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HOME FORECLOSURES: WILL VOLUNTARY MORTGAGE MODIFICATION HELP FAMILIES SAVE 

THEIR HOMES? (PART I) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 9, 2009 

Serial No. 111–53 

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 

JULY 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 

The Honorable William D. Delahunt, a Representative in Congress from 

the State of Massachusetts, and Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Ranking Member, Committee on the Judiciary ......................... 4 

The Honorable Zoe Lofgren, a Representative in Congress from the State 

of California, and Member, Subcommittee on Commercial and Administrative Law ................................................................................................................ 5 

WITNESSES 

Mr. Alan M. White, Assistant Professor of Law, Valparaiso University School 

of Law, Valparaiso, IN 

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

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

Mr. James H. Carr, Chief Operating Officer, National Community Reinvestment Coalition, Washington, DC 

Oral Testimony ..................................................................................................... 14 

Prepared Statement ............................................................................................. 16 

Mr. Mark A. Calabria, Ph.D., Director of Financial Regulation Studies, CATO 

Institute, Washington, DC 

Oral Testimony ..................................................................................................... 20 

Prepared Statement ............................................................................................. 22 

Mr. Irwin Trauss, Manager, Attorney for the Consumer Housing Unit, Philadelphia Legal Assistance, Philadelphia, PA 

Oral Testimony ..................................................................................................... 26 

Prepared Statement ............................................................................................. 29 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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

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

Judiciary, and Member, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 49 

Response to Post-Hearing Questions from Alan M. White, Assistant Professor 

of Law, Valparaiso University School of Law, Valparaiso, IN ......................... 51 

Response to Post-Hearing Questions from James H. Carr, Chief Operating 

Officer, National Community Reinvestment Coalition, Washington, DC ....... 54 

Response to Post-Hearing Questions from Irwin Trauss, Manager, Attorney 

for the Consumer Housing Unit, Philadelphia Legal Assistance, Philadelphia, PA ................................................................................................................ 62 

(1) 

HOME FORECLOSURES: WILL VOLUNTARY 

MORTGAGE MODIFICATION HELP FAMILIES 

SAVE THEIR HOMES? (PART I) 

THURSDAY, JULY 9, 2009 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 1:06 p.m., in room 

2237, Rayburn House Office Building, the Honorable Steve Cohen 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Cohen, Lofgren, and Franks. 

Staff Present: James Park, Majority Counsel; Daniel Flores, Minority Counsel; and Adam Russell, Majority Professional Staff 

Member. 

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

Subcommittee on Commercial and Administrative Law, will now 

come to order. 

Without objection, the Chair will be authorized to prepare a recess to the hearing. I will now recognize myself for a short statement. 

Today’s hearing gives us an opportunity to revisit the roots of the 

mortgage foreclosure crisis and its continuing effects on our economy. We will examine the effectiveness of government initiatives, 

principally the Treasury Department’s Home Affordable Modification Program, in addressing that crisis. 

This Subcommittee and the full Judiciary Committee have been 

examining the foreclosure crisis since 2007, holding four hearings 

on the issue and two markups of legislation to address this crisis. 

The mortgage foreclosure crisis triggered a broader economic crisis 

that the Nation finds itself in today. Unfortunately, home foreclosures continue to rise precipitously nationwide, notwithstanding 

the efforts by the Congress and the previous Administration and 

this Administration to stem that tide of foreclosures. 

For me, the foreclosure crisis hits home almost literally. In a survey of the top 100 metro areas nationwide, my hometown of Memphis, Tennessee is ranked 18th in the number of foreclosures, according to data collected by Realtytrac.com. In a similar comparison of States, the State of Tennessee, my home State, ranked 12th 

in the number of foreclosures. The extent of the foreclosure crisis 

2 

is such that all socioeconomic classes are affected by growing foreclosure numbers. 

So far, the government’s efforts at helping families avoid losing 

their homes appear not to be working effectively. Some of my colleagues and I suspect this is because the government’s efforts have 

focused almost exclusively on the voluntary modification of the 

mortgage terms for distressed borrowers. The evidence tends to 

suggest that encouraging voluntary modifications alone is, at best, 

minimally effective in helping financially struggling borrowers stay 

in their homes. 

I recognize that the current Treasury Department program is 

still relatively new, having been instituted only in March. Therefore, we have to reserve final judgment on its effectiveness. Nonetheless, media reports suggest that this current effort may need to 

be enhanced. 

Earlier this year in the 111th Congress, I cosponsored and 

helped champion Chairman Conyers’ bill, H.R. 1106, the Helping 

Families Save Their Homes Act of 2009, which, among other 

things, would have given authority to bankruptcy judges to modify 

debtors’ mortgage terms in bankruptcies, including a reduction of 

the mortgage principal amount. In my view, this provision would 

have substantially and effectively reduced the number of foreclosures. Unfortunately, this provision was never signed into law. 

Adopting this provision would help strengthen any program and 

would encourage voluntary mortgage modifications by loan 

servicers. 

I thank the witnesses for appearing today, and I look forward to 

their testimony. 

I now recognize my colleague, Mr. Franks, the distinguished 

Ranking Member of the Subcommittee, for his opening remarks. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Mr. Chairman, today, we revisit the important question of mortgage foreclosures. Now, probably very few Members know better 

than I do how important this question is to individuals in congressional districts across this country, especially those that have had 

high foreclosure rates, as mine has. 

I have to say, however, that I am puzzled by today’s hearing. The 

only foreclosure-related measure I know of that is within this Subcommittee’s jurisdiction is the mortgage cramdown legislation we 

considered earlier this year. That proposal was deeply defective. It 

promised to help virtually no one while inflicting unnecessary damage on the home lending market and the rule of contract. It was 

precisely the opposite of what we needed to consider. It therefore 

died a quick and deserved death in the Senate. Any attempt to revive it now is a pointless distraction from our need to arrive at a 

genuine solution to our constituents’ problems. 

But that, Mr. Chairman, is not the only thing that puzzles me, 

troubles me or disturbs me—I do not know which is the best 

term—about today’s hearing. I need only to consider the title of today’s hearing to be concerned, ‘‘Will Voluntary Mortgage Modification Help Families Save Their Homes?’’ The implications of that 

topic, or that question, cannot really be missed. 

Someone thinks that voluntary modifications will not help families stay in their homes. Someone, whether by cramdown or otherVerDate Aug 31 2005 13:04 Feb 23, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 H:\WORK\COMM\070909\50864.000 HJUD1 PsN: 50864
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wise, wants government to mandate mortgage modifications to 

keep families in their homes, and someone must want government 

to inflict that financial sacrifice on lenders and not on borrowers. 

Why? No one mandated borrowers to enter into mortgage contracts. 

The question has to be asked if anyone is to be held accountable 

in America anymore for entering into a contract. 

Why are we still trying to get out of the historic credit crisis in 

this country? 

The last I heard, it was still a problem. Confiscating contract 

rights of lenders will freeze credit. It will not free it up. If neither 

borrowers nor lenders are voluntarily modifying their contracts, 

why on Earth should the government be forcing them do so? 

Is the era of freedom of contract over in this country? I hope it 

is not. In fact, under both HOPE NOW and the Obama administration’s voluntary mortgage modification programs, freedom of contract is still at work. Many lenders and homeowners are voluntarily modifying their mortgages. 

What these programs need is not to be replaced by a government 

program that is mandating modifications. What they need is more 

time to work, Mr. Chairman. The Obama administration program 

is barely a few months old. It has just been modified. There has 

not been enough time for it to produce results allowing us to even 

judge it one way or the other. Congress dedicated $75 billion to the 

Obama administration program earlier this year, and I wonder if 

my colleagues across the aisle have already concluded that the 

money was ill-spent, as was the $787 billion they spent in the stimulus bill. Speaking, Mr. Chairman, of the stimulus bill, it takes me 

to my last point. 

Evidence shows that an overwhelming number of foreclosures we 

face are due to unemployment and falling home values. How many 

of these foreclosures could have been avoided completely if this 

Congress had just passed a responsible and effective stimulus bill? 

How many real jobs would we have ‘‘saved or created’’? How many 

individuals would have been better able to bid on homes in the 

housing market, helping to stabilize falling home values? How 

much good could we truly have done? 

Mr. Chairman, this Congress has already committed too many 

grievous and profoundly dangerous economic mistakes in the long 

run in this term alone. Let us not add fuel to that unfortunate fire 

by reconsidering mortgage cramdown, proposing government-mandated modifications, or otherwise spending a single minute on anything other than considering and passing a genuine job-producing, 

growth-creating piece of legislation. 

With that, Mr. Chairman, I appreciate your indulgence, and I 

yield back. 

Mr. COHEN. I thank the gentleman for his statement. 

I will now recognize Members on this side if they would like to 

make opening statements. 

Would the distinguished Vice Chair and the former great prosecutor and current great Congressman like to make a statement? 

Mr. DELAHUNT. Do you have any more adjectives? 

Mr. COHEN. Dashing. Handsome. 

Mr. DELAHUNT. I can stay here all day if you want to just keep 

going. 

4 

Mr. COHEN. No more. 

Mr. FRANKS. Aging. 

Mr. COHEN. Mr. Franks, the ‘‘aging’’ part will not be mentioned. 

Mr. FRANKS. I am sorry. 

Mr. DELAHUNT. The problem is I had premature white hair, but 

the real problem is that my face is now catching up with my hair. 

You know, I will be very brief. I heard the Ranking Member 

speak of the sanctity of contract. I would just, you know, make a 

point that bankruptcy, an opportunity to start afresh, has been a 

concept that has been embraced in American jurisprudence for 

years, as long as the sanctity of contract. So let’s not pretend that 

this idea or the concept of cramdown is breaking new ground. That 

is simply inaccurate. It is inaccurate. We have crammed down and 

have provided benefits for those who own boats and cars and rental 

property, so the idea of the cramming down principal for people 

who are about to lose their homes is not Earth-shattering. It is not 

an aberration of American jurisprudence by any stretch of the 

imagination. 

My friend from Arizona then goes on to talk about, you know, 

what this Administration has promised for 5 months. Let me respond with a partisan comment. What we have got on our plate is 

the product of 8 years of economic policies that were formulated by 

the previous Administration, along with the Republican Congress 

that held the majority on both sides for some 6 years. 

With that, I yield back. 

Mr. COHEN. Thank you, sir. 

Does the distinguished Ranking Member, Mr. Smith, desire to 

make an opening statement? 

Mr. SMITH. I do, Mr. Chairman. 

Mr. COHEN. And I should say some nice things about you to 

equal those things I said about the Vice Chairman, but we will 

take judicial notice. 

Mr. SMITH. You know, I would not mind hearing those adjectives 

repeated, if you wanted to go that far, but if not—— 

Mr. COHEN. I will incorporate by reference. 

Mr. SMITH. Okay. Thank you, Mr. Chairman. 

As we again consider mortgage foreclosures and mortgage modification programs, we should remember two fundamental principles. 

First, we in Congress should not take actions that undermine 

personal accountability. In recent years, an unusual number of people took on mortgages they could not afford. The vast majority of 

Americans, however, did not. They took on loans for which they assumed responsibility, and they continue to pay their mortgages on 

time. I continue to believe that Americans do not want so-called 

‘‘solutions’’ that absolve borrowers of personal responsibility. 

Second, we should aim to supplement, not threaten, the loan 

modification programs that lenders and the government are implementing. The mortgage bankruptcy legislation we considered earlier this year failed to honor both of these principles as well as a 

host of others. As a result, it rightly met its demise in the Senate. 

By all appearances, what lies most behind foreclosure rates today, 

July 2009, are two basic facts: 

5 

First, unemployment is spiraling upward. Second, housing prices 

and the housing market have not stabilized. Rising unemployment 

is due to the failure to adopt economic policies that will genuinely 

stimulate the economy. 

When Congress considered the stimulus bill, Republicans proposed an alternative that would have put money into the hands of 

individuals and small businesses. It would have promoted real job 

growth. It would have avoided thousands of the unemployment-related foreclosures we are now witnessing. 

The stimulus bill did not give us unemployment rates below 8 

percent as President Obama promised. On the contrary, unemployment is approaching 10 percent, and it may rise higher still. As a 

result, we have a whole new wave of unemployment-related foreclosures. Nothing we can do to revise the Bankruptcy Code will 

help an unemployed person pay off a mortgage. Only real jobs and 

economic growth will do that. 

What about stabilizing home prices in the housing market? The 

Responsible Homeowners Act of 2009, introduced this April, would 

honor personal responsibility in the mortgage market while providing home purchase incentives that can actually help to stabilize 

that market. 

The already rejected mortgage bankruptcy ideas would destabilize the housing market and housing prices by tightening mortgage credit. How do we know that? Because that kind of destabilization has happened before. When chapter 12 of the Bankruptcy 

Code was modified to allow cramdowns for family farms, interest 

rates for farm mortgages went up. Rising mortgage interest rates 

under the fundamental laws of economics can mean only one thing: 

fewer buyers able to bid on homes, coupled with our continuing excess housing inventory that is guaranteed to produce new declines 

in home prices. 

Under normal conditions, a decline in housing prices could stimulate housing sales, but with the continued increase in unemployment rates and the sputtering economy, we would not see any such 

increase today. Furthermore, additional declines in home prices are 

likely to push more mortgages under water. That will trigger still 

more foreclosures, deepening the problem, not solving it. Our housing markets are beginning to show signs of recovery, so we should 

not now—not ever—enact legislation that will be a drag on a housing recovery. 

Thank you, Mr. Chairman. I yield back. 

Mr. COHEN. I thank the Ranking Member of the full Committee. 

I now recognize the Chair of the Immigration Subcommittee and 

another cosponsor and true champion of the Helping Families Save 

Their Homes Act of 2009, Ms. Lofgren of California. 

Ms. LOFGREN. Thank you, Mr. Chairman. Thank you for convening a hearing on this crucial issue because we are in a continuing crisis of home foreclosures in this country. 

We saw record number of foreclosures in June, nearly 300,000 

according to the figures I have seen, and it is very clear to me that 

the voluntary modifications are not working. Several million homes 

have been foreclosed on. Several hundred thousand new homes are 

going into foreclosure every month, and the total number of voluntary modifications has been very few. We will get the exact numVerDate Aug 31 2005 13:04 Feb 23, 2010 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 H:\WORK\COMM\070909\50864.000 HJUD1 PsN: 50864
6 

bers, but it looks like a few hundred thousand at most, in the face 

of millions in need. 

This mismatch means real trauma for individuals, but it also 

means a disaster for the American economy, not only for those 

going into foreclosure but for their neighbors. As we know, for 

every home in foreclosure, the average decline in value for the innocent bystanders, the neighbors, is about 7 percent. If you go into 

some towns in California and you see the amount of foreclosures, 

you can see that the value of homes is just collapsing, which is 

feeding into the spiraling down of our American economy. The voluntary program is not working. 

Today, in the San Jose Mercury News, there is a headline: ‘‘Loan 

Pleas Swamp Banks.’’ If you read the article, it talks about individuals who have tried in vain over a period of months to get information for voluntary modification with their banks. I will just mention 

one individual, my constituent Angelo Gallo, 46, of San Jose, who 

has been working since January with his bank. He has sent, numerous times, information which is always lost by his bank. Now 

he has been notified here in July that they are going to go into 

foreclosure except, oops, they are eligible for the Obama plan modification. This is a disaster. 

I want to note with great disappointment that the Treasury Department was too busy to come to this hearing today. I think it is 

shameful that the Treasury Department is too busy to deal with 

the Congress with regard to the collapse of the housing market in 

America. We passed a very good bill in the House that allowed for 

the Obama plan to work, but failing that, made sure that the bankruptcy laws are available for those who are eligible to readjust the 

principal or interest of their mortgages. 

I note that this is not a new concept. Article I, section 8 of the 

Constitution, which has been with us since 1789, indicates that the 

Congress should establish a uniform law on the subject of bankruptcies throughout the United States. 

Certainly, as my colleague Mr. Delahunt has mentioned, second 

homes and certain other properties are available for modification. 

We are also, I think, led by the decline in individual home mortgages and are about to see an absolute avalanche of commercial 

real estate bankruptcies. Those will all be eligible for modification 

in the Bankruptcy Court, unlike the hapless poor individual homeowner. 

I am just tremendously frustrated that we have provided funding 

for banks around the country, and yet they are stiffing the homeowners of the United States. The Congress has failed to act. The 

Administration has failed to act. I think it is up to us to step forward once again and not to give up on this, Mr. Chairman, because 

I think it is not yet too late to enact this reform and to stem this 

collapse of the housing market in the United States. 

I yield back. 

Mr. COHEN. Thank you. I thank the gentlewoman for her statement. 

We don’t have any other Members here, and I am now pleased 

to introduce our first witness. I want to thank all of the witnesses 

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

statements will be placed into the record, and we would ask you 

7 

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

here that shows a green light, which shows you have got between 

1 and 5 minutes left. At the 4-minute time, it turns yellow, or the 

yellow light comes up, and the green light goes off. Then after that 

minute, the red light comes on, and at that time, you should have 

finished or should be prepared to quickly finish your remarks. 

After each witness has presented his or her testimony—‘‘his’’ in 

this case—Subcommittee Members will be permitted to ask questions, again, subject to the 5-minute rule. 

Our first witness is Alan White, a professor at the Valparaiso 

University School of Law, the former home of Gene Bartow. He has 

been there since 2007, teaching consumer law, commercial law and 

contracts. He is a nationally recognized expert on the credit regulation of the mortgage market, and is quoted frequently in the national media, including in The Wall Street Journal, The Washington Post and The New York Times, in connection with his research on this particular issue. 

He has published a number of research papers and articles on 

housing, credit and consumer law issues, and has testified before 

Congress and other agencies on the foreclosure crisis, bankruptcy 

reform and predatory mortgage lending. 

Mr. COHEN. Thank you, Professor White. Will you begin your testimony? 

TESTIMONY OF ALAN M. WHITE, ASSISTANT PROFESSOR OF 

LAW, VALPARAISO UNIVERSITY SCHOOL OF LAW, VALPARAISO, IN 

Mr. WHITE. Thank you. 

Mr. Chairman and Members of the Committee, thank you for inviting me to testify about this very important issue. I have indeed 

been following, specifically, mortgage modification and foreclosure 

activity very closely for the last 24 months, and I have tried as 

much as possible to gather the available facts and data about what 

is actually happening in the real world in the markets, and it is 

based on that information and that data that I want to offer my 

remarks today. 

One comment I would like to make about information is that we 

need more of it. I have said this before, but the Treasury Department now has access to very detailed information from mortgage 

companies that will tell us how many homes are being foreclosed 

every month, how many mortgages are being renegotiated and 

under what terms. It is really vital that that information be made 

public and be in as much detail and in as timely a fashion as possible so that all of the questions that are going to be considered 

today can be evaluated with accurate information. The information 

I rely on is mostly mortgage information reported to investors in 

mortgage-backed securities. It is somewhat helpful, but it does not 

cover the entire market. It does tell us, I think, a few important 

things about what is going on out there. 

First, clearly, we have a massive failure of contracts. And I certainly would associate myself with a comment that adherence to 

contracts is a very important principle, and I teach contract law. 

We have, in particular, subprime mortgages that are failing at a 

rate of greater than 50 percent, so we are looking at a situation 

8 

where lenders and servicers need to administer contracts that are 

going to default or that are already in default. The question is 

what to do with those contracts. 

There are now 2.5 million American homeowners with mortgages 

in foreclosure. There are considerably more than that who are delinquent. Every month, another quarter of a million is added to 

that number, so any program which modifies 10,000 or 20,000 or 

50,000 mortgages is only making a very small dent in a very large 

problem. 

I suppose the good news is, currently, about 125,000 mortgages 

are being modified every month. That is prior to the implementation of the Administration’s new program. What is disappointing 

about the Home Affordable program is that the announced goals in 

terms of the number of renegotiations are extremely modest, and 

they are talking about numbers of modifications that would not 

make any significant increase, that probably would be less than 

what the industry has been doing voluntarily up until now. 

In addition to the fact that modifications are consistently lagging 

behind foreclosures, the number of foreclosures is still increasing. 

We have not reached the peak of the crisis and started to taper off, 

and that is very troubling. 

The third fact that is very troubling is the levels of losses that 

are being inflicted on investors, banks and ultimately, perhaps, on 

the taxpayers. Each month when a home is foreclosed and sold, the 

investor is losing more money than the last month. Of the June 

data that I have, the loss severities are running at about 65 percent, meaning that if a $100,000 mortgage is foreclosed, the investor is recovering $35,000. That is not a very good return. It also 

suggests that if there is some way to renegotiate the loan and successfully get a borrower to pay 70 or 80 percent rather than 35 percent, everyone would be better off. 

Now, I want to address briefly a paper that was just released 

earlier this week, written by some economists at the Boston Federal Reserve, which kind of takes issue with the simple proposition 

that if we could reduce and renegotiate mortgages to a more affordable level, everybody would be better off, not only the homeowners 

and their communities but also the investors. 

In this paper—and I have had some correspondence with its author—it contends that, really, servicers are acting quite rationally 

because, in fact, they make more money in foreclosing than in renegotiating loans. The difficulty with this paper—and I make some 

reference to it in my written testimony—is that it makes a bunch 

of assumptions which, I think, are just not based on what is happening out in the real world market today. 

They assume, for example, that large numbers of homeowners 

who are behind on their mortgages can get caught up and pay their 

loans in full. So, of course, the investors will lose money if we allow 

bankruptcy courts to voluntarily reduce their debts by 10 or 20 percent, because if we just left everything alone, they would have paid 

100 percent. I looked at the data that I am getting from the investor reports. The cure rates for defaulted mortgages are less than 

10 percent. The chances that somebody who is behind now is going 

to be able to refinance or to catch up are slim to none. 

9 

They also talk about the fact that many modifications fail. We 

have this problem of re-defaults, and that is certainly true as 30 

or 40 percent, maybe 50 percent, of modified loans have not succeeded. I think that is partly because the modifications have not 

been very well designed. 

I think it is also important to stress that even with a 50 percent 

failure rate, you can develop numbers to show that if you succeed 

with half of your modifications, you are saving investors money as 

well as obviously saving half of the homes that otherwise would 

have been foreclosed. 

So I will stop there since my time is up. I will be happy to answer any questions you may have. Thank you. 

Mr. COHEN. Thank you, Professor White. I thank you for your 

testimony and for being cognizant of the lighting system and of the 

time requirements. 

[The prepared statement of Mr. White follows:] 

10 

PREPARED STATEMENT OF ALAN M. WHITE


AMW-1.eps
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Mr. COHEN. Our second witness is Mr. Jim Carr. He is Chief Operating Officer for the National Community Reinvestment Coalition. He is an associate of 600 local development organizations 

across the Nation that are dedicated to improving the flow of capital to communities and to promoting economic mobility. He is a 

visiting professor at Columbia University. Prior to his appointment, 

he served as Senior Vice President for Financial Innovation, PlanVerDate Aug 31 2005 13:04 Feb 23, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 H:\WORK\COMM\070909\50864.000 HJUD1 PsN: 50864

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ning and Research for the Fannie Mae Foundation, and he was 

Vice President of Housing Research at Fannie Mae. He has held 

posts as Assistant Director for Tax Policy for the U.S. Senate Budget Committee and as research associate at the Center for Urban 

Policy research at Rutgers. 

Mr. Carr, you may begin your testimony. 

TESTIMONY OF JAMES H. CARR, CHIEF OPERATING OFFICER, 

NATIONAL COMMUNITY REINVESTMENT COALITION, WASHINGTON, DC 

Mr. CARR. Good afternoon. 

[Technical difficulties.] 

Mr. COHEN. Who is our expert on this? There you go. We have 

had some bad luck with Rutgers in this hearing and on this Committee. Go ahead. 

Mr. CARR. Okay. That seems to have done it. Thank you very 

much. 

Chairman Cohen and other distinguished Members of the Committee, on behalf of the National Community Reinvestment Coalition, we are honored to have an opportunity to share our thoughts 

with you today. I would like to say that NCRC is also pleased to 

be a member of a new coalition of more than 200 consumer, civic, 

labor, and civil rights organizations, called Americans for Financial 

Reform, which is working to cultivate integrity and accountability 

within the financial system. 

Members of the Committee, the U.S. economy is mired in the 

worst economic crisis in more than half a century, and while few 

would conclude the current economic environment is comparable to 

the Great Depression, we could certainly conclude it is the Great 

Recession. Although we have suffered much already, the worst remains ahead of us. 

Unlike the foreclosures of 2007 and 2008 that were driven by the 

toxic and unaffordable mortgage products, the current wave of foreclosures is largely the result of unemployment and/or loss of income. The more than 3 million jobs that have been lost since the 

start of this year, for example, translate into possibly 1.2 million 

more foreclosures. In fact, we are now experiencing a self-perpetuating cycle whereby foreclosures create a drag on the economy 

that leads to more foreclosures and to further economic distress. 

The bottom line of this is that it seems difficult to understand how 

we will enter a meaningful economic recovery as long as the foreclosure crisis continues to grow. 

It is important to recognize that this is not an equal opportunity 

recession. Although the national unemployment rate is an uncomfortable 91⁄2 percent as of June, that rate for African Americans already exceeds 15 percent, and for Latinos it is approaching 13 percent. This is compared to a rate of just under 9 percent for nonHispanic White households. Because African Americans and 

Latinos have comparatively few savings, they are poorly positioned 

to survive a lengthy battle of unemployment. As a result, potentially millions of African Americans and Latinos stand the prospect 

of falling out of the middle class by the time the economy recovers. 

Moreover, African Americans and Latinos were targeted disproportionately for deceptive loan products. As a result, Blacks and 

15 

Latinos are overrepresented in the foreclosure statistics. African 

Americans, for example, have experienced a decline of 3 percentage 

points in home ownership rate since the crisis began. 

In response to the magnitude and complexity of the current crisis, a threefold response is necessary. First, we need to stem the 

tide of foreclosures. The new Home Affordable Modification Program is the most comprehensive plan that has been put forward to 

date, but the program is off to a slow start for a variety of program 

design and administrative reasons. 

In response, the Administration has been aggressive about addressing the weaknesses in the program, but to date they estimate 

that 50,000 loans have been modified since the program was 

launched. This compares to an estimated 7 million foreclosures now 

predicted this year and next by Moodys.com. So it appears that 

there is a mismatch. 

What we believe is needed is a new vintage Great Depressionera Homeowners Loan Corporation or type of operation within the 

Federal Government which would effectively reach out and purchase toxic assets. This was proposed last year, and we believe it 

should have been done; but they should buy them, using exceptional powers of the Federal Government, at a discount between 

the current market and the face value of those loans. That discount 

would be applied to modifying the loans to make them long-term 

affordable. 

We also believe that some type of supernormal entity is needed 

because of the unique nature of the foreclosures now which are 

driven by unemployment. There is no program in place right now 

that currently can deal with homes going into foreclosure for which 

the consumer has no effective income. 

The reform of the Bankruptcy Code is something that we also believe is warranted. It was proposed as part of the President’s Home 

Affordable Modification Program, and we believe it should be reintroduced and passed into law. As has been stated already, currently, bankruptcy courts can modify repayment terms on outstanding debts of luxury yachts, investment properties and other 

assets, except if it is the family home. We believe that there is no 

public purpose served in this treatment. 

Further, expanded bankruptcy protection could address a major 

share of loans going into foreclosure, and it could act as an incentive for servicers to be more responsive to the Federal Government’s public policy goals of loan modifications. 

Second, we believe that certain communities which have borne 

disproportionate shares of the damage should actually receive disproportionate shares of assistance to help us out of this crisis. We 

believe that those neighborhoods that have a convergence of three 

factors—significantly high unemployment rates, high concentrations of foreclosures and historically underfunded or poorly maintained infrastructure—should receive priority treatment. 

Channeling dollars to individuals and communities that need 

them the most will actually, most immediately, stimulate the economy and will create jobs. The reason for this is that families who 

live on the edge of survival will pour those recovery dollars immediately back into the economy, spending it on groceries, medicine, 

16 

clothing, child care, energy, transportation, and on other basic necessities. 

In conclusion, let me say that the final piece of what is needed 

is to put into place financial system reforms that make sure that 

the current crisis we are experiencing never happens again. That 

would include addressing unfair and deceptive lending practices, 

expanding laws that improve access to capital, such as the Community Reinvestment Act, and also enacting, we believe, a consumer 

financial protection agency that can more proactively address 

fraud, misbehavior and abuse before it works its way into the system. 

Thank you very much. 

Mr. COHEN. Thank you, Mr. Carr. I appreciate your testimony as 

well. 

[The prepared statement of Mr. Carr follows:] 

PREPARED STATEMENT OF JAMES H. CARR

INTRODUCTION

Good afternoon Mr. Chairman and other distinguished Members of the Committee. My name is James H. Carr and I am the Chief Operating Officer for the 

National Community Reinvestment Coalition. On behalf of our coalition, I am honored to speak with you today. 

NCRC is an association of more than 600 community-based organizations that 

promotes access to basic banking services, including credit and savings, to create 

and sustain affordable housing, job development, and vibrant communities for 

America’s working families. NCRC is also pleased to be a member of a new coalition 

of more than 200 consumer, civic, labor, and civil rights organizations—Americans 

for Financial Reform—that is working to cultivate integrity and accountability within the US financial system. 

THE FORECLOSURE AND ECONOMIC CRISES

Members of the Committee, the U.S. economy is mired in the worst economic crisis in more than a half century. And while few would conclude the current economic 

environment is comparable to the Great Depression, today’s economy has earned its 

moniker, the Great Recession. Although we have suffered much already, the worst 

remains ahead of us. 

The most dispiriting aspect of the current crisis is that we have yet to meaningfully address foreclosure crisis, the core problem that caused the financial system 

to implode and drove the economy into a ditch. 

The current wave of foreclosures is largely rooted in toxic mortgage products originated between 2007 and 2008. This wave is being driven by rising unemployment 

and reduction in workers’ hours. The more than 3 million jobs that have been lost 

since the start of this year, for example, translate into potentially 1.2 million additional foreclosures. 

In fact, we are now experiencing a self-perpetuating cycle wherein (1) foreclosures 

drive down home values; (2) sinking home values erode bank assets and household 

wealth; (3) loss of wealth leads to lower consumer spending and less lending activity 

by banks; (4) this, in turn, leads to lower productivity; (5) decreased productivity 

creates more unemployment; and (6) more foreclosures. At this point the cycle is 

complete and self-reinforcing, as newly unemployed and under-employed homeowners face foreclosure when they cannot make mortgage payments. 

The reality of this self-reinforcing and economically destructive cycle raises questions about the validity of many recent economic projections that suggest the economy is recovering. The financial services industry, for example, remains on life support despite recent positive earnings news. 

A close look at the fine print and footnotes in the positive earnings reports of 

many large financial firms, for example, reveals that creative accounting has replaced innovative finance as a primary source of profits within the banking industry. Few of the reported earnings are a result of lending for and investments in tangible products and services for the American economy. 

17 

NOT AN EQUAL OPPORTUNITY CRISIS

This is not an equal opportunity recession. Although the national unemployment 

rate is an uncomfortable 9.5 percent as of June, that rate for African Americans exceeds 15 percent, and for Latinos unemployment is approaching 13 percent. The unemployment rate for non-Hispanic whites, by comparison, remains under 9 percent. 

Because African Americans and Latinos comparatively few savings, they are poorly positioned to survive a lengthy bout of unemployment. As a result, potentially 

millions of African-Americans and Latino households could find themselves falling 

out of the middle class by the time the economy recovers. 

Moreover, African Americans and Latinos were targeted disproportionately for deceptive high cost loans. According to a study by the U.S. Department of Housing 

and Urban Development, subprime loans are five times more likely in African American communities than in white neighborhoods, and homeowners in high-income 

black areas are twice as likely as borrowers in lower-income white communities to 

have subprime loans. 

The result is that blacks and Latinos are over-represented in the foreclosure statistics. African Americans, for example, have experienced a full three-percentage 

point drop in their homeownership rate since the crisis began. 

Research by the National Community Reinvestment Coalition found that predatory lenders aimed their toxic products heavily at women of color. Because AfricanAmerican children are more likely to reside in female-headed households, black children are also disproportionately harmed as a result of the foreclosure crisis and its 

attendant stresses. 

Finally, in a separate NCRC study (The Broken Credit System, 2004), we found 

that after controlling for risk and housing market conditions, the portion of 

subprime refinance lending increased when the number of residents over the age of 

65 increased in a neighborhood. If a borrower were a person of color, female, and 

a senior, she was the ‘‘perfect catch’’ for a predatory lender. 

FIXING THE PROBLEMS

In response to the magnitude and complexity of the current crisis, a three-fold response is essential. 

1. Stem the Rising Tide of Foreclosures 

The new ‘‘Home Affordable Modification Program’’ (or HAMP) is the most comprehensive plan to date to address the foreclosure crisis. 

Features that make the President’s plan superior to any similar programs to date 

include: 

(1) The government shares the cost of writing down loans to be affordable for 

borrowers; 

(2) Loan modifications are designed to make loans affordable over the longterm; 

(3) Borrowers do not have to become delinquent in order to receive assistance; 

(4) Second liens can also be modified as part of the plan (more than half 

subprime loans); and 

(5) Servicers are provided financial incentives to encourage their participation; 

and (bankruptcy protection is proposed as a stick to encourage participation. 

These are key and critical program elements missing from previous efforts. But 

there remain challenges. 

Challenges with the program include: 

(1) Principal balances on loans that are severely underwater are not bought 

down or eliminated to improve loan affordability. Forbearance of principal, 

accompanied with balloon payments due on sale of transfer of property, 

codifies predatory or discriminatory loan features. This is a critical weakness in HAMP because many loans have experienced negative amortization 

since they were originated, because they were originated at grossly inflated 

prices. Loans that are deeply upside down are more at risk of foreclosure 

even if the payments are made affordable. 

(2) The program is voluntary for some institutions, and for all, is administratively cumbersome, time-consuming, and inconsistently administered (including failure to fully appraise consumers’ financial situations to ensure 

the modifications is sustainable from borrower’s financial perspective; and 

(3) Unemployment-induced foreclosures are not adequately addressed. Borrowers facing a loss of income before or after a modification are not fully 

18 

protected and foreclosure needlessly continues to be the trigger for costly 

evictions. This latter practice of evicting borrowers who have been foreclosed 

upon further drives down home prices for neighboring homeowners and positions additional properties for foreclosure. 

Finally, the program would benefit greatly from more transparent data on loan 

modification outcomes so as to allow for a more immediate analysis of the program’s 

performance and the need for possible further refinements. 

The Administration has thus far been aggressive about responding to program 

weaknesses and tightening guidelines to improve performance. But as HAMP’s performance thus far bears out, the program remains far from meeting the foreclosure 

prevention needs demanded by the magnitude of the crisis. The best estimates to 

date are that 50,000 loans have been modified since the program was launched earlier this year. This compares with an estimated 7 million foreclosures predicted for 

this year and next by Moody’s Economy.com. 

It is clear that a more robust response is needed. 

A ‘‘new’’ vintage Great Depression era Homeowners Loan Corporation (HOLC) is 

warranted. The new entity would more aggressively pursue loan modifications using 

exceptional powers, such as eminent domain, to secure toxic loan products from investors and modify as many loans as possible to make them affordable and sustainable. Loans would be purchased at a reasonable discount (between current market 

value and face value). Discounts secured through the purchase process would be applied to modify the loans. This process would greatly reduce the cost to taxpayers 

of loan modification. 

The new HOLC could also be useful to address unemployment-driven foreclosures. 

HOLC could take possession of properties and structure foreclosure moratoria based 

on workers’ unemployment benefits. During that period, mortgage payments could 

be greatly reduced. 

Under certain circumstances, borrowers might be allowed to remain in their 

homes at no cost (for a limited time. This arrangement in many instances would 

benefit the borrower, their community and investor since vacant and abandoned 

properties harm all parties and do not benefit anyone. The foreclosure loss severity 

rate on homes financed with subprime loans is now approaching 65 percent. 

Reform of the bankruptcy code is also warranted. It was proposed as part of the 

President’s Home Affordable Modification Program and should be reintroduced and 

passed into law. 

Currently, bankruptcy courts can modify repayment terms on the outstanding 

debt on a luxury yacht or investment property, but not the family home. This disparity in treatment is unfair, inequitable, and serves no legitimate public policy 

goal. Furthermore, expanded bankruptcy protection could address as much as 30 

percent of loans heading to foreclosure and at no cost to the American taxpayer. 

2. Rebuild Communities Harmed by the Crisis 

Certain communities have borne a disproportionate share of the damage and pain 

wrought by the foreclosure and economic crises, and should therefore be targeted 

for priority allocation of economic recovery funding. These acutely suffering communities are characterized by a convergence of three factors: 

1. Significantly higher levels of unemployment; 

2. Significantly greater concentrations of foreclosures; and 

3. Historically under-funded, inferior, or poorly maintained infrastructure. 

Channeling dollars to the individuals and communities that need them most will 

immediately stimulate the economy and save and create jobs. Families that live on 

the edge of survival will pour these recovery dollars immediately back into the economy through spending on groceries, medicine, clothing, child care, energy, transportation, and other basic necessities. Prioritizing areas hardest hit by widespread unemployment and mounting foreclosures would more directly help stabilize the housing market and steady falling home prices that continue to undermine the strength 

of US financial institutions. Finally, investing in areas most in need of infrastructure improvements would provide a needed enhancement of the quality of life in 

communities long-neglected. 

3. Refocus Financial System Regulation on the Interests of Consumers 

Many blame the foreclosure crisis on a claim that financial institutions sought to 

improve homeownership among unqualified low- and moderate-income, and minority 

households. This assertion has no basis in fact or logic. 

According to the Federal Reserve Board, only 6 percent of high-cost subprime 

loans to low- and moderate-income households were covered by CRA regulation. 

19 

And, the Center for Responsible Lending finds that less than 10 percent of subprime 

loans were for first-time homeownership. 

In fact, it was failure to regulate adequately the U.S. mortgage markets that allowed deceptive, reckless, and irresponsible lending to grow unchecked until eventually it overwhelmed the financial system. 

Almost every institutional actor in home mortgage finance process played a role. 

Comprehensive anti-predatory lending legislation should be enacted immediately. 

Such legislation should apply mortgage-related consumer protections to all of the institutional players in the mortgage market including banks, brokers, mortgage companies, appraisers, servicers, investment banks, credit rating agencies, hedge funds, 

and other financial entities. 

Expansion of the Community Reinvestment Act (CRA) is also essential to bringing 

safe and sound lending to struggling families and communities. 

Inasmuch as nearly 95 percent of problematic subprime loans were originated by 

non-CRA covered institutions, the time to bring more financial firms under the regulatory umbrella of CRA. 

Moreover, today roughly 97 percent of banks pass their CRA exams. Yet, more 

than 40 million households are only marginally connected to mainstream financial 

institutions and more than 9 million are completely unbanked. The time has also 

come to increase enforcement of CRA on existing covered institutions, including 

eliminating the loopholes, exceptions, and special preferences that allow banks to 

exclude major shares of their business operations from coverage. 

The CRA ratings system is also in need of refinement to provide more meaningful 

CRA grades, and improve data collection and analysis, and inclusion of race as an 

explicit factor in CRA exams are also long overdue. 

A final component of comprehensive financial regulatory reform is the establishment of a Consumer Financial Protection Agency. President Obama’s regulator reform proposal calls for the creation of such an agency, and Congress should pass 

that into law. The imperative is clear for a regulatory body that puts consumers 

ahead of special banking interests. The reality of the mortgage market is that as 

soon as one predatory practice is eliminated, another takes its place. 

Today, for example, the Mortgage Asset Research Institute estimates that mortgage-related fraud is more prevalent now than it was at the height of the lending 

boom. The proposed Consumer Financial Protection Agency would have the authority to investigate and take action against existing and future unfair and irresponsible lending practices as they evolve. And it would create rules that make financially predatory practices harder to introduce in the markets. 

CONCLUSION

In the words of Nobel Prize-winning economist Joseph Stiglitz, the financial system discovered there was money at the bottom of the wealth pyramid and it did 

everything it could to ensure that it did not remain there. Stated otherwise, the 

business model for many financial institutions was to strip consumers of their 

wealth rather than build and improve their financial security. 

Ironically, most solutions to date have focused on rewarding the financial firms 

(and their executives) that created this crisis. But in spite of more than $12.8 trillion of financial support in the form of loans, investment, and guarantees, this approach is not working because consumers continue to struggle in a virtual sea of 

deceptive mortgage debt and a financial system that remains unaccountable to the 

American public. 

Now is the time to shift the focus away from Wall Street and onto Main Street 

by addressing, in a broader manner, the growing foreclosure crisis and its contagion 

effects on national home prices and the overall economy. This includes introducing 

a more robust foreclosure mitigation program, focusing recovery dollars on the communities most negatively impacted by the crisis, and enacting strong consumer protections against deceptive and reckless lending practices. 

Mr. COHEN. Our third witness is Mark Calabria. Dr. Calabria is 

the Director of Financial Regulation Studies at the Cato Institute. 

Before joining Cato, he spent 6 years as the senior professional 

staff member for the U.S. Senate Committee on Banking, Housing, 

and Urban Affairs. In that position, he handled issues relating to 

housing and mortgage finance, banking and insurance for the 

Ranking Member, Mr. Shelby of Alabama. Prior to his service on 

20 

Capitol Hill, Dr. Calabria served as Deputy Assistant Secretary for 

Regulatory Affairs at the U.S. Department of Housing and Urban 

Development, and he held a variety of positions at Harvard’s Joint 

Center for Housing Studies, at the National Association of Home 

Builders and at the National Association of Realtors. He has also 

been a research associate at the U.S. Census Bureau Center for 

Economic Studies. 

Thank you. We welcome your testimony. 

TESTIMONY OF MARK A. CALABRIA, Ph.D., DIRECTOR OF FINANCIAL REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, DC 

Mr. CALABRIA. Thank you, Chairman. 

My testimony today will address two specific questions. The first 

is: Why have the Obama and Bush administrations’ efforts along 

with those of the mortgage industry’s to reduce foreclosures had so 

little impact on the overall foreclosure numbers? 

The second question is: Given what we know about why previous 

efforts have had such little impact, what are our policy options? 

The short answer to why previous Federal efforts to stem the 

current tide of foreclosures have largely failed is that such efforts 

have grossly misdiagnosed the causes of mortgage defaults. An implicit assumption behind HOPE NOW—FDIC’s IndyMac model— 

and the Obama administration’s current foreclosure efforts is that 

the current wave of foreclosures is almost exclusively the result of 

predatory lending practices and exploding adjustable rate mortgages where large payment shocks upon the rate reset cause mortgage payments to become unaffordable. 

The simple truth is that the vast majority of mortgage defaults 

are being driven by the same factors that have always driven mortgage defaults: generally, a negative equity position on the part of 

a homeowner, coupled with a life event that results in a substantial 

shock to his income, most often a job loss or a reduction in earnings. Until both of these components—negative equity and a negative income shock—are addressed, foreclosures will remain at highly elevated levels. 

If payment shock alone were the dominant driver of defaults, 

then we would observe most defaults occurring around the time of 

reset, specifically just after the reset. Yet this is not what has been 

observed. Of loans with reset features that have defaulted, the vast 

majority of defaults occurred long before the reset. 

Additionally, if payment shock were the driver of default, the 

fixed rate mortgages without any payment shocks would display 

default patterns significantly below that of adjustable rate mortgages. When one controls for owner equity and credit score, the differences in performance between these different mortgage products 

largely disappear. 

To illustrate, consider that those mortgages generally considered 

among the safest—mortgages insured by the Federal Housing Administration, the FHA, which are almost exclusively fixed rate with 

no prepayment penalties and substantial borrower protections— 

perform on an apples-to-apples basis as badly as the subprime market in terms of delinquencies. 

21 

The important shared characteristic of FHA and most of the 

subprime market is the widespread presence of zero or very little 

equity in the mortgage at origination. The characteristics of zero or 

negative equity also explain the poor performance of most subprime 

adjustable rate mortgages. Many of these loans also had little or 

no equity upon origination, providing the borrower with little equity cushion when prices fell. 

Central to the arguments calling for greater government intervention in the mortgage market is that many, if not most, of the 

foreclosures being witnessed are unnecessary or avoidable. Generally, it is argued that investors and loan servicers do not face the 

same incentives and that, in many cases, it would be better for the 

investor if the loan were modified rather than taken to foreclosure, 

but still the servicer takes the loan to foreclosure. 

The principal flaw in this argument is it ignores the costs to the 

lender of modifying loans that would have continued paying otherwise. Ex ante, a lender has no way of separating the truly troubled 

borrowers who would default from those who would take advantage 

of the system if they knew they could get a modification just by 

calling. As long as potentially defaulting borrowers remain a low 

percentage of all borrowers, as they are today, it is in the interest 

of the investor to reject many modifications that might make sense 

ex post. 

The high level of foreclosures has left many policymakers understandably frustrated and searching for answers. One solution that 

has been regularly presented is to allow bankruptcy judges to reduce the principal balance of a mortgage loan to reflect the reduced 

value of the home, the so-called ‘‘cramdown.’’ I believe allowing 

cramdowns would have adverse market consequences while also 

providing little real relief to borrowers. 

Given the unemployment-driven nature of most foreclosures and 

the inability of unemployed individuals to put forth a repayment 

plan under chapter 13 of the Bankruptcy Code, it appears that 

cramdowns would do nothing for those most in need—the unemployed. 

As proponents of cramdowns point out, vacation and investment 

properties can currently be subjected to cramdown. This raises the 

question, why aren’t the significant numbers of foreclosures involving investment properties being resolved via bankruptcy rather 

than by the foreclosure process? 

The most likely reason is that property speculators realize that 

even a reduced mortgage value is likely to exceed the home value 

in the near future. With home prices still declining, a crammeddown mortgage would be underwater in a few months. The incentive facing most speculators is often to simply walk away and to 

let the home fall into foreclosure. This would not be a significant 

problem if investment properties did not constitute approximately 

40 percent of current foreclosures. 

At this point, it is worth reflecting on these two points. 

Cramdowns do little or nothing to help the unemployed, and speculators can already pursue that route but largely choose not to, as 

it is not in their economic interest. With speculators making up 

about 40 percent of foreclosures and the unemployed likely making 

up to around 50 percent, it becomes apparent that, at minimum, 

22 

cramdowns will do little to help at least 90 percent of borrowers 

currently in foreclosure. 

In concluding my testimony, I again wish to strongly state that 

the current foreclosure relief efforts have largely been unsuccessful 

because they have misidentified the underlying causes of mortgage 

default. It is not exploding ARMs or predatory lending that drives 

the current wave of foreclosures but negative equity driven by 

house prices declines, coupled with adverse income shocks, that are 

the main drivers of defaults on primary residences. Defaults on 

speculative properties continue to represent a large share of foreclosures. Accordingly, for any plan to be successful, it must address 

both negative equity and reductions in earnings. Cramdown fails 

on both accounts. 

I thank you for your attention and welcome your questions. 

Mr. COHEN. Thank you, sir. I appreciate it, Dr. Calabria. 

[The prepared statement of Mr. Calabria follows:] 

PREPARED STATEMENT OF MARK A. CALABRIA

Chairman Conyers, Ranking Member Smith, Subcommittee Chairman Cohen, 

Ranking Member Franks, and distinguished members of the Subcommittee, I thank 

you for the invitation to appear at today’s important hearing. I am Mark Calabria, 

Director of Financial Regulation Studies at the Cato Institute, a nonprofit, non-partisan public policy research institute located here in Washington. Before I begin my 

testimony, I would like to make clear that my comments are solely my own and do 

not represent any official policy positions of the Cato Institute. In addition, outside 

of my interest as a citizen and a taxpayer, I have no direct financial interest in the 

subject matter before the subcommittee today, nor do I represent any entities that 

do. 

My testimony today will address two specific questions. The first is: why have the 

Obama and Bush Administration efforts, along with those of the mortgage industry, 

to reduce foreclosures had so little impact on the overall foreclosure numbers? 

The second question is: given what we know about why previous efforts have had 

such little impact, what are our policy options? 

In answering both these questions, I rely on an extensive body of academic literature, the vast majority of which has been subjected to peer review, which has 

examined the determinates of mortgage delinquency and default. Foremost among 

this literature is a series of recent papers written by economists at the Federal Reserve Banks of Boston and Atlanta, in particular the work of Paul Willen, Christopher Foote and Kristopher Gerardi. My testimony owes a considerable intellectual 

debt to this research. 

WHY HAVEN’T PREVIOUS EFFORTS STEMMED THE FORECLOSURE TIDE?

The short answer to why previous federal efforts to stem the current tide of foreclosures have largely failed is that such efforts have grossly misdiagnosed the 

causes of mortgage defaults. An implicit assumption behind former Treasury Secretary Paulson’s HOPE NOW, FDIC Chair Sheila Bair’s IndyMac model, and the 

Obama Administration’s current foreclosure efforts is that the current wave of foreclosures is almost exclusively the result of predatory lending practices and ‘‘exploding’’ adjustable rate mortgages, where large payment shocks upon the rate re-set 

cause mortgage payment to become ‘‘unaffordable.’’ 

The simple truth is that the vast majority of mortgage defaults are being driven 

by the same factors that have always driven mortgage defaults: generally a negative 

equity position on the part of the homeowner coupled with a life event that results 

in a substantial shock to their income, most often a job loss or reduction in earnings. 

Until both of these components, negative equity and a negative income shock are 

addressed, foreclosures will remain at highly elevated levels. 

Given that I am challenging the dominant narrative of the mortgage crisis, it is 

reasonable to ask for more than mere assertions. First, if payment shock alone were 

the dominate driver of defaults then we would observe most defaults occurring 

around the time of re-set, specifically just after the re-set. Yet this is not what has 

been observed. Analysis by several researchers has found that on loans with re-set 

features that have defaulted, the vast majority of defaults occurred long before the 

re-set. Of course some will argue that this is due to such loans being ‘‘unaffordable’’ 

23 

from the time of origination. Yet according to statistical analysis done at the Boston 

Federal Reserve, the borrower’s initial debt-to-income (DTI) had almost no predictive power in terms of forecasting subsequent default. 

Additionally if payment shock was the driver of default, the fixed rate mortgages 

without any payment shocks would display default patterns significantly below that 

of adjustable rate mortgages. When one controls for owner equity and credit score, 

the differences in performance between these different mortgage products largely 

disappears. To further illustrate this point, consider that those mortgages generally 

considered among the ‘‘safest’’—mortgages insured by the Federal Housing Administration (FHA), which are almost exclusively fixed rate with no-prepayment penalties 

and substantial borrower protections, perform, on an apples to apples basis, as 

badly as the subprime market in terms of delinquencies. 

The important shared characteristic of FHA and most of the subprime market is 

the widespread presence of zero or very little equity in the mortgage at origination. 

The characteristics of zero or negative equity also explain the poor performance of 

most subprime adjustable rate mortgages. Many of these loans also had little or no 

equity upon origination, providing the borrower with little equity cushion when 

prices fell. Recognizing the critical role of negative equity of course raises the difficult question as to what exactly it is that homeowners are losing in the event of 

a foreclosure. 

‘‘Unnecessary’’ foreclosures 

Central to the arguments calling for greater government invention in the mortgage market is that many, if not most, of the foreclosures being witnessed are ‘‘unnecessary’’ or avoidable. Generally it is argued that investors and loan servicers do 

not face the same incentives and that in many cases in would be better for the investor if the loan were modified, rather than taken to foreclosure, but still the 

servicer takes the loan to foreclosure. 

The principal flaw in this argument is it ignores the costs to the lender of modifying loans that would have continued paying otherwise. Ex Ante, a lender has no 

way of separating the truly troubled borrowers, who would default, from those that 

would take advantage of the system, if they knew they could get a modification just 

by calling. As long as potentially defaulting borrowers remain a low percentage of 

all borrowers, as they are today, it is in the best interest of the investor to reject 

many modifications that might make sense ex post. In addition, lenders may institute various mechanisms to help distinguish troubled borrowers from those looking 

to game the system. 

It is also claimed that the process of securization has driven a wedge between the 

interests of investors and servicers, with the implication that servicers would be 

happy to modify, and investors would prefer modifications, but that the pooling and 

servicing agreements preclude modifications or that servicers fear being sued by investors. The first fact that should question this assumption is the finding by Boston 

Fed researchers that there is little difference in modification rates between loans 

held in portfolio versus those held in securitized pools. There is also little evidence 

that pooling and servicing agreements preclude positive value modifications. According to recent Credit Suisse report, less than 10 percent of agreements disallowed 

any modifications. While the Congressional Oversight Panel for the TARP has been 

critical of industry efforts, even that Panel has found that among the sample of 

pools it examined with a 5-percent cap on the number of modifications, none of the 

pools examined had actually reached that cap. If few pools have reached the cap, 

it would seem obvious that the 5 percent cap is not a binding constraint on modifications. In many instances the pooling agreements also require the servicer to act as 

if the servicer held the whole loan in its portfolio, raising substantial doubts as the 

validity of the ‘‘tranche warfare’’ theory of modifications. 

A careful review of the evidence provides little support for the notion that high 

transaction costs or a misalignment of incentives is driving lenders to make foreclosures that are not in their economic interest. Since lenders have no way to separate troubled borrowers from those gaming the system, some positive level of negative value foreclosures will be profit-maximizing in the aggregate. 

Is cramdown the answer? 

The high level of foreclosures has left many policymakers and much of the public 

understandably frustrated and searching for answers. One ‘‘solution’’ that has been 

regularly presented is to allow bankruptcy judges to reduce the principle balance 

of a mortgage loan to reflect the reduced value of the home, the so-called 

‘‘cramdown.’’ For a variety of reasons, I believe allowing cramdowns would have adverse market consequences while also providing little real relief to borrowers. 

24 

Given the unemployment-driven nature of most foreclosures, and the inability of 

unemployed individuals to put forth a repayment plan under Chapter 13 of the 

bankruptcy code, it appears that cramdowns would do nothing for those most in 

need, the unemployed. 

As proponents of cramdowns point out, vacation and investment properties can 

currently be subjected to cramdown. This raises the question: why aren’t the significant number of foreclosures involving investment properties being resolved via 

bankruptcy rather than the foreclosure process? The most likely reason is that property speculators realize that even a reduced mortgage value is likely to exceed the 

home value in the near future. With home prices still declining, a crammed down 

mortgage would be underwater in few months. The incentive facing most speculators is often to simply walk away and let the home fall into foreclosure. This 

would not be a significant problem if investment properties did not constitute approximately 40 percent of current foreclosures. 

At this point, it is worth reflecting on these two points: cramdowns do little or 

nothing to help the unemployed and speculators can already pursue that route, but 

largely choose not to, as it isn’t in their economic interest. With speculators making 

up about 40 percent of foreclosures, and the unemployed likely making up to around 

50 percent, it becomes apparent that at minimum cramdowns will do little to help 

at least 90 percent of borrowers currently in foreclosure. 

The main function of a cramdown would be to serve as reduction in outstanding 

principle, thereby lowering the monthly payment. Even significant payment reductions may not offer long-term solutions. According to the most recent OTS/OCC 

mortgage metrics report, of those delinquent borrowers seeing a payment reduction 

of 20 percent or more 37.6 percent were again delinquent twelve months later. Continuingly re-modifying the same loan is not a solution for the borrower, investor, or 

lender. 

We often use the term ‘‘speculator’’ to refer to purchasers that do not intend to 

live in the home and often quickly ‘‘flip’’ the home to make a quick profit. That definition is useful, but far too narrow. Many borrowers purchasing a home for occupancy did not do so solely for the consumption benefits of homeownership, but also 

for the investment returns. They were both consumers and speculators. As these 

speculators were generally not offering to share potential gains with their lenders, 

it is not clear why they should be allowed to share their losses. 

Of the remaining borrowers, who were neither pure speculators nor unemployed, 

many of these borrowers invested little of their own cash in the home purchase. 

Once again, the empirical evidence demonstrates that minimal or zero 

downpayments on the part of borrowers are the leading mortgage characteristic in 

terms of predicting default. If borrowers, who have placed no money of their own 

at risk, are allowed to reduce their losses via cramdown, while also reaping any future appreciation, we are only encouraging future speculation in our housing markets. We should not act surprised if the next housing cycle of bubble and bust is 

even worst than the most recent. 

Proponents of cramdown have also misrepresented the treatment of vacation 

homes and investor properties during a Chapter 13 bankruptcy. While the current 

Bankruptcy Code does allows secured debts other than those secured by a principal 

residence to be crammed down; if they are crammed down, the debtor is required 

to pay off the entire amount of the secured claim within the three-to-five year duration of the Chapter 13 plan. The debtor does not have 30 years to pay off a modified 

mortgage as the original loan term may provide. The borrower in these instances 

is required to pay the entire amount of the secured mortgage by the end of their 

payment plan. This is one of the reasons many owners of investment choose to walk 

way rather than seek bankruptcy protection. 

Cramdown is often presented as simply a way to put pressure on lenders to negotiate, or to ‘‘bring them to the table.’’ It is no more appropriate, in a free society, 

to use the coercive stick of the state to bring lenders to the table, than it would 

be to use that stick to bring borrowers to the table. A government focused on the 

common good, the general welfare, does not choose sides in private disputes. 

Less tangible, but perhaps more important in the cramdown debate is the message it sends to market participants, particularly investors. It has long been established in law, and in common sense for that matter, that the body of law relevant 

to and existing at the time of a contract enters into and comprises part of that contract. To change by legislative fiat the terms of contracts that have already been 

agreed to is to change the contract itself. I fear if the cramdown were to become 

law, we send a signal that any private agreement is subject to being re-written depending on which way the political winds are blowing. This is a sure recipe to reduce investment and the overall reliance of market participants on contract. In 

order to rebuild public trust in both our markets and our government, I believe ConVerDate Aug 31 2005 13:04 Feb 23, 2010 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 H:\WORK\COMM\070909\50864.000 HJUD1 PsN: 50864
25 

gress should affirm its own trust in the voluntary decisions of private parties. To 

do otherwise is to weaken the very bonds that make a free and civilized society possible. 

In speaking of investors, it is also important to remember that cramdown is not 

simply an issue of taking from lenders and giving to borrowers. As bad as that 

would be, it is made all the worse as the ultimate investors in mortgage related assets that will suffer losses rather than the largest banks. As the largest banks are 

mostly just servicers and not the ultimate investor, they will pass along any losses 

from cramdown to investors. As we have seen in the recent auto restructuring, often 

these investors are not large corporations or wealthy individuals; they are pension 

funds representing the retirement savings of millions, usually retired state and local 

government employees. I have yet to hear a compelling reason why retired teachers 

and firefighters should be forced to bear the burden of irresponsible borrowing and 

lending. 

NON-COERCIVE SOLUTIONS

I am concerned that inherent in the title of this afternoon’s hearing is the assumption that if voluntary modifications are not working, we must look to coercive 

solutions. The force of the State must be applied to those unwilling to see the light. 

This assumption should trouble anyone who values a free society. I urge Congress 

to look for only those solutions that are voluntary. 

Some voluntary alternatives to consider: encouraging bank regulators to give 

lenders more flexibility to lease out foreclosed homes to the current residents. Typically banks come under considerable pressure from their regulators not to engage 

in long term property leasing or management, as that activity is not considered a 

core function of banks. I believe we can avoid the larger debate of banks being property managers by giving banks greater flexibility in retaining properties with nonperforming mortgages as rentals, preferably to current residents. 

In order to separate out deserving borrowers, who are trying to get back on their 

feet, from those simply walking away from a bad investment, Federal lending entities, such as FHA and the GSEs, should engage in aggressive recourse against delinquent borrowers who have the ability to pay, but simply choose not too. We 

should make every effort to turn away from becoming a society where legally incurred debts are no longer obligations to be honored but simply options to be exercised. 

CONCLUSIONS

In concluding my testimony, I again wish to strongly state: the current foreclosure 

relief efforts have largely been unsuccessful because they have misidentified the underlying causes of mortgage default. It is not exploding ARMs or predatory lending 

that drives the current wave of foreclosures, but negative equity driven by house 

prices declines coupled with adverse income shocks that are the main driver of defaults on primary residences. Defaults on speculative properties continue to represent a large share of foreclosures. Accordingly for any plan to be successful it must 

address both negative equity and reductions in earnings. Cramdown fails on both 

accounts. I thank you for your attention and welcome your questions. 

Primary References: 

Foote, Gerardi, Goette and Willen (2009) ‘‘Reducing Foreclosures: No Easy Answers,’’ National Bureau of Economic Research working paper 15063. 

Cordell, L., K. Dynan, A. Lehnert, N. Liang, and E. Mauskopf (2008). The Incentives 

of Mortgage Servicers: Myths and Realities. Finance and Economics Discussion 

Series, Federal Reserve Board 46. 

Foote, C., K. Gerardi, L. Goette, and P. S. Willen (2008). Just the facts: An initial 

analysis of subprime’s role in the housing crisis. Journal of Housing Economics 

17 (4). 

Foote, C., K. Gerardi, and P. Willen (2008). Negative equity and foreclosure: Theory 

and evidence. Journal of Urban Economics 6 (2), 234–245. 

Gerardi, K., A. Shapiro, and P. Willen (2007). Subprime outcomes: Risky mortgages, 

homeownership experiences, and foreclosures. Federal Reserve Bank of Boston 

Working Paper 07–15. 

Hunt, J. (2009). What do subprime securitization contracts actually say about loan 

modification. Berkeley Center for Law, Business and the Economy. 

Kau, J. B., D. C. Keenan, and T. Kim (1994). Default probabilities for mortgages. 

Journal of Urban Economics 35 (3), 278–296. 

26 

Sherlund, S. (2008). The past, present, and future of subprime mortgages. Finance 

and Economics Discussion Series 2008–63, Federal Reserve Board. 

Mr. COHEN. Our final witness is Irwin Trauss. For the past 10 

years, he has worked for the Philadelphia Legal Assistance, providing free legal services to low-income Philadelphians. As supervisor of the Consumer Housing Unit there, he works with Community Legal Services to provide legal services to an eligible low-income population of approximately 400,000 in Philadelphia. For the 

20 years preceding his time there, he worked for Community Legal 

Services in Philadelphia where he co-managed the law center in 

the Northeast. For a time, he was also chief of the law center’s 

Consumer Housing Unit. 

Thank you, Mr. Trauss, and I appreciate your testimony. 

TESTIMONY OF IRWIN TRAUSS, MANAGER, ATTORNEY FOR 

THE CONSUMER HOUSING UNIT, PHILADELPHIA LEGAL ASSISTANCE, PHILADELPHIA, PA 

Mr. TRAUSS. Thank you, Mr. Chairman and Members of the 

Committee for the invitation to appear this afternoon to describe 

our experience with voluntary mortgage modifications, particularly 

since the Making Homes Affordable plan came into effect on March 

4 of this year. 

In addition to supervising the Consumer Housing Unit of Philadelphia Legal Assistance, I also am primarily responsible for running the Save Your Home Philly Hotline, which over the past 15 

months, as part of the Philadelphia Court of Common Pleas Mortgage Foreclosure Diversion Pilot Program, has handled about 

10,000 calls from Philadelphia homeowners facing the loss of their 

homes to foreclosure. Also, for the past 32 years, it has been my 

primary practice, legal practice, to represent low-income homeowners in bank foreclosures. I have done that by litigating in State, 

Federal and bankruptcy courts. 

Before I go on with some of the comments that I have prepared 

to answer the question that I think I was asked to address, I just 

want to make a comment about Dr. Calabria’s testimony about 

cramdowns. I just want to make two quick points about that. 

One, in the Third Circuit, except as a result of some changes in 

the law, cramdowns were largely available in the Third Circuit— 

and still are—with respect to mortgages in certain circumstances 

since 1978. They were largely available in the Third Circuit due to 

Vanguard’s allowing cramdowns, and they had no effect—no effect—either on the pricing or on the availability of mortgages. 

Secondly, the notion that comparing the experience of speculators, with respect to bankruptcy, to the experience of homeowners 

is completely inappropriate. In my personal experience of representing homeowners, as I say, for my long career, the availability 

of cramdowns, particularly for low-income homeowners with lowvalue homes, is extremely helpful in the ability for them to save 

their homes. 

At one point in my practice, a large majority of the chapter 13 

cases that I filed for low-income homeowners in Philadelphia involved cramdowns of mortgages, which indeed helped them save 

their homes. 

27 

I think the reason that I was asked to testify was to broaden the 

perspective as somebody who day-to-day represents homeowners 

attempting to save their homes. From that perspective, the question that underlies this hearing is that voluntary modifications will 

not help homeowners save their homes in the numbers required to 

significantly stem the tide of foreclosures that has been alluded to. 

Substantive changes in the law, such as proposed amendments 

to the Bankruptcy Code, that require loans to be modified to make 

them affordable are needed to prevent foreclosures in the numbers 

necessary to prevent the erosion that is occurring in our communities and the erosion of our economy. Unless homeowners have leverage to force a favorable result, lenders will continue to avoid 

meaningful modifications. 

While Making Homes Affordable has made a significant difference in a small percentage of the cases that we have seen in 

Philadelphia, which is reflective of the nationwide percentage, I believe, it has not resulted in a significantly greater willingness on 

the part of the servicers to enter into modifications that meaningfully reduce mortgages. It has not resulted in the willingness of 

lenders to reduce principal, and it has not even resulted in a willingness of lenders to reduce the amount of principal that is subject 

to interest. 

I say this based not only on my personal experience but also on 

my position as a supervisor of the Hotline and from my involvement in the creation and operation of the Diversion Program that 

is being run in the courts in Philadelphia. 

The Diversion Program, which is described at length in my written testimony, is a program that requires conciliation prior to a 

loan being foreclosed and prior to a foreclosure sale being able to 

take place. The lender and the borrower are required to sit down 

with a JPT who is available to try to work out an alternative resolution. This program is primarily voluntary, and it cannot impose 

a resolution on an unwilling mortgagee. 

It has been my experience that, absent some leverage that can 

be applied by the homeowner to the lenders, the lenders are ordinarily unwilling to significantly compromise mortgages to make 

them affordable for the long run. They usually do so when they are 

forced to, either by aggressive advocacy, by the prospect of litigation, by litigation that actually frustrates their ability to foreclosure, or, in some cases, by pressure that is applied directly or 

indirectly by the court through the Diversion Program. 

The implementation of the Making Homes Affordable Program 

has resulted in some wholesale delays in foreclosures, which has 

been helpful to homeowners, but it has not meaningfully affected 

this dynamic. It is clear that with or without Making Homes Affordable, homeowners represented by knowledgeable advocates, and 

who are backed up by counsel who are prepared to litigate, get resolutions that are simply not available to homeowners who are not 

so represented, but resolutions are available if pressed. 

The arrival of Making Homes Affordable has not significantly affected the way servicers and their counsel operate. For example, 

Bank of America has signed a Servicer Participation Agreement, 

which requires it to make Making Homes Affordable available to 

homeowners in non-GSE circumstances. Despite this, they have reVerDate Aug 31 2005 13:04 Feb 23, 2010 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 H:\WORK\COMM\070909\50864.000 HJUD1 PsN: 50864
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fused to do so, and they inform homeowners that it is only available if they have a GSE loan. Thus, properties that should be protected by this program are not being. This is not an isolated event 

and we have lots of examples, which are in my testimony, regarding the missed application of the program. 

In closing, let me just say that absent significant leverage on the 

part of homeowners to force a change in the behavior of the majority of servicers, they will continue to avoid meaningful modification, and that contrary to what has been expressed here, the existence of the availability of the cramdown actually will complement— 

as the Obama administration, I think, has recognized—the voluntary efforts by creating the leverage that is necessary to get 

lenders to modify loans and to prevent foreclosures at the rates 

that we need them prevented. 

Mr. COHEN. Thank you, Mr. Trauss. 

[The prepared statement of Mr. Trauss follows:] 

29 

PREPARED STATEMENT OF IRWIN TRAUSS


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Mr. COHEN. Now we will begin our series of questioning, and I 

will start the questioning. The first question I have is for Dr. 

Calabria. 

In your testimony, you mentioned that of the vacation and investment properties, in grouping them together, 40 percent of current foreclosures fall into that class. In your testimony you say this 


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would not be a significant problem if investment properties did not 

constitute approximately 40 percent of current foreclosures. 

First, I would like to know the source of your numbers and also 

your numbers where you suggest that speculators make up about 

40 percent of foreclosures and that the unemployed likely—likely— 

make up around 50 percent. Where do you get those numbers? 

Mr. CALABRIA. The 40 percent is from Freddie Mac. The close to 

50 percent is a variety of sources in the mortgage industry. A lot 

have come from the mortgage and bankruptcy associations. Others 

have come from other sources. I would be happy to kind of get you 

actual citations on that. There have been a variety of services that 

have looked at the causes of mortgage default. So the employment 

part, that is where I have gotten those surveys from. 

I also think, if you look at—and I did not bring the data with 

me. If you take a map and look at where initial unemployment 

claims are, and you map that to where initial foreclosures are, you 

will see a huge overlay. So it should not be surprising to anybody 

that where you have had a complete jump in unemployment, you 

also see a very large jump in foreclosures. They very much match 

each other in terms of geography. 

Mr. COHEN. Thank you, sir. 

In your written testimony, you say that borrowers purchasing a 

home for occupancy did not do so solely for the consumption benefits of home ownership but also for investment returns. They were 

both consumers and speculators. 

Under your definition, what homeowners are not speculators? 

Mr. CALABRIA. I guess to some extent we all are, but I think that 

is one of the policy changes that I think we need to change. I mean, 

one of the things that has gotten us to where we are today is that 

in the last 10 years, or even further back, we had an attitude in 

this country that the market for home ownership was just a casino. 

You know, get in quick; flip it, you know. How many shows did we 

see come on TV like ‘‘Flip This House’’? 

I think we really need to turn back in terms of a public policy 

perspective in Washington, where we say home ownership is for 

stable communities where you put a life investment in, and this is 

not something that you get into and flip 6 months later. That, to 

me, has been part of the reason we are where we are today, which 

is that we have treated homes like they were casinos. I think we 

really need to move beyond that and change many of the things in 

our Tax Code, many of the things in our financial services policy 

that encourage that. 

Mr. COHEN. Thank you, sir. 

If the current foreclosure crisis were caused by unemployment 

and other ‘‘traditional’’ factors as you describe them, why did the 

number of foreclosures increase so dramatically during a good economy? 

Mr. CALABRIA. First, we have to keep in mind there is always a 

steady level of foreclosures during a good economy. The reason that 

it increased at that time is during a good economy, when you have 

positive house price appreciation, you do not have to go to foreclosure. Very few people will actually walk away from their homes 

when there is positive equity. If you have lost your job, you are 

38 

going to do much better in a short sale, and you will be able to take 

some of the equity. 

So when you have a decline in house prices—and really, the decline in house prices started before we were in the recession. It was 

2005-2006 where you had the housing market peak in terms of 

house price appreciation. So the housing market turned at least a 

year before the economy actually turned, and it was the negative 

equity situation. Even in a good economy, people lose jobs all the 

time. But in a good economy and in an increasing housing market, 

you have other options to refinance. That went away when the 

housing market turned down. 

Mr. COHEN. Thank you. 

Mr. Carr, do you have any thoughts on Dr. Calabria’s theory that 

this was all just normal, like global warming? 

Mr. CARR. I have several comments. I am not exactly sure where 

to start, but I guess I would just say that the truth is, between two 

sides of the table, usually somewhere in between. So while I can 

agree with a number of statements that he has made, particularly 

now about the unemployment-driven aspect of the foreclosure crisis 

and the significance of loans being upside down, I would offer a 

slightly different perspective. 

That is that this foreclosure crisis began many years ago, first 

in Black and Latino communities. It was driven by payment shock 

of the mortgages, combined with things like prepayment penalties, 

second liens, no escrow set aside to protect borrowers who were entering the market, excessive broker fees, and other predatory features. 

I also agree that there were a lot of consumers, including investors and speculators, who were into the market and who did turn 

it into a casino; but I would say that that is one of the most profoundly positive reasons for putting forward a consumer financial 

protection agency so as to make sure that consumers cannot treat 

their homes in such a manner and on such a massive scale that 

it actually implodes the credit markets and destroys everyone’s 

home ownership values. 

The final argument or point I would make is the idea that 

servicers now are not modifying loans because they cannot identify 

or understand how to modify a loan. It is an odd statement because 

nonprofit counselors do that every single day. We at the National 

Community Reinvestment Coalition engage with servicers every 

single day. It is not a mystery, and it is not rocket science. It is 

standard, old-fashioned, good underwriting practices. When you collect the information from consumers—their credit scores, their income and other financial attributes—you know which borrowers 

are, in fact, solvable in terms of a loan modification and which ones 

are not. 

Then the final point that I would make, even though I have already said this is my final point, is as to the notion of cramdowns. 

It is just amazing to me the people who say, if you somehow adjust 

the principal in Bankruptcy Court, you will undermine the credit 

markets. Those people are not paying attention to the news. Those 

credit markets have already been destroyed. The most significant 

thing that we can do for this credit market right now is in this 

39 

foreclosure crisis. The way we end that foreclosure crisis is, in one 

way, putting into place a stick. 

I think one of the most significant values of bankruptcy reform 

is not necessarily the people who go through bankruptcy. It is 

servicers now knowing that the American public expects them to 

respond to the crisis we are in and to do something about this foreclosure crisis before we see a whole new wave of bank losses that 

ultimately could potentially cripple the U.S. economy, the Treasury 

and other major financial institutions. 

There is a lot of concern out there despite all of the idea that the 

economy is recovering. If anyone looks at the footnotes and the 

small print, you will see that this economy is on life support and 

so is the banking system. 

Mr. CALABRIA. Can I respond a little bit if you don’t mind? I 

know it is your time. 

Mr. COHEN. With those encouraging words, I think we could use 

some response. 

Mr. CALABRIA. Thank you. 

Let me say I want to clarify, because I think there has been a 

misunderstanding. 

When I am saying lenders do not know, it is they do not know 

who. If you go and say anybody who calls me gets a 10 percent reduction in their payment, a lot of people are going to call who will 

never default, so it is very difficult for the lender ahead of time. 

I do want to emphasize. One of the problems throughout this 

mortgage meltdown has been the capacity of the mitigation offices 

of the lenders. You know, I myself yelled at lenders a year and a 

half ago. ‘‘You guys need to staff up. You are going to get phone 

calls, and you are not going to be able to handle them.’’ 

I actually think one of the problems of the Obama foreclosure 

plan is you have this whole thing where you refinance Freddie and 

Fannie loans for people who are not even in any imminent danger 

of foreclosure, and what that gives the incentive for a lender to do 

is I am going to refinance this person because, okay, they have got 

100 percent equity; but Fannie takes the risk, and I will make 

origination fees on it, and I will spend my time doing that rather 

than working with the hard cases. 

You know, I have described one of my conversations with the Administration. Their approach is reverse triage: Let us take care of 

the people who need help the least rather than those the most. I 

do want to make a—— 

Mr. COHEN. Let me ask you this, Doctor—— 

Mr. CALABRIA. Sure. 

Mr. COHEN [continuing]. If Mr. Franks will indulge me, because 

you asked us. 

You know, the people who need the help the most seem like they 

would be the people who are going into bankruptcy. They are willing to go into bankruptcy, take all of their assets and all of their 

life and throw it up to the court and public eye and say, hey, you 

take over control of my life for a period of time and tell me what 

I can spend and what I cannot spend and what I did. And you can 

only do this every so often. 

Doesn’t it seem like those people maybe would be the ones that 

would benefit if they are that much distressed? 

40 

Mr. CALABRIA. My concern is that—my understanding of chapter 

13 is you need to come up with a repayment plan. If you have lost 

a job, it is pretty hard to kind of come up with a repayment plan 

because you do not have the income. That is why, you know, I keep 

saying that I think we need to find a way—and, you know, one of 

things that I think we need to think through—— 

Mr. COHEN. Let us assume that this is not a person who has lost 

a job. This is a person who has still got a job. Their adjustable rate 

mortgage went up to a point that they could not afford it, or maybe 

they took a 10 percent cut, like so many people have at businesses, 

to continue. 

What is the situation with them? Would they not benefit? 

Mr. CALABRIA. Potentially. 

Let me preface with the reason I talk about the employment, as 

long as we are going to hear numbers about 2 million foreclosures 

and such, you know, we need to keep in mind, you know, if this 

could help 5 percent of the people, then maybe you need to debate 

it in those terms, and you might even want to do something if it 

only helps 5 percent of the people; my point being is you need to 

go ahead of time and be honest that this is not going to help 80 

percent of the people, this is going to help 5 percent of the people. 

My concern is I do think—and I think there are two different debates between have we learned that this did not work and perhaps 

we should change it going forward between going backward, because I do think—to me, I think a fundamental principle of law is 

that—when the law that is outstanding at a time of contract incorporates into that contract, and for me to go back and change it— 

I think there is a very different argument between saying, okay, we 

think there should be cramdown for principal residences. You do 

that going forward for obligations that have not been entered into. 

I want to comment a little bit on something that Jim has said 

and that a lot of people have said, and I think it is important. We 

quite often have heard sort of we need to put a stick behind the 

lenders. You know, that kind of concerns me. My vision of government is you look at the common welfare. You do not choose sides. 

I mean, for instance, we know that a very large impetus for higher 

foreclosures in California is that if you walk away from a home in 

California, they cannot come after you for the rest of it. They take 

the home. They do not become a creditor for the rest of it. In other 

States—there are about a dozen States like that where you cannot 

get a deficiency judgment, and that encourages it. 

My perspective would be, while I think that law encourages foreclosure, I would not go back and rewrite it. I would not take a stick 

behind the bar in that case. So I think taking a stick to anybody, 

you know, I find problematic. I mean we should be trying to come 

up with consensual, noncoercive solutions here rather than trying 

to force people. 

Mr. COHEN. Thank you, Doctor. I think our time is beyond, but 

I appreciate the information. 

I now would like to recognize for questioning Mr. Franks, the 

Ranking Member. 

Mr. FRANKS. Well, thank you, Mr. Chairman. 

Dr. Calabria probably left off where I will start, and that is this 

notion of retroactive law. 

41 

You know, sometimes I think that those colleagues on the left believe that those of us on the right think that only competition is 

the fundamental drive of economy, and that is really not true. I believe that the fundamental drive of a free market economy is a 

thing called trust. I believe that the people who have capital trust 

government to be able to enforce their contracts and to be able to 

act rationally and not to come back and change the rules in the 

middle of the game. 

Mr. Delahunt mentioned bankruptcy, that it has been a part of 

our scheme for a long time, and I completely concede that. What 

is different about this is that it is retroactive. When those bankruptcy laws are already in place, lenders take those things into 

consideration. They are able to actuarially or they are able to kind 

of extrapolate what the possible risks are to bankruptcy and take 

that into consideration, and that is the big challenge that we have 

here. 

If we do things that scare those with capital—I know that capitalists are bad, but we forget that those are all of the people who 

are the investors in this country. Incidentally, I said that tongue 

in cheek, of course. The reality is that if we scare the capitalists 

away, they will take their capital out of the system, and if they do, 

only government will be left to deal with the result. 

I want to thank Mr. Carr for pointing—you know, for perhaps 

being a little bit different from my perspective, but he did understand that a lot of the present mortgage problem is driven by unemployment, and I appreciate that. 

Dr. Calabria, I have to tell you: Your opening statement, rarely 

have I seen a more out-of-the-park explanation. I think, if all of us 

could carefully analyze what you said, we probably would all come 

out on the same page. And I do not know that you and I would 

have to move at all, but that is just a guess. 

Mr. Chairman, under the Community Reinvestment Act, the 

Clinton administration, Fannie Mae and Freddie Mac leaned on 

lenders to grant more and riskier mortgages to less creditworthy 

borrowers. That is an undeniable reality. Bank regulators and 

HUD even forced banks to meet quotas for these riskier loans or 

jeopardize their ratings as lenders. To meet these requirements, 

banks essentially had little choice but to make bad loans. 

For example, no-money-down loans became common under the 

CRA, Community Reinvestment Act, regime because it was often 

the only way they could make those loans to fit that quota. And 

of course, not surprisingly, the result was a train wreck for everyone. 

What we had was not so much predatory lenders preying on poor 

borrowers but a predatory government preying on banks to force its 

political ends and, thereby, many times, destroying poor borrowers. 

The mortgage cramdown legislation, I believe, threatens the same 

result. 

Now, Dr. Calabria, let me just ask you—and again, I have never 

seen, since I have been on this Committee, something like the 

cramdown legislation more thoroughly dismantled by an opening 

statement, okay? 

Mr. CALABRIA. Very kind of you to say. 

42 

Mr. FRANKS. So, if we simply, sir, let the natural foreclosure 

process work, will the housing market, in your opinion, stabilize 

and the foreclosure wave subside faster than if we intervene as a 

government? In other words, give me your juxtaposition here. 

Mr. CALABRIA. One of the very key factors to keep in mind, both 

in terms of the lender and the borrower, is not as much the absolute level of house prices but the direction, the incentive. I mean, 

for instance, one of the incentives for a lender would be, okay, you 

are going—there might be a redefault. If I take the home today, it 

might be worth more if I sell it than if I take it 6 months or a year 

from now. 

So in a declining housing market, the incentive for the lender is 

actually to foreclose as quick as possible; and also for the borrower, 

if your time horizon—depending on your time horizon, if you are 

looking at, well, you know, I can sit in this home, but it is going 

to lose value. That is the one thing about the cramdown. If you 

take it down to where they have zero equity, as I said in my opening statement, they could in 6 months be underwater. Whereas, if 

you get to a point in the housing market where the only direction 

is up, then the incentives of both the lender and the borrower are 

actually greater to stay in the home. 

So my own perspective is that I think we want the housing market to actually hit—and people have talked about the dangers of 

overshooting, and those are very real dangers, but I actually think 

the dangers of not overshooting are worse. So the quicker we hit 

bottom, the quicker we can sort of go back up, and I think that that 

is a very important part. So I think we need to keep that in mind. 

Mr. FRANKS. All right. Let me try to—excellent answer. Let me 

try to cram in one more question. 

Many portray the mortgage cramdown proposal as no cost to consumers, that it will not cost consumers anything. 

What are the hidden costs of cramdown for regular people, you 

know, due to the impact on mom-and-pop investors and the mortgage-backed securities, home mortgage rates, and other factors? 

What are the hidden costs? Is it at no cost to the average person? 

Mr. CALABRIA. Well, let us start with the first direct cost to the 

taxpayer. We now, via Fannie, Freddie and the Federal Reserve, 

are the largest single holders of mortgage-backed assets in the 

world. I have had conversations with folks over at the Federal Reserve. They have factored into their portfolio cost what they think 

the cramdown will do to them. So they think they are going to lose 

money. 

Freddie Mac announced that their projections were going to be, 

you know, potentially tens of billions, so all of these—and we were 

picking it up. The important thing—it would be one thing if 

Freddie and Fannie were simply private companies. We are 

Freddie and Fannie, and the taxpayer will back that. So first of all, 

there are direct taxpayer costs to this. 

Second, you know, most of it will probably not be the increase 

of rate, but it will be the increase of down payments you will see 

going forward, to sort of modify that effect of cramdown. You can 

forget getting a zero down payment, and that may or may not be 

a good thing, but you will definitely see people move toward seeing 

a 20 percent down payment or something like that. And you even 

43 

are seeing that in many parts of the market now, and the reason 

that that is a huge obstacle is we know from a variety of research 

that the number one obstacle to any anybody achieving home ownership, particularly in minority communities, is coming up with a 

down payment. 

So at some point—and I do think it is important for borrowers 

to have skin in the game, but at some point you will have such a 

requirement for down payment that you will have adverse impacts 

upon home ownership rates. So that is something to kind of keep 

in mind. 

I think the broader picture in this that concerns me is that, is 

this the end? What are you going to tell investors? Well, we are 

going to change the terms of the contract because we do not like 

it, because there is overwhelming public policy in that. 

I look at it this way: You know, when we want to build a road, 

when we take somebody’s land for the public good, we compensate 

them. If you want to take somebody’s mortgage rights for the public good, you compensate them. It is a very simple concept, and I 

think that that is the approach that needs to be taken, if we are 

going to do that. 

I think, you know, if you look at Professor White’s work, he 

makes a lot of strong arguments there. There are externalities 

there, but if you are going to take those externalities, you need to 

compensate for it because those costs are going to be shifted to 

somebody. 

Mr. FRANKS. Thank you, Mr. Chairman. Let me just say we learn 

something every day, and I have just learned that the taxpayers 

now are the largest mortgage holders in the world. I do not know 

about you, but that does not encourage me. 

Mr. COHEN. Thank you, sir. 

Now I would like to recognize Mr. Delahunt. 

Mr. DELAHUNT. Thank you, Mr. Chairman. 

I think we have a lot more to learn, and I agree with the Ranking Member. I would like to learn about how government created 

this mess. 

Can you help me, Mr. Carr? Particularly CRA. You put some statistics in your testimony that seem to contradict what I just heard, 

but maybe government is what caused this problem. So maybe you 

can tell us that your statistics were inaccurate and that you unintentionally misrepresented to the Committee what the real facts 

are. I thought your testimony, Mr. Carr, was really a home run as 

well. 

Mr. CARR. Thank you. 

Mr. DELAHUNT. It was a grand slam. That is what I call it. With 

that, Mr. Carr, can you tell us about the CRA and about how that 

has brought forth this economic tsunami that happened to occur 

during the past 8 years of the Bush administration? 

Mr. CARR. Sure. It is actually the Federal Reserve Board statistic 

that only 6 percent of high-cost loans to low- and moderate-income 

households were covered under CRA, and so it is just amazing that 

CRA continues to be the fault of these loans. The reality of it is 

that consumer groups for years were arguing—— 

Mr. DELAHUNT. Can you repeat that for me—— 

Mr. CARR. Sure. 

44 

Mr. DELAHUNT [continuing]. Because I think it is important that 

we all really listen to what the facts are. 

Mr. CARR. Six percent of the high-cost loans to low- and moderate-income households were covered under CRA. 

Mr. DELAHUNT. So there is only 6 percent? 

Mr. FRANKS. Those are the ones that failed. Just kidding. 

Mr. DELAHUNT. No. See, but that is his schtick. You know, we 

continue to hear this because some—you know, it is a philosophical 

perspective, and that is really what it comes down to. 

Mr. CARR. Right. 

Mr. DELAHUNT. When you are looking for whipping boys, you 

know, the CRA is just a prime target. 

What you are telling us as to what the facts are, as opposed to 

just the assertion and the allegation, is that only 6 percent of the— 

you finish the sentence for me. 

Mr. CARR [continuing]. High-cost loans to low- and moderate-income borrowers were covered under CRA. 

Mr. DELAHUNT. That is kind of reassuring. So the other 94 percent were not covered by the CRA. Thank you. 

Can you proceed? We will get back to you, Mr. Calabria. 

Mr. CARR. There are other statistics, such as from the Center for 

Responsible Lending, that show that less than 10 percent of highcost subprime loans made between 2008—between 1998 and 2006 

were to first-time home buyers. But I think, more importantly, it 

is that there is just a treasure trove full of research and papers 

that track all the way back to the mid-1990’s that point out these 

unfair and deceptive lending practices by nonprofit organizations; 

and I think it is important to remember that the State of North 

Carolina actually put into place a comprehensive predatory lending 

law back in 1999, and several other States attempted to protect 

their residents from these obvious unfair and deceptive practices, 

again, going back 10 years. 

So it was not like it was just predictable; it was predicted. And 

the nonprofit and the the development community were actively 

working to strengthen CRA rules specifically so that unfair and deceptive lending would not occur under that act, and we are still 

working—— 

Mr. DELAHUNT. Mr. Carr, were they successful in doing that to 

a better degree than the other non-CRA institutions? 

Mr. CARR. Well, most of the lending ultimately went out to nonCRA institutions or to affiliates of CRA-covered institutions that 

were not counted for CRA purposes. 

I think that there are also a couple of other things, I think, to 

keep in mind about this. 

Mr. DELAHUNT. I have got to make—you know, with CRA, we 

have got to put this to bed one way or another, and I think the 

members of the panel have to really come together to agree upon 

what the data shows, whether I am correct or Mr. Franks is correct 

or whomever is correct. 

Compare for us, if you will, the performance of loans that are 

issued under CRA-regulated institutions and those that are issued 

under non-CRA institutions or mortgage lenders. 

Mr. CARR. Right. Well, Dr. White—I do not want to put him on 

the spot. He might have more specific statistics. What we know 

45 

from our research is that, in fact, they perform significantly better. 

Although in this—— 

Mr. DELAHUNT. That is what I want to hear. 

Mr. CARR. In this environment, however, everyone’s loans are 

going into foreclosure, and so depending on what year you look—— 

Mr. DELAHUNT. I understand that. In this environment, everybody is going down. You know, we talk about negative equity. Everybody is underwater, it is just not the subprime. But the historical data indicates that the CRA-regulated institutions did better 

than the non-CRA. 

I yield to my friend from Arizona. 

Mr. FRANKS. Keep in mind that the 6 percent of those loans that 

were under CRA, that were extended under CRA, Mr. Delahunt, 

caused the entire system to change. The government cannot say 

this is okay for this group and not for the other group, and it became a systemic issue. 

Mr. DELAHUNT. Reclaiming my time. 

Mr. FRANKS. I hope you will let Dr. Calabria respond. 

Mr. COHEN. I am going—— 

Ms. LOFGREN. Mr. Chairman. 

Mr. COHEN [continuing]. To suggest that your time has expired. 

I am going to recognize Ms. Lofgren for as much time as she may 

consume before we rush to votes. 

Ms. LOFGREN. Thank you, Mr. Chairman. And I will be brief because I know that we have a number of votes, and perhaps we can 

finish this and not keep our witnesses here. 

First I would like to say, once again, how disappointed I am that 

the Treasury Department was too busy to participate in this hearing, and I would like to suggest, Mr. Chairman, that we prepare 

a written inquiry to the Department with the questions that we 

would have asked, and ask them to respond and to get the facts 

and information to us within the next week, or at most two, so that 

we can take whatever action is necessary. 

Mr. COHEN. I appreciate that. We will do that, and we will also 

look into the Government Accounting Office study. 

Ms. LOFGREN. I would be very happy to work with the Chairman 

on that point. 

I would like to ask Professor White, your testimony about how 

many modifications actually involved a reduction, I mean so many 

of the modifications actually involve an increase in the monthly 

payment. Small wonder that they are not working. 

I thought a lot about why is this, why are the banks behaving 

in this way? In The New York Times article, just right after the 

Fourth of July—and this is a quote. It said: But the most frightening, fascinating and frightening figures in the data that they 

have looked at from the Wells Fargo Bank detail how much money 

is lost when foreclosed homes are sold. 

In June, the data show almost 32,000 liquidation sales. The average loss on those was 64.7 percent of the original loan balances. So 

I guess what I am looking at is if you took a look at modifications 

in Bankruptcy Court, where those are allowable for secondary 

mortgages, commercial real estate and the like, generally the reduction in principal is nowhere near what the banks are losing in 

the foreclosure sale. What is motivating, what is going on here? 

46 

Why are they operating in manners that seem so adverse to their 

financial interests? 

Mr. WHITE. Well, one of the important things you have to understand is that it is not the investors who are making the decisions. 

The servicers have their own economic calculations that they make 

that have nothing to do with ultimately how much is lost on the 

loan because the servicer, in most cases now, has no skin in the 

game. They are not the investor and they not affected by whether 

the foreclosure loss is 10 percent or 90 percent. So long as they can 

recover the servicing advances, which might be 5 percent of the 

total amount, they will be made whole in a foreclosure. 

In fact, the servicers have every reason to go ahead with foreclosure and every reason not to modify. And some of those incentives, I think, the Administration wisely tried to correct a little bit 

in the design of the Home Affordable Program. We will see if that 

works or not. But I think it is also the case that investors and the 

servicers are in denial. In spite of the fact that they are losing 60 

percent every time they foreclose on a home, they believe somehow 

that if they continue foreclosing and refusing to modify, eventually 

they will recover closer to 100 percent of these mortgages that are 

so massively delinquent and in default. And we have right now a 

huge pipeline. There are a lot of foreclosures that have been started. Fortunately, the completed liquidation sales have been at a 

fairly—I don’t want to say low level, because they are—— 

Ms. LOFGREN. The States have stopped them in some cases. Now 

those laws are running. 

Mr. WHITE. They are having some moratoria, and even just looking at the data in general, there are a lot more foreclosures coming 

into the pipeline than are coming out of the sales. There a lot of 

homeowners who are in foreclosure but haven’t lost their house yet, 

so there is still time to restructure more loans. 

Now I have no illusion that 100 percent or 50 percent or any 

huge percentage of the 21⁄2 million families in foreclosure can successfully renegotiate their loans. But I am quite confident that 

more can be renegotiated than are being renegotiated now. I mean, 

I think there are foreclosures happening, there are several data 

that—— 

Ms. LOFGREN. Well, clearly, not every person who is in trouble 

is going to be successful in renegotiating their loan. I think that 

is clear. On the other hand, I will close now because I know we 

have a vote outstanding. 

As we were coming up to our vote on the bankruptcy provision 

in the House, I was present at a meeting where Chairman Frank 

was there; and one of the other Members said, how are we—you 

know, what about this new Administration program? What do we 

do with our constituents? And Mr. Frank says, tell them to call 

their lender today because the program is in effect. And the Member said, well, the banks won’t return their calls. I will say the 

banks won’t return my calls on behalf of constituents either. So Mr. 

Frank said, well, tell them that your constituent is going to go 

bankrupt, and then they will return the call. 

I think that that is an element to this. It is a motivation to actually be accountable and to get serious about this. I think it is tragic 

47 

that we have not adopted the measure, and I hope that we will yet 

do so. And I yield back. 

Mr. COHEN. I want to thank the lady and thank all the witnesses 

for their testimony today. 

Without objection, Members have 5 legislative days to submit 

any additional written questions, which we will forward to the witnesses and ask that you answer as promptly as you can and they 

will be made a part of the record. 

Without objection, the record will remain open for 5 legislative 

days for submission of any additional materials. 

Again, I thank everybody for their time and patience. The hearing of the Subcommittee on Commercial and Administrative Law 

is adjourned. 

[Whereupon, at 2:23 p.m., the Subcommittee was adjourned.] 

49 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

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

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

At the heart of 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. 

In my hometown of Detroit, 1 out of every 275 housing units faces foreclosure. There 

are 138 foreclosures a day in Wayne County. 

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. 

In March of this year, the Treasury Department instituted its Home Affordable 

Modification Program with the laudable goal of addressing this crisis by providing 

financial incentives to servicers to voluntarily modify mortgages headed to foreclosure. 

The Program provides servicers economic and other incentives to make mortgage 

payments for troubled borrowers more affordable. Payments can be reduced to 31% 

of the borrower’s gross monthly income by a reduction in the interest rate or an extension of the mortgage term, or both. 

Empirical studies suggest, however, that voluntary modifications continue to be 

ineffective. The Program appears to be hampered by a series of administrative 

issues, including adequate staff to handle modification requests, among other deficiencies. 

Although there will be an estimated 2.5 million home foreclosures in 2009, there 

have only been about 240,000 voluntary mortgage modifications since the Program’s 

inception. 

Even worse, the number of modifications appears to be decreasing rather than increasing. According to Professor Alan White, one of our witnesses today, 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. 

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. 

And, an analysis of many of these so-called ‘‘modifications’’ indicates that they actually may worsen a homeowner’s financial predicament. 

While I appreciate the Program’s well-intentioned attempt to entice loan servicers 

to voluntarily modify mortgages of financially troubled homeowners, I believe that 

these efforts do not go far enough to address the foreclosure crisis. 

Accordingly, I have three suggestions that may help to enhance any voluntary 

mortgage modification program, which I hope we will address today. 

First, bankruptcy judges must be given the authority to modify mortgages in 

bankruptcy. 

The threat of a mandatory principal reduction in bankruptcy will serve as a 

healthy incentive to better ensure that more meaningful voluntary modifications 

will be done outside of court. 

In the absence of judicial mortgage modification authority, or some similar threat 

of mandatory mortgage modification, lenders and servicers simply do not have 

enough of an incentive to modify mortgages in a meaningful and substantial way. 

Just this past Monday, the Federal Reserve Bank of Boston released a study concluding that only 3 percent of delinquent borrowers who were more than 60 days behind in their payments had their loans modified to reduce monthly payments. A 

somewhat greater percentage received modifications that did not even result in 

lower payments. 

50 

According to one of the study’s coauthors, lenders will not modify loans voluntarily because ‘‘maximizing profits does not mean modifying loans.’’ 

As many of you know, mortgages on second and third homes and investment properties (such as multi-family homes) can be judicially modified under current law, as 

can virtually any other secured claim, including claims secured by yachts, airplanes, 

and commercial real estate worth many millions of dollars. 

It is unfathomable to me that no such authority exists for a working family’s principal residence. 

Judicial modification of primary mortgages would help stop the endless cycle of 

foreclosures, by allowing homeowners to avoid foreclosure and by keeping more distressed properties from coming into the market. 

Second, any mortgage modification program should require—or at least provide 

strong incentives for—servicers to reduce the principal balance on a mortgage, as 

studies have shown that the most successful mortgage modifications included principal reductions. 

Many have noted that when a homeowner does not have an equity stake in his 

or her home, he or she is more likely to default on the mortgage loan. The best thing 

for struggling homeowners is to reduce mortgage principal. 

But the Home Affordable Modification Program fails to include any requirement 

or incentive for principal reductions. 

As a result, most loan modifications merely postpone or stretch out the payments 

and, thus, merely delay the inevitable default and foreclosure. In fact, some studies 

show that homeowners often wind up deeper in debt as a direct result of these modifications. Not surprisingly, the re-default rate is nearly 50%. 

Third, any efforts by Congress or the Administration to address the foreclosure 

crisis must put distressed homeowners ahead of the interests of financial institutions. 

Giving the mortgage lending industry a free hand to pick and choose which mortgages to modify, and under what terms, simply does not work. 

Yet most of the government’s efforts have centered on encouraging voluntary loan 

modifications, which unfortunately prioritizes the interests of financial institutions 

at the expense of the interests of struggling homeowners. 

For instance, in a belated response to the mortgage foreclosure crisis, the Bush 

Administration issued various incentives, brokered with the lending industry, to 

provide some relief for American homeowners facing foreclosure. Over time, it became apparent that these initiatives were largely ineffective. 

Unfortunately, the current Home Affordable Modification Program may actually 

have the unintended consequence of discouraging loan servicers from helping the 

borrowers most in financial need. 

Under its system of incentives, participating servicers receive a financial reward 

when borrowers stay current on their payments for three years under modified 

terms. As a result, this incentive system may steer servicers away from the most 

financially troubled borrowers, who are most in need of a mortgage modification. 

For more than 2 years, this Committee has carefully considered the causes and 

consequences of the mortgage foreclosure crisis. We offered a meaningful yet modest 

solution to the problem 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. 

Last March, the House passed H.R. 1106, the ‘‘Helping Families Save Their 

Homes Act of 2009,’’ which contained a provision authorizing judicial mortgage 

modification. 

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. 

If Congress and the Administration fail to respond to the mortgage foreclosure crisis in a more assertive and thoughtful manner, I fear for our Nation’s future. 

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

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RESPONSE TO POST-HEARING QUESTIONS FROM ALAN M. WHITE, ASSISTANT

PROFESSOR OF LAW, VALPARAISO UNIVERSITY SCHOOL OF LAW, VALPARAISO, IN 


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OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION, WASHINGTON, DC 


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RESPONSE TO POST-HEARING QUESTIONS FROM IRWIN TRAUSS, MANAGER, ATTORNEY

FOR THE CONSUMER HOUSING UNIT, PHILADELPHIA LEGAL ASSISTANCE, PHILADELPHIA, PA 


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