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STRAIGHTENING OUT THE MORTGAGE MESS: 

HOW CAN WE PROTECT HOME OWNERSHIP 

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

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

OCTOBER 30, 2007 

Serial No. 110–164 

Printed for the use of the Committee on the Judiciary 

( 

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

(II) 

COMMITTEE ON THE JUDICIARY 

JOHN CONYERS, JR., Michigan, Chairman 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

LINDA T. SA ́ NCHEZ, California 

STEVE COHEN, Tennessee 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

ARTUR DAVIS, Alabama 

DEBBIE WASSERMAN SCHULTZ, Florida 

KEITH ELLISON, Minnesota 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

CHRIS CANNON, Utah 

RIC KELLER, Florida 

DARRELL ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

PERRY APELBAUM, Staff Director and Chief Counsel 

JOSEPH GIBSON, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

LINDA T. SA ́ NCHEZ, California, Chairwoman 

JOHN CONYERS, JR., Michigan 

HANK JOHNSON, Georgia 

ZOE LOFGREN, California 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

STEVE COHEN, Tennessee 

CHRIS CANNON, Utah 

JIM JORDAN, Ohio 

RIC KELLER, Florida 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

OCTOBER 30, 2007 

Page 

OPENING STATEMENT 

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

State of California, and Chairwoman, Subcommittee on Commercial and 

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

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

of Florida, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 11 

WITNESSES 

Dr. Mark M. Zandi, Ph.D., Chief Economist, Moody’s Economy.com, Inc., 

West Chester, PA 

Oral Testimony ..................................................................................................... 2 

Prepared Statement ............................................................................................. 4 

William E. Brewer, Jr., Esq., The Brewer Law Firm, Raleigh, NC, on behalf 

of the National Association of Consumer Bankruptcy Attorneys 

Oral Testimony ..................................................................................................... 99 

Prepared Statement ............................................................................................. 101 

Mr. David G. Kittle, CMB, Chairman-Elect, Mortgage Bankers Association, 

Washington, DC 

Oral Testimony ..................................................................................................... 109 

Prepared Statement ............................................................................................. 111 

Richard Levin, Esq., Cravath, Swaine & Moore LLP, New York, NY, on 

behalf of the National Bankruptcy Conference 

Oral Testimony ..................................................................................................... 126 

Prepared Statement ............................................................................................. 128 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Letter from the National Association of Federal Credit Unions, submitted 

by the Honorable Tom Feeney, a Representative in Congress from the 

State of Florida, and Member, Subcommittee on Commercial and Administrative Law ........................................................................................................... 13 

Prepared Statement of the Honorable Chris Cannon, a Representative in 

Congress from the State of Utah, and Ranking Member, Subcommittee 

on Commercial and Administrative Law ........................................................... 16 

Material submitted by the Honorable Chris Cannon, a Representative in 

Congress from the State of Utah, and Ranking Member, Subcommittee 

on Commercial and Administrative Law: 

Prepared Statement of the Honorable Steve Chabot, a Representative 

in Congress from the State of Ohio ............................................................. 26 

Prepared Statement of the Securities Industry and Financial Markets 

Association ..................................................................................................... 32 

Prepared Statement of Steve Bartlett, on behalf of the Financial Services 

Roundtable ..................................................................................................... 37 

Prepared Statement of the American Bankers Association and America’s 

Community Bankers ..................................................................................... 43 

Prepared Statement of Edward J. Kulik, Senior Vice President, Real 

Estate Division, Massachusetts Mutual Life Insurance Company before 

the Committee on the Judiciary, United States Senate ............................ 57 

Page

IV 

Material submitted by the Honorable Linda T. Sa ́nchez, a Representative 

in Congress from the State of California, and Chairwoman, Subcommittee 

on Commercial and Administrative Law: 

Letter from Robert Shiller, The Cowles Foundation for Research in Economics ............................................................................................................ 72 

Prepared Statement of Eric Stein, Center for Responsible Lending ............ 78 

Article from The New York Times, dated October 8, 2007, titled ‘‘The 

American Dream in Reverse’’ ....................................................................... 93 

Letter to the Honorable John Conyers, Jr., Chairman, Committee on 

the Judiciary, and the Honorable Lamar Smith, Ranking Member, 

Committee on the Judiciary ......................................................................... 94 

Memo from the Congressional Research Service (CRS) ................................ 96 

Letter from the Honorable Richard Cordray, Ohio Treasurer of State ........ 152 

Special Report by Moody’s Investor Service ................................................... 153 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Letter to the Honorable Linda T. Sa ́nchez, a Representative in Congress 

from the State of California, and Chairwoman, Subcommittee on Commercial and Administrative Law, from J. Rich Leonard, Judge, United States 

Bankruptcy Court, Eastern District of North Carolina .................................... 160 

Letter to the Honorable John Conyers, Jr., a Representative in Congress 

from the State of Michigan, Chairman, Committee on the Judiciary, and 

Member, Subcommittee on Commercial and Administrative Law, and the 

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

of California, and Chairwoman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 163 

(1) 

STRAIGHTENING OUT THE MORTGAGE MESS: 

HOW CAN WE PROTECT HOME OWNERSHIP 

AND PROVIDE RELIEF TO CONSUMERS IN 

FINANCIAL DISTRESS? (PART II) 

TUESDAY, OCTOBER 30, 2007 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 1:18 p.m., in room 

2141, Rayburn House Office Building, the Honorable Linda T. Sa ́nchez (Chairwoman of the Subcommittee) presiding. 

Present: Representatives Sa ́nchez, Conyers, Johnson, Cannon, 

and Feeney. 

Also Present: Representatives Chabot and Miller of North Carolina. 

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

Minority Counsel; and Adam Russell, Professional Staff Member. 

Ms. SA ́ NCHEZ. The Subcommittee on Commercial and Administrative Law will come to order. 

I want to welcome everybody. Unfortunately, the Committee’s 

other hearing this morning went unavoidably longer than anticipated, and I want to thank everybody for their patience and their 

flexibility. 

One of our witnesses, Dr. Mark Zandi, unfortunately will have to 

leave shortly. So to permit him to give his testimony and take 

questions, we are going to sort of do things in a little bit different 

way this afternoon. We are going to take his testimony first, followed by a round of questions that any Members may have for him. 

And then we will return to opening statements and to our other 

witnesses. 

Dr. Zandi is the Chief Economist and the cofounder of Economy.com, which provides economic research and consulting services 

to corporations, governments and institutions, maintaining one of 

the largest online databases of economic and financial time series. 

Dr. Zandi’s recent work includes a study of the outlook for national and regional housing market conditions, the determinants of 

personal bankruptcy, the location of high technology centers and 

the impact of globalization and technological change on real estate 

markets. 

2 

In addition to being regularly cited in The Wall Street Journal, 

New York Times, Business Week, Fortune and other leading publications, Dr. Zandi also appears on ABC News, Wall Street Week, 

CNN and CNBC. 

Dr. Zandi, welcome. Your full written statement will be made 

part of the record and we would ask that you please limit your oral 

remarks to 5 minutes. And at this time, I would invite you to 

please give your testimony. 

STATEMENT OF MARK M. ZANDI, Ph.D., CHIEF ECONOMIST, 

MOODY’S ECONOMY.COM, INC., WEST CHESTER, PA 

Mr. ZANDI. Thank you very much. Thank you for the opportunity 

to present this testimony today. I also would like to thank the 

Mecklenburg Health Center for the opportunity to use their facility. It was very kind of them, and their hospitality has been wonderful. 

I will make six points in my remarks. First, the Nation’s housing 

and mortgage markets are suffering a very severe recession. The 

housing activity peaked over 2 years, and since then home sales 

have fallen nearly 20 percent, housing starts by 40 percent and 

house prices by 5 percent. Over half the Nation’s housing markets 

are currently experiencing substantial price declines with doubledigit price declines occurring throughout Arizona, California, Florida, Nevada, in the Northeast Corridor and industrial Midwest. 

Further significant declines in construction and prices are likely 

throughout next year as a record amount of unsold housing inventory continues to mount. Given the impact of the recent subprime 

financial shock and its impact on the mortgage securities market 

and, thus, mortgage lenders, it is reasonable to expect national 

house prices to fall by at least 10 percent from the peak of their 

eventual trough late next year. This, of course, assumes that the 

economy avoids recession and that the Federal Reserve will continue to ease monetary policy. 

Second, residential mortgage loan defaults and foreclosures are 

surging, and without significant policy changes, will continue to do 

so through 2008 and well into 2009. Falling housing values, resetting adjustable mortgages for recent subprime and all day borrowers, tighter lending underwriter standards and most recently a 

weakening job market are conspiring to create the current unprecedented mortgage problems. 

I expect approximately 3 million mortgage loan defaults this year 

and next, of which 2 million will go through the entire foreclosure 

process forcing these homeowners to leave their current homes. 

The impact on these households, their communities and the broader economy will be substantial. 

Foreclosure sales are very costly after accounting for their substantial transaction costs in certain significantly depressed, already 

reeling housing markets, as foreclosed properties are generally sold 

at deep discounts from prevailing market prices. These discounts 

are estimated to be well over 30 percent. 

Third, there is a substantial risk that the housing downturn in 

surging foreclosures will result in a national economic recession. 

The stunning decline in housing activity and prices is sure to severely crimp consumer spending into next year, and the job market 

3 

appears increasingly weak as it struggles with layoff in the housing-related industry. Regional economies such as California, Florida, Nevada and the industrial Midwest are already near or in recession. 

Fourth, without a policy response, mortgage loan modification efforts are unlikely to prove effective in forestalling the increase in 

foreclosures. A recent Moody’s survey of loan servicers found that 

very little modification had been done, at least through this past 

summer. 

There are a large number of impediments to modification efforts. 

Some tax, accounting and legal hurdles appear to have been overcome, but large differences in the incentives of first and second 

mortgage lienholders and the various investors in mortgage securities are proving to be daunting. While the total economic benefit 

of forestalling foreclosure is significant, these benefits do not accrue 

to all of the parties involved in determining whether to proceed 

with the loan modification. 

Fifth, the legislation to give bankruptcy judges the authority in 

Chapter 13 to modify mortgages by treating them as secured only 

up to the market value of the property will significantly reduce the 

number of foreclosures. To limit any potential abuses, Congress 

should provide firm guidelines to the bankruptcy courts, such as 

providing a formula for determining the term to maturity, the interest rate and the property’s market value. 

Properly designed legislation could reduce the number of foreclosures through early 2009 by at least 500,000. This would be very 

helpful in reducing the pressure on housing and mortgage markets 

and the broader economy. 

Six, this legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets or lead to substantial 

abuses. Given that the total cost of foreclosure is much greater 

than that associated with a Chapter 13 bankruptcy, there is no 

reason to believe that the cost of mortgage credit across all mortgage loan products should rise. Indeed, the cost of mortgage credit 

to prime borrowers may decline. 

The cost of second mortgage loans, such as piggyback seconds, 

could rise as they are likely to suffer most in bankruptcy, but such 

lending has played a clear contributing role in the current problems. 

There is also no evidence that secondary markets will be materially impacted after a period of adjustment as other consumer loans, 

which already have similar protection in Chapter 13, have well 

functioning secondary markets. 

The residential mortgage securities market will go through substantial changes in response to the recent financial shock and will 

adjust to these new rules. Abuses should also be limited, given that 

a workout in Chapter 13 is a very costly process for borrowers. Indeed the number of bankruptcy filings has remained surprisingly 

low since late 2005 bankruptcy reform, likely affecting the higher 

cost to borrowers. 

Finally, I think it is important that the changes to bankruptcy 

law in this legislation sunset after several years. Based on historical experience, changes to bankruptcy law can have unintended 

consequences. I believe the changes in this legislation—proposed 

4 

legislation, will have significant benefits, both short- and long-run, 

but lawmakers may decide otherwise after several years of experience. 

Allowing the legislation to sunset should also help dissuade concerns that this legislation is an effort to readdress other issues in 

the Bankruptcy Code. The housing market downturn is intensifying and foreclosures are surging. Odds are quickly rising that 

is self-reinforcing a negative dynamic of foreclosures beginning 

house price declines to getting more foreclosures will develop in 

many neighborhoods across the country. There is no more efficacious way to short circuit this cycle than adopting legislation to 

allow bankruptcy judges the authority to modify mortgages by 

treating them as secured up to the market value of the property. 

Thank you. 

Ms. SA ́ NCHEZ. Thank you for your testimony Dr. Zandi. 

[The prepared statement of Mr. Zandi follows:] 

PREPARED STATEMENT OF MARK M. ZANDI

Mr. Chairman and members of the Committee, my name is Mark Zandi; I am the 

Chief Economist and Co-founder of Moody’s Economy.com. 

Moody’s Economy.com is an independent subsidiary of the Moody’s Corporation. 

My remarks represent my personal views and do not represent those held or endorsed by Moody’s. Moody’s Economy.com provides economic and financial data and 

research to over 500 clients in 50 countries, including the largest commercial and 

investment banks; insurance companies; financial services firms; mutual funds; 

manufacturers; utilities; industrial and technology clients; and governments at all 

levels. 

I will make six points in my remarks. First, the nation’s housing and mortgage 

markets are suffering a very severe recession. Housing activity peaked over two 

years ago, and since then home sales have fallen nearly 20%, housing starts by 40%, 

and house prices by 5%. Over half the nation’s housing markets are currently experiencing substantial price declines, with double-digit price declines occurring 

throughout Arizona, California, Florida, Nevada, in the Northeast Corridor and industrial Midwest. Further significant declines in construction and prices are likely 

throughout next year as a record amount of unsold housing inventory continues to 

mount give the impact of the recent subprime financial shock and its impact on the 

mortgage securities market and thus mortgage lenders. It is reasonable to expect 

national house prices to fall by at least 10% from their peak to their eventual trough 

late next year. This assumes that the economy will avoid recession and the Federal 

Reserve will continue to ease monetary policy. 

Second, residential mortgage loan defaults and foreclosures are surging and without significant policy changes will continue to do so through 2008 and into 2009. 

Falling housing values, resetting adjustable mortgages for recent subprime and AltA borrowers, tighter lending underwriting standards, and most recently a weakening job market are conspiring to create the current unprecedented mortgage credit 

problems. I expect approximately 3 million mortgage loan defaults this year and 

next, of which 2 million will go through the entire foreclosure process, forcing these 

homeowners to leave their current homes. The impact on these households, their 

communities, and the broader economy will be substantial. Foreclosed sales are very 

costly after accounting for their substantial transaction costs, and serve to significantly depress already reeling housing markets, as foreclosed properties are generally sold at deep discounts to prevailing market prices. These discounts are estimated to be well over 30%. 

Third, there is a substantial risk that the housing downturn and surging foreclosures will result in a national economic recession. The stunning decline in housing activity and prices is sure to severely crimp consumer spending into next year, 

and the job market appears increasingly weak as it struggles with layoffs in housing 

related industries. Regional economies such as California, Florida, Nevada and the 

industrial Midwest are already near or in recession. 

Fourth, without a policy response, mortgage loan modification efforts are unlikely 

to prove effective in forestalling the increase in foreclosures. A recent Moody’s survey of loan servicers found that very little modification had been done, at least 

through this past summer. There are a large number of impediments to modification 

5 

efforts. Some tax, accounting and legal hurdles appear to have been overcome, but 

large differences in the incentives of first and second mortgage lien holders and the 

various investors in mortgage securities are proving to be daunting. While the total 

economic benefit of forestalling foreclosure is significant, these benefits do not accrue to all of the parties involved in determining whether to proceed with a loan 

modification. 

Fifth, the legislation to give bankruptcy judges the authority in a Chapter 13 to 

modify mortgages by treating them as secured only up to the market value of the 

property will significantly reduce the number of foreclosures. To limit any potential 

abuses, Congress should provide firm guidelines to the bankruptcy courts, such as 

providing a formula for determining the term to maturity, the interest rate, and the 

property’s market value. Properly designed, the legislation could reduce the number 

of foreclosures through early 2009 by at least 500,000. This would be very helpful 

in reducing the pressure on housing and mortgage markets and the broader economy. 

Sixth, this legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses. Given that the total cost of 

foreclosure is much greater than that associated with a Chapter 13 bankruptcy 

there is no reason to believe that the cost of mortgage credit across all mortgage 

loan products should rise. Indeed, the cost of mortgage credit to prime borrowers 

may decline. The cost of second mortgage loans, such as piggy-back seconds, could 

rise, as they are likely to suffer most in bankruptcy, but such lending has played 

a clear contributing role in the current credit problems. There is also no evidence 

that secondary markets will be materially impacted after a period of adjustment, 

as other consumer loans which already have similar protection in Chapter 13 have 

well functioning secondary markets. The residential mortgage securities market will 

go through substantial changes in response to the recent financial shock and will 

adjust to the new rules. Abuses should also be limited given that a workout in 

Chapter 13 is a very costly process for borrowers. Indeed, the number of bankruptcy 

filings has remained surprisingly low since the late 2005 bankruptcy reform, likely 

reflecting the much higher costs to borrowers. 

Finally, I think it is important that the changes to bankruptcy law in this legislation sunset after several years. Based on historical experience, changes to bankruptcy law can have unintended consequences. I believe the changes in this proposed legislation will have significant both short and long-term benefits, but lawmakers may decide otherwise after several years of experience. Allowing the legislation to sunset should also help assuage concerns that this legislation is an effort 

to re-address other issues in the bankruptcy code. 

The housing market downturn is intensifying and mortgage foreclosures are surging. Odds are quickly rising that a self-reinforcing negative dynamic of foreclosures 

begetting house price declines begetting more foreclosures well develop in many 

neighborhoods across the country. There is no more efficacious way to short-circuit 

this cycle than adopting legislation to allow bankruptcy judges the authority to modify mortgages by treating them as secured only up to the market value of the property. 

Ms. SA ́ NCHEZ. We will now begin with a round of questioning because we know that you cannot stay long with us. So I will recognize myself for 5 minutes. 

It is a little interesting because you have not heard the testimony of our other panelists, and yet my first question deals with 

some testimony that was presented by Mr. Kittle in his written testimony that he submitted. 

He states that if these provisions were enacted, it would increase 

the cost and reduce the availability of mortgage credit for principal 

residents; and I am interested in hearing your response to that 

statement. 

Mr. ZANDI. You know, I don’t think that will be the case. I think, 

most fundamentally the reason is that the cost of foreclosure, the 

total cost of foreclosure, is measurably higher than will be the cost 

of a bankruptcy in Chapter 13 under this proposal. 

In terms of the cost of foreclosure they are quite significant. It 

is not only the difference in the mortgage amount and the market 

value of the property. It is all of the transaction costs involved, inVerDate Aug 31 2005 17:23 May 05, 2009 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 H:\WORK\COMM\103007\38638.000 HJUD1 PsN: 38638
6 

cluding the legal cost, the maintenance cost, the cost associated 

with realtors selling property post-auction. 

It also is the time involved. There is a period of a year or two 

that could pass before foreclosure actually takes place and a person 

is asked to leave the home, and there is lots of depreciation and 

other costs associated with that. 

And, finally, I don’t think we should discount the cost to the 

broader economy of foreclosures and the impact that has on the 

communities and the broader economy. It serves to reduce market 

values for all homes in those communities, and that is also a cost. 

So I think the point is that when you consider the wide range 

of costs involved in a foreclosure it is very, very significant. Someone bears it, and those costs are measurably greater than the cost 

that would ensue in a Chapter 13 bankruptcy under this proposed 

legislation. 

So, in my view, it is hard to argue that the cost of mortgage credit will rise in aggregate. You may argue that certain groups will 

suffer higher costs, that those folks that are making piggyback seconds definitely will have higher costs, but for the vast majority of 

mortgage buyers I don’t think it will make a difference. 

Ms. SA ́ NCHEZ. Thank you. 

It has also been argued that if a mortgage loan can be modified 

or rendered unsecured during bankruptcy it will be far more difficult to originate or sell mortgages in the secondary market. As a 

result, it has been argued that the cost of mortgages would have 

to increase to reflect this additional risk. How would you respond 

to that argument? 

Mr. ZANDI. I don’t think that will be the case either. It is a 

change, and therefore, the secondary market will have to adjust to 

that change; but I think it is a relatively straightforward thing to 

do. 

The issue for the secondary market is, what is the loss on the 

mortgage in a foreclosure and how is that different from a loss that 

would incur in a Chapter 13 bankruptcy under this proposed legislation. I mean, the worst-case scenario for the securities market 

would be just to assume what they are assuming now about the 

loss in foreclosure. That would be sort of the most conservative outside estimate of the cost. But I do think with time they will figure 

it out. 

The other point is—and they can do that relatively quickly. 

And the other point is, the market is broken; as it is, it is not 

functioning well. A lot of changes have to occur to make this market function appropriately. And this is a perfect time to ask them 

to make this kind of a change because they have to, in a sense, 

redo the plumbing because the plumbing is broken. And why not 

put in better pipes while you are at it? 

Ms. SA ́ NCHEZ. Great. 

And the final question, also in his prepared testimony—and, 

again, it is kind of weird because you have not heard the testimony. Mr. Kittle states that the proposed reform to section 

1322(b)(2), which allows a Chapter 13 debtor to modify a home 

mortgage, would result in higher down payments and that the borrower would have to pay 1 to 3 points on the entire loan, an additional three-eighths of a percent in the mortgage interest rate; and 

7 

he also estimates that borrowers would see a 200 basis point jump 

in interest rates with a 5-to-10-percent down payment home mortgage with no points or fees at closing. 

And I am interested in getting your reaction to that assertion. 

Mr. ZANDI. I don’t agree. This is very similar to the first question 

about the interest rate costs. 

There are numerous ways that you can raise the cost to the borrower. One is the interest rate, the other is the size of the down 

payment. I think, in aggregate, when you consider all mortgage 

borrowers and all mortgage lending, that we will not see any significant increase in the cost, whether it be through an interest rate, 

whether it be through the size of the down payment or other lending terms that are offered up to borrowers. 

And just to reiterate, there will be some groups where the cost 

will rise. I mean, I do think that some borrowers wished to put 

very little down and relied on a piggyback second to be able to fit 

into the home 100 percent cumulative loan-to-value ratio or above. 

Those borrowings will be, under this legislation, will be more difficult. But in my view, a large part of the foreclosures or problems 

that we are facing are related to that kind of a lending; and I don’t 

see any downside to having that be restricted to some degree by 

the marketplace. 

Ms. SA ́ NCHEZ. Great. Thank you. 

My time has expired, so at this time I would like to recognize our 

distinguished Ranking Member, Mr. Cannon, for 5 minutes of questions. 

Mr. CANNON. Thank you for joining us, Mr. Zandi. I am actually 

looking forward to the time when we cannot not all be here together and participate the way you are participating. I think this 

is the first time we have actually had a witness on a videoconference. 

Ms. SA ́ NCHEZ. Yes. 

Mr. CANNON. So thank you for breaking the ice here and setting 

a precedent. Mr. Chairman of the whole Committee, I hope you are 

taking note that this works pretty well. 

Mr. Zandi, you made a comment that made me wonder if we are 

talking about the same thing. You mentioned a sunset, but the Miller bill does not have a sunset. Do you think it needs a sunset? 

Mr. ZANDI. I do. I think that any legislation should have a sunset 

provision, because as we all know from previous bankruptcy reform 

changes, there are always things that we do not anticipate. And I 

fully believe that this proposed change is a good idea that will work 

out in the short run and the long run. But I would counsel that 

a sunset provision will be advisable so that we can go back 3, 5 

years down the road and evaluate whether this was an appropriate 

change or not. 

Mr. CANNON. We have people saying that this problem may be 

very short-term, others saying that the resets in mortgages may 

happen over a long period of time through 2010—2009. 

How long, if you had to put a number on it, how far out would 

you put that sunset? 

Mr. ZANDI. I would put it out at least 3 years, because the problems will be very severe through the spring, summer of 2009; post 

that, the recent tightening in underwriting standards will have 

8 

benefits and the foreclosure problems will abate significantly by 

late 2009 into 2010. And by that point, we will have enough data 

points to really judge whether this was appropriate or not. 

Mr. CANNON. Given what I think is a risk—and you sort of presented a no-cost solution here; I don’t agree with that. But given 

what I think are the risks, should we think in terms of a 2-year 

sunset so 2009, about this time, we have to reauthorize it if it has 

worked and if it is necessary. 

Mr. ZANDI. Well, I think 2 years might be a little too short because you need to get the data, you need to see it come in, and 

there are lags involved. 

Now, suppose that, as I am anticipating foreclosure problems, 

continue into the spring of 2009. It will take at least until the end 

of 2009, early 2010, to get all the information in and be able to 

really digest it, make sense of it and make sure that things are 

working properly. 

So I would counsel 3 years. 

Mr. CANNON. We are moving in a world with quicker data; and 

in a case like this, I would hope that we could focus the data, because the risks, I think, are high. Let me ask one other question. 

My experience—and this is anecdotal and that is why we are 

here; but my sense is that many subprime lenders are now yielding 

windfall profits by repossessing houses of people who can’t sell 

their house or can’t make their payments and then selling them in 

a market that is actually artificially high, but which has been supported by purchases. And while they are doing it at a discount— 

you talked about deep discounts for foreclosed houses—my sense is 

the discounts are not so deep, and that there is a big incentive on 

the part of the forecloser to take the house and resell it at a profit 

from the house. 

I suspect that if you give the borrower the time frame and context to cram down that loan in bankruptcy that the system will not 

heal itself so quickly. 

Am I wrong about some lenders getting windfall profits from 

foreclosing? And secondly, do we have to worry about not solving 

the problem by giving borrowers who are in over their heads more 

leverage? 

Mr. ZANDI. I am not aware of a significant amount of profit being 

made in the foreclosure, in post sales, post-foreclosure sales. My 

sense of the data that I am seeing, which is now coming in quite 

quickly, is that prices are falling and they are falling very rapidly. 

And all indications are that they will continue to fall very rapidly, 

at least for the foreseeable future. 

Fundamentally, the problem here is that there is a massive 

amount of unsold inventory, and it is rising because of the fall in 

home sales and because of the increase in foreclosure. So I would 

be surprised if what you described is occurring in a very significant 

broad base; and if it is now, I doubt it will be in a few months because of the market conditions which are eroding exceptionally 

quickly. So I don’t think that is an issue. 

Now, with respect—or it soon won’t be. 

Secondly, with respect to giving more power to the borrower in 

the cram-down, to some degree that is the idea. That is the purpose 

here. Lenders and servicers and investors are having a very difVerDate Aug 31 2005 17:23 May 05, 2009 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6601 H:\WORK\COMM\103007\38638.000 HJUD1 PsN: 38638
9 

ficult time coming to terms and figuring out how to make loan 

modifications work, even though we all sense that in a broad— 

when you consider all the costs of all the foreclosures, that it would 

make sense to go through this process because for each one of the 

individual parties involved in the process, they may not make a 

profit, they may lose. 

So it is very, very difficult for everyone to come to terms on this. 

And by giving the borrower a little bit more power in the process, 

I think you crystallize a sense of urgency on the part of the lenders, the servicers and the investors to come together, come to terms 

and try to figure this out quickly. Because the problem is now, it 

is not 6 months from now or 12 months from now, it is now. 

Mr. CANNON. I notice, Madam Chairman, that my time has expired. But I will just point out, if I might take a moment, that what 

we are debating here on this bill is exactly what Mr. Zandi has 

said, which is, Where do we put the thumb on the scale here and 

how heavily do we press? 

Thank you, and I yield back. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. We have 

just been notified that we have votes across the street, but I think 

we have time for Mr. Conyers’ round of questions. Mr. Conyers is 

recognized for 5 minutes. 

Mr. CONYERS. Thank you, Chairwoman Sa ́nchez. I want to thank 

everyone for arranging this. 

There are only two questions that I have. One is that the industry tells us that they are on top of the problem and that if we trust 

them, they can solve this. I know that the ‘‘trust me’’ question always suggests the obvious answer. 

But why would they give us this kind of information? 

Mr. ZANDI. You are asking me, Congressman? 

Mr. CONYERS. Yes, sir. 

Mr. ZANDI. Well, I think that many parties involved are well intentioned. They would like to help solve this foreclosure problem. 

But, you know, there are a lot of countervailing incentives—secondlien versus first-lien holders, the various flavors of investors, the 

servicers versus the investors. 

So I think the problem is that they may be well intentioned, they 

want to make it work, but given the incentives that are present 

and the conflicts that are involved, it is going to be extraordinarily 

difficult for them to come to terms of agreement, at least quickly 

enough to make a big enough difference for the people who are losing their homes today and next year and the year after. 

Mr. CONYERS. In other words, they have got vested interests that 

don’t lead them to be as concerned about resolving this problem as 

quickly as we can? 

Mr. ZANDI. That is one way of looking at it. 

Or their view is that they can solve this problem in a different 

way and a better way, a more profitable way than another person 

or party involved and can’t come to terms. 

Mr. CONYERS. Well, you know, the problem that I am finding, 

Mr. Zandi, is that some of them were in on the predatory lending 

and the incredible schemes that got people into this mess to begin 

with. 

10 

Mr. ZANDI. Yeah. You know, there are certain cases of that, and 

certainly there is, I think, evidence that lenders were overly aggressive, many of whom were in the nonregulated part of the industry or the lightly regulated part of the industry. 

But I think, broadly the industry wants to do the right thing. 

They want to do good; they are working hard. But my point is, because of the impediments in their way, they are just not going to 

be able to get it together quickly enough to make a big difference. 

And I think with this proposed legislation it will allow for some of 

those impediment barriers to come down, and we will get something done, something worthwhile, something that will make a difference to this market and to these households before it is too late. 

Mr. CONYERS. The last question, Chairwoman, is this to Mark 

Zandi. 

I have just been encouraged by some of my friends that want us 

to freeze all foreclosures and allow American families to retain 

their homes. The monthly payments and rent should be made to 

banks, designated banks, which can use the funds as collateral for 

normal lending practices, thus recapitalizing the bank system. 

These payments will be factored into new mortgages reflecting the 

deflating of the housing bubble and the establishment of appropriate property valuations and reduced interest rates. 

Has that occurred to you recently? 

Mr. ZANDI. Yeah. I wouldn’t agree with that. I think that would 

be a very significant mistake. 

I think—what you are discussing, I think, today in the form of 

this legislation is a good middle ground and something that will do 

right by lenders and by borrowers. But by completely shutting 

down the foreclosure process, I think that would do more harm 

than good—particularly to the very people that I think you would 

like to help in the long run. 

So I really believe that this legislation is a piece of legislation 

that will strike the right balance. 

Mr. CONYERS. I think so, too. I am a cosponsor of it. 

And I thank you very much for your comments, Mr. Zandi. 

Thank you, Madam Chairman. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired, and I 

think this is a good time to take a natural break. We need to go 

across the street to vote. 

Dr. Zandi, I want to thank you for your participation. I know by 

the time we get back, you will have to run. But Members will be 

submitting written questions that we will ask you to answer as 

quickly as possible to be made a part of the record as well. Again, 

we want to thank you for your patience and all of our panelists for 

their flexibility. 

We are going to be in recess while we vote, and we will come 

back to finish the hearing. 

[Recess.] 

Ms. SA ́ NCHEZ. This hearing on the Judiciary Subcommittee on 

Commercial and Administrative Law will come to order. We are 

trying to speed things along, given our late start. And normally we 

would do full-blown opening statements. I am going to actually recognize Mr. Feeney to give the minority opening statement. The 

11 

gentleman is recognized. I will respond, and then we will proceed 

with the testimony of our panelists. 

Mr. Feeney is recognized. 

Mr. FEENEY. Well, thank you, Madam Chairman. I think it is important that we had a second hearing. Some of us were very concerned that we had rushed through the first consideration. And I 

remain determined to point out that the unintended consequences 

that may adversely impact credit markets throughout America in 

this bill really need to be examined by the Financial Services Committee, which has the bulk of the expertise. 

Having said that, that decision is admittedly way beyond my pay 

grade, as to whether or not the Financial Services Committee 

ought to consider what potentially could be the most damaging impact on credit availability in the homeowners’ market in America 

of any bill that—in the 6 years since I have been here. I will say 

that all of us are sympathetic with the plight of homeowners that 

for whatever reason may be foreclosed on in their homes. So there 

is an enormous amount of sympathy with the 1 or 2 or 3 percent 

of Americans that may suffer this. 

But ultimately, there is a price to be paid for allowing a judge 

to arbitrarily cram down the mortgage after the fact. And that 

price I am afraid could be huge. The protection for home lending 

in the Bankruptcy Code goes back at least to 1898. In 1978, Senator DeConcini pointed out the intent of section 1322(b)2 of the 

code was to preserve the availability of residential mortgage funding for individuals of modest means. We need to determine I think 

as a Congress what it means if we do away with the availability 

of mortgages for individuals of modest means. 

Justice Stevens, no right wing justice, in the case of Nobelman 

v. American Savings Bank, pointed out that it was the intent of 

Congress all along in enacting that very section to assist with home 

ownership. And I quote him from that case: ‘‘At first blush, it 

seems somewhat strange 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 the favorable treatment of residential mortgages was intended to encourage the flow 

of capital into the home lending market.’’ 

I would note that we had an economist earlier—and of course, 

Ronald Reagan famously remarked that he wished he could find a 

one-armed economist because you can always find an economist 

that will say, on the one hand, this may occur, and the other hand, 

the opposite may occur. To his credit, the economist that testified, 

he thought on balance this proposal would probably be helpful. 

Also acknowledged in Mr. Zandi’s testimony that the unintended 

consequences of such legislation often outweigh the intended positive consequences, and so that was the sole entire reason why he 

suggested that we sunset any reform of the Bankruptcy Code. 

There are other economists, presumably who are advising some 

of the major players in the lending industry, including the American Bankers Association, National Association of Home Builders, 

the U.S. Chamber of Commerce and others, that are asserting the 

importance of protecting availability of credit to homeowners 

throughout the country by preserving this section of the code. And 

12 

I would also like, Madam Chairman, to ask for unanimous consent 

because there is at least one entity that acts as sort of a mutual 

fund. That would be the National Association of Federal Credit 

Unions, which is not a profit-making entity. I would like to ask 

permission, unanimous consent to insert a letter addressed from 

the National Association of Federal Credit Unions to Chairman 

Conyers and Ranking Member Lamar Smith. 

Ms. SA ́ NCHEZ. Without objection, so ordered. 

[The information referred to follows:] 

13 

LETTER FROM THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS


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Mr. FEENEY. And finally I would point out that the adverse consequences are not just going to be potentially to people of modest 

means who want to buy homes in the future. If you want to sell 

your home to somebody of modest means, there could be huge adverse consequences because the pool of buyers that have access to 

credit may dry up. If you merely want to retain ownership of your 

home because there are fewer buyers for like homes, the equity 

that otherwise might grow in your home will be depressed by this 

variable, this uncertainty that is thrown into the ability to collect 

markets, so even people that want to hang onto their homes for the 

next 20 or 30 years, in my view, will be likely to suffer some damage if this is imposed, not to mention realtors, home builders, title 

companies, mortgage companies, surveyors. 

As you diminish on the margins the number of people that could 

access credit or you reduce the credit availability to people to buy 

a larger home or a nicer home than they would—if it hadn’t been 

for the uncertainty we are putting in the market here by removing 

this section of the code, you diminish the value of all residential 

real estate in the country. 

And with that, Madam Chairman, I would yield back the balance 

of my time. 

Ms. SA ́ NCHEZ. The gentleman yields back. 

And I will yield myself just a couple of minutes to respond to 

some of what has been said. 

Last month, this Subcommittee held a hearing on the subprime 

mortgage meltdown, this very same issue, and we got to hear from 

experts on how we got into this mess, and we heard their views on 

how to fix it. We have already heard testimony from one witness 

today with respect to the proposed legislation that Congressman 

Brad Miller and I introduced, H.R. 3609. And I am pleased to recognize my colleague and welcome him to our Subcommittee hearing 

today. 

I know it has kind of been a quirky and out-of-order hearing. But 

I think everybody will agree, and I think all of our witnesses at the 

last Subcommittee hearing on this issue agreed that foreclosure is 

the worst possible option for everybody in all instances. And so I 

think the legislation, as crafted by Mr. Miller and I, while we are 

open to some suggestions for improving it, I think really strikes at 

the heart of what could provide some real relief and some reasonable measures that are not going to—not going to over address the 

problem, if you will. 

With that, I am going to yield back my time. And we will, without objection, allow Members to submit their written statements 

for the record. Without objection, the Chair will be authorized to 

declare a recess of the hearing at any point. 

[The prepared statement of Mr. Cannon follows:] 

16 

PREPARED STATEMENT OF THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF UTAH, AND RANKING MEMBER, SUBCOMMITTEE ON

COMMERCIAL AND ADMINISTRATIVE LAW


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Ms. SA ́ NCHEZ. And at this point, I am pleased to introduce the 

witnesses for today’s hearing. Our first witness is William Brewer, 

Jr., certified as a specialist in consumer bankruptcy law by the 

North Carolina State Bar. Mr. Brewer has represented the debtors 

in a series of cases in the Eastern District of North Carolina dealing with the effect of purchasing money security interest in bankruptcy cases. Mr. Brewer has been an NACBA member since 1993 

and a NACBA director since 1997 and has served as an extremely 

popular panelist at NACBA’s previous conventions. 

Mr. Brewer served as a law clerk to Judge R.A. Hedrick of the 

North Carolina Court of Appeals before beginning private practice 

in 1977. I want to thank you and welcome you for your patience 

and for being here today. 

Our second witness is David Kittle. Mr. Kittle is chairman elect 

of the Mortgage Bankers Association and president and chief executive officer of Principle Wholesale Lending, Inc., in Louisville, KY. 

He started with American Fletcher Mortgage Company and became 

a top loan originator before moving to management in 1986. In 

1994, Mr. Kittle opened his own company, Associates Mortgage 

Group, Inc., and sold it in January of 2006. We want to welcome 

you here today. 

He is the former chairman of MORPAC, MBA’s political action 

committee, a former vice chairman of the MBA Residential Board 

of Governors and is a member of MBA’s Advisory Committee. Mr. 

Kittle is also a member of the Fannie Mae Advisory Council. 

We already heard from our third witness Dr. Zandi a little out 

of order. 

Our final witness is Richard Levin, vice chair of the National 

Bankruptcy Conference. Mr. Levin is a partner at Skadden Arps, 

concentrating on corporate restructuring, insolvency and bankruptcy issues. He was counsel to a House Judiciary Committee 

Subcommittee and was one of the principal authors of the Bankruptcy Code and the Bankruptcy Reform Act of 1978. I will note 

that this is the second time that Mr. Levin has testified before this 

Subcommittee during this congressional session. The first being 

during the executive compensation hearing that we had. 

And we welcome you back, Mr. Levin. 

Mr. LEVIN. Thank you very much for having me back, Madam 

Chair. 

Ms. SA ́ NCHEZ. Not at all. Without objection, all of the witnesses’ 

written statements will be placed into the record in their entirety. 

And we are going to ask that you please limit your oral remarks 

to 5 minutes. We have a lighting system that starts with a green 

light. At 4 minutes, it will turn yellow to remind you that you have 

about a minute left in your testimony. And when the light turns 

red, we will ask you to summarize your final thoughts so that we 

may hear from all of our panelists. After each witness has presented his or her testimony, Subcommittee Members will be permitted to ask questions subject to the 5-minute limit. 

With everybody understanding the rules, I will invite Mr. Brewer 

to please begin his testimony. 

Can you please hit your microphone? Okay. I might recommend 

you try the other microphone. Your microphone doesn’t appear to 

25 

be working. And we will reset your time. All right. Is it working? 

None of the microphones are working. Okay. 

We are going to pause for just a moment to see if we can get the 

microphones working. 

Mr. CANNON. Madam Chair, while we are paused, may I ask 

unanimous consent to introduce several items into the record? 

Ms. SA ́ NCHEZ. Of course. 

Mr. CANNON. The first is a statement by Representative Steve 

Chabot. The second is a Securities Industry and Financial Markets 

Association statement and the third is a testimony or statement 

from Financial Services Roundtable, also a statement from the 

American Bankers Association and a statement of Edward J. 

Kulik, that is K-U-L-I-K—before a 1978 Senate Judiciary Committee hearing on bankruptcy. 

[The information referred to follows:] 

26 

PREPARED STATEMENT OF THE HONORABLE STEVE CHABOT, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OHIO


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PREPARED STATEMENT OF THE SECURITIES INDUSTRY AND

FINANCIAL MARKETS ASSOCIATION (SIFMA) 


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PREPARED STATEMENT OF STEVE BARTLETT, ON BEHALF OF THE

FINANCIAL SERVICES ROUNDTABLE


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PREPARED STATEMENT OF THE AMERICAN BANKERS ASSOCIATION AND

AMERICA’S COMMUNITY BANKERS


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PREPARED STATEMENT OF EDWARD J. KULIK, SENIOR VICE PRESIDENT, REAL ESTATE

DIVISION, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY BEFORE THE COMMITTEE ON THE JUDICIARY, UNITED STATES SENATE


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Ms. SA ́ NCHEZ. Without objection, so ordered. 

And since we are still trying to get the microphones working, I 

will ask unanimous consent to enter into the record a letter from 

Professor Robert Shiller with the Cowles Foundation for Research 

in Economics at Yale University; a statement by Eric Stein, on behalf of the Center for Responsible Lending; a New York Times article dated October 8, 2007, entitled, ‘‘The American Dream in Reverse;’’ a letter from a diverse group of consumers, civil rights, 

labor, housing and community organizations; and also, from the 

Congressional Research Service, a memo regarding the 1978 bankruptcy legislation and secured lending supplement. Without objection, so ordered. 

[The information referred to follows:] 

72 

LETTER FROM ROBERT SHILLER, THE COWLES FOUNDATION FOR

RESEARCH IN ECONOMICS


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PREPARED STATEMENT OF ERIC STEIN, CENTER FOR RESPONSIBLE LENDING


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ARTICLE FROM THE NEW YORK TIMES, DATED OCTOBER 8, 2007, TITLED

‘‘THE AMERICAN DREAM IN REVERSE’’ 


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LETTER TO THE HONORABLE JOHN CONYERS, JR., CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND THE HONORABLE LAMAR SMITH, RANKING MEMBER, COMMITTEE ON

THE JUDICIARY


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MEMO FROM THE CONGRESSIONAL RESEARCH SERVICE (CRS) 


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Ms. SA ́ NCHEZ. How are we doing with the microphones down 

there? Okay. 

Mr. Drew Brewer, we will try this one more time. We invite to 

you open your testimony. 

TESTIMONY OF WILLIAM E. BREWER, JR., ESQ., THE BREWER 

LAW FIRM, RALEIGH, NC, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS 

Mr. BREWER. Okay. Working good now. 

Chairwoman Sa ́nchez, Ranking Member Cannon and Members of 

the Subcommittee, I am grateful to have the opportunity to offer 

testimony today that hopefully will facilitate congressional action 

that will enable many thousands of your constituents to avoid losing their homes to foreclosure. My name is William E. Brewer, Jr., 

and I am on the Board of Directors of the National Association For 

Consumer Bankruptcy Attorneys. 

From that title, you might conclude that I am an officer in this 

battle over the proposed amendments of the bankruptcy law, but 

I am just a foot soldier. I practice law in Raleigh, North Carolina, 

as a sole practitioner. From my 20 years of representing debtors, 

I know as much or more as any person in this room about debtors. 

What they are like, what motivates them, what gets them in financial trouble, the great lengths to which they will go to avoid filing 

bankruptcy. These things I know, and that is a perspective I bring 

to this debate today. 

I consult every day with clients who face the stark reality of losing their homes to foreclosure. When I look into their faces, I see 

fear and hope; fear that they are going to lose their homes, but 

hope that I, through the bankruptcy process, can help them save 

their home. Unfortunately, with increasing frequency, I am forced 

to confirm their fears and eliminate their hopes. 

Here is a typical dialogue. 

I say: If you are going to keep your house, you have to resume 

making your full house payments. 

The client says: But they are too high. That is why I am here. 

Me: I know but that is the rule. 

Client: Well, I was making them at first, but the payments kept 

going up. They are $500 more now than when I started. Doesn’t the 

bankruptcy law allow me to reduce the amount of the debt or the 

interest rate? You said we could do that on my car. My house is 

more important than my car. 

I say: I know. It makes no sense. But calling Congress can 

change it. 

The culprit, as you know, is section 1322(b)2 of the Bankruptcy 

Code, which prohibits the modification of loans secured solely by a 

debtor’s principal interest. The blanket bar to modification is 

unique to home loans. For example, a debtor who owns residential 

rental property can modify a loan secured by property. 

The solution is simple, remove the bar to modification. The mortgage industry opposes any change to the anti-modification provision. Others propose that the bar be removed only as to these 2/ 

28 adjustable rate mortgages and that the bar continue to apply 

only to future loans. 

100 

Unquestionably, the bar to modification should be eliminated 

across the board to existing and future loans. Though ARMs represent the bulk of these troublesome loans, there are a plethora of 

other subprime loans and other predatory high-interest loans in the 

market contributing to the foreclosure crisis. The homeowners 

trapped in these loans are no less deserving than the ARM borrowers of a chance to save their homes from foreclosure. Congressional policy that grants relief to one and not the other has no defensible rationale. The same is true for future loans. 

The mortgage industry created a mortgage market predestined 

for disaster. Through the fragmentation of the various segments of 

the industry and the securitization of mortgage, it promoted the 

meteoric rise in the issuance of these ill-advised 2/28 ARMs. The 

mortgage brokers and the loan originators either didn’t pay attention to the fact or perhaps just didn’t care that these loans were 

no good. They made their money and passed the risk of loss up the 

line through securitization. 

Metaphorically, the disaster created by the mortgage industry is 

a conflagration, putting people out of their homes all over this 

country. The incendiary device are these exploding ARMs. The fire 

must be put out. 

As more and more homes are foreclosed, property values are 

driven lower and lower, and neighborhoods are being destroyed. 

The industry claims it will get the fire under control with its voluntary modification program. Do we really want to turn over that 

responsibility to the people who started this mess by playing with 

matches? 

In conclusion, you were elected to deal with this kind of problem. 

I implore each of you, whether you be Democrat, Republican, Blue 

Dog Democrat to cooperate in a bipartisan way to enact this legislation which is so badly needed by so many homeowners. While 

these financial fires continue to burn, don’t just sit here in Washington playing your fiddles. 

[The prepared statement of Mr. Brewer follows:] 

101 

PREPARED STATEMENT OF WILLIAM E. BREWER, JR. 


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Ms. SA ́ NCHEZ. Thank you, Mr. Brewer. I appreciate your testimony. 

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

TESTIMONY OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, 

MORTGAGE BANKERS ASSOCIATION, WASHINGTON, DC 

Mr. KITTLE. Thank you, Madam Chairman, Ranking Member 

Cannon. Thank you for the opportunity to testify before you on this 

most important issue. 

H.R. 3609 is a well-meaning attempt to close what is mistakenly 

described as a bankruptcy loophole and to ensure that people don’t 

lose their homes to foreclosure with no material effect on the real 

estate financial system. Unfortunately, this bill will have a devastating impact on current and future homeowners. This legislation 

would repeal anti-modification protections on home loans that have 

been in existence since the Bankruptcy Act of 1898 and that were 

confirmed by the Bankruptcy Code of 1978 and by unanimous Supreme Court in 1993. 

These protections are not loopholes. They were created by Congress to ensure the continued lowered cost and free flow of mortgage credit for primary residences. The anti-modification protections are sound public policy and have helped generations of families by keeping mortgage interest rates down. Changing the law 

will have serious consequences for home buyers, homeowners with 

existing mortgages. The hardest hit will be people in areas with declining home prices. 

Members of this Committee have discussed their goal of keeping 

people in their homes. We at the Mortgage Bankers Association 

share that goal. It pains all of us and me personally to look at the 

statistics and the real families behind them. None of us wants to 

see a family pushed out of their home. Current law already provides sufficient protection to keep borrowers in their homes. As 

soon as a borrower in foreclosure files for bankruptcy, the foreclosure is stayed. The borrower is then allowed 3 to 5 years to 

repay their delinquency without fear of foreclosure if they pay their 

bills on time. By reorganizing and ultimately discharging the unsecured debts, money is freed up to pay the mortgage and arrearage. 

H.R. 3609 would have a tremendous impact on the mortgage finance system. If this bill becomes law, we believe mortgage rates 

would jump significantly, going up 1.5 to 2 percent for everyone 

taking out a loan, holding loan terms, credit, the economy and everything else constant. Our home finance system is based soundly 

on the idea that mortgage debt is secured lending. If borrowers do 

not pay their bills, the lender can take possession of the home and 

partially recover from the bad debt. 

The current security and protections in bankruptcy mean that 

home lenders are not taking as much risk as creditors take with 

them. For example, credit cards. This is why, at the most basic 

level, you pay more interest on unsecured debt, such as credit 

cards, than for a mortgage. If you chip away at the security created 

on home mortgages—and this bill is not a small chip; it is a sledgehammer attack—you chip away at the entire core of the mortgage 

finance system. 

110 

In order to account for the added risk, you will add significant 

cost to obtaining a mortgage. What does this mean? Assume you 

take out a 30-year fixed rate mortgage for $300,000 in today’s market. If you are a prime borrower, you will receive a rate of about 

6 percent with no points, giving you a principal and interest payment of about $1,800 per month. If you pass this bill, we estimate 

the same loan at the same terms could cost as much as 8 percent. 

That increases your payment to about $2,200 per month. This will 

be an increase of $400 per month, $4,800 per year, for a total over 

$144,000 over the life of a loan. This is a massive backdoor tax increase on homeowners. 

Members of the House can take considerable pride in the steps 

you have taken already to address the problems in the mortgage 

market. You have passed legislation giving the Federal Housing 

Administration a greater ability to help troubled borrowers refinance. You have made it possible for people to exclude discharges 

of debt on primary residences from gross income, saving borrowers 

from higher tax bills. The House has passed GSE reform and established an Affordable Housing Trust Fund. The Financial Services 

Committee is working on a bill to ensure that the problems we 

have recently seen never happen again. Chairman Frank intends 

to have that bill on the floor of the House by the end of this year. 

I urge you to reconsider your support for the bill and assure you 

that we will work with the House in addressing the mortgage crisis. This bill is not the answer to the problems, and we urge you 

to oppose it. Thank you. 

[The prepared statement of Mr. Kittle follows:] 

111 

PREPARED STATEMENT OF DAVID G. KITTLE


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Ms. SA ́ NCHEZ. Thank you for your testimony, Mr. Kittle. 

At this time, I would invite Mr. Levin to give his testimony. 

TESTIMONY OF RICHARD LEVIN, ESQ., CRAVATH, SWAINE & 

MOORE LLP, NEW YORK, NY, ON BEHALF OF THE NATIONAL 

BANKRUPTCY CONFERENCE 

Mr. LEVIN. Thank you, Ms. Chairman, and Members of the Subcommittee. It is an honor and a pleasure to be here, to be invited 

back. 

I am here on behalf of the National Bankruptcy Conference, 

which is a voluntary nonprofit, nonpartisan organization committed 

to the improvements in the bankruptcy law. The National Bankruptcy Conference was formed in the 1930’s at the request of this 

Committee to assist the Congress in deliberations on this complicated and technical area. 

I stress that we do not represent any economic interest. We 

pledge when we meet to leave our clients at the door and focus on 

what we believe is sound bankruptcy policy. 

We believe that a bill along the lines of H.R. 3609 is sound bankruptcy policy. You have my prepared statement. I will not review 

all of the points in there. I would like to make just a few remarks 

based on what has been said already. But I cover obviously a lot 

more territory in the prepared statement. 

It is our experience, as Mr. Brewer has said, that bankruptcy is 

not a first resort. It is a last resort. It is a last, last resort. People 

tend to head toward the bankruptcy court at 11:59 and 59 seconds. 

Many of the things that have been proposed by the Mortgage Bankers as ways of alleviating the mortgage crisis are helpful, but they 

are not a complete solution. I note that, just last Friday, the Joint 

Economic Committee majority staff produced a report on the 

subprime lending crisis. It proposes many of the things that the 

Mortgage Bankers have suggested and more, including an amendment to Chapter 13. And it traces the history and effect of the crisis quite well, and I commend its reading to the Subcommittee. 

But the fact is, voluntary measures will not work. We need a 

backstop, a last resort if lenders are to come to the table and negotiate in good faith with borrowers over restructuring mortgage 

loans. 

H.R. 3609 only recognizes economic facts. It does not impose 

losses that are not already present on the ground. The real estate 

has lost value. A foreclosure will cause it to lose even more value, 

increasing the cost to the lender through foreclosure expenses, 

taxes, insurance, maintenance and cost of resale. H.R. 3609 provides a better solution that is a win-win, that keeps families in 

their homes and allows lenders to mitigate their losses. 

We must focus on this. This is the very fabric of our neighborhoods that we are trying to protect. 

We believe that the bills and the law as it currently exists have 

adequate safeguards already against abuse. To file a Chapter 13 

case, a debtor—the court must find that the debtor acted in good 

faith in filing the case and in proposing the plan of arrangement. 

The debtor must devote all of his or her disposable income to the 

plan for 3 to 5 years, and the debtor is hampered in filing—or restricted from filing bankruptcy because of the adverse effect it will 

127 

have on the debtor’s credit report, which will stay on I think it is 

at this point 10 years, but I defer to Mr. Brewer on that. 

We have no evidence, reading the cases, talking to the judges, 

following this area closely, that solvent bankruptcies are running 

to the bankruptcy court. And the other protections that are present 

are the two Supreme Court decisions within the last 10 years Rash 

against Associates Commercial finance, which provided for what we 

will call fair market value of an asset such as a home where the 

debt is being adjusted until, which sets forth the Supreme Court’s 

interpretation of a market rate in interest. The bankruptcy courts 

are bound by both of these restrictions if they are to have the 

power to approve plans and adjust mortgage interest rates. 

Finally, just a word on the effect on rates. Before the Supreme 

Court decided Nobelman in 1993, four Circuits permitted mortgage 

modifications, and many, many, many bankruptcy courts did as 

well. We did not see any perceptible effect on credit rates, mortgage 

rates in those jurisdictions than in the only one circuit that went 

the other way when the Supreme Court took up the Nobelman 

case, the Fifth Circuit. 

Second, what H.R. 3609, by recognizing the economic facts on the 

ground that are already going on, when lenders go to foreclose, 

most the lenders get is the value of the property, which is what 

3609 proposes. And that—even though that has been the economic 

fact, if not the law, has not affected mortgage lending. And finally, 

every time a change in the bankruptcy law is proposed that is adverse to lenders, the statement is made, this will hurt credit rates. 

The converse also ought to be true. If rates—if bankruptcy law is 

made more generous to lenders, one might think that rates would 

come down. Have you looked at your credit card bill recently? Have 

your rates changed in the 2 years since the adoption of the 2005 

amendments? 

Thank you, Ms. Chairwoman. 

[The prepared statement of Mr. Levin follows:] 

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PREPARED STATEMENT OF RICHARD LEVIN


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

We are now ready to begin questioning, and I will begin by recognizing myself for 5 minutes. 

Mr. Brewer, Steve Bartlett, on behalf of the Financial Services 

Roundtable, stated in his prepared testimony for last month’s hearing that mortgagees are reaching out to help consumers in trouble 

on an unprecedented scale. And I am interested in getting your response to that statement. 

Mr. BREWER. I would like Mr. Bartlett’s phone number because 

I have got some clients that I need to call him about. Because 

whether they are reaching out in record numbers, I don’t know. 

Are they reaching out enough? The answer is, it is just a tiny little 

bit of help based on what the problem is. 

And I think you have got to look at two issues. One is, just how 

many people are they reaching, which is small. And then, what are 

they doing when they reach them? I think that is where the key 

is. If you look at the testimony here by Mr. Kittle, it talks about, 

well, these mortgage servicers are not going to modify the loans to 

the extent that this bankruptcy will. They are talking about maybe 

letting folks skip two or three payments, capitalize, put the loan at 

the end. The modifications are not real. They are not meaningful 

as far as dealing with the underlying problem, which is property 

that is worth a whole lot less than what the debt is and interest 

rates that, when these ARMs reset, hit, you know, get up to 13, 14, 

15 percent. And they are one-way ARMs. They are ARMs in which 

they, you know, they never—they were adjustable rate but only adjustable upwards, never could go beyond that initial teaser rate. So 

the answer is, in the real world where I practice—I only know 

about Raleigh, North Carolina—it is not happening. 

Ms. SA ́ NCHEZ. Okay. 

In your prepared statement, you note that homes sold in foreclosure generally sell for only 70 to 75 percent of the actual fair 

market value. I want you to please explain your basis for that 

statement. 

Mr. BREWER. Well, that is just a rule of thumb that I have—I 

mean, obviously I have filed many bankruptcies for folks who have, 

perhaps, didn’t try to save their home from foreclosure, so it foreclosed before they came to see me. I looked at what the value is, 

based on what appraisal they had, what tax values were, they have 

told me it was worth. I see what the deficiency is. North Carolina 

is one of those States that allows a deficiency judgment. When it 

sells at foreclosure, the difference the debtor owns. And that is my 

own unscientific numbers. You can actually find some cases back 

in history—at one point, that was an issue about bankruptcies, 

about whether the property brought a fair value at foreclosure sale. 

And that was a pretty fairly accepted number. If you have seen the 

TV shows where folks are sitting at home and they are going to 

make lots of money sitting at home, normally they are talking 

about buying these homes at foreclosures at these bargain basement prices and flipping them and making money off of them. 

Ms. SA ́ NCHEZ. Thank you. 

Mr. Levin, what is your recollection of why the exception or carve 

out for home mortgages was included in section 1322(b)2 when you 

helped draft the 1978 bankruptcy amendments? Because we have 

144 

heard them described as loopholes but to me are more appropriate 

as a carve out. 

Mr. LEVIN. It is not a loophole. Mr. Kittle is correct. It was a policy decision made at the time. This Committee had a different 

view. This Committee thought that the mortgage, mortgages 

should be permitted to be modified. 

I heard Mr. Feeney say earlier that this was a provision in the 

law since 1978. In one sense, that is correct. But the difference in 

1978 was that, before 1978, no secured debt could be modified, 

homes, cars, vacation homes, investment property, nothing. The 

1978 law moved a long way in permitting modification of secured 

debt but excepted out mortgage debt because that was the Senate’s 

view. It was not the House’s view. It was not this Committee’s 

view. This Committee thought it was sound policy at the time to 

permit it. But as part of a compromise to get the legislation enacted, which did a tremendous amount of good for many people for 

many years, the House receded on that point. 

Ms. SA ́ NCHEZ. Okay. I have here a quote. The Fifth Circuit in 

1984 wrote that the section 1322(b)2, the exception for home mortgages was included—and I am quoting here from them—‘‘apparently in response to perceptions or to suggestions advanced in the 

legislative hearings that home mortgage lenders performing a valuable service through their loans needed special protection against 

modification thereof.’’ And I am interested in getting your response 

to that. 

Mr. LEVIN. A couple of responses to that. The first, that came 

from I think the statement of the organization represented by the 

gentleman sitting on my right. And it is nice to know that their position has not changed over 30 years. 

Second and more important, the home mortgage lending was 

very different in 1978 than in 2007, 2006, 2005; 80 percent loan to 

value, 20 percent down payment, fixed rates, no exploding ARMs, 

no negative amortization, no securitization. The local bank held 

your mortgage. These were people you knew and who supported 

the community. That is not the market we are in today anymore. 

If anything, the progress of bankruptcy law should keep up with 

the changes in the economy, not go back to 1978, unless, of course, 

the mortgage industry would like to go back to 1978, and maybe 

that would—maybe that would solve this crisis in a lot of respects. 

Mr. KITTLE. Madam Chairman, can I comment on that? 

Ms. SA ́ NCHEZ. Thank you, Mr. Levin. 

My time has expired. If I can get unanimous consent for 30 seconds, we will allow you to respond. Without objection. 

Mr. KITTLE. Thank you, Mr. Chairman. 

It was nice to know Mr. Levin was there in 1977. I am not sure 

I was born in 1977. 

Ms. SA ́ NCHEZ. We are going to check your driverss license after 

that statement. 

Mr. KITTLE. The Senate at that time held for all protections as 

far as the bankruptcy went. The House held for no protections, and 

a compromise was gained. And I am sure he would concur with 

that. 

There was a witness, Mr. Edward Kulik, senior vice president of 

Mutual Life Insurance. His views were captured and actually put 

145 

into law. And he pointed out that reducing a mortgagees’s claims 

to the actual value of any real estate securing the claim would 

have a dramatically negative impact on the mortgage industry. 

That is what he said. That was embraced by the Committee, and 

it became part of the statute. 

I will close by saying, Supreme Court Justice Stevens said also 

in the 1993 decision: At first blush, it seems somewhat strange. 

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. It was there for a purpose. 

Ms. SA ́ NCHEZ. Thank you. My time has expired. 

At this time, I will recognize the Ranking Member of the Subcommittee, Mr. Cannon, for 5 minutes. 

Mr. CANNON. I am always pleased to take my time. And by the 

way, thank you for letting the gentleman respond without taking 

my time. 

I would also like to thank Mr. Levin for being here today. You 

know, I have worked very closely with the National Bankruptcy 

Conference and appreciate the expertise and the tremendous work 

that was done, especially on the passage of the bankruptcy bill a 

couple of years ago, which took great effort. 

I think that quote, by the way, was Senator DeConcini, not the 

National Mortgage Bankers Association, and he was a Democratic 

Senator. Just I think that might play interestingly in the record. 

We will have to look a little more on that. I think that is the quote 

that we had before us. 

For the record, Mr. Conyers is going to do the research on that. 

And if it turns out it was Mr. DeConcini, the Democratic Party 

may disown him, although that may not be relevant at this stage 

of his life. 

Mr. Levin, you talked about—I think you said something to the 

effect, voluntary measures might get—won’t get the job done or 

won’t get lenders to the table; the problem is more urgent. But they 

are the guys who have the most to lose, are they not? 

Mr. LEVIN. I am sorry for interrupting you. 

Mr. CANNON. Go ahead. 

Mr. LEVIN. They are not actually the guys to lose. In 1978, they 

were the guys with most to lose because the local banker was making the loan and keeping it on his books. Now these loans are 

securitized in pools into mortgage-backed securities which are purchased by collateralized debt—— 

Mr. CANNON. Let me say, rather than the lenders, let me say, the 

owners of the paper are the ones who have the most to lose. People 

who ought to be getting there and solving the problem and by minimizing their losses if it costs so much to go through a foreclosure 

process, they ought to be the ones in there that are driving that 

forward. 

Mr. LEVIN. You would think so. However, they are not the ones 

who are at the table. The ones who are at the table are the mortgage loan servicers, and the servicers get a fee for the work they 

do. And they get a bigger fee when they foreclose because that is 

a big process. 

146 

Mr. CANNON. Right. The guys that are going to have to pay that 

fee, whoever that—that may be a mutual fund. It may be all kinds 

of folks out there that own this kind of paper. There ought to be 

terrific pressure on those folks to solve the problem. 

Mr. LEVIN. There ought to be. But what happens is, there is a 

certain assembly line mentality to this. It i simpler and easier to 

work through the process than to try to custom tailor a solution to 

every single problem. 

Mr. CANNON. Well, Mr. Brewer talked about that he is not seeing 

much—and he noted, it was anecdotal—with the industry’s attempt 

to rework these issues, and maybe Mr. Kittle would like to speak 

about this. But I think—was it Mr. Brewer we had here or Mr. 

Bartlett—was talking about something in the neighborhood of 

1,500 renegotiations per week. So over a couple-year period between now and the end of 2009, you are talking about 150,000. We 

heard on the last panel, there may be as many as 500,000 of these 

such houses that will go into some kind of crisis mode. One would 

expect that as the word gets out—and by the way Mr. Brewer, I 

suspect that you can find the phone number online. And I think 

there is a pretty strong—— 

Mr. BREWER. I have called it. I have called it. It is a black hole. 

Mr. CANNON. Well, I guess my point is, what is the best thing 

for America to have a black hole that gets light over time because 

you have huge incentives by the owners of this paper to solve the 

problem short of blowing the market apart with foreclosures, or a 

bill that would fundamentally transform how we securitize the biggest segment of wealth in America? And you obviously have something to say, Mr. Brewer. 

Mr. BREWER. Well, if that question is put to me, the answer is, 

I don’t see why we can’t do both. I mean, if these folks are going 

to fix the problem or fix—I think your numbers will make—I think 

that might represent—if those numbers are real—I doubt they 

are—but that may be 30 percent of the problem. 

Mr. CANNON. Pardon me. I am about out of time, and I would 

like Mr. Kittle to have the opportunity to respond to those issues. 

Mr. KITTLE. Thank you, Congressman Cannon. 

Our Members are reaching out, but communication is a two-way 

street, which I think Mr. Brewer would agree. We call the consumer on a regular basis, can provide the data to show that, many 

times, many times, the calls are not returned. We are joined with 

NeighborWorks; our Home Loan Learning Center Web Site has 

gone from getting hits as low as 200,000 per month up to 1.6 million hits in August alone. We spent over—— 

Mr. CANNON. Those numbers—you are talking about numbers 

that are big enough to solve the problem and would indicate that— 

I mean, this is a complicated world with different people owning 

paper. This is not like 1978. But if I understand what you are saying right, there is a massive outreach by your industry to help 

proactively solve the problem. 

Mr. KITTLE. There absolutely is a massive outreach. Are we 

reaching everybody? No. Because, again, sir, communication is a 

two-way street. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. I would request unanimous consent for 30 seconds for Mr. Brewer to continue 

147 

his thoughts since we allowed Mr. Kittle during my round of questioning to do the same. 

Mr. BREWER. Thank you. My point is that the idea of voluntary 

modifications to the extent that the real—to the extent they actually help people save their homes is good. Folks will turn to that 

first. But I am telling you from that, down there in the trenches, 

it is not enough. It is not even anywhere close to enough. So this 

Congress needs to do something for those people that those voluntary modifications are not reaching. And, again, I think that the 

real issue is the fact that what they are offering folks in a way of 

modifications do not fix the problem. We are talking—they are negotiating with the same people who sold them on the idea of these 

exploding ARMs in the first place. 

Mr. KITTLE. That is not accurate. 

Mr. CANNON. Madam Chair, may I ask 15 seconds to say something conciliatory here? 

Ms. SA ́ NCHEZ. Fifteen seconds, Mr. Cannon, and then we are 

going to move on to Mr. Conyers. 

Mr. CANNON. The Chairman of the full Committee is laughing 

because he knows I can do it in 15 seconds. 

Ms. SA ́ NCHEZ. Your time starts now. 

Mr. CANNON. This is a matter of where the thumb goes on the 

scale. And I suggest that the overwhelming weight that we are 

talking about putting on the scale here may distort it to the great 

detriment of your clients in the future and hope that we can find 

something that will balance the problem. 

Thank you, Madam Chair. 

Mr. KITTLE. Can I correct the inaccurate statement? 

Ms. SA ́ NCHEZ. I apologize. We do want to ensure that everybody 

gets an opportunity to ask questions. And we have gone a little 

long. 

So I will at this time like to recognize Mr. Conyers for 5 minutes 

of questioning. And before we begin, Mr. Conyers’ time, I want to 

recognize Mr. Chabot, the gentleman from Ohio, who has been sitting in for the last 30 minutes or so on this hearing. I know he has 

a keen interest in this issue, and we welcome you to the Subcommittee and thank you for your interest. 

And now I will recognize Mr. Conyers for 5 minutes. 

Mr. CONYERS. Thank you, Madam Chairman. The Detroit area 

has the fourth largest number of foreclosures of anyone. Atlanta 

comes in number seven. It is a serious problem. And most of our 

experts agree that it is going to get worse before it gets better. How 

did a nice guy like Kittle get involved in this stuff, representing the 

mortgage people? I mean, what happened in your life that created 

this—— 

Mr. KITTLE. Well, I chose to be here, Congressman. And mortgage bankers are nice people, just like I am. So I am pleased to 

be here to represent them today. 

Mr. CONYERS. Well, that is very reassuring. And if anyone could 

do it, it would be you that make us feel reassured. 

But you know, this Committee is quite collegial with Chris Cannon and Tom Feeney and Mr. Chabot from Cincinnati; Brad Miller 

is over here. We have got a real political situation here. And that 

is that we can talk all we want. But this bill is going to be tough 

148 

to get through the House and the Senate, gentlemen. It is not going 

to be an easy thing to do, and unless we can get Mr. Chabot and 

Mr. Miller and this Committee together, that to me is my goal. We 

have sensational discussions and exchanges on this Committee. 

But you see, there are a lot of people that are now—I will be putting out a press release later on, and so will a lot of others—but 

the problem, Chris, is that we have got people who will be listening 

and looking at this and say, good night, the Sa ́nchez Committee is 

really getting us taken care of. We are talking upward of 500,000 

people or families now. And help is on the way. 

The Members, the witnesses that have been invited here today, 

is there anything you can recommend out of your vast experience? 

I know Mr. Brewer and Attorney Ted Kalo from North Carolina 

know of each other. But tell me, knowing the difficulties of getting 

both Houses of the Congress together, what I am beginning to get 

worried about is what is going to really happen? I mean, it will be 

a noble effort and all these people are saying, ah, boy, Chairman 

Conyers, I know he would do it. And I knew Chabot would do it. 

I knew Brad Miller could come through. Sa ́nchez has got more 

work than any other Subcommittee in the Judiciary. Where are 

we? Mr. Brewer. 

Mr. BREWER. If you are asking me how you get this bill passed, 

that is way above my pay grade, but I mean—— 

Mr. CONYERS. So tell me anyway. 

Mr. BREWER. Well, I think you either do it sooner or you do it 

later because I—if I am right, if what I am hearing is these modification—these voluntary modifications are going to fix the problems, I will come back here and admit I was wrong. But I will bet 

anybody here any amount of money that we will come here—you 

wait until next spring and you don’t do something and this foreclosure crisis, this fire I am talking about, is going to be burning 

out of control, and you will have to do something, you know, because people will ultimately demand it. 

Ms. SA ́ NCHEZ. Attorney Levin, what say you? 

Mr. LEVIN. I don’t know where the middle ground is to answer 

your question directly. But the answer is not, do nothing. The answer is not, let the lenders decide when they want to give up value. 

To Mr. Cannon’s thumb-on-the-scale point, it is a very important 

consideration in all bankruptcy legislation. At this point, my experience tells me that homeowners with homes with values that have 

fallen and cannot afford the payments do not have anything on 

their side of the scale. I think passing something along these lines 

would give them a little bit of negotiating leverage. Now they have 

none. And it would be cabined and regulated by the bankruptcy 

judges under the Supreme Court’s decision. But I don’t think doing 

nothing is the answer. 

Mr. CONYERS. Madam Chairwoman, could I ask Mr. Kittle for his 

advice? 

Ms. SA ́ NCHEZ. I will grant you an additional 30 seconds because 

your time has expired so that Mr. Kittle may respond. 

Mr. KITTLE. Thank you, Madam Chairman. First of all, to correct 

what he said earlier, that the people are not dealing with the same 

people that originated the loans. The servicers, in many cases, 

bought those loans from brokers who had no fiduciary responsiVerDate Aug 31 2005 17:23 May 05, 2009 Jkt 000000 PO 00000 Frm 00152 Fmt 6633 Sfmt 6601 H:\WORK\COMM\103007\38638.000 HJUD1 PsN: 38638
149 

bility in the transaction. So they are talking with a servicer who 

is there who wants to help them work the loan out. 

Congressman, if could I give you a quick example of how this 

cram down bill will harm the people that you want to protect, and 

the quick example is: On an FHA loan, there is a statute in FHA 

loans that says they cannot insure when you do the cram down. 

Therefore, the part you would cram down—and I will use an example of a $150,000 loan, and it gets crammed down to $100,000. The 

FHA insurance can’t pay on that $50,000. It goes back to the 

servicer. The servicer has to eat that money. It has to pay that 

money to Ginnie Mae, and the servicer takes the cost. That is a 

statute. 

Therefore, those loans, because of higher risk, in many cases, will 

not be made unless interest rates are raised or points or fees to 

mitigate the risk going forward. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

Mr. CANNON. Madam Chair, may I ask unanimous consent for 30 

seconds to compliment—that is not compliment Mr. Conyers, but 

complement—make a statement that is complementary to the 

statement that he had just made. 

Ms. SA ́ NCHEZ. You can compliment Mr. Conyers, too. 

Mr. CANNON. I do that at almost every opportunity I get, and I 

will do that right now. 

Ms. SA ́ NCHEZ. If you will be brief, I do want to give everybody 

an opportunity to ask questions, Mr. Cannon. But go ahead. 

Mr. CANNON. The gentleman has talked about the people watching this Committee hearing today. And I think many people in 

America may actually be watching it. Therefore, I think it is extraordinarily important that they begin taking responsibility for 

their own lives because the likelihood that this bill will get passed 

in a way that will actually affect them is I think fairly minor. And 

so let me point out that the global flow of capital is dramatically 

important here. If we want capital in America to continue making 

loans, we are going to need to deal with this. 

And I would love to have Mr. Kittle say for the record how people 

can get in touch with the association that is dealing with these 

mortgages so people can start calling up and screaming at bankers 

and telling them what they can do and what the value of their 

house is. 

Ms. SA ́ NCHEZ. I will allow Mr. Kittle to do that, but I would like 

to get through our round of questions first. 

At this time, I will recognize the very patient Mr. Feeney for 5 

minutes of questions. 

Mr. FEENEY. Thank you. 

And again, I want to thank the Chairman for having a second 

hearing on this very important issue. 

I think all of us sympathize with people who have to come see 

you, Mr. Brewer. Nobody wants to be in that position. And I will 

tell you that I serve on the Financial Services Committee. And you 

know, for 30 years, Congressmen and Congresswomen have been 

beating up, begging, brow beating the credit industry to make credit more available to nontraditional borrowers. We are now up to 70 

percent home ownership. America is the first country in the history 

150 

of the planet where 70 percent of families could actually live in a 

home that they own. That is a miraculous thing. 

But let’s acknowledge that much of the bubble that has been created in real estate is because of credit that was too loose. Loans 

that just simply didn’t make sense unless market prices were going 

to dramatically increase forever. 

The market has already overreacted. It has overreacted so severely that policymakers in this building, as we are trying to make 

credit more risky and therefore tighten credit availability, the Financial Services Committee is actually encouraging Fannie Mae 

and Ginnie Mae to loosen credit availability. We have the Fed that 

just dropped interest rates by half a point in order to make sure 

that we don’t dry up credit markets and literally turn a partial recession in one market of our economy into a deep depression in all 

areas of the economy. 

So the question here is not whether the patient is sick. I happen 

to agree with your proposed analysis and the gentleman from 

Moody’s, too, that the situation is likely to get worse in the next 

6 to 12 months, not get better. I happen to agree with that. But 

like medieval blood letting by doctors, my question is, are we making the situation worse by being sympathetic? My question is, what 

happens going forward to credit markets? Because, ultimately, the 

way to relieve yourself of a problem of debt on a piece of property 

is to have a rising—unless you can get a job that pays you twice 

as much—is having rising property values. That only happens if 

there are buyers available. The problem in today’s market across 

the country and especially in the States that have had double-digit 

declines is that there are just no buyers to sell to at the price that 

the owner needs to cover the cost of his mortgage. 

Now I think there may be things that we can do to get the holders of these mortgages and the folks that actually service the loans 

in better contact with. That is what this Committee and the Financial Services Committee ought to be doing. I talked to a local judge 

because at our last panel we had a bankruptcy judge testify that 

almost none of the servicers or securitized holders of mortgages 

were available to assist the individual that needed help. And just 

as Mr. Levin said, you can’t deal with this on a case-by-case basis 

when it is happening across the country. 

I talked to an Orlando judge who happens to be a friend of mine, 

and he does foreclosure, not bankruptcy, admittedly a different animal, but similar. He said that, on a regular basis, he can dial up 

a phone at 2 in the afternoon and tell the servicer of a loan that 

the property is going to be sold the next day. One thing all of the 

witnesses both in this panel and the previous panels have agreed, 

in this market, especially with declining real estate values, holders 

of mortgages do not want that property back. It cost them months 

of interest rate payments, of paying attorneys, of paying realtors to 

remarket and fix-up costs. So it is in the interest of the holders of 

securitized mortgages across the country to find a way to negotiate 

these loans. 

But what you do in this piece of legislation that the two of the 

three of you have endorsed is you have said to all future lenders 

that you are adding uncertainty into the credit markets. All creditors, all lenders abhor risk. They abhor uncertainty, and you are 

151 

adding to the uncertainty. And what you are doing is to say that 

a judge arbitrarily can modify the terms of the mortgage despite 

what is in the best interest of the long-term economy. And you are 

taking that decision out of the hands of the people that now are 

at risk. 

So I understand that none of the three of you—maybe Mr. Levin, 

maybe you have an economics degree. I think Mr. Kittle has referred—I don’t know whether you are an economist. But I am worried about the long-term economic impacts. And I am afraid, like 

medieval doctors, we are taking a sick patient, and we are letting 

blood all over the place so that we can argue, as Mr. Levin said, 

we are doing something. And admittedly, the American people 

want us to do something. But I am afraid for the patient in the future. 

With that, if the Chairman would allow, I would be happy to invite comments. 

Mr. BREWER. Do you want my comment on that? Because this is 

my thought. I was with you because what you were describing was 

a situation in which doing nothing is bad because we are going to 

have all these foreclosures. There are going to be losses in the community. There is not going to be enough people buying these 

houses. Why don’t we let the people who are in the houses now, 

who could make these payments at a reasonable rate and who 

could pay for the house at its current fair market value? In my 

area, the market is not that depressed. I understand, in other 

places, it is terrible. But wherever that level is—and this is not arbitrary. The court—you know, you determine the fair market value. 

They pay that lender a reasonable interest rate. If you want to let 

it be like the till rate that is done on car loans, fine. If this Congress wants to set what that rate is—— 

Mr. FEENEY. Well, respectfully, this bill contains no constraints 

whatsoever on the bankruptcy judge, and it takes out—there are 

no constraints whatsoever in this bill. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. 

And I would also just like to comment briefly on that last point 

that bankruptcy judges tend to be experts in assessing the value 

of assets. I am going to ask—pardon me—unanimous consent to 

enter into the record a letter from Richard Cordray, the Ohio 

Treasurer of State, who sent a letter in support of H.R. 3609, and 

also I would ask unanimous consent to enter into the record— 

Moody’s did a subprime mortgager survey on loan modifications 

with the finding that less than 1 percent of serviced loans that experienced a reset in the months of January, April and July of 2007 

were actually modified by the mortgagees. Without objection, those 

will be entered into the record. 

And at this time, I would like to recognize the gentleman from 

Georgia, Mr. Johnson, for his 5 minutes of questions. 

[The information referred to follows:] 

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LETTER FROM THE HONORABLE RICHARD CORDRAY, OHIO TREASURER OF STATE


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SPECIAL REPORT BY MOODY’S INVESTOR SERVICE


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Mr. JOHNSON. Thank you, Madam Chair. In our background material, it recites that, in 2006, there were 1.2 million foreclosures 

in the United States, representing an increase of 42 percent over 

the prior year, an explosion in foreclosures. And economists estimate that 5 percent of all mortgage holders are expected to default 

on their mortgage loans this year and next, resulting in a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities. 

And that being the projection, and it being foreseeable that this 

would have a tremendously negative impact on the economy of this 

Nation, I want to ask Mr. Kittle, what would be worse, for that situation to unfold, or would it be better for a bankruptcy court to be 

able to ensure that many of those loans, instead of going into default and becoming nonconforming, would be continuing, would be 

allowing loans to continue to perform but only partial performance? 

Which would be better, nonperformance or partial performance, to 

the lending industry in this country? 

Mr. KITTLE. Thank you, Congressman. I am happy to address 

that. 

I think it would be better for the market to let it correct 

itself—— 

Mr. JOHNSON. Well, now, that is a different question. 

Mr. KITTLE. But I will finish and answer your question the way 

you put it. 

—and I think it would be better for it to play out and not to have 

this legislation go through. 

And here is why: There are a couple of points and statistics that 

have not been given today. We keep talking about the mortgage 

products putting these people into foreclosure. 

Mr. JOHNSON. Well, you haven’t answered my question. 

Mr. KITTLE. I am going to. 

The three main reasons for foreclosure, Congressman, are unemployment, divorce and illness, not the mortgage products. So that 

needs to be said. 

Mr. JOHNSON. If you have got a mortgage, if you have got an adjustable rate mortgage which is getting ready to adjust upward, 

and it will cause the—and the value of your property is going down 

because of foreclosures around it—— 

Mr. KITTLE. But it is not the mortgage products all the time that 

are causing the foreclosures around the property. 

Mr. JOHNSON. Whatever the cause might be, wouldn’t it be better 

to enable the debtors to continue to pay something on those loans 

as opposed to ensure that they go into default? 

Mr. KITTLE. No, and for this reason. 

Because if you enact this legislation, the future interest rates 

will be up by 2 percent. Borrowers will not be able to obtain credit 

because the risk will be so high some investors will pull out of the 

market. You will hurt future purchases. 

Mr. JOHNSON. I heard you say that. But now you have got a market of lending as to debtors’ principal residences. Then you have 

got a number of loans that are made for investment property in 

real estate. You have got commercial property loans. The residential lending industry that is consumed or that portion of the residential lending industry consumed by debtor-occupied homes is 

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probably not as great as that overall market, but yet the overall 

market allows for a bankruptcy judge to come in and modify the 

loans. 

Mr. KITTLE. Are you speaking on the investment loans? 

Mr. JOHNSON. Any other kind of property, other than a debtor’s 

primary residence. 

Mr. KITTLE. Well, there is equity in those properties, that’s correct. 

Mr. JOHNSON. Let me ask Mr. Brewer. 

Do you understand the question? 

Mr. BREWER. Yeah, I do. 

Mr. JOHNSON. We are only talking about a portion of the whole 

market. 

Mr. BREWER. It is obviously the industry—I mean, it is like you 

are trying to force them to do what is in their best interest. And 

the most efficient way to modify these loans is not through this 

cumbersome jump through all these hoops counselor’s process, but 

for those people who cannot make their loan payments, to modify 

them through a bankruptcy; and it is the most efficient way to do 

it. 

Mr. JOHNSON. Let me add that according to Moody’s back in August, a study by Moody’s, only 1 percent of the loans that qualified 

for a workout were actually being voluntarily worked out by the industry. 

Mr. Levin, what can you add to that? 

Mr. LEVIN. On that specific question, as I said earlier, sometimes 

lenders need—let me put it this way. 

If I am going to negotiate with you about something and you get 

to make the final decision, you don’t have to take my views into 

account at all, and you invite me to the negotiating table, take it 

or leave it. What negotiation is there? Whenever one party to a negotiation has all of the decision-making authority, there is no real 

negotiation; it is a unilateral decision. 

What this law would do would be to try to put some negotiating 

leverage on both sides, regulated by a bankruptcy judge, regulated 

by Supreme Court decisions, constraints on the process where the 

Supreme Court has said, a valuation has to be done according to 

this standard, interest rates have to be done according to that 

standard. 

There is nothing in these bills that talks about valuation and interest rate. It is already in the law. These bills would hitch onto 

that. That is what I think about voluntary negotiation. 

Sure it can be done, but why would it be? 

Mr. JOHNSON. And it works very well in circumstances other 

than debtors’ primary residences, which is what is causing the big 

problem that we are faced with today and which this legislation, 

H.R. 3609—which was introduced by Representative Miller, who is 

seated to my right, along with Representative Sa ́nchez and others—seeks to address. 

And so, with that, I will yield back my time. 

Ms. SA ́ NCHEZ. The time of the gentleman has expired. I want to 

thank all of our—— 

Mr. KITTLE. Madam Chairman, may I make one 15-second comment, please? 

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Ms. SA ́ NCHEZ. I will allow you 15 additional seconds and nobody 

else gets additional time. 

Mr. CANNON. I ask to give him 20 seconds so he can announce 

a phone number and we page. 

Ms. SA ́ NCHEZ. I will allow you 15 seconds for that purpose, and 

we are watching the clock. 

You are on, Mr. Kittle. 

Mr. KITTLE. Okay. 

I wish Mr. Zandi were here—and he is not—because the 1 percent figure you just allude to is misleading and inaccurate. He says 

1 percent of all ARMs, 50 percent of the subprime ARMs, almost 

50 percent, have already refinanced. There is a high percentage of 

those subprime ARMs that are paying on time. Therefore, his using 

1 percent of all ARMs is totally inaccurate. 

I would encourage you to ask Mr. Zandi to verify his statistics. 

And also ask him if his own company, Moody’s, even supports the 

bill. 

Ms. SA ́ NCHEZ. The gentleman’s time has expired. 

And we appreciate again the patience of all the witnesses. We 

have had a number of scheduling difficulties with this hearing. 

Without objection, Members will have 5 legislative days to submit any additional written questions, which we will forward to the 

witnesses and ask that they answer as promptly as they can so 

that we can make them a part of the record. Without objection, the 

record will remain open for five legislative days for the submission 

of any additional materials. 

Again, I want to thank everybody for their time and their patience. I want to thank Representatives Miller and Chabot, who 

joined us. Back in the old days they would have had an opportunity 

to participate in the asking of questions of our panelists, and I am 

sorry that that was not the case today. But I do appreciate your 

presence here and your interest in this issue. 

And this hearing of the Subcommittee on Commercial and Administrative Law is adjourned. 

[Whereupon, at 3:30 p.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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LETTER TO THE HONORABLE LINDA T. SA ́ NCHEZ, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA, AND CHAIRWOMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW, FROM J. RICH LEONARD, JUDGE, UNITED STATES

BANKRUPTCY COURT, EASTERN DISTRICT OF NORTH CAROLINA


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LETTER TO THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND

MEMBER, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW, AND THE

HONORABLE LINDA T. SA ́ NCHEZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE

OF CALIFORNIA, AND CHAIRWOMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW


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