Testimony of Michael D. Calhoun Center for Responsible Lending
Before the U.S. Senate Judiciary Committee
"Helping Families Save Their Homes: The Role of Bankruptcy Law"
November 19, 2008
Good morning Chairman Leahy, Ranking Member Specter, Senator Durbin and other members of the Committee. Thank you for holding this hearing on judicial loan modifications and for inviting me to testify.
I serve as president of the Center For Responsible Lending (CRL), (www.responsiblelending.org), a not-for-profit, non-partisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is an affiliate of Self-Help (W\vw.self-help.org), a nonprofit community development financial institution that consists of a credit union and a non-profit loan fund.
For close to thirty years, Self-Help has focused on creating ownership opportunities for low¬wealth families, primarily through fmancing home loans to low-income and minority families who otherwise might not have been able to get home loans. In total, Self-Help has provided over $5 billion of financing to 55,000 low-wealth families, small businesses and nonprofit organizations in North Carolina and across America.!
With the constant barrage of statistics and staggering dollar figures that have become commonplace during this financial crisis, it is easy to become numb to the depth and scope of the financial pain American families are experiencing today. However, the numbers paint a picture we cannot ignor~. Using recent data from the Mortgage Bankers Association, we calculate that foreclosures on all types of mortgages are occurring at an annual rate of 2.3 million.2 On subprime mortgages alone, the "spillover" costs are massive. At least 40 million homes¬households where, for the most part, people have paid their mortgages on time every month-are suffering a decrease in their property values of $352 billion.3 And these figures only consider spillover for subprime foreclosures, let alone prime and Alt A, which will drive the losses much higher. These losses, in turn, are infiltrating nearly every part of American life, from police and fire protection to community resources for education.
The most pressing need today is to help homeowners stay in their homes and, by extension, support their neighbors' property values and the financial system as a whole, since financial institutions will not survive if their mortgage-related portfolios continue to fail. As we have become accustomed to hearing about the losses stemming from foreclosures,4 we also hear on a regular basis that the foreclosure epidemic is being addressed through the voluntary efforts of servicers and lenders. Notwithstanding these efforts and results published by HOPE NOW,s the foreclosure problem is getting worse, not better. In fact, the voluntary efforts have typically raised a distressed family's mortgage payment instead of lowering it, resulting only in a temporary fix with a high probability offailure.6
We have been encouraged by more recently proposed streamlined modification programs that include systematic affordability thresholds to better ensure sustainability. We have urged the Treasury Department to promptly implement a streamlined program using its authority under the Troubled Asset Repurchase Program (TARP).7 In particular, we have recommended that Treasury adopt the FDIC's proposed loan modification guarantee program and provide guarantees to modifications from servicers with streamlined affordable modification protocols based on the FDIC/IndyMac model under the authority provided by Section 109 of the Emergency Economic Stabilization Act (EESA).8 However, even a well-designed streamlined program has its limitations. While a strong step in the right direction if implemented, certain aspects of a streamlined program are potentially problematic, and it may not be able to reach sufficient numbers of loans held in private label securities.
Given the challenges of even the most promising voluntary efforts, something more is needed: a mechanism (l) to maximize the effectiveness of existing and proposed voluntary efforts by inducing lenders and investors to make sustainable modifications; and (2) to serve as a last resort for those homeowners who could afford market rate loans but who will fall through the cracks of voluntary programs when the servicer either cannot or will not modify. The most efficient and cost-effective way to accomplish this is to lift the ban on judicial modification of primary residence mortgages so that a court can provide an economically rational solution when the investors or servicers do not. Working through the existing infrastructure of the bankruptcy court system, the solution could take effect immediately, leveraging the expertise of the bankruptcy courts. And the plan would be implemented at no cost to the taxpayer.
Judicial loan modifications will provide a strong incentive for servicers and investors to make voluntary programs work, since they will have clear authority to avoid judicial modifications by offering their own workout solutions outside of bankruptcy.
Bankruptcy courts already modify loans for all manner of other debts, including,mortgages on vacation homes and investment properties. They should be permitted to do so for a homeowner's primary residence, which is typically the asset most critical to a family's financial and physical security.
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