Republican amendments from the mark-up of H.R. 200, so 
that it is narrowly targeted at the loans at the heart of the 
current crisis.

                                   Lamar Smith.
                                   F. James Sensenbrenner, Jr.
                                   Howard Coble.
                                   Elton Gallegly.
                                   Bob Goodlatte.
                                   Daniel E. Lungren.
                                   Darrell E. Issa.
                                   J. Randy Forbes.
                                   Steve King.
                                   Trent Franks.
                                   Louie Gohmert.
                                   Jim Jordan.
                                   Ted Poe.
                                   Jason Chaffetz.
                                   Tom Rooney.
                                   Gregg Harper.

                                  
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