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S. HRG. 111–328 

THE WORSENING FORECLOSURE CRISIS: IS IT 

TIME TO RECONSIDER BANKRUPTCY REFORM? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT 

AND THE COURTS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 23, 2009 

Serial No. J–111–39 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MATT MINER, Republican Chief Counsel 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

SHELDON WHITEHOUSE, Rhode Island Chairman 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

BENJAMIN L. CARDIN, Maryland 

EDWARD E. KAUFMAN, Delaware 

JEFF SESSIONS, Alabama 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY O. GRAHAM, South Carolina 

SAM GOODSTEIN, Democratic Chief Counsel 

MATT MINER, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois .................... 4 

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 122 

Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama .......................... 3 

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island ...... 1 

prepared statement .......................................................................................... 147 

WITNESSES 

Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, Cato Institute, Washington, D.C. ........................................................................................ 14 

Cohen, Alys, Staff Attorney, National Consumer Law Center, Washington, 

D.C. ........................................................................................................................ 9 

Genirberg, Richard, Attorney, Genirberg Law Office, Jonesboro, Georgia ......... 17 

Levitin, Adam J., Professor, Georgetown University Law Center, Washington, 

D.C. ........................................................................................................................ 11

Verdelotti, Joseph, Jr., Homeowner, West Warwick, Rhode Island .................... 7 

QUESTIONS AND ANSWERS 

Responses of Mark Calabria to questions submitted by Senator Whitehouse ... 34 

Responses of Richard Genirberg to questions submitted by Senator Sessions .. 35 

SUBMISSIONS FOR THE RECORD 

Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, Cato Institute, Washington, D.C., statement ..................................................................... 43 

Cohen, Alys, Staff Attorney, National Consumer Law Center, and on behalf 

of National Association of Consumer Advocates and National Association 

of Consumer Bankruptcy Attorneys, Washington, D.C., statement ................ 50 

Genirberg, Richard, Attorney, Genirberg Law Office, Jonesboro, Georgia, 

statement .............................................................................................................. 127 

Levitin, Adam J., Professor, Georgetown University Law Center, Washington, 

D.C., statement .................................................................................................... 131 

Verdelotti, Joseph, Jr., Homeowner, West Warwick, Rhode Island, statement . 144 

(1) 

THE WORSENING FORECLOSURE CRISIS: IS IT 

TIME TO RECONSIDER BANKRUPTCY REFORM? 

THURSDAY, JULY 23, 2009 

U.S. SENATE, 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE

COURTS, 

COMMITTEE ON THE JUDICIARY, 

Washington, D.C. 

The Subcommittee met, pursuant to notice, at 10:01 a.m., in 

room SD–226, Dirksen Senate Office Building, Hon. Sheldon 

Whitehouse, Chairman of the Subcommittee, presiding. 

Present: Senators Whitehouse, Feingold, Durbin, and Sessions. 

OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. 

SENATOR FROM THE STATE OF RHODE ISLAND 

Chairman WHITEHOUSE. The hearing will come to order. This is 

a hearing of the Senate Committee on the Judiciary’s Subcommittee on Administrative Oversight and the Courts on the topic 

of ‘‘The Worsening Foreclosure Crisis: Is It Time to Reconsider 

Bankruptcy Reform? ’’ I welcome the witnesses. 

As many of you are probably very well aware, the Senate is extremely busy right now, and I expect that my colleagues will be in 

and out during the course of the hearing. No meaning is intended 

by either their arrivals or their departures, so take no offense if 

they get up and leave while you are speaking. It is a matter of 

schedule entirely and the many conflicting demands on Senate 

schedules. 

Nearly 10 months ago, we enacted a $700 billion bailout package 

to rescue the economy from the subprime mortgage meltdown. This 

hearing will look at whether the foreclosure situation is worsening 

and what can be done for the millions of families in Rhode Island 

and across the Nation at risk of losing their homes. 

We tried in October to include in the Troubled Asset Relief Program measures that would help homeowners on Main Street, in addition to the banks on Wall Street. Unfortunately, these efforts 

then proved fruitless. We included in the bailout legislation a requirement that the Treasury work to modify the mortgages that it 

purchased as part of the TARP. That requirement, too, was rendered meaningless by the outgoing Bush administration’s decision 

not to purchase ‘‘toxic assets’’ as had originally been proposed. The 

money instead went directly to banks, and the Treasury held no 

mortgage-related assets to modify. So with nothing to modify, there 

2 

were no modifications. Wall Street benefited, and Main Street was 

left in the cold. 

I am delighted to welcome the Ranking Member, Senator Sessions. 

Senator SESSIONS. Thank you. 

Chairman WHITEHOUSE. Many of us in Congress, led by Senator 

Durbin, tried to include in the TARP legislation a provision that 

could have kept millions of families in their homes at zero cost— 

zero cost—to the taxpayers. This proposal would have corrected an 

anomaly in the Bankruptcy Code that prohibits judges from modifying primary residence mortgages the way they can modify every 

other type of contract from mortgages on vacation homes to car and 

jewelry and corporate loans. Despite the fact that a bankruptcy 

modification would spare the community the terrible costs of foreclosure, the mortgage banking industry has invested millions of 

dollars to lobby against this reform and has so far been able to prevent its passage. 

As subprime mortgage teaser periods began to expire last year, 

and with the credit market dried up so they could not refinance, 

millions of homeowners faced higher monthly payments that they 

could not afford. In the final quarter of 2008, there were over 

200,000 family home foreclosures. These homeowners faced this 

foreclosure wave with minimal assistance from their Government. 

The new administration tried to address the foreclosure crisis. 

Through the Treasury’s Making Home Affordable programs, President Obama encouraged loan servicers to start modifying mortgages. While these programs so far have kept 160,000 families in 

their homes through trial modifications, it is becoming increasingly 

clear that Congress must do more—much more—to address the 

worsening crisis. 

As you will hear from one of the witnesses today, there is evidence that the worst of the foreclosure crisis is not behind us. Just 

as the wave of potential foreclosures from subprime mortgages begins to subside, a new wave of potential foreclosures tied to other 

mortgage instruments is just around the corner. The Center for Responsible Lending estimates that 9 million homes may be lost to 

foreclosure from 2009 through 2012. At their current rates of modification, the Treasury’s voluntary programs would only assist 2 million or fewer families during that same period. 

It is clear to me that Congress must do more to help struggling 

American homeowners, and specifically, that we need to take another serious look at the proposal to allow bankruptcy judges the 

same authority to modify the terms of mortgages on principal residences that they have for other loans. If we fail to act, I fear that 

we put ourselves at risk: that a vicious cycle of foreclosures, falling 

home values, and declining tax revenues will keep us in recession 

for years to come. 

I look forward to hearing the views of today’s panel on this proposal and others. I think what I will do now is introduce the Ranking Member to make any opening statement that he cares to. I will 

then recognize the distinguished Majority Whip, Senator Durbin, to 

make any opening statement that he cares to. And then I will introduce the witnesses, and we will proceed with the hearing. 

Senator SESSIONS. 

3 

STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM 

THE STATE OF ALABAMA 

Senator SESSIONS. Thank you, Senator Whitehouse. 

This is an issue that we have discussed for a number of years, 

and Senator Durbin has been an articulate leader on the question. 

I would just say that when people borrow $200,000 to buy a house, 

somebody gave them that money. It did not come from nowhere. It 

came from somebody’s pocket. It is money that has been lent to 

them at a certain interest rate. 

As I have traveled the world, I am absolutely so saddened in 

many ways to see other countries not have a financial market. And 

the reason is, if you give someone $200,000 to buy a house or build 

a house, you have got to know you are going to be repaid. And if 

you are not going to be repaid, you have got a big problem here, 

and it drives up costs. And in the future, people may not be willing 

to loan money, because this is a 30-year loan. And when you go 

around the world and you see people with houses, as I have done, 

half-built—and I used to wonder why, and it has been explained to 

me. They did not have the money to put the windows in. They have 

the windows on the first floor and the doors, but the upstairs window would be open, just have a roof and inside. They are just trying to save a little more money so they can put up the next part 

of the house. We borrow the money up front and build the house, 

buy the house, and it is a fabulous thing. An average American can 

pay it back over 30 years at a reasonable interest rate. 

And so I would just say that that is the fundamental thing that 

is concerning me about the whole deal. If we now say after someone has loaned a person money for 30 years that the Government 

is not going to come in and authorize the alteration of that contract, fewer people may be willing to loan in the future, and more 

people would have to pay a higher interest rate. That is what the 

bankers have produced information that shows this will result in 

a significant increase in the interest rate. And you know that if you 

are paying 5-percent interest and now you pay 6-percent interest, 

that is a 20-percent increase in your payment basically every 

month. So if you are paying $1,000 a month, now you are paying 

$1,200 a month for the same loan, essentially. 

So there is just no free lunch here. We can maneuver with this, 

and I know we will. But I am worried about it. 

What we do know is that loans do need to be renegotiated, and 

I have just seen a Forbes.com article where Wells Fargo announced 

that they have refinanced 750,000 mortgages already. Because they 

have an interest in doing this, it is their decision, and it makes 

sense. And it is not totally unrealistic to say a bankruptcy judge 

could do this. 

Senator Durbin and I have worked on the cramdown on automobiles. We know it is done on automobiles. But I am dubious 

about it, because it is so much money, it is such a long loan. 

Houses do not normally decline over decades. They may go down 

for a while, but except in certain small, extreme areas of the country, I expect housing will, before too many years, get back to a normal level. So I am concerned about that, and I would hope that we 

can move forward. 

4 

I also am hopeful that there would be no effort to alter the credit 

counseling. I see Eileen Connelly with the Associated Press, and 

this is in the Washington Times headline: ‘‘People drowning in debt 

gain by consulting credit counselors.’’ I do not know that that is a 

bad thing. 

So, Mr. Chairman, this is important. One thing I would like to 

ask is: I have heard it said from my bankruptcy lawyers and judges 

that I have talked to in Alabama that there are occasions when nobody seems to be able to speak for the mortgage holder to negotiate 

a deal. And if nobody can, you know, maybe that is the kind of justification we might think about. But normally I would think a bank 

that has loaned somebody money under a law that says that they 

have the authority to negotiate if any negotiation is done would 

kind of be subjected to almost an ex post facto law to say you cannot—now the court can renegotiate your mortgage. 

Thank you. 

Chairman WHITEHOUSE. I think the distinguished Ranking Member has made a very good point. I think that there is a significant 

distinction between a homeowner in a community who has a mortgage loan from the community bank and they know each other and 

the homeowner can go into that community bank and can speak to 

somebody at the bank and can have an understanding about what 

their financial situation is, and together they can reach a meeting 

of the minds, if one is possible, about how to renegotiate and restructure that loan for both parties’ mutual convenience. 

That I think goes out the window when that loan has been 

carved up into dozens or even hundreds of strips and sold across 

the country and around the world, and now that poor homeowner 

is trying to find somebody who has some authority to negotiate 

with them, and they find that there is nobody to talk to. And that 

I think is a very frustrating and difficult situation. 

Senator Durbin. 

STATEMENT OF HON. RICHARD J. DURBIN, A U.S. SENATOR 

FROM THE STATE OF ILLINOIS 

Senator DURBIN. Senator Whitehouse, thank you for doing this, 

and, Senator Sessions, I am glad you are here, and I know that we 

all share an interest in this. 

I started on this trek more than 2 years ago, and I gave a very 

ominous forecast that if we did not do something quickly in 2007, 

we could face up to 2 million Americans losing their homes. It 

turns out that that was painfully naive on my part. As the banks 

and their disciples have told us over and over again that everything will work itself out, unfortunately the foreclosure rate in this 

country has skyrocketed. Let me show you a chart which illustrates 

it. 

This is an indication of what is happening. It is pretty clear. And 

now over 9 million families are expected to lose their homes to foreclosure between now and the end of 2012. That is about one out 

of every five mortgages in America. That is a conservative estimate. So when I said 2 million in 2007, people scoffed, and now we 

are dealing with 9 million, headed up. 

Let me show the second chart there, if you will, Brad, because 

this chart says that when it comes to resets, the red line is where 

5 

we are at the moment. That is the past. This is the future. The 

resets are going to continue to grow, and we are going to see this 

crisis continue to grow. 

I learned a valuable political lesson when I offered this amendment a second time, because the banking industry mobilized as one 

voice against this notion of dealing with the bankruptcy court. I expected it from the biggest banks. They have been opposed to this 

notion from the beginning. But the so-called independent community banks joined ranks with them. And then the credit unions 

joined ranks with them in opposing cramdown. 

We even reached the point, after this went to conference, where 

we offered to the independent community banks and credit unions 

exemption from this so that they would not be covered. Their opposition was no longer needed because they would not be covered by 

this cramdown. They still joined at the American Banking Association and said, ‘‘We oppose it anyway.’’ I think they have to take the 

word ‘‘independent’’ out of ‘‘independent community banks’’ after 

that. They are not independent anymore. They are part of the same 

operation. 

And we know, because an e-mail—e-mails just float around the 

world now. An e-mail from the Arizona Banking Association, which 

I would be happy to share with the Committee, the head of the Arizona Banking Association sent an e-mail to all of the major bankers and their associations across America and said, ‘‘Be careful. 

Durbin is compromising. He really wants to get this out. We cannot 

compromise with him. There is no compromise acceptable.’’ 

So it is not as if we did not make a good-faith effort to do this. 

We did it over and over and over again. They just would not even 

consider it. 

I am glad you did this hearing. I think we have to revisit this 

issue. This issue still remains, I think, at the core of the weakness 

of our economy. This great recession we are in has a lot to do with 

foreclosures and the housing market. 

Professor Levitin, who is here, suggests we are about to enter a 

new phase of the crisis. Just as the subprime mortgage tsunami is 

beginning to recede, a new wave is coming. This time it is the option ARMs that are beginning to reset late this year. And at the 

same time, with high unemployment, with house prices depressing 

and falling, these resets will usually include a large payment shock 

that will cause an enormous number of these so-called pick-and-pay 

mortgages to fail. All the while, more fixed-rate borrowers will also 

lose their homes as job losses continue. 

Second, after 2 years of effort that relies on banks to volunteer— 

that is what this has been about up until this point, waiting for 

the banks to step up and volunteer to solve the problem—it is time 

to admit that is not working. The banks have long said, ‘‘We are 

just going to ride this out.’’ But as you can tell, it is not as if this 

is going to get bumpier. We are going to face a cliff at some point 

here. And we have to be honest about it, and I hope we are honest 

about it in enough time. 

This is what David Kittle, who was then Chairman of the Mortgage Bankers Association, said in front of this Committee last November, and I quote: ‘‘The industry has been engaged in historic efVerDate Nov 24 2008 11:18 Mar 30, 2010 Jkt 055519 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55519.TXT SJUD1 PsN: CMORC
6 

forts to assist distressed homeowners, and we believe these have 

proven successful in stemming foreclosures.’’ 

Really? According to the Mortgage Bankers Association’s own 

survey, foreclosures are skyrocketing. While the Obama administration’s Home Affordable Modification Program has been in operation for only a few months, the initial results are not that encouraging. One hundred sixty thousand trial modifications were offered 

in the first 4 months. That translates to fewer than half of the administration’s goal for this program. And the number of mortgages 

modified represents less than one-quarter of the foreclosures initiated. We are not keeping up with this. The foreclosures are growing far faster than our voluntary programs. We are falling further 

and further behind. 

We cannot ignore this, and I thank you for calling this hearing. 

This economic crisis that began with the popping of a bubble in the 

housing market cannot be tamed until we stabilize the housing 

market. Toxic assets based on mortgages will remain toxic until the 

underlying mortgages are addressed. Regardless of how many billions of taxpayers’ dollars are pumped into bank balance sheets 

with few strings attached, we have got to address the root cause 

of the illness, because when you lose your home, you are far less 

likely to buy anything, and that means companies that are trying 

to sell things need fewer workers to produce the things that folks 

would otherwise buy. 

In 2009, the Center for Responsible Lending estimates foreclosures will cause nearly 70 million nearby homes to suffer price 

declines averaging $7,200. Folks, it is not just your neighbor. It is 

you. We are all in this together. Over $500 billion in home equity 

will be lost for families that have done absolutely nothing wrong 

and are faithfully making their mortgage payments. During the period 2009 to 2012, CRL projects that foreclosures will cost 92 million U.S. families $1.9 trillion in lower home values. Just what 

America needed while it watched its savings accounts diminish, 

now the home values are diminishing through no fault of the homeowners, because we are not addressing that foreclosed home right 

next door. 

So thank you for this hearing. I will not go into this other than 

to say, Senator Sessions, we have really reached a point we cannot 

bring these folks to the table, and they are not going to do it on 

their own. That is clear. The bankruptcy court, at least as a possibility out there, is a motivator to get these folks to finally sit down, 

the lenders to finally sit down and try to work things out. They 

cannot save every soul, but we have got to put more effort in it. 

Thank you. 

Chairman WHITEHOUSE. Thank you, Senator Durbin. Thank you 

for your years of leadership on this issue; in addition, on the point 

that Senator Sessions raised about the poor homeowner who has 

got nobody to talk to because nobody on the other side can negotiate for the mortgage holder’s interest because they have sold it 

in strips around the world and around the country, and there is 

just nobody to find or talk to. One solution to that problem is that 

a bankruptcy judge can make, ‘‘thunk,’’ a final decision, and then 

people have to live with it, and I think that will also help get 

through that deadlock. 

7 

Senator DURBIN. Was that ‘‘thunk’’? 

Chairman WHITEHOUSE. That is the sound of the gavel coming 

down. I should have probably done it live. But I did not want to 

confuse anybody that the hearing was coming to an end. 

The witnesses that we will hear from now are: 

Joseph Verdelotti, Jr., a constituent of mine from West Warwick, 

Rhode Island, who will share his experience struggling with two 

mortgages during a period of rising costs and falling home prices. 

Mr. Verdelotti, a licensed electrician, and his wife, April, a hospital 

worker, have been unable to obtain mortgage modifications and 

may soon be forced to lose their home. 

Alys Cohen is a staff attorney at the National Consumer Law 

Center’s Washington office, where she advocates on predatory lending and sustainable homeownership issues. Ms. Cohen leads 

NCLC’s mortgage policy. Ms. Cohen is a graduate of the University 

of Pennsylvania Law School. 

Professor Adam Levitin of the Georgetown University Law Center is a nationally regarded expert in bankruptcy and consumer 

law. He serves as Special Counsel for Mortgage Affairs for the Congressional Oversight Panel. Professor Levitin is a graduate of Harvard, Columbia, and Harvard Law School. 

Dr. Mark Calabria is Director of Financial Regulation Studies at 

the Cato Institute. Prior to joining the Cato Institute, Dr. Calabria 

was a senior professional staffer on the Senate Banking, Housing, 

and Urban Affairs Committee. He holds a doctorate in economics 

from George Mason University. 

Richard Genirberg is a practicing attorney from Jonesboro, Georgia. He specializes in bankruptcy, collections, and criminal law. He 

earned his law degree from Georgia State University College of 

Law and his B.A. at Michigan State University. He also has an 

MBA from Georgia State University. Prior to owning his own firm, 

Mr. Genirberg was general counsel for the minority party at the 

Georgia House of Representatives. 

We welcome the witnesses, and we will begin with the testimony 

of my constituent, Mr. Verdelotti. Please proceed. 

STATEMENT OF JOSEPH VERDELOTTI, JR., HOMEOWNER, 

WEST WARWICK, RHODE ISLAND 

Mr. VERDELOTTI. Chairman Whitehouse, Ranking Member Sessions, members of the Subcommittee, thank you for the opportunity 

to speak at today’s hearing on this very important matter. 

My name is Joe Verdelotti, Jr., and I am a licensed electrician 

from West Warwick, Rhode Island. My wife, April, works in the 

emergency room registering patients at the Roger Williams Medical 

Center in Providence, Rhode Island. We have been married for 91⁄2

years and have known each other for nearly 20 years. We have one 

daughter, Brooke, who is 9, and two sons, Lorenzo who is 6, and 

Gianni who just celebrated his 1st birthday a few months ago. 

Needless to say, we have quite an active household. On January 

26, 2006, we purchased a 1,100-square-foot home in West Warwick, 

Rhode Island, for $225,000. 

Since we, like many other homeowners, did not have savings for 

a down payment, we took out two mortgages. The first mortgage, 

which covered 80 percent of the purchase price, is an adjustable 

8 

rate mortgage that is currently at 6.5 percent but will adjust in the 

fifth year. The second mortgage, which covered the other 20 percent of the purchase price, has a fixed interest rate of 9.25 percent. 

Both mortgages were originally through Aurora Loan Services, but 

CitiMortgage subsequently purchased the second mortgage. 

At the time we purchased our home, I was a fourth-year elec- trician’s apprentice making $18 an hour. The construction industry 

was booming and times were good in Rhode Island. The good times 

did not last, however. Not long after we purchased our home, the 

recession began and work became scarce. 

My company has had to lay off workers and make cutbacks just 

to stay afloat. As of today, we still have a wage freeze in effect, and 

our health care premiums have increased. My wife, too, has felt the 

effects of the recession at work and is also under a pay freeze. Despite our income freeze, the cost of living has not slowed and we 

are feeling the squeeze. Our utility bills, such as electric and water, 

have increased, as have our property taxes, and we may see further 

increases in the future. Our budget is stretched as tight as we can 

get it. 

Like many of our neighbors, our home is ‘‘underwater.’’ It just is 

not worth what we paid for it at the height of the housing bubble 

in 2006. We received a glimmer of hope last fall when the Help for 

Homeowners program took effect, but that proved to be a disappointment. The day the program started, my wife called the 

number listed on HUD’s website and spent hours waiting and talking to someone at debt service about our situation. In the end, their 

only advice to her was to consider a roommate, get a part-time job, 

contact the United Way to locate food banks in our area, reduce 

spending, and contact legal aid for a consultation with a bankruptcy attorney. The person on the phone even recommended we 

consider walking away and letting the bank foreclose. 

We called for help in saving our home, and we were told to consider food banks and foreclosure. 

I later contacted Aurora Loan Service directly and spoke with a 

customer agent to see if they would be willing to work with us 

under the Help for Homeowners program. After giving the necessary information to the agent over the phone, I was met with another disappointing blow: the agent informed me that I did not 

make enough money for them to help us and that we should consider a short sale. 

Next, we decided to apply for a financial hardship package 

through CitiMortgage. On February 26, 2009, we sent CitiMortgage 

the necessary documents through certified mail. The documents 

were received on March 2nd. On March 20th, my wife contacted 

CitiMortgage at approximately 1 p.m. to try to find out to the status of our hardship application, but all she got was the runaround. 

Each person she spoke to said she had the wrong department and 

that they would transfer her to the right one, but this never happened. This went on until I came home from work and I took over. 

Each person was clearly reading the same talking points: we always had the wrong department, and they would transfer us to the 

correct department. After listening to elevator music on hold for 

over an hour, I, too, gave up. We had been on the phone with 

CitiMortgage for over 5 hours and accomplished nothing. 

9 

On April 8, 2009, my wife contacted CitiMortgage again, and 

after several attempts to get a straight answer, she was informed 

that our case was closed since they never received our package. She 

informed them that that it was sent on February 26th and that we 

had delivery confirmation that they received it on March 2nd. After 

hearing this, they changed their story to, ‘‘It must have gotten 

lost,’’ and that we would need to resubmit the application. This was 

quite unsettling to hear because that package contained all of our 

personal and financial information. 

Since we have two mortgages, we also sent a hardship package 

to our first lien holder, Aurora Loan Service. In a letter dated 

March 11, 2009, just 2 days after receiving the package, Aurora denied our request. 

In May, I once again requested a mortgage modification from 

CitiMortgage. This time we were rejected because, according to 

them, we make sufficient income to support our current mortgage 

payment. They also suggested that we consider a short sale. 

CitiMortgage apparently believes that we make enough to cover 

our mortgage, but that we should consider a short sale? This seems 

pretty contradictory to me. 

Now, even though we are current on our financial obligations, we 

are hardly living comfortably. We have had to make even more adjustments in order to make ends meet, and it gets increasingly difficult. We are not sure how much longer we can survive like this. 

My health care premiums rose at the same time the Making Work 

Pay tax credit took effect, so I now take home $2 less a week than 

I used to. How can my family and others help stimulate the economy if Congress doesn’t do something fast to help curb this foreclosure problem? 

All we are asking for is a little help, a little consideration, and 

a little professionalism on the part of our mortgage holders. If we 

are able to negotiate a more manageable payment plan and keep 

our home, it becomes a win-win solution for everyone: We keep our 

home, the banks avoid the costs of foreclosure, and the community 

avoids a hit to property values and tax collections. 

Senators, please do something to help struggling homeowners 

like my wife and me. Thank you again for the opportunity to tell 

my story. 

[The prepared statement of Mr. Verdelotti appears as a submission for the record.] 

Chairman WHITEHOUSE. Thank you, Mr. Verdelotti. I think you 

have very well captured and very well expressed the predicament 

of people across this country who are hard-working, who are honest 

and honorable, who have worked hard to make their financial obligations and have indeed kept them current through considerable 

stress, who do not want any special deals from anybody, but who 

simply cannot get even a straight answer from the industry. I appreciate it. 

Ms. COHEN. 

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL 

CONSUMER LAW CENTER, WASHINGTON, D.C. 

Ms. COHEN. Chairman Whitehouse, Ranking Member Sessions, 

Senator Durbin, thank you for inviting me to testify today. I testify 

10 

here today on behalf of the National Consumer Law Center’s lowincome clients and on behalf of the National Association of Consumer Advocates and the National Association of Consumer Bankruptcy Attorneys. 

For the last few months, I have been working with colleagues at 

NCLC and other organizations to promote large-scale solutions to 

the foreclosure crisis. During that time, the pleas for help from advocates on the front lines of saving homes have escalated in both 

number and in urgency. When the Home Affordable Modification 

Program, HAMP, was announced by the administration on March 

4th, hopes were high that homeowners would finally have a means 

to prevent foreclosures. Unfortunately, that reality has not materialized. In fact, what we increasingly hear is that HAMP is not the 

essential tool it is intended to be. 

It is not just that we get calls about the instances in which the 

program has had a blip of failure. It is that, in general, advocates 

find that HAMP loan modifications are hard to get at all and, when 

obtained, often are not compliant with program rules. Mr. 

Verdelotti’s concerns, including the horrific consumer service he 

and his wife experienced, are typical of what we are hearing about 

participating servicers. He appears to have been denied HAMP 

processing by two participating servicers, but the lack of transparency in the system and the lack of accountability make it hard 

to know what happened. He and borrowers like him need to be 

given a clear opportunity to show that they are at risk of imminent 

default or in default and need help. 

Moreover, even if HAMP operated at its full capacity as envisioned by Treasury officials, HAMP’s loan modifications still would 

be substantially outpaced by foreclosures, and the modifications 

themselves lack the mandated principal reductions that many believe are necessary to stem the foreclosure tide. 

While Treasury officials have been actively receptive to our operational concerns, progress is slow and core problems with HAMP’s 

design have not been addressed. Even if implementation problems 

were fixed, the design of the program precludes transparency and, 

thus, accountability, and it also lacks mechanisms to assure longterm sustainability of the program. 

The net present value test, which is the primary basis upon 

which a loan modification is granted or denied, is not available to 

the public, and thus homeowners have no ability to question 

whether a servicer’s analysis is based on accurate information. 

Moreover, the lack of a mandate on principal reductions undermines the long-term effectiveness of the program. 

Homeowners who could normally refinance their way out of a 

lost job or sell their home in the face of foreclosure are denied both 

options when they owe more on their home than it is worth. Without principal reductions, homeowners who lose their jobs, have a 

death in the family, or otherwise experience a drop in income are 

more likely to experience redefault and foreclosure. 

Goldman Sachs estimates that starting at the end of the last 

quarter of 2008 through 2014, 13 million foreclosures will be started. Last week, Assistant Treasury Secretary Herbert Allison, in responding to questioning from the Senate Banking Committee, 

agreed that in order to meet Treasury’s goals of doing 3 to 4 million 

11 

modifications by 2012, they would need to do 1 million per year. 

Even if the administration reaches those numbers, that will address no more than one-third of all foreclosures. Using current figures, the program is on pace to modify only 480,000 mortgages a 

year, not even half of its annual goal, assuming that every trial 

modification, in fact, leads to a permanent modification. 

Creating affordable and sustainable loan modifications for distressed homeowners is labor intensive. It is no surprise then that 

servicers continue to push homeowners away from HAMP loan 

modifications or delay the process substantially. In addition, 

servicers’ profit is directly linked to the principal of mortgages they 

service and the timing for writing down loans. Also, servicers who 

hold second liens, many of whom service large portions of the first 

lien market, may prefer to gamble on a market recovery rather 

than accept the incentive payments under HAMP and recognize 

their losses now. 

A time line should be set to evaluate HAMP and other existing 

programs. If the data confirm the experience of advocates nationwide, more stringent measures should be adopted. Congress should 

pass legislation to allow bankruptcy judges to modify appropriate 

mortgage loans and also should consider further servicing reform. 

Adoption of court-supervised mortgage loan modifications would 

sidestep many of the structural barriers in the servicing industry 

that today are preventing mass loan modifications from occurring. 

Congress soon should recognize that voluntary measures, even 

with incentives, by entities that profit from homeowner default and 

unsustainable loan principals cannot lead us out of this crisis. 

Thank you for the opportunity to testify before the Subcommittee 

today. We look forward to working with you to address the challenges that face our Nation’s communities. 

[The prepared statement of Ms. Cohen appears as a submission 

for the record.] 

Chairman WHITEHOUSE. Thank you very much, Ms. Cohen. 

Professor Levitin. 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR, GEORGETOWN 

UNIVERSITY LAW CENTER, WASHINGTON, D.C. 

Mr. LEVITIN. Good morning, Mr. Chairman. My name is Adam 

Levitin. I am an Associate Professor of Law at the Georgetown 

University Law Center. I am also the Robert Zinman Resident 

Scholar at the American Bankruptcy Institute. I am not currently 

serving as Special Counsel for Mortgage Affairs for the Congressional Oversight Panel, however, and I want to make clear that I 

am not speaking in any context for the panel, nor do I speak on 

behalf of the American Bankruptcy Institute. 

We are now in the second year of the foreclosure crisis—or really 

into the third now, and there is no light at the end of the tunnel. 

That is what is scary about this. There are plenty of foreclosures 

yet to come, and these are not just going to be subprime mortgages 

that are in foreclosure. These are going to be prime mortgages. 

This is going to be the mortgages held by families that have had 

good credit, that have taken out traditional, safe mortgage products. 

12 

I have some slides here that I would like to show the Committee, 

and this first one you have actually seen from Senator Durbin. This 

is the percentage of homes that are in foreclosure currently. As you 

can see it spiked to something almost four times the historical average. 

The next slide shows that this is also happening in prime mortgages, that delinquencies are up and foreclosures are way up in 

prime mortgages. This is no longer a subprime crisis. This is a national foreclosure crisis. 

Chairman WHITEHOUSE. Those are all prime mortgage—— 

Mr. LEVITIN. Those are three different measures for prime mortgages, and as you can see, they are all rising sharply currently. 

This is not just my opinion based on current market measures. 

It is also what the market believes will happen. If you show the 

next slide, please—I am sorry. Go back one, please. The pink line 

in this slide shows sort of an index of national housing prices, and 

as you can see, there is a bubble that goes up, and it falls, and then 

the little blue triangles that more or less flatten off at the end, that 

is what housing market futures are predicting; that we are going 

to have housing prices go down for a while, still for maybe another 

year, and then a very slow recovery; that it is basically going to be 

flat until 2013. That means that families that purchased their 

homes between, say, 2003 and 2008, many of them will be trapped 

with negative equity, with very deep negative equity. 

Even if the monthly payments are affordable, negative equity 

creates a long-term foreclosure problem. Families have to move 

from time to time. There are life events that happen—that you lose 

your job working at General Motors and you have to find a new job; 

that you get divorced; that you have a child and you need more 

space; or your kids move out of the house and there is no reason 

you should have a large house if you are an empty-nester; that a 

family member gets sick and needs special assistance; that a 

spouse dies. 

These are events that are inevitable, and when families are 

trapped with negative equity in their home, they have a choice. If 

they have to move, they can either somehow find money to pay a 

large balloon payment in effect, or they can give up the house in 

foreclosure. Those are their choices. And that means that for the 

foreseeable future, for the next 5, maybe 10 years, we are going to 

have thousands, hundreds of thousands of families that are trapped 

in their home. This means labor market disruptions. This means 

continuing foreclosures that will continue at an elevated level. 

Even if not an acute crisis, it will create tremendous instability for 

housing markets because foreclosure rates will not be predictable. 

Unfortunately, all the foreclosure mitigation efforts to date have 

not worked. I believe Ms. Cohen went into that in some detail, and 

I believe there is also broad agreement on that, that our efforts at 

foreclosure mitigation have not been working and are not likely to 

start working. 

There is much less agreement as to why that is the case. I believe that Dr. Calabria and I have some disagreements as to the 

reasons these programs are not working, but I think we can agree 

that they are not working. 

13 

So where does that leave us? I believe that means that we only 

have one tool left in the box, and that tool is bankruptcy. Bankruptcy modification of mortgages can not only incentivize voluntary 

renegotiation, as Senator Durbin pointed out, but in the event that 

voluntary renegotiations do not happen, for whatever reason, bankruptcy modification is a route that will let families that are able 

to make reasonable payments save their houses. It is a method 

that will not cost the taxpayers anything. 

Senator Sessions, I want to address something that you said in 

your statement. You asked the very important question about what 

cost bankruptcy modification will have to future borrowers, and we 

should be very concerned about that. We do not want to hurt the 

future economy at the cost of, say, helping people—we do not want 

to help people now at the cost of the future economy. But I think 

it is important to recognize that bankruptcy modification, it is not 

a choice for a lender between getting paid back in full and not getting paid back because of bankruptcy. That is not the choice a lender has. A lender’s choice is taking a loss in foreclosure or taking 

a loss in bankruptcy, and the question is going to be: Which will 

be the greater loss? As long as the loss in bankruptcy will be smaller than the loss in foreclosure, it is not a problem for a lender in 

terms of their future rates, that the bankruptcy actually will be 

saving them money. 

The best evidence on this is that bankruptcy will not cause greater losses than foreclosure. The structure of bankruptcy law basically guarantees that. It says that a secured creditor has to receive 

the value of their property as part of a Chapter 13 plan—the collateral, as part of their Chapter 13 plan. That is a floor that says you 

have to do at least as well as in foreclosure. 

And with due respect, I think it is very important to note that 

the banking industry has not produced any evidence to the contrary. They have made assertions about this, and Mr. Kittle in particular, whom Senator Durbin referenced, from the Mortgage Bankers Association, has testified before saying rates will go up 2 percent or 1.5 percent—it is a changing number—but there is no evidence of that. It is just an assertion. So if the best evidence is that 

bankruptcy modification will not affect future mortgage costs and 

that it will help thousands of families, this is something we really 

should do. It is the only tool we have left in the box, and it is time 

we use it. 

Thank you. 

[The prepared statement of Mr. Levitin appears as a submission 

for the record.] 

Chairman WHITEHOUSE. There was one slide that you showed 

and then have not discussed. You have a minute or so—actually, 

you are a little bit over, but with the Ranking Member’s indulgence, would you explain this slide? It appears to show the first 

wave, which was the subprime mortgages, and then where we are 

now is the valley in the middle, and then there appears to be a just 

as steep, if not in some places steeper, second wave bearing down 

on us. Could you tell us what that is? 

Mr. LEVITIN. That is correct. The foreclosure crisis has been happening in waves, and the first wave of defaults was primarily specVerDate Nov 24 2008 11:18 Mar 30, 2010 Jkt 055519 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55519.TXT SJUD1 PsN: CMORC
14 

ulators, people who were buying houses as investment properties 

and looking to flip them. 

The second wave, which you can see was peaking in 2007–2008, 

those were primarily subprime mortgages, and what this chart is 

showing is on adjustable rate mortgages when the interest rate will 

reset or, if it is pick-or-pay mortgage, a pay option ARM, when 

there will be a recast, because the pay option ARM, if there is too 

much negative equity, if you are not making amortizing payments—— 

Chairman WHITEHOUSE. And that is closely associated with foreclosure. 

Mr. LEVITIN. That is right. And that is going to be a tremendous 

payment shock when it resets in a pay option ARM. 

Chairman WHITEHOUSE. And so the second wave that we are 

looking at coming in, in your testimony, is not subprime families; 

it is families with traditional mortgages, with jumbo mortgages, 

with prime mortgages, with Alt-A mortgages. 

Mr. LEVITIN. That is correct. For example, Countrywide Financial, the largest mortgage company in the country, most of the 

products that they underwrote were Alt-A pay option ARMs, heavily concentrated in California, which has already been just taking 

a beating in the foreclosure market, and it is going to get worse. 

Chairman WHITEHOUSE. Thank you. 

Dr. Calabria. 

STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR, FINANCIAL REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, D.C. 

Mr. CALABRIA. Subcommittee Chairman Whitehouse, Ranking 

Member Sessions, Senator Durbin, I appreciate the invitation. I do 

want to say before my testimony, my primary duties when I was 

up here at the Banking Committee were mortgage finance and 

housing, and in addition to my legislative duties, because I very 

much remember the 5 weeks we spent total on the Housing Recovery Act—because I spent that 5 weeks on the floor and I still have 

the scars to remember it—I also spent a considerable amount of 

time answering constituent calls, helping people. I actually literally 

helped dozens, many of which were from the State of Alabama, and 

I am very proud to be able to have helped people stay in their 

homes and negotiated with lenders. So I want to be very clear that 

none of my comments are meant to dismiss that. My comments are 

all meant to help us focus on what is driving it. But I have very 

much been in the shoes of you and your staff in terms of having 

heard from homeowners and having heard from your constituents 

about these problems. 

That said, my testimony is going to address two very specific 

questions. The first is: Why have the Obama administration, the 

Bush administration, and the mortgage industry efforts to reduce 

foreclosures had so very little impact? And the second is: Given the 

reasons for that question, what should we do in terms of policy? 

The short answer to why previous efforts to stem the current tide 

of foreclosures have largely failed is that such efforts, in my opinion, have grossly misdiagnosed the causes. An implicit assumption 

behind HOPE NOW, run by former Secretary Paulson, the FDIC’s 

15 

IndyMac model, and the Obama administration’s current efforts is 

that foreclosures are being driven almost exclusively as the result 

of predatory lending or exploding adjustable ARM rates—we just 

saw Adam’s chart on the ARMs—and that you had these payment 

shocks that caused mortgages to be unaffordable. The simple truth, 

if you look at the data very carefully, is that the vast majority of 

mortgage defaults are being driven by the very same factors that 

have always driven mortgage defaults: a combination of negative 

equity position on the part of a homeowner coupled with a life 

event that often 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, I believe foreclosures will remain at highly elevated levels. 

To address some of the points that ere made by others, if payment shock were the dominant driver of defaults, then we would 

observe most defaults occurring around the time of reset, specifically just after reset as that burden hits. Yet this is not what has 

been observed in the data. Of the loans that have reset features 

that have defaulted, the vast majority have defaulted long before 

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

the fixed-rate mortgages without any payment shock would display 

default patterns significantly below those of adjustable-rate mortgages. We just saw from Adam’s chart that prime mortgages are 

starting to increase. If you actually do some econometric statistical 

work and you control for the differences in credit, you will see that 

for the vast majority of differences in prime and subprime, those 

things almost always go away. I will give the example of we have 

what are called FHA loans in this country that are fixed-rate, no 

prepayment penalties, extensive borrower protections on an applesto-apples basis looking at homeowner loans under the limit, the 

loan limit for FHA, FHA performs just as badly as subprime. So 

the argument that these are bad products driving it, well, the good 

products are performing terribly, too. 

So the important shared characteristic of FHA and most of the 

subprime market is the widespread presence of zero or very little 

equity at the time of origination or near the time of the default. 

The characteristics of zero or negative equity explain almost all of 

defaults in this situation. 

I share your frustration. I share the frustration of everyone at 

the table, and I recognize that that is leading us to push for solutions. One of the solutions that has been talked about is to allow 

bankruptcy judges to reduce the principal balance of a mortgage to 

reflect the reduced value of the home. Many have called this 

‘‘cramdown.’’ I believe cramdown would have adverse consequences 

in the marketplace and actually provide very little real value. 

I think the primary differences in opinion between Adam and 

myself is probably the extent of how much of this is employment 

driven. In Adam’s testimony, and I believe in Richard’s testimony, 

it is very clearly spelled out that if you have unemployment, you 

cannot put together a repayment plan, Chapter 13 is not going to 

work for you. 

So given that we know that Chapter 13 is not going to work for 

you if you are unemployed, given we also know that about 40 percent of foreclosures today are second or vacation homes and you 

16 

consider that—take your 50 percent unemployment, 40 percent 

from vacation and second homes, you get to 90 percent right off the 

bat. We will not be able to help 90 percent of foreclosures with 

cramdown. That is not to mean we should not help them. That 

means we need to find a solution that actually does help them, in 

cramdown or not. 

I want to mention a couple other things. It has often been presented that cramdown is without cost. I want to note a couple of 

things. First of all, it is not the lenders who will bear the burden. 

The investors in mortgage-backed securities will bear almost all 

the burden. As we have seen in the recent auto restructuring, these 

investors are often pension funds of retired State and local employees. It is not clear to me why retired teachers, firefighters, and 

other public servants should actually bear the cost of mortgage 

foreclosures. 

I also want to note that with the Government takeover of Fannie 

Mae and Freddie Mac, along with the Federal Reserve’s holding of 

almost half a trillion in mortgage-backed securities, we, the American taxpayer, are the largest single investor in mortgage-backed 

securities. Any losses from cramdown will accrue to us, the taxpayer. So this is not simply a matter of we are taking from banks 

and giving to homeowners. 

I also want to note, many people have talked about the CRL 

numbers. I have a tremendous amount of respect for Martin Eakes 

and Michael Calhoun there. I think they do good work. But I also 

think some of their forecasts have been wildly off. If you go look 

at what the Census Bureau numbers have actually said, between 

2007 and 2009 a little more than a million households—and let me 

emphasize, this is from the Census Bureau. Not my numbers. This 

is independent estimates from the Census Bureau from 2007 to 

2009, a little bit more than a million, 1 million, homeowners have 

transitioned to being renters. Not 2 million, not 4 million, not 9 

million. One million. That clearly can be 1 million—— 

Chairman WHITEHOUSE. Mr. Calabria, I allowed Mr. Levitin go 

over his time a little bit, so I will extend you the same courtesy, 

but if you could begin to wrap up. 

Mr. CALABRIA. With that I will wrap up and say that I just want 

to reiterate that the primary driver is negative income coupled 

with job loss. We need to focus almost all of our efforts on job 

loss—— 

Chairman WHITEHOUSE. Negative income or negative equity. 

Mr. CALABRIA. Both. You have a negative income shock coupled 

with negative equity. And why that is important is if you lose your 

job and you have got equity, you can borrow against it. You can try 

to make that through. If you do not have negative equity—it is 

both, the combination of shocks, and it is very important that we 

address both, not just the negative equity, not just the negative income, but the combination of the two is the primary driver. 

With that, I will wrap up. 

[The prepared statement of Mr. Calabria appears as a submission for the record.] 

Chairman WHITEHOUSE. Thanks, Mr. Calabria. 

Mr. Genirberg. 

17 

STATEMENT OF RICHARD GENIRBERG, ATTORNEY, 

GENIRBERG LAW OFFICE, JONESBORO, GEORGIA 

Mr. GENIRBERG. Chairman Whitehouse, Ranking Member Sessions, distinguished members of the Subcommittee, thank you 

kindly for inviting me to address bankruptcy reform in light of the 

worsening foreclosure crisis. I will share with you my experience of 

foreclosure in bankruptcy from the perspective not of an academician, but of a ‘‘country-lawyer’’ practitioner in the trenches. In my 

general trial and transaction practice, I represent consumers and 

creditors in Chapter 7 and Chapter 13 bankruptcy cases. 

Before 2006, it was common in Chapter 7 and 13 cases to advise 

financially overwhelmed debtor clients to surrender late-model cars 

and trucks. Since 2006, it has become common for debtors instead 

to surrender the house. What is different now? 

Since the bursting of the residential real estate asset bubble, my 

debtor clients owe more on their mortgages than their home is 

worth on the open market. Many of my clients are unaware that 

their home is financially ‘‘underwater.’’ They have sought the protection of the bankruptcy court to avoid repossession of a car or because they are behind on their mortgage payments. My clients usually express their wish to retain their home. I find myself explaining that their home is a financial albatross around their necks, 

that it is a liability, not an asset. I inform Chapter 7 clients that 

I will not sign a reaffirmation agreement to ratify a debt on undervalued collateral. Such conversations usually are long, tense, and 

uncomfortable for all involved. It is not uncommon to repeat such 

a conversation two, three, or four times in office visits or over the 

phone before reality sets in that the debtors cannot keep house and 

hearth together. What brings my consumer clients to such a financially uncomfortable impasse? It has almost never been because of 

the interest rate on their home loan. 

I see individuals compelled to file bankruptcy petitions because 

of medical catastrophe or because one or both spouses is laid off 

from a job or has become employed with reduced compensation 

after having lost a job. Upon further scrutiny of my clients’ financial organization, I typically have found that individuals spent way 

too much and saved way too little. They bought houses, timeshares, 

and cars they could not afford. It is not uncommon to see my bankruptcy clients drive up to my building in a newer vehicle than I 

own. I see consumers having adopted a self-defeating, self-perpetuating mind-set of viewing spending through the lens of the monthly payment rather than with an eye to the long term. I pray that 

the Congress will not be so short-sighted. My clients often wish to 

retain all their collateralized purchases despite their inability to 

pay for all of them and to service their credit card debt as well. 

My observation is that consumers have gone way overboard in 

borrowing for consumption. Americans would benefit from viewing 

borrowing money as a financial vehicle for businesses that plan to 

make a profit on the borrowed money. Americans would be wise to 

save more, to spend less, to establish a reserve of 6 months of income, and to buy cars for cash. 

Would cramdown of residential real estate loans benefit my debtor clients? Of course it would. Any reduction of the cost of any 

collateralized debt would benefit my debtor clients. Not only would 

18 

cramdown be beneficial, it would create a cottage industry within 

consumer bankruptcy practice of encouraging everyone earning 

under their median state income with an ‘‘underwater’’ residential 

loan to file bankruptcy expressly for the purpose of cramming down 

the loan. If cramming down a car loan older than 200 days would 

be moderately beneficial to a consumer debtor, cramming down a 

residential real estate loan would be so greatly beneficial to debtors 

that any residential loan underwater by more than $5,000 would 

benefit from a Chapter 13 bankruptcy. Under such a law, I imagine 

that consumer bankruptcy practice would thrive like never before. 

Legislating cramdown of residential real estate would create a 

veritable ‘‘license to steal’’ from mortgagees. The question this 

raises for the Congress is whether or not this would be beneficial 

for the American economy. 

Finally, which consumer debtors would benefit from residential 

real estate loan cramdown? Ironically, the higher the income of the 

debtor, the more able would be the debtor to benefit from 

cramdown. Again, I return to my observation that debtors become 

unable to pay their mortgages primarily because of job loss, sometimes due to medical catastrophe. Chapter 13 plans seem to benefit 

those mainly who have experienced a temporary setback in income 

due to job loss or medical catastrophe, not those who have been 

laid off permanently. Those consumers with residential mortgages 

and steady employment whose only financial weakness is the loss 

in value of the market value of their home would be the cohort who 

I believe would benefit the most from mortgage cramdown. 

Thank you very much for listening. 

[The prepared statement of Mr. Genirberg appears as a submission for the record.] 

Chairman WHITEHOUSE. Thank you for your testimony. 

With the very courteous agreement of Ranking Member, we will 

ask Senator Durbin to lead with the questioning. He is the Deputy 

Majority Leader and has many demands on his time, whereas I 

have to and, frankly, will actually love to be here until the end of 

the hearing. But I do not have the same demands on my time that 

the distinguished Senator from Illinois does. So, again, with the 

courteous agreement of the Ranking Member, Senator Durbin, 

please proceed. 

Senator DURBIN. Senator Whitehouse, if you are trying to get on 

my good side, it is working. 

[Laughter.] 

Senator DURBIN. Thank you. Thank you, Senator Sessions. 

Mr. Verdelotti, what is your current value of your home? 

Mr. VERDELOTTI. At this point I could not tell you, but we went 

to go refinance back in the beginning of this year, and it is under 

the $234,000 that I needed just to refinance, just to a lower mortgage rate of 5 percent with an FHA loan. So it is under what I owe. 

Senator DURBIN. And that was the original purchase price? 

Mr. VERDELOTTI. It was $225,000. 

Senator DURBIN. So your current mortgage payments on the two 

mortgages that you talked about? 

Mr. VERDELOTTI. $1,852. 

Senator DURBIN. It is interesting. I may be off here, but usually 

a rule of thumb on principal and interest is about $600 for each 

19 

$100,000 of value of the home. So you are hitting a pretty heavy 

payment there based on your second mortgage, I imagine, which 

probably runs it up into such a high category. Maybe I am off, but 

that is usually my rule of thumb trying to figure out what a mortgage principal and interest payment would look like. 

Your runaround, for instance, Citigroup was not the group that 

you initially did business with. You did not have your original 

mortgage with them, did you? 

Mr. VERDELOTTI. No. Aurora Loan, they had both my mortgages 

when we signed the agreement. They turned around and sold the 

second, the 20-percent loan at 9.25 to CitiMortgage. 

Senator DURBIN. I see. So you did not have anything to say about 

it. None of us do. It just kind of moved through the chain into the 

hands of another mortgage holder. 

Mr. Calabria, Dr. Calabria, could you tell me the source of your 

statement? 

Mr. CALABRIA. The 40 percent, that is from Freddie Mac. 

Senator DURBIN. Freddie Mac? 

Mr. CALABRIA. And that is also consistent with a variety of surveys that have been done by the National Association of Realtors 

on who—— 

Senator DURBIN. How did you know I was going to ask you about 

that? 

Mr. CALABRIA. I have been following you for years, listening to 

you on the floor. 

[Laughter.] 

Mr. CALABRIA. It sort of just soaks in after a while. 

Senator DURBIN. You have got to find a much more interesting 

hobby than following me. 

And ‘‘license to steal,’’ Mr. Genirberg? I guess you just characterized bankruptcy court as a license to steal, because right now you 

can go ahead and get cramdown on a farm, on a ranch, on a second 

home. You think that is a license to steal? 

Mr. GENIRBERG. No, sir. 

Senator DURBIN. Why? What is the difference? 

Mr. GENIRBERG. I am trying to make a different point. The point 

I am making is that with cramdown of residential real estate, the 

amount that one could glean, the benefit that a debtor could glean 

from a bankruptcy would be so great that it would be worth it to 

file a Chapter 13 expressly for the purpose of the cramdown, even 

without any other factor that often forces people into Chapter 

13s—or Chapter 7s—such as a temporary loss of job or medical catastrophe. 

Senator DURBIN. You are familiar with the Bankruptcy Code reform that we passed a few years ago and the new standards of 

qualifying for bankruptcy and credit counseling requirements and 

all the things that are part of it? It is not an easy process. You 

have to qualify for it on the front end to be able to go into it. 

Mr. GENIRBERG. I am very familiar with it, Senator. 

Senator DURBIN. Yes, I am, too. 

Let me ask you this, Ms. Cohen. It seems to me that our best 

efforts at voluntary renegotiation have really failed, and the numbers you gave us about the numbers of potentially voluntarily reVerDate Nov 24 2008 11:18 Mar 30, 2010 Jkt 055519 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55519.TXT SJUD1 PsN: CMORC
20 

negotiated mortgages says that this wave is just going to grow 

rather than diminish with that approach. 

Ms. COHEN. So I think Professor Levitin’s numbers also show 

and your numbers show that the foreclosure crisis is growing and 

that the modifications are not keeping up. We trace it primarily to 

the structure of the servicing industry, and for many, many years 

now, and for many different rounds of efforts, we keep hearing the 

servicers will do better. 

Senator Dodd had a pow-wow with the servicers. We had Hope 

for Homeowners. We have HOPE Now. There is a long, long list, 

as everybody knows, of the voluntary measures. But as long as 

servicers profit because homeowners are in default, they are not 

going to voluntarily take a hit, and the investors are taking the hit 

at the same time that the homeowners are taking the hit. And so 

what we really need is a stick and not a carrot. 

Senator DURBIN. And let me ask you, Professor Levitin, you have 

heard the point—and I am sure you have debated Dr. Calabria before on this issue. He talks about negative equity and negative income. It would seem the only place that you can address negative 

equity and negative income is in a bankruptcy court. 

Mr. LEVITIN. That is correct. I agree with Dr. Calabria that negative equity and payment shocks together, whether it is from unemployment or a mortgage rate reset, whatever the cause, you need 

those two things together. Those are the two key ingredients. But 

the only place we can address those is bankruptcy. Bankruptcy addresses payments, and it addresses negative equity. I do not know 

of any other solution that does. 

Senator DURBIN. And Mr. Genirberg’s suggestion that these people going to bankruptcy court into Chapter 13 actually have an income is really stating the obvious. You could not go to Chapter 13 

unless you had an income. 

Mr. CALABRIA. That is correct. 

Senator DURBIN. The question is whether you have an adequate 

income to even pay the restructured loans based on the assets you 

would bring into bankruptcy. That is just the nature of it. There 

is nothing sinister about this. I think that that is what Chapter 13 

is there for, isn’t it? 

Mr. LEVITIN. That is right, and I think it is also really important 

to emphasize that Chapter 13 is not a fun process for a debtor. You 

talked about the difficulty of getting into Chapter 13. The real 

problem is once you are in Chapter 13, it is not fun. You are living 

on a court-supervised budget for the next 3 to 5 years. If you want 

your daughter to get braces, you are going to have to go and wrangle with the trustee and the judge about that. That is not something that people do for fun just to get rid of a little bit of mortgage 

debt. 

Senator DURBIN. Thank you. 

Thank you, Mr. Chairman. 

Chairman WHITEHOUSE. Thank you, Senator Durbin. 

The distinguished Ranking Member, Senator Sessions. 

Senator SESSIONS. Mr. Calabria, do you want to respond to that? 

Mr. CALABRIA. I actually wanted to draw some distinction between these two points because I think that they are incredibly important, and Adam is right, you need to have the combination of 

21 

the two. But I would stress if it is solely a case of where you have 

a negative equity and, you know, your income stayed the same, 

your mortgage payment stayed the same, all it is is that the value 

of your house has declined, there is nothing physically stopping you 

from making your mortgage. And in those cases, there is nothing 

at all that we should be doing to encourage you not to pay your 

mortgage. You knew what the house price was. You knew what the 

value was. You have not lost your job. So for that category of people—and I think it is very interesting that Adam talks about in his 

testimony what he calls ‘‘strategic defaulters,’’ and he is very clear 

about it. These are people who can pay their mortgage and who 

choose not to. And I think we need to be concerned about not encouraging voluntary defaults that would not happen otherwise. 

Senator SESSIONS. Well, the question I was going to ask was: If 

you cramdown the principal—and we are talking about cramming 

down the principal, not stretching out payments—which a judge 

can do now. Can’t they, Mr. Genirberg, in bankruptcy? Or can 

they? Can they—— 

Mr. GENIRBERG. On long-term loans, the payments generally stay 

the same. The altering of monthly payments or the altering of the 

payback on collateral really happens with short-term loans such as 

auto loans, those that can be paid back within 5 years. Long-term 

loans are just paid back as originally contracted. 

Senator SESSIONS. The problem with principal, it seems to me, 

on an underwater loan is that we, in effect, would have altered the 

historic concept that it is the homeowner that takes the risk of a 

depressed housing price and not the person who lends them the 

money, that the homeowner has got to be careful when they buy 

a house to make sure they have a reasonable expectation that it 

will hold its value. 

Mr. Calabria, do you have any thought about that? 

Mr. CALABRIA. I do, and I think this is an incredibly important 

point. You know, when I got my mortgage, I certainly did not intend to share any of the appreciation with the lender, nor did I intend to expect the lender to share any of the loss. And I think you 

do need to parse out these separate things. You know, people who 

have lost their job, particularly if it is a mass layoff a company 

shuts down, they deserve our help, they deserve our sympathy. 

People who invested in a house solely as—you know, not just in the 

consumption aspect but because they wanted to, you know, share 

in the casino that our housing market had become, they took a 

gamble, they took a loss, and they should be expected to live up 

to that loss, if they can. 

I think it sends the absolutely wrong message. In my mind, I am 

very concerned that as a society we are moving from thinking of 

a debt as an obligation to thinking of a debt as an option. You 

know, once that happens, we can just sort of forget about actually 

expecting to have that. 

So I want to go back and say my continued focus on the employment side of that is, one, this is the primary driver and, two, this 

is something that we can directly address; and if we do not address 

it—because you can go into bankruptcy, and if your house has declined by 20 percent and they cram it down 20 percent but you are 

not working, that does not solve your problem. 

22 

So my point is that we need to be honest about—you know, my 

back-of-the-envelope is that, realistically, cramdown would maybe 

help 50,000, 60,000 people, not millions, not hundreds of thousands. And if Congress decides that to help 50,000 people this is 

worth it, that is fine. Congress can—you know, you weigh the balances; you do the cost/benefit, you decide that that is it. But I do 

not think we should fool ourselves in thinking that this is a solution that is going to keep millions of people in their houses. If you 

do not get at the core of this, none of the rest of it matters. 

Senator SESSIONS. There is no doubt about that. We have seen 

that a lot of refinanced mortgages, even then they have not been 

able to keep the payments up. Is it, what, 40 percent default 

after—— 

Mr. CALABRIA. It is close—from the OTS, OCC data that they do 

on, where they have looked at—where they have done the reductions of 20 percent or more, you have about 38, 39 percent that redefault, you know, within the next year. 

And I want to make another important point about cramdown, 

and I think Adam’s projections of the housing market are about 

right. And the importance part of that is we could cram somebody 

down today—and as Adam points out in his testimony, he makes 

a very good point—they are not going to have positive equity. At 

best, they are going to have zero equity. But in 6 months, they are 

going to be underwater again. 

So what is the solution? We re-cramdown everybody every 6 

months? You know, we need to come up with a long-term solution. 

Senator SESSIONS. We have a national interest in and the banks 

have an interest in not having too many houses fall on the market 

and collapse the price even further. And that is why they are voluntarily willing to renegotiate. 

Mr. Genirberg, do you think that in your experience and, Ms. 

Cohen, in yours that it is often—or how often is it that there is no 

one to negotiate for the lender in lieu of bankruptcy? How often is 

it that these mortgage tranches with nobody who has the authority 

to negotiate an extended payment or reduced payment or reduced 

interest rate for a period of time? 

Mr. GENIRBERG. Well, the fact that the mortgages are carved up 

into strips and tranches does not really make a difference because 

there is always one servicer that—— 

Senator SESSIONS. Is that servicer—some have told me that that 

servicer does not have the authority, because of contractual circumstances with the lenders who gave them the money, that they 

do not have the authority to negotiate a reduction. 

Mr. GENIRBERG. I have had that experience. I have to agree with 

Ms. Cohen that my clients have uniformly found that it has been 

ineffective to try to negotiate with mortgagees because the mortgagee that does not have the authority or my clients often do not 

have the sophistication to have an ongoing conversation about 

these issues, and they just somehow do not get a very good response. They often get a response like Mr. Verdelotti talked about 

where it is just bureaucratic and frustrating. 

So the experience that my clients have related to me 100 percent 

is that it has never worked to try to do a negotiation yet. 

23 

Senator SESSIONS. But apparently it is working. Wells Fargo 

says, what, 700,000 they have renegotiated. But—— 

Ms. COHEN. Senator Sessions, could I—— 

Senator SESSIONS. But I have no doubt it is not easy, and I take 

very seriously your experience as a practicing attorney. And that 

is what I am hearing from lawyers and bankruptcy judges, that 

this is a problem. 

What would you say, Ms. Cohen? 

Ms. COHEN. Thank you for your question, Senator Sessions. The 

way the agreements work between the servicers and the holders of 

the loans, a study from Credit Suisse has found that, in general, 

servicers have authority without very many limitations on their authority to negotiate with the homeowner, which is a separate question from whether Mr. Verdelotti can get somebody on the phone 

who will then do the right thing, and that is about the incentives 

of the servicer separate from what the holder is trying to accomplish. 

With regard to certain servicers and their numbers, I would like 

to make a couple of points. One—— 

Senator SESSIONS. I am over, but it is okay to—— 

Ms. COHEN. I apologize. 

Senator SESSIONS. That is all right. 

Ms. COHEN. One is, like with Mr. Verdelotti’s situation, we do 

not know why he was told no because there is no transparency in 

the system. And so a number of the big servicers have said X number of people do not quality for HAMP loan mods, for example, and 

Y number of people have received HAMP loan mods. I can tell you 

from talking to attorneys around the country who are very familiar 

with the HAMP guidelines that many people who purportedly are 

receiving HAMP loan mods are receiving loan modifications that do 

not comply with the requirements, and that when people are 

turned down for HAMP loan mods, we do not know whether that 

is justified or not. 

I had one attorney in upstate New York tell me a story where 

her client was turned down for a HAMP loan mod, and she called 

the servicer and said, ‘‘You do not even have my client’s income information yet. How can you turn my client down for a HAMP loan 

mod? ’’ 

I hear stories like that every day, and so we need a little more 

transparency before we know whether the numbers are real. 

Senator SESSIONS. Well, that is what I am hearing, talking to 

real practitioners and judges. I think that is a recognition that 

there is no free lunch. Somebody will pay for when principal is 

crammed down. It is just—it will show up somewhere in the system in the future against somebody that is likely to be a good 

payer. But how we could improve the ability to get a clear answer—because it does advantage the lender if, for example, they 

could reduce the payment 40 percent because one of the family 

members is unemployed, and that person becomes employed 2 

years from now, and they do not have to go through foreclosure, 

real estate commissions, and all the expense of foreclosing on a 

loan. So that is why they are willing, apparently, to renegotiate 

and try to keep things that realistically have a chance to succeed— 

24 

they have an interest in it. But it may be that there is not enough 

people at the front line—— 

Chairman WHITEHOUSE. Although I think that Ms. Cohen’s testimony is that the person who is making that decision is the 

servicer, and that at the servicer’s point of decision, they actually 

make more money and do better letting the property go into foreclosure than they do with a renegotiation. And so at the point of 

decision, the incentives are all in the wrong place, so that decision 

happens the wrong way. 

Senator SESSIONS. If they do not agree with that, the free market 

guides. But I think that makes some sense. 

Mr. CALABRIA. Senator Sessions, if I could—— 

Senator SESSIONS. I should not—— 

Chairman WHITEHOUSE. No, please. Go ahead, Mr. Calabria. 

Mr. CALABRIA. If I could make two points, two comments on this, 

the first of which is there are very serious capacity constraints 

within the servicing industry. When I was Banking Committee 

staff 2 years ago, I sat across from a bunch of bankers and said, 

‘‘You guys need to go out and staff up your loss mitigation, and you 

need to do it today because you are going to get hit with a wave 

of foreclosures.’’ And, of course, they all nodded and said, ‘‘Yes, we 

are going to do that.’’ And I do not think many of them have. 

I do think it is important to keep in mind, you just cannot go 

down to McDonald’s and grab somebody off the drive-thru and put 

them working phones in loss mitigation and expect that to work. 

So there are very serious training capacity response issues there. 

You know, I will note that Congress up to this point has appropriated close to $300 million for nonprofits to service as those intermediaries. I do think we need to look at it and see if that is working, because one of the things that these intermediaries are supposed to do is get people prepped. 

You know, I will also note—and Senator Whitehouse and Senator 

Durbin and everybody talked about the TARP money—Congress allocated $50 billion in the TARP to go to foreclosure mitigation. Not 

a dime of it has actually gone out the door. And one of the things 

that actually can be done with that money is to try to help build 

the infrastructure so that you have people there working the 

phones and the call centers, that you have training, that you have 

best practices around the industry. And none of that has been 

done, and I think that that is a real loss. 

Senator SESSIONS. Where is it? Is it in GM or something? 

Mr. CALABRIA. Actually, it is Treasury. Treasury still has the 

money. Treasury has $50 billion that they have allocated $15 billion of it, which has not been awarded and spent, so not a dime 

of that has actually been spent on building the infrastructure. 

And I want to make a final point near Ms. Cohen’s testimony. 

Given the incentives that lenders and servicers face because the 

problem facing the lender ex ante ahead of time is they do not 

know who actually is going to go into default. If they offer a mitigation, they do not know who is going to cure. So the situation facing 

the lender ahead of time is it is actually profit-maximizing for them 

to have a positive number of foreclosures that are individually negative value in which the homeowner and the lender would actually 

make out ahead of time. But the very real problem with that is the 

25 

lender does not know that. They do not have that information. It 

is very easy to ex post say, ‘‘Well, if you had modified this, then 

everybody would have been better off.’’ 

I guess, you know, I would put it this way: I would not have to 

have bars on my windows at home if I knew exactly who was going 

to try to break into my house. But I do not. And you do not have 

that knowledge, and the lender does not have that knowledge. 

Chairman WHITEHOUSE. But to play the devil’s advocate, isn’t 

that exactly the sort of question that bankruptcy courts sort out 

every day by looking at individual circumstances? 

Mr. CALABRIA. To the extent that you would either have a court 

or I think a lot of the intermediaries, the nonprofits, one of the valuable things that they can actually provide is that sort of screening. I mean, this might sound sort of uncaring, but it is not. This 

is actually to help people. But you need to have a minor obstacle 

to weed out people who are not in trouble because of the capacity 

constraints. And one of the concerns I have greatly had with 

Obama’s refinance plan in terms of Freddie and Fannie is they are 

focusing on people who are not even late yet. It is fine to try to 

help everybody, but to me it is a sort of reverse triage. You know, 

we are helping the guy who sprained his knee before we are helping the guy with the gunshot wound. It is the absolutely wrong 

way, I think, we should be going about it. 

We should be focusing on—you know, all of our resources should 

be on those who look like they might be in the street basically in 

the next couple of weeks, not those who are going to be fine for 6 

months. We have got it in reverse order in that way. 

Chairman WHITEHOUSE. Let me jump in and ask some questions 

myself at this point. My first is Mr. Verdelotti is here. He has 

worked very hard to keep current on his payments, despite the financial difficulties that have been caused. He got a massive runaround from CitiMortgage and from Aurora both. I would—well, I 

will just ask you directly. Mr. Verdelotti, are you here seeking a 

license to steal from anyone? 

Mr. VERDELOTTI. Absolutely not. I have a credit score right now 

in the 700s, and I am not looking to lose that. This world is built 

on credit, and I need it just as much as GM needs it. If I do not 

have credit, then I cannot buy a car. My purchases stop. That only 

hurts the economy in my eyes as well. If I ruin my credit, then 

where do I go? I will lose my house, I will lose my car. I cannot 

get to work without that. If I do not have credit, I cannot get an 

apartment. Everybody does credit checks. 

So, no, I am not looking for a license to steal. I am just looking 

for help. 

Chairman WHITEHOUSE. The point that you made so articulately 

about your experience, 5 hours on the phone, never getting anybody who could give you an answer, hours of elevator music, I 

mean, for a family where both parents are working that have three 

busy kids, an afternoon is a precious thing, you know? If you had 

a spare afternoon, you could go to the park. You could go to the 

beach. You could make a family memory. Instead, you burned that 

whole afternoon because you could not find one person on the 

phone in that whole company to give you the time of day and even 

be able to answer your questions. 

26 

Mr. VERDELOTTI. That is correct. Unfortunately, I do not have 

any time. My wife works nights. I work days. So we pass in the 

wind. 

Chairman WHITEHOUSE. So that afternoon is a big, big cost on 

you and on your family. 

Mr. VERDELOTTI. Time together is important, yes. 

Chairman WHITEHOUSE. We would not ask you to burn that up 

for nothing. And we have heard Mr. Genirberg say that his clients 

do not get a very good response 100 percent of the time when they 

try to deal with the banks. We have heard Mr. Calabria in a much 

more professional way say there are very serious capacity restraints, which I would say is, you know, a little bit jargon for people are not being treated fairly. People are not being served. 

And we heard Ms. Cohen’s testimony about the endless runaround that she has heard about experiencing from her network of 

attorneys, but she has also said in her testimony that the servicing 

effort is, at best, erratic—that is one of the pieces of testimony from 

your long testimony—and that files are routinely lost. They claimed 

that they had lost your file. 

There is an enormous lack of transparency. There is a whiff, at 

least, coming off some of this testimony that the servicing banks, 

in fact, have some pretty nasty strategies about blowing people off, 

not being available, losing their documents on purpose, and all that 

kind of stuff. I mean, we have just come through dealing with the 

credit card industry that declared the day over at 10:00 or 11:00 

in the morning so that they could whack people whose mail came 

in that day on time that afternoon with increased penalties for failing to pay on time. Who would have thought a credit card company 

could declare a day over earlier than the day is actually over? But 

they did that, and they did it, and it was a really dirty trick 

against the American public. 

So the notion that this is an industry that is incapable of really 

dirty tricks against the American public is one that has already 

been—you know, we have been disabused of that notion. They are 

clearly capable of it. They did it with that stunt in the credit card 

business. 

Do you have the sense that there is more to look at here in terms 

of whether they are deliberately keeping families on hold so they 

cannot get through and ask for these modifications, whether they 

are deliberately losing the mail? I mean, at some point incompetence becomes strategic in terms of innocent incompetence, strategic incompetence, and a nefarious plan. Where do you think the 

servicers range? 

Ms. COHEN. Senator, I can give you some hints about why I 

think it is more than just incompetence. I cannot answer the question of whether files are lost on purpose. There do seem to be some 

servicers who—most servicers—completely lack commitment to 

making this work. 

For example, there is some information in my testimony—— 

Chairman WHITEHOUSE. Federal Express does not lose packages 

hardly ever, and they deal with a lot more packages than these 

servicers do. 

27 

Ms. COHEN. I am interested to know on the origination side 

whether they lose the documents when they are trying to make a 

loan or not. So that is sort of one question. 

One servicer in my testimony is cited as having information on 

their answering machine that says, ‘‘If you call more than once, you 

will be put to the bottom of the queue. And so that is one way that 

they are dealing with it. 

But the bigger issue really is what is happening beyond stafflevel incompetence on the front lines. We are seeing on the 

websites of participating servicers inaccurate information about 

who qualifies: You can only get a HAMP modification if you have 

a GSE loan, a Fannie or Freddie invested loan. That is not true. 

We are seeing waivers of people’s legal rights in loan modification offers that directly violate Treasury’s guidelines. Those are not 

mistakes by a random untrained person on the front lines. Those 

are systemic problems that can be found by management. If I can 

find them, they can find them. 

Chairman WHITEHOUSE. And these are not little, bitty corporations that have, you know, Mom-and-Pop businesses that might be 

expected to get lost in this stuff. These are big corporations with 

billions of dollars in business, with lawyers and staff and all that, 

right? 

Ms. COHEN. Without question—— 

Chairman WHITEHOUSE. This is CitiMortage, for God’s sake. 

Ms. COHEN. For example, Ocwen’s 10–K recently identified that 

their income from servicing improved from 52 present—from 42 

percent in 2008 as compared to 2007. So they are making a lot of 

money. I know that the servicers have some financial challenges 

and that they have a lot of paperwork they have to do. But we are 

really talking about a power differential between corporations that 

profit off of people’s disadvantage and individuals like Mr. 

Verdelotti who are just trying to get a decent answer. 

One other reminder about bankruptcy, you take a huge credit hit 

on your credit score for many, many years if you file for bankruptcy. And so people do not do that lightly. People like Mr. 

Verdelotti all over the country are foregoing medicine and food and 

utilities so that they can pay their bills. 

Chairman WHITEHOUSE. And still not get a straight answer. 

The other question, I think we really have very strong agreement 

on the panel from the point of view of treating consumers in anything resembling a humane or civilized fashion. There is a catastrophic failure on the part of the industry here, and perhaps the 

bankruptcy stick would get their attention a little better. 

The other place we seem to have a lot of agreement is between 

Professor Levitin and Dr. Calabria that there is a pairing of circumstances that leads to the foreclosure problem, and that is, on 

the one hand—I think you both used almost identical words—negative equity in the home and some adverse life event, whether it is 

the loss of a job, a reset, or a health care disaster or something else 

in the family. And when those two things converge, that is when 

you get a real problem. 

And as I understand it, as a lawyer, as somebody who has been 

a receiver companies, the only place you can adjust the negative 

equity part of something is a bankruptcy court—or a court. It has 

28 

to be a court in America, because due process of law does not allow 

somebody’s equity to be taken away without a judge signing off on 

it. You would agree with that, both of you, that it has to be a judge 

who makes an equity adjustment and takes away equity so that 

negative equity becomes on the bubble? 

Mr. LEVITIN. Unless it is a voluntary agreement, yes. 

Chairman WHITEHOUSE. Yes. 

Mr. LEVITIN. And I think it is very important to emphasize that 

the modifications that have happened, almost none of them have 

involved principal reductions. So the modifications that have been 

happening have dealt with the affordability of the loan—or sometimes actually they have not. In many cases, many modifications 

actually increase monthly payments rather than decrease them, 

even now. But almost none of them have dealt with problems of 

negative equity. 

There is another slide I would like to show. This comes from the 

Office of the Comptroller of the Currency and the Office of Thrift 

Supervision, their most recent data from the first quarter of 2009, 

the percentage of loan modifications involving principal reduction 

by the type of ownership. So Fannie Mae, Freddie Mac, and private 

label securitizations, there were all of four loan modifications listed 

that involved a reduction in principal. My guess is that those four 

were actually data errors. 

For portfolio loans, it was some 3,000 that had principal reductions. 

Senator SESSIONS. What is a portfolio loan? 

Mr. LEVITIN. I am sorry? 

Senator SESSIONS. What is a portfolio loan? 

Mr. LEVITIN. A portfolio—the lender owns—the servicer actually 

owns the loan itself, rather than servicing for someone else. 

Chairman WHITEHOUSE. So this goes back to the point we talked 

about earlier about the person who is going into the community 

bank and is talking to somebody, and it actually happens there. 

Senator SESSIONS. Look, I can see this is a huge thing for the 

Government to somehow force a person who has loaned somebody 

a bunch of money, given it to them, on a promise it will be paid 

back. It is one thing to delay the payments, reduce the payments, 

extend them over a period of time. It is another thing to say, ‘‘I am 

voluntarily going to give you part of that money, and you do not 

have to pay it back.’’ 

So I think that is a pretty big issue, but I would think, however, 

that the portfolio loans, the people who know what is happening 

out there, probably made good decisions, because at some point you 

need not to be—you need to count the cost of foreclosure, the bank 

taking over property, and all the headaches that go with that. And 

it might just be better if you could have some reasonable expectation that with some modification the lender may be able to work 

its way through that. 

I wanted to ask Mr. Genirberg one more—well, I will not. Go 

ahead, Mr. Calabria. 

Mr. CALABRIA. I was going to make a couple comments in response, and since you brought up that point, you know, I think my 

approach to this is, second, that without addressing the income element of it—for starters, if it is just purely a case of you have lost 

29 

value in the home and nothing else happened, I do not think that 

is a public policy rationale to intervene, you have lost on an investment. And if cramdown does not deal with the job loss, then you 

are not exactly dealing with the underlying cause. But I do want 

to get at a point that you made and sort of a counterpoint that Alys 

made, which is a lot of people have talked about this as a stick, 

and that fundamentally is something I have a problem with. I 

think it is more than fine to try to cajole lenders. I think it is very 

different to try to coerce lenders. 

It is a very different debate if we have decided—— 

Senator SESSIONS. Let me just ask you this: In the future, if a 

person is thinking about investing in providing money to be loaned 

out to home buyers in hopes of a return, I do not think there is 

any doubt that they could become skittish in the future if they do 

not know what Congress next will invalidate, the written contract 

they had when they loaned the money. So this is not a little, bitty 

matter. 

Let us go back to the one thing that we might could make some 

progress with. Apparently we have some TARP money that is designed to help avoid some of these problems. You have raised that, 

Dr. Calabria. Mr. Levitin, would you like to comment on it. Is there 

a way that we could somehow incentivize these loan servicers to 

take the time to actually meet with the borrowers and invest some 

effort in that and to maybe negotiate a loan that would enable 

them to get back on a legitimate payment rate and avoid foreclosure, avoid losses for the bank, and help our economy by not 

dumping too many houses on the market all at once? 

Mr. LEVITIN. I wish that there were. I do not think anyone wants 

to encourage more bankruptcy filings. Unfortunately, the Obama 

administration’s HAMP program offers incredibly generous incentives, or one might even call them bribes, to servicers to engage in 

loan modifications. This has not been working. 

Senator SESSIONS. Why? 

Mr. LEVITIN. Maybe it is not a—well, part of it may be is just 

is not a big enough bribe, but part of it also, I think, is the capacity 

issue, that servicers—one reason, I think, why we do not—you 

know, to modify a loan is like doing an underwriting afresh, and 

when you are doing it on a distressed underwriting, that is very 

difficult. That takes some experience. You cannot do it from an 

automated desktop underwriting model. It is very individualized. 

Servicers do not have the personnel that are trained in that, and 

we cannot create them overnight. 

Senator SESSIONS. I am not sure they cannot. Bankers are being 

laid off all over the country. They are not making the new-home 

loans. There is some expertise out there. 

Mr. LEVITIN. I am not sure you want the people who underwrote 

these loans in the first place doing the modifications. 

Senator SESSIONS. Well, branch managers or people who have 

dealt with customers, they know people who are phony and who 

are not. 

Mr. LEVITIN. I do not think we have the trained resources—— 

Senator SESSIONS. I just think there are personnel out there. 

Mr. LEVITIN. Most servicers outsource a tremendous amount of 

their operations to India. For example, Ocwen’s or Ocwen FinanVerDate Nov 24 2008 11:18 Mar 30, 2010 Jkt 055519 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\55519.TXT SJUD1 PsN: CMORC
30 

cial, which is one of the best servicers out there, actually, has 

about two-thirds of its employees based in India. I do not believe 

that an India-based employee is capable of doing a U.S. loan mod, 

that there are too many factors that you would have to know that 

are culturally contingent in order to do it. You cannot just do it on 

the numbers. If you see that the homeowner works at a Chrysler 

dealership, you are going to view that differently than if they are 

employed by the U.S. Government, let us say. These are culturally 

contingent factors. 

The capacity problem, I think there is broad agreement that 

there is a capacity problem, and it is something that we cannot fix 

immediately. Even if we have a legion of unemployed former community bankers out there, which I do not believe we do, we cannot 

just plug them in the system tomorrow and have loan modifications 

turned out. 

Bankruptcy is different. Bankruptcy is immediately available. 

The capacity is there. We have bankruptcy judges who are trained 

in doing this. They can handle the cases, and when you file for 

bankruptcy, there is an automatic stay. It stops the foreclosure 

process so that even if capacity ramps up, there is some time to 

sort this through. Even with the $50 billion sitting in Treasury, there are ways 

maybe Treasury could improve things on the margins, but it is not 

going to change—there is not another—there really is no other option than bankruptcies, either muddling through this and seeing 

millions of houses lost in foreclosure or trying the bankruptcy option. And maybe Dr. Calabria is right and bankruptcy will not help 

very many people in the end. And if it does not, I do not think we 

should be particularly worried about its effect on the economy. But 

maybe he is wrong and bankruptcy actually can help a lot of people. And that is a chance that I think is well worth taking. 

Ms. COHEN. Senator Sessions, I have a couple of things to add 

to what Professor Levitin said. 

First, your concern about the cost of credit increasing, you were 

talking before about your work with Senator Durbin about auto 

lending, and so in the 1970s, the FTC passed a rule that affected 

the liability of assignees, the holders of the loans, who we were just 

talking about, for cars, and there was a huge outcry that the cost 

of lending, auto lending, was going to go up significantly because 

of the increased burden and uncertainty in the assignee liability 

market. And the answer is that there was really no significant 

change in the cost of lending. My understanding is there is also 

similar research about bankruptcy, but I wanted to provide that 

historical example. 

Further, you asked about how can we get the servicers 

incentivized to do the loan modifications. It appears that the large 

payoffs or payouts that the Treasury Department is willing to give 

for the loan modifications cannot compete with the monthly payment stream and the residuals, which are sort of interests in a 

level of the tranche that the servicers have. And as soon as they 

do the loan modification, their income directly goes down. And so 

it is very hard to bring them to the table with that dynamic. 

We have seen some mediation programs in Philadelphia and 

elsewhere, where if you get a human to the table with another 

31 

human, they can work it out. But when I talked to people in Chicago and they told me how many foreclosures they have there, the 

question really is: What do we need to do on a national basis? And 

on the national basis, we need something that is a little stronger 

and provides greater leverage to homeowners. 

Senator SESSIONS. Mr. Genirberg, you have heard the discussion. 

You are in the real world dealing with real borrowers who are in 

trouble. Many of them, it is so sad. I mean, there are people losing 

their jobs. We have got a lot of people that are not working today 

that had decent incomes just a few years ago. A lot of them are 

bankers, because they have all slashed their employment, too. So 

there are a lot of higher-income people, lower-income people, middle-income people that are losing jobs. 

How do you see this discussion about the ability of the lender to 

effectively renegotiate a loan to their own advantage if they were 

able to do so? 

Mr. GENIRBERG. In the bankruptcy context, it is not so much a 

negotiation as a litigation. So, for example, with car loans, when 

someone—when I file a bankruptcy, a Chapter 13 for an individual 

and there is a car loan, I write a plan based on income and based 

on expenses, and I set terms. There is not a negotiation. I do not 

call up a car lender, the financier of a car, and say, ‘‘Well, here is 

what I propose that we do.’’ I simply write a plan. If there is an 

objection, then we go into litigation in the bankruptcy court. 

So within the bankruptcy context, there is not a real negotiation 

with the servicer. There is simply an assertion. They file a claim, 

and if they do not like the plan that I have set up, then they are 

going to litigate it. And then there will be a negotiation of sorts to 

see if we can settle, just like with any lawsuit. 

So once it gets into the bankruptcy context, there is not really 

a conversation with the lender, and right now there is no way to 

have a conversation with the lender before we get into the bankruptcy context because it just does not really work despite there 

having been 750,000, apparently. I just have not seen it. 

Chairman WHITEHOUSE. And in terms of the plan that you would 

file on behalf of your client, you would not be making that plan up 

out of whole cloth. You would be making it up based on your experience of having done plans like these over and over, knowing what 

elements in the plan would cause a lender to object and to interrupt and to cause this to go to litigation rather than continue to 

go smoothly for your client. So there is an element of learned behavior on the system’s part in the efficiency that you see of being 

able to file a plan and put it through and file a plan and put it 

through, without litigation or negotiation. Correct? 

Mr. GENIRBERG. Yes, Senator. Over time, we sort of come to a 

subliminal agreement. If you go this far, I will not object, and—— 

Chairman WHITEHOUSE. Sort of a meta-negotiation. 

Mr. GENIRBERG. It is a meta-negotiation. You know, the saying 

in bankruptcy always is that pigs get fat and hogs get slaughtered. 

If you seek too much—— 

Chairman WHITEHOUSE. Yes. That is true in politics, also. 

Mr. GENIRBERG. Yes, sir. 

Chairman WHITEHOUSE. Let me wrap up, if I may, with one additional point, and if the distinguished Ranking Member would 

32 

care to respond, I would, of course, give him whatever time he 

needed. But it strikes me that based on the testimony that we have 

heard, which actually shows a very surprising degree of agreement 

among all the witness, a welcome degree of agreement to me, that 

we have almost a kind of mechanical problem here, which is that 

we have the wave of first subprime resets, and then option adjustable, Alt-A, prime, and jumbo resets that Professor Levitin has 

chronicled, this slide right here. And that is coming at us, and 

those resets are one of the life events that, combined with negative 

equity, provoke the foreclosure problem. And so we can see from 

this that there is very likely to be a very significant second wave 

of foreclosures. 

That then precipitates into the problem of once you foreclose, you 

drive down values, particularly in neighborhoods where these foreclosures are happening. There is a lot of evidence that a foreclosure 

down the block hurts the values up the street. You get two of them, 

the effect is compounded. So now the person up the street who was 

doing Okay has an even bigger negative equity problem, and the 

thing begins to be a vicious cycle. 

One of the ways that you can get out of the vicious cycle is that 

really forever, whenever there is an inability-to-pay problem, you 

go to an organized place like bankruptcy court, and you work out 

who gets what, and that way you maximize the return to everybody, and you can bring an end to the sort of death spiral. 

But as Ms. Cohen has testified, the safety valve of modification 

is not working both because the HAMP program is not adequate 

to the scale of the problem and because the servicers are not complying with the terms of the HAMP program and because their incentives are all in the wrong place in terms of actually making 

those adjustments. And so the natural outlet that would defuse 

that potential vicious cycle has been jammed up. And my worry in 

all of this is that when you saw what this country had to go 

through with the subprime mortgages and the cost of the TARP 

and the political rows that the whole TARP caused, if we have another one of those coming up, and this time it is not going to be 

just subprime folks, it is going to be the folks who live down the 

street from us who have jumbo mortgages, the folks who have good 

credit and have good jobs, and it is, you know, a bunch of people 

who thought that hey kind of go through this all right, and now 

suddenly it is not, we are going to be facing a great deal of trouble. 

And we need to make sure that that vicious cycle—that there are 

mechanisms for interrupting it. 

I see most heads nodding, and I want to take this moment to 

thank the witnesses. We have a statement from Senator Feingold, 

who was here earlier but could not stay, unfortunately. Without objection, I would like to put that into the record. His final page 

makes the point I just did: Foreclosures lead to falling real estate 

prices, which lead to more foreclosures. Local businesses are deeply 

affected as well, and empty houses lead to crime and greater costs 

for social services offered by local governments, as well as lower 

property taxes to offset that. After all the money that we have 

spent to save the banks, it is irresponsible for Congress to let this 

vicious cycle continue while an obvious and cost-free solution is 

33 

starting us in the face. So I thank Senator Feingold for his statement, and without objection, it will be in the record. 

[The prepared statement of Senator Feingold appears as a submission for the record.] 

Chairman WHITEHOUSE. The record will remain open for a week 

for anything that any witness wishes to add or that anybody else 

wishes to add. I thank the very distinguished Ranking Member for 

his courtesy throughout this hearing, and I look forward to working 

with him to see if there is a way that we can address this in a 

helpful, thoughtful, bipartisan way. 

With that, the hearing is adjourned. 

[Whereupon, at 11:42 a.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.] 

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