ROLE OF THE LENDING INDUSTRY IN THE 

HOME FORECLOSURE CRISIS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 9, 2009 

Serial No. 111–50 

Printed for the use of the Committee on the Judiciary 

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ROLE OF THE LENDING INDUSTRY IN THE 

HOME FORECLOSURE CRISIS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 9, 2009 

Serial No. 111–50 

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 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

LUIS V. GUTIERREZ, Illinois 

BRAD SHERMAN, California 

TAMMY BALDWIN, Wisconsin 

CHARLES A. GONZALEZ, Texas 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

DANIEL MAFFEI, New York 

LAMAR SMITH, Texas 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TOM ROONEY, Florida 

GREGG HARPER, Mississippi 

PERRY APELBAUM, Majority Staff Director and Chief Counsel 

SEAN MCLAUGHLIN, Minority Chief of Staff and General Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

STEVE COHEN, Tennessee, Chairman 

WILLIAM D. DELAHUNT, Massachusetts 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

DANIEL MAFFEI, New York 

ZOE LOFGREN, California 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

JOHN CONYERS, JR., Michigan 

TRENT FRANKS, Arizona 

JIM JORDAN, Ohio 

HOWARD COBLE, North Carolina 

DARRELL E. ISSA, California 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

MICHONE JOHNSON, Chief Counsel 

DANIEL FLORES, Minority Counsel 

(III) 

C O N T E N T S 

SEPTEMBER 9, 2009 

Page 

OPENING STATEMENTS 

The Honorable Steve Cohen, a Representative in Congress from the State 

of Tennessee, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................................................... 1 

The Honorable Trent Franks, a Representative in Congress from the State 

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

WITNESSES 

The Honorable Elizabeth W. Magner, United States Bankruptcy Court for 

the Eastern District of Louisiana 

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

Prepared Statement ............................................................................................. 10 

Ms. Suzanne Sangree, City of Baltimore Law Department 

Oral Testimony ..................................................................................................... 138 

Prepared Statement ............................................................................................. 140 

Mr. Joseph R. Mason, Ph.D., Louisiana State University 

Oral Testimony ..................................................................................................... 267 

Prepared Statement ............................................................................................. 270 

Mr. Lewis D. Wrobel, Attorney at Law 

Oral Testimony ..................................................................................................... 304 

Prepared Statement ............................................................................................. 307 

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

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

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

Judiciary, and Member, Subcommittee on the Constitution, Civil Rights, 

and Civil Liberties ............................................................................................... 5 

Material submitted by the Honorable John Conyers, Jr., a Representative 

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

Judiciary, and Member, Subcommittee on the Constitution, Civil Rights, 

and Civil Liberties ............................................................................................... 319 

Material submitted by the Honorable Trent Franks, a Representative in 

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

on Commercial and Administrative Law ........................................................... 333 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Response to Post-Hearing Questions from the Honorable Elizabeth W. 

Magner, United States Bankruptcy Court for the Eastern District of Louisiana ..................................................................................................................... 400

Response to Post-Hearing Questions from Suzanne Sangree, City of Baltimore 

Law Department .................................................................................................. 403 

Response to Post-Hearing Questions from Joseph R. Mason, Ph.D., Louisiana 

State University ................................................................................................... 405 

Response to Post-Hearing Questions from Lewis D. Wrobel, Attorney at Law .. 406 

Page

IV 

Prepared Statement of the Honorable Cecelia G. Morris, United States Bankruptcy Court for the Southern District of New York—Poughkeepsie Division ........................................................................................................................ 407 

OFFICIAL HEARING RECORD 

MATERIAL SUBMITTED FOR THE HEARING RECORD BUT NOT REPRINTED

Enclosures to the Response to Post-Hearing Questions from Suzanne Sangree, City 

of Baltimore Law Department, have been retained in the official Committee hearing record 

(1) 

ROLE OF THE LENDING INDUSTRY IN THE 

HOME FORECLOSURE CRISIS 

WEDNESDAY, SEPTEMBER 9, 2009 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:10 p.m., in room 

2141, Rayburn House Office Building, the Honorable Steve Cohen 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Conyers, Johnson, Scott, 

Franks, and King. 

Staff Present: James Park, Majority Counsel; Zachary Somers, 

Minority Counsel; and Adam Russell, Majority Professional Staff 

Member. 

Mr. COHEN. This hearing of the Committee on the Judiciary, 

Subcommittee on Commercial and Administrative Law now comes 

to order. Without objection, the Chair will be authorized to declare 

a recess of this hearing. I now recognize myself for a short statement. 

Today the Subcommittee continues its examination of the ramifications of the home foreclosure crisis. At this time we will focus 

on the role of the lending industry both in contributing to the crisis 

and in mitigating its effects. This hearing is certainly not intended 

to be an attack on the lending industry, but rather is a chance for 

the Subcommittee to offer constructive criticism of some of the industry’s past and current practices to better serve its customers 

which are our constituents and America’s citizens. 

I represent Memphis, Tennessee, which is 60 percent African 

American. Memphis also has one of the highest foreclosure rates in 

the Nation, and African American homeowners have been particularly hard hit. Memphis homeowners were targeted with aggressive 

marketing of subprime mortgage loans. According to many observers, many such loans were the principal cause not only of the home 

foreclosure crisis but also of the Nation’s continuing economic troubles. 

Baltimore, Maryland shares many demographic similarities with 

Memphis, including roughly the same percentage African American 

population. Baltimore, like Memphis, is facing a particular severe 

home foreclosure crisis with African American homeowners bearing 

the disproportionate brunt of such foreclosures. 

2 

Therefore, I was intrigued when I learned of the lawsuit filed by 

the City of Baltimore against one of the Nation’s largest mortgage 

lenders, Wells Fargo. This suit alleges that Wells Fargo deliberately steered African Americans to high cost subprime mortgage 

products, even in cases where the borrower would have qualified 

for a traditional prime loan. 

These are very troubling allegations. This phenomenon, referred 

to as reverse redlining, is illegal and a perversion of the laudable 

goal of increasing home ownership among traditionally disadvantaged groups. At this point Memphis has been considering filing a 

lawsuit similar to Baltimore’s. Shelby County, which includes 

Memphis, and Memphis is the county seat thereof, has already authorized the filing of such a lawsuit. 

In addition, recent media reports are suggesting a growing frustration on the part of judges nationwide with improper documentation and poor administrative practices on the part of mortgage 

servicers. This improper documentation or handling of records 

often impedes voluntary loan modification efforts, and in some instances ownership of a note on a mortgage and the attendant legal 

right to foreclose on a home have been called into question. 

We will examine the experience of financially troubled homeowners and their interactions with servicers and their attempts to 

seek a meaningful modification of their mortgage terms. The voluntary system apparently has not been working, and that is quite 

unfortunate. 

I welcome our witnesses, look forward to their testimony, and I 

will now recognize my colleague Mr. Franks, the distinguished 

Ranking Member of the Subcommittee, for his opening remarks. 

Mr. FRANKS. Thank you, Mr. Chairman. And welcome back to everyone. 

Mr. Chairman, the title of today’s hearing is the Role of the 

Lending Industry in the Home Foreclosure Crisis. And I think that 

no one here doubts that the lending industry has had a role in that 

crisis. Lenders made irresponsible underwriting decisions for many 

of the loans that are currently distressed, and lenders and servicers 

probably could have done more at the outset of the crisis to modify 

troubled mortgages to make them more affordable. 

However, I am concerned that if we focus only on the role of the 

lending industry we will be missing the major part of the problem. 

We will fail to acknowledge that the lending industry is not the 

only culpable party in this crisis. There is certainly plenty of blame 

to go around, including to the Federal Government itself. Through 

the Community Reinvestment Act the quasi-government entities 

like Fannie Mae and Freddie Mac and efforts like that on our part, 

the Community Reinvestment Act and Fannie Mae and Freddie 

Mac lending guidelines actually encouraged and sometimes almost 

coerced the underwriting of questionable loans. 

That said, we need to find solutions, and the lending industry 

unquestionably has a role to play in getting us out of our current 

predicament. But many aspects of this crisis, unemployment, falling home values, are simply outside of the lending industry’s control. So while I look forward to the witnesses’ testimony regarding 

what additional steps the lending industry can make to help stem 

3 

foreclosures, we must be mindful that not all of the solutions or the 

blame rests with the lenders. 

What is more, as we continue to search for solutions to this crisis, there is one so-called solution that I hope we can avoid, and 

that is bankruptcy cramdown. Allowing bankruptcy courts to modify home mortgages will have adverse consequences for all while 

providing little real relief to distressed borrowers. Bankruptcy 

cramdown will invariably lead to higher interest rates and less 

generous borrowing terms for all borrowers, and I think that will 

especially hit the very hardest those at the lowest income levels. 

Moreover, given that unemployment has been a driving factor behind most foreclosures and that those who do not have regular income may not file under Chapter 13 bankruptcy, cramdown will do 

nothing for those most in need of relief, those being the unemployed. Combine the unemployed with speculators, another large 

segment who would be unhelped by cramdown, and one quickly realizes that cramdown will really do nothing to help the vast majority of borrowers facing foreclosure. There is no reason to enact 

cramdown legislation with its attendant high costs when it will 

only produce modest results at very best. 

Furthermore, we must not forget that cramdown will not only 

impact lenders but investors as well. These investors include in 

large part pension funds representing the retirement savings of 

millions of Americans. We should not pass the cost of irresponsible 

borrowing and lending off on current and future retirees. 

I understand that cramdown is not the focus of this hearing, but 

because of this Subcommittee’s jurisdiction I feel that every time 

we examine the foreclosure crisis we are really revisiting 

cramdown. The Senate put cramdown to rest earlier this year, and 

I hope that we can leave it there. 

And I look forward to the witnesses’ testimony and hope they 

have some positive suggestions for actions the lending industry can 

take to help alleviate the foreclosure crisis. And with that, Mr. 

Chairman, I yield back. 

Mr. COHEN. Thank you. I appreciate the gentleman for his statement. And now recognize Mr. Conyers, the Chairman of this Committee, the distinguished Member of this Subcommittee and the father of universal coverage and the father of cramdown. 

Mr. CONYERS. Thank you, Mr. Chairman. And I want to join all 

of us in welcoming our witnesses. I am glad cramdown was mentioned before. I wish I could say I wasn’t going to mention it until 

you mentioned it, Mr. Ranking Member, but I probably would have 

anyway. 

Mr. FRANKS. It is all right. You can blame it on me. 

Mr. CONYERS. The House passed our provision. And cramdown is 

such a tacky term, isn’t it? I mean what we are talking about is 

giving the bankruptcy judge the same authority to review property 

matters that come before him on everything but houses; homeowners. So home, no good. And so all we are asking the judge to 

do, and fortunately we have a very distinguished member of the 

court here, is to look at it and see if the people that are the mortgagors are worthy of having the mortgage rewritten, the terms extended, the interest rate maybe reduced, the note itself lowered. 

4 

And it is not mandatory. It would be discretionary. What is 

wrong with that? Especially when we are having—is it in Wayne 

County? 200,000—what is the number? 200 a day. We are going 

in—and I love the President’s diplomacy in saying this is a deep 

recession. We are in a depression. 200 every single day in Wayne 

County. I used to say 127 a day. Now it is 200 enter the process 

of being foreclosed on for failure to—to be delinquent in their mortgage payments. 

Now, this Committee has had six hearings on this subject—six. 

This is the seventh. I commend all of the Members, especially my 

dear friend from Virginia, Mr. Franks, for his participation and 

making us stick to the proposition and prove what it is that we are 

doing is in the best interest of all the people losing their homes in 

my area and in his and across the country. He is concerned about 

that. He just wants to do it right. And so he is making sure that 

we do it right. And if we don’t he doesn’t hesitate to tell us about 

it. 

But all of this started with the subprime mortgage meltdown. 

This is what created it. And the meltdown was created, from this 

Member’s point of view, because of the fact that people were enticed into mortgage contractual agreements in which when they 

said there would be an adjustable rate mortgage they didn’t know 

that adjustable meant up, and many didn’t know how soon up 

would kick in. Sometimes it was years, sometimes it was months, 

but it was always—and then sometimes it was a big increase that 

everybody knew, including the people that gave them the mortgage, 

that they could never ever sustain it. 

But now what about this? What about the people that were paying their mortgage and Chrysler Corporation announced that they 

were going to close down the Hamtramck plant in my district. And 

everybody goes; white collar, industrial, the janitor. And you lose 

your income, which leads to you becoming delinquent in your mortgage, but you also lose your health care benefits and your pension. 

So to tell people that 200 new people, I could see in my county 

every day new, there will be 200 more tomorrow, there will be 200 

more Friday, that’s too bad, the bankruptcy court can’t do anything 

about it. 

And so I am just here to start our conversation off with the observation that this Administration business about voluntary, moderating the problem through volunteerism hasn’t been working. As 

a matter of fact, fewer and fewer people each month work into any 

agreement. But worse than that, the people that do work into 

agreement frequently fall off the wagon because they don’t have 

the money, so they end up getting socked anyway. 

So the servicers aren’t bad guys or these are not evil people. 

There was a contract. The first thing somebody says is, when you 

signed it didn’t you, buddy, Mr. and Mrs. Jones, you didn’t know 

that this was in there. These provisions, we didn’t make them up. 

That was the terms of the agreement that we got you a mortgage 

for your dream house. Everybody knows to own a home in America 

is the standard. That is the gold standard. We want everybody to 

be homeowners. At one time Detroit had the record of more working people owning homes than any other city in the country. That 

5 

is when the automobile industry was booming and people, ordinary 

working people, were able to do that. 

But there has been some negligence in what the servicers do. 

And by the way, after the mortgage is executed the bank, Wells 

Fargo, sells it to somebody else. And guess what, somebody else 

sells it to somebody else. And then they bundle them up and they 

infuse not only the American financial system, but these things 

traveled around the world in every financial system; in Europe and 

the Far East and Latin America. And that is what created the 

problem that brought us to what is now called the recession, the 

deep recession. 

Now I exclude from that the people that were catching hell before there was a subprime mortgage. There were some people losing their homes and jobs before this thing hit big time. And so, no, 

I don’t think anybody is here to criticize unduly the servicers, the 

people who ended up getting all this. But I do think they have done 

some things that they shouldn’t have done, and I do think they did 

some things wrong, and I do think that the bankruptcy judges are 

strapped by the regulations that we were—we were trying to—we 

came within—what was it in the Senate, 51 to 45? Yeah, we came 

within six votes, seven votes, of getting a bill that would go before 

the President. 

Now, I am working on Trent Franks because I know of his concerns. He is going to be one of those that might reconsider his vote 

if we handle this hearing properly to his satisfaction and the Chairman’s. 

I yield back. 

[The prepared statement of Mr. Conyers follows:] 

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

IN CONGRESS FROM THE STATE OF MICHIGAN, CHAIRMAN, COMMITTEE ON THE JUDICIARY, AND MEMBER, SUBCOMMITTEE ON THE CONSTITUTION, CIVIL RIGHTS, AND

CIVIL LIBERTIES

Central to our Nation’s current economic troubles is the endless cycle of home 

mortgage foreclosures, a cycle that unfortunately appears to be gaining momentum 

rather than drawing to a close. 

In addition to undermining our Nation’s economy, these foreclosures devastate 

families, neighborhoods, and local governments. 

In 2008, 1 in 10 American homeowners fell behind in their mortgage payments 

or were in foreclosure. The Federal Reserve estimates that in 2009, there will be 

2.5 million home foreclosures. Others estimate that the number could be as high as 

3 million. 

Over the next four years, there could be between 8 and 10 million foreclosures. 

As of July, in my hometown of Detroit, 1 out of every 275 housing units faces foreclosure. Also, there were 127 foreclosures a day in Wayne County. 

Vanessa G. Fluker, an attorney in Detroit, has shared with me many stories of 

clients who were treated poorly by the lending industry. For example, one of her 

clients requested a mortgage modification from Countrywide Financial, now part of 

Bank of America. Countrywide refused and, instead, sold her client’s home to a 

third-part investor for $800. The lending industry would rather throw people on the 

street and sell their homes for pennies on the dollar rather than engage in a reasonable modification. 

Others of Ms. Fluker’s clients who have been refused modification by mortgage 

servicers include a member of our armed forces, whose mortgage servicer refused 

to provide a mortgage modification after he fell behind on his payments while he 

was serving in Iraq and a woman and her mother who is dying of cancer. 

Despite the billions of dollars that the Administration has provided to lenders and 

servicers to encourage voluntary mortgage modification, we continue to hear stories 

like those of Ms. Fluker’s clients. And these are just a sampling of stories from one 

attorney in Detroit. 

6 

I also note that some of Ms. Fluker’s clients are senior citizens who originally had 

equity in their homes. Then, they were induced into taking on adjustable rate mortgages by aggressive marketing, and now they face usurious interest rates and mortgage payments that exceed their fixed incomes. We cannot forget how this foreclosure crisis began. 

We have not seen foreclosure numbers like these since the Great Depression, and 

the mortgage foreclosure crisis continues to grow at an alarming rate, with devastating consequences for communities across the Nation. 

The Judiciary Committee, including this Subcommittee, has been examining the 

causes and consequences of the home foreclosure crisis for more than two years. Between the full Committee and this Subcommittee, we have held at least six hearings 

in that period. 

We have also marked up legislation to help address the foreclosure crisis. My bill, 

H.R. 1106, the ‘‘Helping Families Save Their Homes Act of 2009,’’ offered a meaningful yet modest solution to the foreclosure crisis by granting bankruptcy judges 

the authority to modify mortgage terms, including a so-called ‘‘cramdown’’ of mortgage principal to more reasonably reflect actual market values. 

The version of the legislation that ultimately was signed into law, however, failed 

to include this critical provision, which was perhaps the one provision that would 

have most effectively helped families save their homes from foreclosure. 

I am disappointed not for myself or for the Members of this Committee. Rather, 

my disappointment stems from my deep concern for the millions of families now facing the loss of their homes and a life of insecurity and desperation. 

Today, as part of our continuing oversight of this issue, we look at how the lending industry has contributed to the foreclosure crisis. There are three issues I want 

to raise. 

First, anecdotal evidence suggests that mortgage servicers have not been cooperative or even communicative with borrowers who have sought mortgage modifications. 

Back in July, this Subcommittee held an oversight hearing on the Treasury Department’s Home Affordable Modification Program. This Program is intended to address the home foreclosure crisis by providing financial incentives to servicers to voluntarily modify mortgages at risk of default. 

Central to the Program’s success, however, is that it is voluntary. Accordingly, the 

quality of the participation by lenders and servicers is critical. 

It is no secret that I am deeply skeptical of allowing an industry, which caused 

this financial crisis, to be given total control to resolve it. I continue to question 

whether the industry’s voluntary efforts to modify mortgages—absent the possibility 

of involuntary judicial modification in bankruptcy—will be sufficient. 

At our last hearing in July, it unfortunately became very clear that the hopedfor success of these efforts was not materializing. Empirical studies suggest that voluntary modifications continue to be ineffective. Even worse, the number of modifications appears to be decreasing rather than increasing. 

According to Professor Alan White, one of our witnesses from the previous hearing, mortgage modifications peaked in February at 23,749 modified loans. By contrast, there were only 19,041 modified loans in May and 18,179 modified loans in 

June. 

Today’s hearing will likely help us better understand why these efforts are ineffective. In particular, mortgage lenders and their servicers appear to be hampered by 

a series of shortcomings, including inadequate staff to handle modification requests, 

sloppy administrative practices, and a lack of responsiveness to borrowers desperate 

to know how they can save their homes from foreclosure. 

In the meantime, the number of foreclosures continues to rise, going from 242,000 

foreclosures in January to 277,847 in May and 281,560 in June. 

Second, I want to know how our judicial system is currently addressing these 

deficiencies. 

For example, the New York Times reported last week on the rising frustration of 

bankruptcy judges nationwide with mortgage servicers who lack necessary documentation for the mortgages that they purportedly service. These servicers are often 

unable to accurately respond to borrowers’ questions about their mortgages, and 

they cannot determine whether these borrowers, in fact, qualify for requested mortgage modifications. 

Additionally, judges are citing lenders and their servicers for their improper practices, which include attempts to impose and collect unjustified fees, charging homeowners for unnecessary insurance, and failing to properly credit homeowners’ payments. 

7 

Other judges simply refuse to authorize foreclosure sales, because the party seeking relief lacks critical documentation to establish that it is entitled to seek foreclosure. 

Given that we are being asked to trust the lending industry to work with homeowners to help families keep their homes, I find these reports of mortgage companies’ administrative incompetence to be deeply troubling. 

Third, what more can Congress do to ensure that racially discriminatory lending 

practices do not recur? 

I applaud the City of Baltimore for pursuing fair housing claims against lenders 

suspected of engaging in ‘‘reverse redlining,’’ the deliberate attempt to steer racial 

minorities to high-cost, subprime mortgages. 

Nevertheless, it is as much, if not more, of a federal obligation to ensure that 

Americans’ civil rights are protected, as highlighted at an oversight hearing held by 

our Constitution Subcommittee last year. That hearing clearly established that enforcement of the Fair Housing Act was severely lax. 

In addition, there have been various studies identifying predatory mortgage lending practices as having played a key role in fueling the home foreclosure crisis, 

which has, in turn, devastated communities of color across our Nation. 

With the arrival of new management at the Justice Department, which has expressed a renewed desire for vigorous civil right enforcement, I am hopeful that federal enforcement of our fair housing laws will once again be a priority. 

I thank the witnesses for being here today, and I eagerly await their testimony. 

Mr. COHEN. That puts a high burden on me. Two votes. Thank 

you, Mr. Chairman. 

Without objection, the other Members’ opening statements will 

be included in the record. I would like to thank all of the witnesses 

for participating in today’s hearing. Without objection, your written 

statement will be placed in the record and we would ask you to 

limit your oral remarks to 5 minutes. There is a lighting system 

that kind of tells you what your time is. Green means you are within the first four, yellow you are on your last, and by red you should 

have finished quickly. Nobody seems to pay attention to it. I hope 

you will be the first panel that does. 

After you have presented your testimony Subcommittee Members 

will be permitted to ask questions. It is also subject to the 5-minute 

limitation. We might have votes come up, and if we do we will recess and will come back. 

Our first witness is Judge Elizabeth Magner. Judge Magner was 

sworn in on September 9, 9/9, of 2005, and prior to that was in private practice with Lemle and Kelleher, and then with her own 

firm. During 23 years in private practice Judge Magner specialized 

in bankruptcy foreclosures, seizures, and other commercial litigation matters. She has a broad range of experience in representing 

and presiding over matters concerning debtors, creditors, trustees 

and committees. 

Thank you for being here, Judge Magner, and we now ask you 

to begin your 5 minutes of testimony. 

TESTIMONY OF THE HONORABLE ELIZABETH W. MAGNER, 

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN 

DISTRICT OF LOUISIANA 

Judge MAGNER. Thank you, Congressman Cohen, Ranking Member Franks, and Congressman Conyers, and the other Members of 

the Subcommittee. I appreciate this opportunity to speak to you 

about the home mortgage crisis. Obviously I am just one of 330 

bankruptcy judges in the United States, but I hope my observations may be of some assistance to you. 

8 

The historic model of a lender originating and then holding a 

mortgage loan has been lost, perhaps forever. While the change in 

this practice has created tremendous opportunities for consumers, 

we also know that it had its dark side in the form of predatory 

lending and shoddy underwriting. But more devastating to consumers and the economy than either of these issues is another 

largely untold issue, the inaccurate accounting of loans. 

The pooling of loans for sale often to special purpose trusts with 

far flung investor owners has resulted in the rapid rise of the mortgage servicing industry. More and more the owners or the holders 

of notes are not typical financial institutions with the ability to administer a loan. Third-party loan servicing companies fill that 

need. These companies bid for the right to service millions of loans. 

In order to keep costs low they rely on sophisticated computer software that handles virtually every aspect of a loan’s administration. 

With disturbing regularity, however, these programs have improperly applied loan payments in derogation of the terms of notes and 

mortgages, failed to recognize and honor the terms of plans of reorganizations and court orders, and falsely place consumers into foreclosure. The amounts claimed on proofs of claim and in motions of 

relief are very often wrong by more than trifling amounts. 

Because there is no standard software platform for managing a 

loan, no industry accepted format for reporting, nor uniform set of 

guidelines for administration, inconsistencies in loan administration are rampant and can vary even on one loan from year to year 

as servicers change. In addition to these issues, the records of one 

servicing company probably will not interface with those of others. 

As the note holder changes servicers, perhaps as often as every 

year, the historical information on a loan may be lost, become inaccessible or unintelligible. This creates an obvious and serious problem when a loan balance is questioned or needs to be verified. 

As amazing as this might sound, the fact is that most national 

servicers cannot produce a simple spreadsheet which shows a loan’s 

history. Without the ability to examine the loan’s amortization in 

a quick and clear format, answering a question regarding the 

amount owed produces an almost insurmountable barrier to consumers. When a consumer files for bankruptcy relief his home is 

probably already in foreclosure. Determining the amount of the 

debt due is critical to his plan’s feasibility, yet mortgage lenders 

routinely fail to produce the most basic of information necessary to 

validate their balances and check the cost and fees assessed. At 

least one study has found that 40 percent of all proofs of claim 

check did not attach a copy of the note or the mortgage even 

though that is required by bankruptcy rule 3001. 

Of greater concern to me is the absence of an accounting for the 

loan. Typically, either before or after a bankruptcy, a lender will 

advise a debtor that a fee or charge has been placed on their account. Because of this borrowers can become quickly confused when 

they make a payment and much to their surprise the note is still 

past due. If a loan goes 60 days past due, significant charges are 

usually incurred. Again, this is without notice or detail, making it 

even harder for a borrower to cure a default. 

When a borrower files for bankruptcy his home in foreclosure has 

already incurred sizeable fees and costs. If a mortgage debt is 

9 

itemized at all on the proof of claim, broad categories of expenses 

are utilized, such as corporate advances or prior servicer fees. Finding out any detail on this is an arduous task. In my experience it 

takes 4 to 6 hearings and over 4 months of time for a national servicing company to produce a single loan history or the documents to 

support third-party charges on the account. Over 80 percent of the 

lenders who appear before—excuse me, the borrowers who appear 

before me make less than $40,000 per year. They simply don’t have 

the financial resources to force through litigation the documents 

they need to assess the accuracy of the loans they are being asked 

to pay. So they tend to accept the proofs of claim without any challenge whatsoever. 

But why am I so concerned about the accuracy of the proofs of 

claim; aren’t they correct? I am afraid to tell you my concern is no. 

In every trial I have presided over payments were applied first to 

fees and costs—excuse me, fees and costs, then principal, interest, 

and escrow, exactly the opposite of what is required by the loan 

documents. 

Now, why is this important? Because the application of payments 

first to fees and costs will always result in additional fees and costs 

assessed against the borrower as well as additional accrued interest. It is simply math. After a bankruptcy is filed post petition payments are commonly applied against pre-petition costs, installments and undisclosed post-petition charges contrary to the terms 

of plans or court orders. Escrow amounts are routinely—I am sorry. 

I have gone over my time, Chairman. I will stop now, and if there 

are any further questions I will go forward. I couldn’t see the light. 

[Material submitted by Judge Magner follows:] 

10 

MATERIAL SUBMITTED BY THE HONORABLE ELIZABETH W. MAGNER, UNITED STATES

BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF LOUISIANA


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Mr. COHEN. Thank you, Judge. It just came on. That was great 

timing. This is the fourth anniversary of your being on the bench? 

Judge MAGNER. Yes, it is. 

Mr. COHEN. Well, do you have a king’s pay for something like 

that? 

Judge MAGNER. I was sworn in a week after Katrina. 

Mr. COHEN. And you sit in New Orleans? 

Judge MAGNER. In New Orleans. 

Mr. COHEN. Great. Thank you so much. Are you going to get 

back tonight to get a good meal in New Orleans? 

Judge MAGNER. Tomorrow. 

Mr. COHEN. Tomorrow. Well, you are great to come up here with 

us and give up all that good cuisine. 

Our next witness is Ms. Suzanne Sangree. 

Ms. SANGREE. Sangree. 

Mr. COHEN. Ms. Sangree is the Chief Solicitor for the Baltimore 

City Law Department, Baltimore, MD. The city has filed a lawsuit 

against Wells Fargo alleging the bank’s lending practices discriminated against minority borrowers. It further alleges the bank’s 

lending practices led to a wave of foreclosures that reduced city tax 

revenues and increased its costs. 

And if you could do your 5 minutes, we can get away and run 

to vote. But we thank you, Ms. Sangree, and we look forward to 

your testimony. 

TESTIMONY OF SUZANNE SANGREE, 

CITY OF BALTIMORE LAW DEPARTMENT 

Ms. SANGREE. Thank you, Chairman Cohen. Thank you, Chairman Conyers, Ranking Member Franks, and the rest of the Subcommittee Members. It is my pleasure to testify. 

Baltimore is a case study of the damage that has befallen cities 

in the absence of Federal regulation. In particular, lax enforcement 

of the Fair Housing Act, relaxation of banking regulations, and 

Federal preemption of States’ ability to regulate has created an environment in which racially discriminatory predatory lending has 

flourished. 

Baltimore, a majority African American city, as Chairman Cohen 

pointed out, much like Memphis, is currently contending with the 

economic fallout. One of the city’s strategies for staunching the 

damage that predatory lending has caused is litigation against the 

wrongdoers. And we have sued—under the Fair Housing Act, we 

have sued Wells Fargo for racially discriminatory predatory lending, as you mentioned earlier. Redlining, we have sued them for reverse redlining, which is the flip side of redlining. Redlining is the 

practice of drawing a boundary around a minority neighborhood 

and saying we are not going to lend prime credit inside that boundary. Reverse redlining is saying we are going to target that same 

neighborhood for predatory lending, for high cost, high fee, high interest rate, unfavorable loans. 

The shapers of the Fair Housing Act smartly designed it so that 

cities could sue directly, would have standing to sue, but it was always envisioned that the Federal Government would play a leading 

role in enforcement of the act, and in the recent past it has not 

done that. 

139 

Like other American cities with large non-White populations, 

Baltimore is particularly vulnerable to predatory lending, and this 

vulnerability is caused by two related factors. One is a history of 

redlining, of denying credit to certain communities, and the other 

is racial segregation patterns in housing, so that those communities that have been denied or those people who have been denied 

credit in the past are geographically concentrated and so very easily targeted by abusive lenders. 

As our history of redlining and racial segregation would predict, 

beginning in the late 1990’s Baltimore became the target of predatory lending, and this fact is reflected in a wave of foreclosures. 

Since the year 2000 we have had over 33,000 foreclosure filings, 

homes that are subject to foreclosure filings. 

Home Mortgage Disclosure Act data reveals racial disparities in 

Wells Fargo’s lending practices, and Wells Fargo has been the biggest lender in Baltimore City since 2000. As documented in our 

amended complaint, in 2006 Wells Fargo made high cost loans to 

65 percent of its African American borrowers compared to only 15 

percent of White borrowers in the city, and Wells Fargo foreclosure 

rates are four times higher in African American neighborhoods 

than they are in White neighborhoods. 

High level ex-employees of Wells Fargo have come forward to testify to the economic incentive structure at Wells Fargo that encouraged and rewarded employees handsomely for steering African 

American borrowers into unfavorable loans, and they describe practices of steering even borrowers who qualified for prime, steering 

them into subprime, assuring borrowers that pre-payment penalties could be waived when they could not be waived, assuring 

them that they were getting a fixed rate loan when they were getting a variable rate loan or that they would be able to refinance 

before the adjustment rate would begin to kick in. They were also 

encouraged to take more equity out of their homes or not to document their income even though they were salaried employees with 

W-2s of all of their income. And the purpose of encouraging borrowers to not do those things was that the lenders knew, the brokers knew, the agents knew, that this would cause the loan to flip 

to subprime from prime and they would make much higher commissions and the company would make much higher profits when 

that happened. 

When people are locked into mortgages they cannot afford, it is 

very predictable they will fall behind and foreclosure will often result. And this has caused Baltimore great damage. Goldseker 

Foundation estimates that in 2006 alone the city lost $41.9 million 

in tax revenue. We have increased code enforcement, as well as fire 

and police, and all of our efforts to nurture our neighborhoods and 

have urban renaissance are being washed down the drain. 

The legal claims and the facts and figures concerning the city’s 

damages don’t capture the devastating impact of foreclosure on African American families and neighborhoods. Adding injury to insult 

communities that for generations—and I have a red light too. It is 

hard to watch that light when you are reading. So I will stop as 

well. 

[The prepared statement of Ms. Sangree follows:] 

140 

STATEMENT OF SUZANNE SANGREE


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Mr. COHEN. Thank you so much. You are the two best witnesses 

we have had during the whole time that I have been Chair. But 

we do only have 4 minutes to run and vote. We have got about, I 

think I have been told, four votes. And so that theoretically is give 

or take 30 minutes. And so in the interim you are relieved of any 

responsibilities to improve the world. And we are in recess. 

[Recess.] 

Mr. COHEN. The Committee will now come back into session. I 

want to thank the witnesses for their continued attendance. 


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Our third witness is Professor James Mason. Joseph, yes, that’s 

right. Somehow it got diverted into acting. Professor Mason is Associate Professor of Finance at LSU’s Department of Finance and 

a senior fellow at the Wharton School. Dr. Mason’s research spans 

the fields of corporate finance, financial intermediation, financial 

history, monetary economics focusing on issues related both to theory and public policy. And do you know where the deduct box is. 

Mr. MASON. The what box? 

Mr. COHEN. The deduct box. 

Mr. MASON. The beat up box. 

Mr. COHEN. You don’t know the deduct box? 

Judge MAGNER. He hasn’t lived in the State long enough. 

Mr. COHEN. One of Huey Long’s last requests made of him is, 

Huey, where is the deduct box? That is the D. Would you deduct 

it from your salary, your State job, to give to the political organization. They never found the deduct box. Huey would not tell them 

on his death bed. So with that recognized, always looking for the 

deduct box, thank you for being here Professor Mason. We now recognize you for your testimony. 

Mr. MASON. Thank you. I will add that to my palette of Huey 

Long stories, of which I have several, but that is a new one. 

TESTIMONY OF JOSEPH R. MASON, Ph.D., 

LOUISIANA STATE UNIVERSITY 

Mr. MASON. Thank you, Chairman Cohen, Ranking Member 

Franks, and Members of the Subcommittee, for allowing me to testify today. 

The reasons for the limited success of private modifications to 

date lie in the realities of the mortgage crisis, the same realities 

that could hinder the relevance of judicial modifications. First, 

many residents of homes today could never afford an amortizing 

loan and still cannot do so today. Second, a significant proportion 

of Chapter 13 repayment plans have historically failed. And third, 

allowing bankruptcy judges to modify mortgage debt may cause 

other perverse incentives among both lenders and borrowers. 

The sad fact is a significant number of borrowers can’t afford any 

amortizing mortgage. In the last several years substantial numbers 

of consumers borrowed money they could not afford to repay. The 

extent to which those loans were outside any reasonable bounds of 

affordability, however, is still not widely understood. The problem 

is that while the industry created the loans in a process that labeled them, quote, unquote, prime or Alt-A, many loans were nothing of the sort. Within the industry many of the loans that are distressed today were known as, quote, unquote, stealth prime or 

stealth Alt-A, acknowledging that the loans qualified for their 

monikers only on the basis of copious quantities of scissors, WiteOut, and adhesive tape all in the name of the democratization of 

credit and expanding home ownership pursuant to Federal policy. 

The question then becomes what can reasonably be expected of 

modification, judicial or otherwise. Prior to the crisis I reported 

that some 40 to 50 percent of modified loans redefaulted within 2 

years of modification. And for further background on that I urge 

you to see the accompanying working papers that I have included 

to be entered into the record. Of course those results are from the 

268 

benign economic period prior to the crisis. We are already seeing 

evidence of far worse performance in the crisis with 1 year redefaults pushing above 70 percent. 

A similar dynamic is common in Chapter 13 repayment plans. 

The 2008 report of statistics required by the Bankruptcy Abuse 

Prevention and Consumer Protection Act of 2005, reported that of 

113,289 Chapter 13 cases dismissed in 2008, 48,081 of those, or 

just over 42 percent, were dismissed for, quote, unquote, failure to 

make repayments under plan. 

Moreover, Chapter 13 plan failures are related to economic difficulty just like private modifications. The Ninth Circuit of Eastern 

California Federal Court District experienced a 51 percent failure 

rate in making payment under plans in 2008 while the Eleventh 

Circuit of Northern Florida experienced a 59 percent rate, and the 

Eleventh Circuit of Central Florida experienced a 62 percent rate. 

When economic conditions are known to dominate judicial and legal 

arrangements in determining foreclosure outcomes we shouldn’t 

rely centrally upon modification policy, judicial or private, to alleviate economic difficulties or declining home prices. 

That being said, private modifications are proceeding apace. 

Treasury recently reported that servicers initiated 230,000 trial 

modifications in the month of July alone, more than the total of 

118,000 Chapter 13 bankruptcy cases reported for the whole of 

2008. Hence, it seems that private modifications are extracting the 

lion’s share of policy effects from the market already and judicial 

modification can contribute relatively little to the mortgage market 

and economic recoveries. 

Regarding the subject of cramdown, since it was introduced in 

opening remarks, there is a substantial threat that changes to the 

Bankruptcy Code can create perverse incentives. Recent bankruptcy reforms produced unanticipated effects that are only now 

being felt in mortgage defaults. It is now widely understood that 

the 2005 bankruptcy reform made escaping debts through bankruptcy less attractive by increasing the cost of filing and forcing 

some high income debtors to repay bankruptcy income. But because 

many consumers are hyperbolic discounters, making bankruptcy 

law less debtor friendly did not solve the problem of consumers borrowing too much. The reason is that when less debt is discharged 

in bankruptcy lending becomes more profitable and lenders increase the supply of credit. Along with low interest rates therefore 

the increased credit supply became a powerful incentive to lend 

and borrow, but one that had predictable and predicted results in 

the credit crisis. 

Now, more perverse incentives can reasonably be expected to 

arise from judicial modification. The reason is that bifurcation of 

debt secured by real assets can be exploited in ways that bifurcation of debts secured by other assets cannot. If a court bifurcates 

a claim on an automobile loan, for instance, the automobile is not 

expected to ever be worth more than the current market value established by the courts. For real estate though, even in today’s 

market conditions, perhaps especially in today’s market conditions, 

the value of the collateral can be expected to grow in the future. 

Hence, judicial modifications, if allowed, perhaps should be limited 

269 

to a shared appreciation mortgage paradigm that can reduce the 

opportunity for bankrupt borrower arbitrage. 

In summary, from an economic perspective, reducing the supply 

of loans while maintaining consumer demand will lead to credit rationing in which lenders refuse to lend to borrowers for reasons 

other than credit quality. Credit supply shortfalls, along with an 

estimated $30 billion price tag of additional costs of mortgage lending in the industry from cramdown, will then drag out financial 

sector recovery beyond that which can otherwise be reasonably be 

expected. Major changes to property rights, like any changes to 

legal precedent, are inherently economically destabilizing. 

There exists a substantial body of literature on the economic inefficiency of discretionary policy relative to well-designed and wellarticulated rules. Hence, without clear public policy objectives or 

compelling economic initiative, I find it hard to advocate judicial 

modification. 

Thank you. 

[The prepared statement of Mr. Mason follows:] 

270 

PREPARED STATEMENT OF JOSEPH MASON


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Mr. COHEN. Thank you, sir. How long have you been at LSU? 

Mr. MASON. LSU, now a year and a half. 

Mr. COHEN. Year and a half. Well, that deduct box might have 

been too difficult. Chinese bandits? 

Mr. MASON. No. But the reason for the bank holiday, that stems 

the New Orleans banking panic. 

Mr. COHEN. More relevant. 

Mr. MASON. Well, they needed a holiday, something they could 

point to to close the banking system just for a day to alleviate depositor panic. They couldn’t think of anything that happened on the 

day, so Huey told them to look back in the history books and find 

something, anything, they could commemorate. So they found that 

this was the day that the U.S. broke economic—I am sorry—diplomatic ties with Germany prior to World War I. Boom, you had your 

holiday. It wasn’t especially attractive from the perspective of the 

German immigrants, but it closed the banking sector and the bank 

run subsided. 

Mr. COHEN. That was good work on Huey’s part, wasn’t it? 

Mr. MASON. Yes. 

Mr. COHEN. Thank you. The Chinese bandits were back in the 

early 1960’s. The go team, the white team, the Chinese bandits, 

Billy Cannon, Halloween, 1959. You need to learn all that. Thank 

you, Professor Mason. 

Our final witness is Mr. Lewis Wrobel. Mr. Wrobel has been in 

practice for 32 years in Poughkeepsie, NY, with a concentration of 

bankruptcy law. He has represented consumers and businesses in 

Chapters 7, 13 and 11 and has also represented creditors. 

Mr. Wrobel, thank you, and you are recognized. 

TESTIMONY OF LEWIS D. WROBEL, ATTORNEY AT LAW 

Mr. WROBEL. Thank you. Chairman Conyers, Ranking Member 

Franks, thank you for allowing me to speak with you today about 

this issue which is now affecting so many Americans. 

Although in our area of upstate New York we do not have the 

numbers, thankfully, of Memphis or Detroit, still there are record 

numbers of foreclosures in our area, and I think to look at this 

problem one must take an historical perspective. Prior to the 1990’s 

the great majority of loans to purchase homes were made by local 

banks and credit unions. The officers of these institutions usually 

served for many years, were knowledgeable about the community 

and often about the borrower who was seeking the home mortgage. 

If the borrower faced financial distress, he could contact that bank 

officer who certainly knew the property and the community and 

often knew the borrower. A workout of the loan may be accomplished by deferring payments, lowering the interest rate, or entering into a forbearance agreement. 

If that was not feasible, the bank might arrange a deed in lieu 

of foreclosure which would allow the borrower to surrender the 

property in full satisfaction of the debt and not suffer the damaging 

effect of a foreclosure on his credit record. 

Beginning in the 1990’s and continuing to the present, the mortgage lender and/or mortgage assignees are not the local banks or 

credit unions for the most part but rather large commercial institutions such as Wells Fargo, Wachovia, Bank of America, GMAC, 

305 

Citimortgage, et cetera. At these lenders, for better or ill, there is 

often a high turnover of personnel. At times no loan officer is 

present, as the mortgage loan is obtained through a broker, and 

there is no contact with the representative of the lender. Usually 

the lender does not have an office in the locality, hence communication is primarily over the phone and occasionally over the Internet. 

My clients have often complained that there is no one to listen 

to their problem. It is common for the borrower to provide copious 

financial information to the lender in trying to do workout only to 

wait weeks or months for a response for a loan modification request. During this time, however, the lender may very well be proceeding with a foreclosure action. A responsible person who foresees a job loss or oncoming financial crisis and who has never 

missed a payment will receive no response on a loan modification 

request from a lender. It is the policy of nearly every major lender 

that I have been involved with not to discuss loan modification 

until the borrower is at least three payments in arrears. 

I would like to illustrate these frustrations for the borrowers 

with a particular case. A retired woman in her seventies with a 

solid pension from her work in municipal government requested a 

loan modification. The home had been in her family for many 

years, practically her entire life. She filed and confirmed a Chapter 

13 bankruptcy case but soon realized that she would need mortgage relief. To make her request for modification, Litton Loan Servicing requested the usual, pay stubs, bank statements, a financial 

statement. After reviewing the information an offer was made to 

reduce the interest rate from 71⁄2 percent to 61⁄2 with a missed payments being added to the principal. The principal therefore was increased by $23,000 and the maturity date was extended. The 

monthly payment, including escrow, however, remained $2,229.05. 

Therefore she received no relief. She is a senior citizen with a fixed 

income. She tried to enter into further dialogue but her telephone 

calls are not returned. She enlisted the assistance of a local housing agency, Neighborhood Works, but the agency has received no 

response. 

In the district where I do practice we do have a program which 

has been instituted rather recently and it shows some signs of success. That is the program instituted in the Southern District of 

New York bankruptcy courts for loss mitigation. Judge Cecelia 

Morris has championed this program, and it applies only to individuals, only to their residences. It is of a voluntary nature, but it 

does push both parties to sit down and talk. Either the debtor or 

creditor may make a request for loss mitigation. The judge may 

then enter the order for loss mitigation which will then require the 

parties to talk. It would require the debtor to provide the information requested by the lender and on the other side of the table it 

would require the lender to announce a contact person, someone 

who the debtor or debtor’s attorney can speak with. 

Also the court holds status conferences to see if there is going to 

be some progress in this negotiation. I have seen where some of 

these have succeeded, at least certainly in the short term where 

lenders have agreed to reduce interest rates or extend out pay periods, one even reducing to 2 percent. Since the program began in 

February of 2009, there have been 252 requests for loss mitigation, 

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192 orders approving the loss mitigation. So there appears to be 

something that this may very well work. It is probably a little too 

early to tell because we do not know how it is going to work longterm. But it does relieve the frustration of the borrower in that the 

borrower now has somebody to speak with and someone who will 

respond. 

Thank you. 

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PREPARED STATEMENT OF LEWIS D. WROBEL


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Mr. COHEN. Thank you, sir. Now we will begin our series of questions, and I will start. First, I would like to ask the Honorable 

Judge Magner here on your fourth anniversary, after 4 years on 

the Federal bench and a career as a litigator, I guess a practicing 

lawyer and a graduate, do you think you would be capable of modifying mortgages to the benefit of society if such a bill was passed 

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Judge MAGNER. Yes. As a litigator before I took the bench, I did 

commercial lending, loans, reorganizations for companies. Very 

typically cramdowns are used for commercial lending purposes 

where often million, even billions of dollars are reduced or otherwise reworked in loans. So that is something I did on a regular 

basis in private practice. 

What I suspect would happen in the bankruptcy context if a 

cramdown were allowed to judges is that just as in the commercial 

context the bar would take a view of their judges and how they 

ruled after two or three times and there would be a paradigm that 

would establish what the value of the real estate was and what the 

acceptable terms of the market might be. Lawyers tend to look at 

precedent when making decisions in negotiating, so I suspect you 

would not see wholesale litigation on the issue if you really want 

to know the truth of the matter. 

I do, however, agree with Professor Mason and also with Congressman Franks that the benefits of cramdown may be fairly limited in bankruptcy. I have had the opportunity to view about 

20,000 cases in the last 4 years. I was not a consumer practitioner 

before I got on the bench. In most instances the values of the property in Louisiana were not tremendously different than they were 

when the loans were taken out. I know there are other parts of the 

country where that may be the case, but Louisiana isn’t one of 

them. 

The interest rates are also not tremendously high, usually in the 

8 percent range. You might save a percent on a cramdown maybe. 

So I agree with Professor Mason that the reason why for example 

the voluntary reworks or the cramdowns might not work are really 

coming from the same place. The borrower simply can’t afford the 

loan. There are people who don’t have income or have too little income to pay for their debt. I actually think that what I chose to 

talk about and why I chose to talk about it, which is the accounting 

method, would have a greater impact on both borrowers in and outside the bankruptcies, because it would allow borrowers to quickly 

determine where their default might lie, to give it to either their 

counsel or some other community organization to help them figure 

out what could be done. And that would have a greater impact on 

more loans, reduce cost to lenders and also help borrowers. 

Now I have to tell you, Congressman Cohen, these thoughts are 

coming just from what I see, you know, on the bench. I have not 

statistically studied this particular issue. I certainly can do a 

cramdown, I have no problems with doing cramdowns and let me 

add on the flip side. 

Mr. COHEN. Just call them judicial modifications. 

Judge MAGNER. All right. I will agree with you as well that judicial modifications are generally just good business as well from the 

lender’s perspective. When the lender is in a situation where they 

are about to foreclose, all they are going to get is the value of the 

collateral. That is what you are doing in a bankruptcy. You are valuing the collateral and you are saying that is what you will pay 

back. And frankly the value in a bankruptcy will be higher than 

in foreclosure because with a foreclosure you have considerable 

fees, remarketing expenses and management that occurs before the 

foreclosure. So most lenders would normally rework a loan or agree 

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to a reduction through a judicial modification, because it makes 

good economic sense. It is the same paradigm that works in commercial lending. 

The problem that I see with the voluntary programs and the reason they don’t do that in bankruptcy is that most of the loans are 

owned by trusts, and the trusts are held by investors that are far 

flung all over the globe. What happens were when the servicers or 

trustee tries to get permission to modify the loan, they can’t get it. 

They cannot get the vote from the owners, so they are caught. So 

the one thing that would help is if judges could modify the loans, 

they could in essence give that lender permission, if you will, cover 

to make the business deal that makes sense. 

I have lenders stand in front of me and say, I can’t agree to it, 

sort of like, would you make me do it. That happens, I mean, it 

happens. So if you gave judges the right to make it happen, I suspect most lenders would be doing it willingly anyway, because it 

doesn’t make a lot of sense for them to go to foreclosure. 

Mr. COHEN. If they were willing to do it willingly, wouldn’t the 

voluntary provisions that we encourage be successful and they are 

not? 

Judge MAGNER. They are not typically successful, you are right. 

The voluntary modifications are reviewed in my experience again 

based on creditworthiness. Let’s face it, people in bankruptcy are 

not creditworthy. It doesn’t take a rocket scientist to understand 

that. So they don’t meet the paradigms of the voluntary reorganization or refinancing. 

Anecdotally, I checked with the lending community before I came 

up here, their counsel as well as the major debtor counsel, to see 

what their experiences were with the voluntary program and to a 

person they said basically they see very few loans going through. 

And they all said it is because the borrowers in bankruptcy are not 

creditworthy. This goes back to my statement. They can’t afford the 

loan in the first place. Or Chapter 13 affords them the kind of relief that they need. 

As an aside, the reduction of the loan if there is a significant 

value drop or if you can extend the loan’s terms, a lot of the 

loans—Congressman Franks, I don’t know if you are aware of 

this—some of the loans were made with 5-year balloons. And when 

a debtor is facing a balloon in 5 years and they can’t refinance, that 

is a huge problem. If a judge could judicially modify a mortgage by 

extending the term to a normal 15-year or 20-year loan, that would 

have a positive impact on borrowers. Lenders can’t get that permission oftentimes because they don’t have owners who can give it to 

them. So that is something to consider when you are looking at judicial modifications. 

Mr. COHEN. Thank you, the red light is on for me. 

Judge MAGNER. I am sorry. 

Mr. COHEN. No problem. I now recognize the Ranking Member, 

Mr. Franks. 

Mr. FRANKS. Thank you, Mr. Chairman. Mr. Chairman, I know 

that these are challenging issues to discuss, because I especially 

wanted to tell the Chairman of this Committee, of the full Committee, that I appreciate so many of the remarks that he made, because I want him to know, and I think he does, I know he is comVerDate Aug 31 2005 12:21 Jan 27, 2010 Jkt 000000 PO 00000 Frm 00319 Fmt 6633 Sfmt 6601 H:\WORK\COMM\090909\51993.000 HJUD1 PsN: 51993
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ing from a heart of wanting to do the best that he can for those 

who are having a hard time. And I identify with this in every way 

that I know somehow. I truly believe that is the goal here to try 

to make it work for everyone. The challenge that divides us is that 

I have come to a sincere conclusion that to force mortgagors, those 

who loan money for houses to be uncertain as to what will happen 

to the mortgage in the future if there is a foreclosure or if there 

is, say, a breach in the loan agreement, that the overall impact will 

cause many of those who otherwise could get a loan not to be able 

to get one. I think it will hurt the poor in the long run. 

Now I want so say, even though there is some fundamental disparity between Judge Magner’s position and mine, I was very 

touched by her testimony just now, because she may come to some 

different conclusion, but sincerity just exudes. And she said something that I was completely unaware of and that is one of the dynamics in all of this, is that sometimes when maybe an agreement 

could be reached between a lender and a borrower they can’t get 

ahold the people that, quote, own the loan to be able to make that 

agreement. And that is something this Committee ought to be able 

to address, because that may be one of the most effective things 

that we could do here in the big picture. It is something that, you 

know, I am sure it doesn’t shock all of you that I didn’t know that, 

but it was something that this Committee Member was completely 

unaware of as it being a major dynamic. Because it makes sense, 

because most banks, as she said so eloquently, don’t want to go 

through the expense—even if they don’t care about the lender at 

all, they don’t want to go through the expense of the full foreclosure if they can find a viable alternative for both people. It is 

difficult to weigh the best interest of the lender and the borrower. 

And unfortunately sometimes we have to do that based on whether 

the numbers add up for both the lender and the borrower, and 

there is a tremendous incentive in the existing system for them to 

try to reach that. And we need to take out some of those roadblocks 

that the judge told us about here to facilitate that more. Because 

I am convinced the more that government forces a change in contract law, and that is what a mortgage is, that in the long run it 

causes people to lose confidence in these things and that that has 

some ramifications that are hard for us to really fully appreciate 

in a setting like this. 

So I am through philosophizing here, but I hope that the Committee will take a look at that. I wanted to ask Professor Mason, 

maybe just a general question first, and I am back on my original 

point that I think government is a big culprit in all of this. I think 

that we tried to in a genuine interest of trying to promote home 

ownership, we pressured a lot of the lenders to make loans that 

weren’t sound. And I would like Professor Mason to give—would 

you give me some idea of what you think in terms of the genesis 

of this problem, the subprime loan, what part is government to 

blame in that, the beginning of all of that. What did we do to help 

catalyze this? 

Mr. MASON. Well, in my opinion the government expected too 

much out of the home ownership policy. Is it enough to have the 

highest home ownership rates in the world? Possibly. But we kept 

pushing against homeowner rates. We do not know what the goal 

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was. Was it 100 percent home ownership rate? Well, we know in 

economics from the 1970’s—I don’t know how many of you are well 

trained in economics or remember these lessons from macro in your 

undergrad. Before the 1970’s we did not teach stagflation or the 

natural rate of unemployment we didn’t know existed. In the 

1970’s part of what caused stagflation was trying to reduce unemployment for what we thought was a social good. But when we 

pushed unemployment down too far, all we got out of it was more 

inflation, because we had to come to a realization that there is a 

natural rate of unemployment. There are some people that just are 

not working for whatever reason and to try to push them into jobs 

through economic policies merely fueled inflation for those who 

were working because for whatever reason these people, whether 

because of frictions between jobs or other reasons, were just unemployed. There wasn’t a lot we could do about it. 

In the same vein, we are never going to have 100 percent home 

ownership. So what is the natural rate of home ownership? Is it 65 

percent or 62 percent? I don’t know exactly what that is, but I 

would say that we probably shot way above that with origination 

practices and national home ownership policy. There is a particular 

quote I will try to get as accurate as I can from the 1996 version 

of the National Home Ownership Initiative. It sticks in my mind, 

that sought to get people into homes by relieving the historical constraints on home ownership of having enough money to make a 

down payment or even having enough income to make the monthly 

payments. To me that sounds like that policy is really only going 

one direction and that is the direction it went. 

But there is an important aspect I want to draw out of your comments and also Judge Magner’s comments about the investors who 

own the loans. And it draws upon something you said, Mr. Franks, 

that incentives are aligned all the way from the owner of the loans, 

who does want to realize value for modification and maximize the 

value of those loans, all the way through to the homeowner. But 

what is missing is actually in the middle of that relationship. Between the investor and the homeowner is a servicer, and Federal 

policy to date has embedded a friction in the servicer relationship 

on both sides with respect to the investor and the homeowner that 

is maintaining an inefficiency in today’s market. The investor has 

the contractual right to replace the servicer with someone who can 

do a really good job at modification, but since modification is new 

and there is no data collected on it and no data given to the investor to see if the servicer is doing a good job, the investor can’t tell 

if the servicer is actually doing a good job at modifying or if they 

are trying to maximize their own stake in the deal through some 

conflict of interest, and so you have typical terms of securitizations 

that require the servicer to buy the loan back from the investor in 

order to modify. 

It seems to me in this space some simple rules for investor reporting can solve a big, big problem and get these loans to servicers 

who can modify in the best interest of the borrowers and the best 

interest of the investors. 

Mr. FRANKS. Mr. Chairman, the full Chairman of the Committee 

suggested that he might be able to get my vote on a bill and I 

would suggest to you that if a bill that dealt with some of the probVerDate Aug 31 2005 12:21 Jan 27, 2010 Jkt 000000 PO 00000 Frm 00321 Fmt 6633 Sfmt 6601 H:\WORK\COMM\090909\51993.000 HJUD1 PsN: 51993
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lems of Professor Mason’s and also Judge Magner said related to 

making sure that lenders were able to give a borrower an immediate accounting and clarify, those are the kinds of things that a 

right wing nut like me can support. 

So I thank you. 

Mr. COHEN. Let me add before I recognize the distinguished 

Chairman, the Ranking Member has hit upon what is probably the 

real issue here on the issue of judicial modifications, that if you 

allow judicial modifications will it hurt the poor in that it will take 

away the incentive for the lending industry to make money available to them because their contracts could be changed in a bankruptcy court. And so Professor Mason, I would like to ask you, 

since we allow for the courts to modify the terms on the purchase 

of secondary homes, vacation homes, yachts, airplanes and things 

like that, what has happened to the lending industry’s willingness 

to loan money to people to buy yachts and airplanes and secondary 

homes since they can be modified? Has there been a big change in 

industry’s desire to loan money? 

Mr. MASON. Well, there has been but not necessarily recently. I 

have to say I am not an expert in the deeper history of bankruptcy 

reforms and bankruptcy law has changed across time and the economic effects of those reforms, although there is research into that 

that could be pointed to. I would be happy to look into that later 

if you would like. 

I would like to correct one possible misconception from Judge 

Magner’s perspective just based upon my view of the lending space 

though. She made a point that borrowers in bankruptcy are not 

creditworthy. I think it is very important to introduce that from 

the industry perspective they are very creditworthy. In fact this is 

part of what drove the subprime lending revolution because they 

can’t declare bankruptcy again. And so if you get a substantial 

amount of their debt reduced in bankruptcy which realigns their finances and then you can give them a very high interest rate loan, 

they are very creditworthy and they can’t go bankrupt on you 

again. 

This is an impediment that I urge you to think about from the 

borrower’s perspective with respect to judicial modification, that judicial modification only gives the borrower one shot. And if the borrower has, let’s say, strategically misjudged and let’s say declared 

bankruptcy when home values are down 20 percent and they are 

now going to drop another 30 percent, then they have their judicial 

modification locked in at the 20 percent and they don’t have a 

chance to go back. 

Mr. COHEN. I didn’t intend to open Pandora’s box, but since it is 

open, Judge, would you like 1 minute for rebuttal? 

Judge MAGNER. Thank you. I guess this is where Professor 

Mason and I are going to disagree. When I say creditworthy, I 

mean worthy of getting a loan, not creditworthy, in other words, go 

out and you don’t owe anybody else anything so we can charge you 

more interest. Creditworthy means could you get a new loan to me. 

I don’t believe debtors are creditworthy in any real sense of the 

word. I don’t think that is a novel or radical view. Debtors also 

don’t arbitrage their debts and. They come in and bet home prices 

are going to go up and down more or less, so maybe this is the time 

317 

to file to get the better deal. That really is beyond their ability to 

understand. They can’t pay their mortgage, they are in foreclosure. 

That is why they file. They do not file before they are in foreclosure 

and after the house is gone they don’t file. It is a very—it is almost 

a process that is really in the are lender’s hands, not theirs. 

I don’t think that what the professor is saying about the creditworthiness or the effect on the poor is really correct. From my perspective, and it is really from my perspective is correct. For the 

most part lenders have to always assume that a borrower is going 

to go into default. There is a certain percentage that they count on, 

and based on a borrower’s credit scores and their income when they 

make the loan, they make that determination at the time the loan 

is made. The fact that a loan might be crammed down in the future 

again—— 

Mr. COHEN. Judicially modified. 

Judge MAGNER. Judicially modified. I am sorry, I am a bankruptcy practitioner. I do use the terms of art. 

The fact it might be modified by a judge down the road is not 

something that I think would affect the credit markets, because 

what happens is they figure that is all they are going to get in foreclosure anyway. If the loan defaults and they have to go to foreclosure, they are going to get the value of the collateral, and probably a lot less because of the cost of the foreclosure and, as we discussed, the administrative expenses. So I don’t see the fact that 

there would be a judicial modification as something that the lending community when it looks at the macro level would say would 

make credit unavailable. They are already experiencing that, they 

are just experiencing it in a different way. 

Mr. COHEN. Thank you. 

Now the distinguished Chairman, Mr. Conyers, is recognized for 

5 minutes or longer. 

Mr. CONYERS. Thanks so much to all the panelists. 

Ms. Sangree, you have listened to the colloquy between the judge 

and the professor. Would you want to make an observation? 

Ms. SANGREE. The observation I would like to make is actually 

on a comment that Congressman Franks made earlier that he believes or he suspects that the Community Reinvestment Act may 

have been part of the fuel for the subprime meltdown, and I would 

disagree with that thought. I think the Community Reinvestment 

Act did put pressure on lenders to loan in underserved communities. And it was in response to this practice of redlining that we 

had been experiencing in this country for decades at that point. 

And the pressure was to properly underwrite loans in these communities. And I think it is because of the economic incentives, the 

huge profits to be made through these newly available subprime 

products through the new software that was developed in the late 

1990’s in which borrowers without prime credit ratings could now 

be able to assess what their ability to repay loans would be with 

much more accuracy. And that then made it possible for lenders to 

lend to borrowers without perfect credit ratings, without prime 

credit ratings. And so then we saw this profusion of subprime products. And that was all good, I think. It made it possible for people 

to own homes who couldn’t own homes if loans were only available 

to people with prime credit ratings. 

318 

But where the problem came in was in abuses of those products, 

and that is what we are seeing in the Wells Fargo suit. We have 

two high level ex-employees of Wells Fargo who have come forward 

and said that they worked on commission and you made more 

money putting a borrower into a subprime loan than you did putting them into a prime loan and there was no oversight on the 

practice. And so loan officers routinely put unsophisticated borrowers into subprime products at much higher interest rates and 

paying initiation fees and points up front which were very profitable to the company, but really just disadvantageous to the borrower. And yes, there were borrowers who never should have been 

given loans at all and you have the underwriting mechanisms to 

figure that out. But they didn’t really care whether the borrower 

could pay or not because they would be selling the loans on the secondary market and not face the risk. 

I would say the problem was in a failure of oversight, not in encouraging or requiring lenders to lend in underserved communities. 

Mr. CONYERS. Would the judge generally agree with those comments? 

Judge MAGNER. I would, Congressman Conyers. I think that the 

real problem with the subprime industry was what Ms. Sangree 

has indicated, is the disconnects between those that originate and 

those that hold the loans. So you really get shoddy underwriting 

when you don’t care what happens to a loan. If you put in some 

sort of mechanism, maybe not necessarily for financial institutions 

that originate but for these other lenders who are not financial institutions, many of them were not, so that they have to originate 

and hold for some period of time, you might force the type of underwriting that would avoid these problems. I really think it is an underwriting issue. 

Mr. CONYERS. I thank you. We were all impressed with your 

opening statement because it came out of an experience of being a 

judge and it really gave us a new window on this. 

This is the seventh hearing, and I am pleased with Trent Franks’ 

comments about improving communication between the borrowers 

and the lenders and the other subsequent people that intervene, all 

taking profit out of this. And frequently when the mortgagor tries 

to contact somebody, they are closed, they are out of business, you 

can’t find them anymore. 

And so I would like to ask unanimous consent to put in the New 

York Times, October 15, 2007, Study Finds Disparities in Mortgages By Race; October 17, 2007, Subprime in Black and White, 

New York Times; and then May 16, 2009, Minorities Affected Most 

As New York Foreclosures Rise. 

Mr. COHEN. Without objection, they will be entered into the 

record. 

[The information referred to follows:] 

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Mr. CONYERS. And if I may be granted just a few more minutes, 

Mr. Chairman. 

I wanted everyone to know that we are going to get copies not 

only to you, Chairman Cohen, but to Trent Franks and Steve King, 

who has a very deep interest in this subject as well. Now there is 

an attorney, Vanessa Flucker, in Detroit that does the same work 

Mr. Wrobel, Attorney Wrobel does. And she was talking to one of 

our staff members about a lady she represented who was two payments behind. She got foreclosed on, I don’t know if she was evicted first and then foreclosed on or what, but the house was foreVerDate Aug 31 2005 12:21 Jan 27, 2010 Jkt 000000 PO 00000 Frm 00333 Fmt 6633 Sfmt 6601 H:\WORK\COMM\090909\51993.000 HJUD1 PsN: 51993

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closed by Countrywide. Countrywide then sold—this hurts—to 

Fannie Mae, and Fannie Mae sold the property to an investor for 

$800. We are getting more detail about that and there were other 

cases. And I know that between the judge and the counsel there 

and this Detroit lawyer, we could do case by case. I mean, I don’t 

know how and you have a very obvious stamina for this sort of 

thing, but to get up and to go in to work every day in either a law 

office or a courtroom and hear these incredible tales of exploitation, 

frequently minority purchasers who of course have read a mortgage 

contract, is really something. 

Now Professor Mason, I am happy to come to agreement with 

you because I was one of the ones who voted against the credit 

card, the Bankruptcy Abuse Prevention and Consumer Protection 

Act of 2005. You know the story I think, that the credit card companies for about 10 years had been trying to tighten up bankruptcies, make it harder for people to get into bankruptcies. Maybe 

my colleagues on the other side voted in the negative on that bill, 

too. I am not sure. But I did for the simple reason that it was adverse to the interest of people who were in financial difficulty. It 

made bankruptcy tougher on individuals. And the credit card companies had been lobbying on this for years and they finally were 

able to put together a majority. And I remember one part of the 

hearings, Chairman Cohen, when they were talking about single 

mothers or people that had a divorce situation. They were tough 

on—I mean, you couldn’t get any relief for the mother and 2 kids, 

there was nothing there for them. It was just a mean-spirited bill 

all the way around. And I had—oh, here it is—I had all these reasons that tilted—the bill tilted the playing field in favor of credit 

card companies at the expense of struggling families. It was tough 

on small businesses for sure. Many of us were very concerned 

about that. It increased the cost of bankruptcy, and it did nothing 

to hold irresponsible lenders accountable for their actions. 

So in my way of taking hearing number seven is that this bankruptcy judge has shown a new light on this unregulated part of the 

financial world that we keep going over. And it is very hard, these 

are exotic instruments and there are some practices that there 

aren’t even any laws, were never written for them. We hadn’t even 

known about them. And I would invite your comments as I conclude, Professor Mason. 

Mr. MASON. Thank you, Chairman Conyers. I agree and I am 

humbled to the magnitude of the task before your Committee in 

dealing with this very difficult set of circumstances and a very difficult body of law. My comments are to be taken really in the spirit 

of trying to get to the important aspects or most powerful aspects 

of the law, and I do take into consideration Judge Magner’s comments about the ability to time bankruptcy, and that is just extremely important and that is part of what I was alluding to both 

in terms of what was characterized as the ability to arbitrage bankruptcy, choosing your time to file. But Judge Magner is correct, you 

often can’t choose. The time to file is when you get shocked by divorce or medical debt or something like that. But I also don’t want 

people to get hurt either, because bankruptcy as currently constructed is something you get one shot at. And if things get worse, 

329 

then you could lock yourself out. And so I think both sides deserve 

to be considered here. 

But in the sense of going back to some of the securitization arrangements and where the meat is, so to speak, it is important for 

me to point out that it is overly simplistic to think of the problem 

as just one where the originator doesn’t care so much about the 

loan or the performance of the loan because they will be selling it 

on. It is actually worse than that. 

Think of it this way. Chairman Conyers, you get to sell something to me and I promise that I’ll pay you—well perhaps I should 

take the other side of this—neither side is very good, quite honestly. Perhaps I should take both sides. I agree to sell something 

to my right hand. And my left hand will pay for that say $50 a 

month for the next 30 years. So my right hand gets to value that 

$50 a month for the next 30 years. It doesn’t obviously have the 

money yet, but just like we teach in Finance 101 it can effect that 

valuation by choosing a different discount rate or really it might 

not go the whole 30 years of monthly payments, it may go 20 or 

25 or 10 or 5. And my right hand gets to choose that time period 

too, how many months I pay $50 a month in order to effect this 

valuation. Worse yet, my right-hand gets to report this as a corporate entity as income today. And the CEOs of my right hand get 

to use that calculation in calculating their bonuses this year. Again 

no cash has come here. This is called gain on sale accounting. This 

has been a plague of the securitization industry well acknowledged 

since the mid-1990’s. But FASB accounting standards won’t let the 

industry get rid of this even though certain well-managed companies have wanted to. In fact we have gone the other direction with 

policy, requiring other companies to do the same kind of valuation, 

calling it mark-to-market accounting and expanding it across the 

financial marketplace. It is the wrong direction to go. We are adding insult to injury here. So not only do you get to sell the loan, 

you get to call it whatever value you want and record that as income today. That is really bad. We have a very perverse set the incentives in the system that could use some realignment. I am convinced that some very targeted legislation can fix many of the deep 

problems that we have today without broad strokes. But it does 

take expertise in the area to get those few touch points that can 

have the most dramatic effect. I think probably the same can be 

said of consideration for judicial abilities to modify loans as well. 

Mr. CONYERS. Well, I hope we can continue this discussion after 

today. I thank the Chair for his indulgence. 

Mr. COHEN. Thank you, sir. I appreciate your questions. Now I 

recognize the gentleman from Iowa, the State that launched the 

presidential ambitions and successes of our great President Barack 

Obama, State of Iowa, Mr. King. 

Mr. KING. I thank the Chairman and I hope he is as delighted 

when we launch the next President as well. 

Mr. COHEN. Mr. Biden is waiting until 2016, and he thanks you. 

Mr. KING. This testimony has been quite interesting, and like 

many Members we are trying to do a number of things at once, but 

all of it that I have heard has been engaging and I appreciate you 

all coming here to testify. I run some things across random 

thoughts that accumulate as I am listening to the testimony. One 

330 

of them is in some data that has been handed to me by staff that 

says mortgage delinquency rates are at 9.12 percent, and unemployment now is 9.7 percent. I think if you count the real unemployed in America it probably approaches 20 million. If you add the 

unemployed along with those who no longer qualify as unemployed, 

it probably actually exceeds 20 million. Loan modifications are up 

172 percent from last year. That is an interesting piece of data that 

doesn’t necessarily correlate with some of the things we have 

talked about here. I inject that into the dialogue as a level of optimism that the lenders really are working I think to try to avoid 

going before the Honorable Judge Magner. And so that would be 

one of those observations. 

Another one as I listen to Ms. Sangree’s testimony, racially segregated patterns of housing, and I want to come back to this, I just 

lay that out there. Racially predatory lending, another phrase, four 

times higher foreclosure rates in minority communities I believe is 

the phrase compared to White communities. That is quite arresting 

to hear that data. 

Then the testimony that I am convinced does exist among probably more lenders than I am aware that there is misinformation 

there, that appears to be a pattern in the lending community. 

So I lay this out so you know that at least I was listening to 

parts of this. I would like to go back first to Ms. Sangree, I don’t 

know how long you have been involved in this particular trade, but 

do you recall when redlining first became an issue? You couldn’t be 

old enough, but I ask if you do recall that. 

Ms. SANGREE. I read about it. Yes, I recall reading about it. 

Mr. KING. And so then when the Community Reinvestment Act 

was passed, it essentially outlawed redlining or at least with the 

language the effect was to try to eliminate redlining, and I reject— 

the idea of drawing lines around neighborhoods, declaring them to 

be minorities and refusing to loan money in those neighborhoods. 

But I reject the concept. 

I am wondering what are the root causes of how we got here for 

this testimony today, how we got here economically. So we had the 

Community Reinvestment Act that was designed to reduce or hopefully eliminate redlining, bad loans in neighborhoods where the 

asset value wasn’t sustained. Then we had a number of other 

things, but the secondary markets got stronger. Fannie Mae and 

Freddie Mac began taking on these mortgages. And people began 

taking their margins out of these mortgages on the front end so 

they weren’t invested in the long-term performance of that mortgage loan. 

Then we have the situation that has come up with us within the 

last year this phrase too big to fail, banks that are too big to be 

allowed to fail, to be more precise, and now we have boards of directors that are so remote that borrowers can’t identify who they 

owe the money to in order to negotiate some terms. So it has to 

happen with blocks of mortgages and large boards of directors making huge decisions in places like New York, et cetera. 

So then I look back and I think okay, there are other subsets of 

these kind of negotiations that took place. Rewards for those who 

could broker these subprime loans sometimes, but the loans that 

were misrepresented other times. And I am thinking in particular 

331 

of ACORN, and I am wondering, Ms. Sangree, do you have an engagement or involvement with ACORN? And what would be your 

view of how ACORN might have been involved in these problems 

that I have strung out? Do they fit into that chain somewhere that 

I need to understand? 

Ms. SANGREE. I don’t really know that much about ACORN. They 

are real activists, they are sort of plagues at city hall, they hold 

demonstrations there pretty frequently. 

Mr. KING. Okay. I am just looking back somebody needed to 

broker these loans going into these neighborhoods that were redlined in order for the banks to qualify, and I think we are pretty 

confident here that ACORN was involved in negotiating or setting 

that up. I just remember reading news articles on it. So I just take 

you back to the racially segregated housing, the racial predatory 

lending that is going on. The four times higher foreclosure rates. 

That data, and can you tell me has that been adjusted for income 

and jobs or is race the only factor involved here or has it been corrected for the other factors? 

Ms. SANGREE. There are several studies that have been done that 

had access to FICO scores and credit rating agency data that have 

concluded that correcting for credit risk, race, there are racial disparities in who gets prepayment penalties, who is put into 

subprime products, and that they are high and extremely high was 

one of the conclusions. AFT Associates did a study for the Casey 

Foundation, including Baltimore City, I think it was 12 cities 

across the country and Baltimore was one of the cities studied. And 

the conclusion for Baltimore was the refinance racially disparities 

were extremely high and origination loans, there were high racial 

disparities in quality of product. 

Mr. KING. Okay. Would you want this Committee to accept the 

statement they are four times higher after they are corrected for 

other factors or before? 

Ms. SANGREE. Before. We survived the motion to dismiss in the 

Wells Fargo litigation and now we are commencing discovery. So 

we have not had access to the Wells Fargo’s loan documents, which 

would include risk credit ratings. 

Mr. KING. So we don’t know what it would be after it is corrected. It is an alarming figure, but it probably isn’t that stark if 

one corrected it for the other factors involved. 

Ms. SANGREE. That is probably true, we are basing that four 

times rate based on Home Mortgage Disclosure Act data which is 

publicly available and does not include credit risk. That is one of 

the measures that the GAO report that just came out in July of 

this year recommends, is HMDA should require credit risk. 

Mr. KING. Thank you, Ms. Sangree. I just want to tell you why 

I asked one of these questions and now I will make a statement. 

I know the clock is red but we have been a little loose today, and 

I hope the Chairman indulges me. One of the reasons I asked you 

about ACORN, and I don’t ask you to follow up on it, I have got 

an article here in front of me that is a press account, it is actually 

dated June 8, 2006. It says, ACORN has been waging a national 

campaign for more than 3 years against Wells Fargo’s predatory 

lending. And that is how they have described it. 

332 

There are a number of articles like that that has taken place in 

Des Moines, too. I want to make this point, just suppose there had 

never been a Community Reinvestment Act, just suppose we found 

another way to put competition into those cities that needed to 

have a better practice of mortgage lending. What if we had small 

community banks that were investing in those communities, even 

though the real estate wasn’t worth as much as the neighboring 

real estate. What if they were loaning a percentage on the asset 

value, what if they were evaluating the ability of people that were 

getting the mortgage to pay back the loan, wouldn’t the real estate 

values have dropped down to a point where the people that were 

ready to buy those houses could actually afford them, and then 

when we have got banks that have gotten too big to fail, I mean 

too big to be allowed to fail and they are getting bigger and bigger, 

and we bailed out big banks and we have fewer banks. Now we lost 

3,000 banks in America in the 80’s during what we call the farm 

crisis where I come from. If we lost 3,000 banks in America today, 

it truly would be a financial crisis because the banks have gotten 

so much bigger with all the mergers, they have gotten more impersonal, and they are not serving the inner city the way they did, and 

they are not serving the small communities as well as they did either. I would suggest that we have tried to fix things at the national level and write rules because we had a moral abhorrence to 

redlining. And we want everybody to own a home as much as we 

can but I take the testimony of Professor Mason that probably 

there is a limit to the number of people just like there is to unemployment. So I am going to suggest that we take a look at how to 

create competition in the free market and how we let these values 

go to where they can actually be sustained by the people that will 

buy the homes and that can, that have the ability to perform on 

those loans and those mortgages. And I will suggest that maybe we 

got our hands in here too much from the Federal level and I think 

it has diminished the free market component of this and I think 

it has hurt a lot of people in the inner city and across the country. 

And if we keep going in the direction we are going we will end up 

with just a few great big banks that are ever more personal that 

we have to give more regulation to. If we believe in Adam Smith’s 

invisible hand, we ought to inject more free market into this and 

probably less regulation so that lenders can go into those communities and make a profit, but do so at a level that is going to be 

useful for the people that are living there and then they can build 

themselves up on the American dream and go out and build a mansion and then I can buy the house that they live in. 

Mr. Chairman, I yield back, and I thank you for your indulgence. 

Mr. COHEN. Thank you. The gentleman’s time has expired. 

I would now like to recognize the Ranking Member for a special 

extraordinary, super owed request. 

Mr. FRANKS. Thank you, Mr. Chairman. In addition to seconding 

Mr. King’s comments, I would like with your permission and the 

committee to place into the record four different articles, one being 

the Housing Policy Council, September 9, 2009; one being an article called Spreading the Virus, it was in the New York Post on October 13, 2008; and one being the Committee on Oversight and 

Government Reform report of July 7, 2009; and one called the IndeVerDate Aug 31 2005 12:21 Jan 27, 2010 Jkt 000000 PO 00000 Frm 00338 Fmt 6633 Sfmt 6601 H:\WORK\COMM\090909\51993.000 HJUD1 PsN: 51993
333 

pendent Policy Report: Causes of the Mortgage Meltdown by Stan 

Lebowitz October 3, 2008. 

Mr. COHEN. Without objection, they will be admitted into the 

record. 

Mr. FRANKS. Thank you, Mr. Chairman. 

[The information referred to follows:] 


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Mr. COHEN. Is there any other request for admission of extraordinary requests? If not, I would like to thank all the legislative 

days to submit any additional questions to the witnesses, which we 

will forward thereto. Then we would ask the witnesses to answer 

those questions as quickly as possible. The record will remain open 

for 5 legislative days for the submission of any other materials that 

you might have. 


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Again, I thank everybody for their time and patience, and I declare that the hearing of the Subcommittee on Commercial and Administrative Law adjourned. 

[Whereupon, at 5:05 p.m., the Subcommittee was adjourned.] 

(399) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

400 

RESPONSE TO POST-HEARING QUESTIONS FROM THE HONORABLE ELIZABETH W. 

MAGNER, UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF

LOUISIANA


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RESPONSE TO POST-HEARING QUESTIONS FROM SUZANNE SANGREE, 

CITY OF BALTIMORE LAW DEPARTMENT


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RESPONSE TO POST-HEARING QUESTIONS FROM JOSEPH R. MASON, PH.D., 

LOUISIANA STATE UNIVERSITY

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RESPONSE TO POST-HEARING QUESTIONS FROM LEWIS D. WROBEL, ATTORNEY AT LAW

f 


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PREPARED STATEMENT OF THE HONORABLE CECELIA G. MORRIS, UNITED STATES

BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK—POUGHKEEPSIE

DIVISION


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Æ 


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