Yesterday, the House Judiciary Committee held a hearing entitled “Role of the Lending Industry in the Home Foreclosure Crisis.” Testifying before the Committee were:
- Elizabeth W. Magner, Judge, U.S. Bankruptcy Court for the Eastern District of Louisiana
- Lewis D. Wrobel, Attorney at Law, Poughkeepsie, NY
- Joseph R. Mason, Ph.D., Associate Professor, Louisiana State University
- Suzanne Sangree, Chief Solicitor, City of Baltimore Law Department
Mr. Wrobel began by outlining the shift in the lending industry starting in the 1990s. Prior to the 1990s, a majority of loans were made by local banks and credit unions, whose officers had knowledge of the community and the borrower seeking the home mortgage. Mr. Wrobel notes that during this time, “if the borrower faced financial distress, he could contact the bank officer who certainly knew the property and the community and often knew the borrower.” However, it is now common for “a responsible person who foresees a job loss or an oncoming financial crisis [to] receive no response to a loan modification request from a lender [since] it is the policy of nearly every major lender to not to discuss a loan modification until the borrower is at least three payments in arrears.” After illustrating the current problems with case studies from his own practice, Mr. Wrobel encouraged the federal and state adoption of the Loss Mitigation program from the Bankruptcy Courts of the Southern District of New York. If a debtor requests Loss Mitigation, the Court will enter an order which requires: (1) the parties to exchange information; (2) the creditor to announce a contact person for the debtor; and (3) status conferences to monitor the negotiations. According to Mr. Wrobel, the program has resulted in lenders being more responsive to a debtor’s plea for relief.
Mr. Mason focused on why the modification policies enacted to date and the judicial remedies of allowing bankruptcy judges to determine property values may be expected to yield little relief for the mortgage crisis. According to Mr. Mason, “many residents of single-family homes today could never afford an amortizing loan that could enable them to economically own a home in the first place, and still cannot do so today.” He argued that, since many of the failed mortgage underwriting operations have been plagued with operational difficulties, modification policies can provide little relief. Further, Mr. Mason argued that most Chapter 13 bankruptcy repayment plans have failed, and, therefore, allowing modification of mortgage debt by bankruptcy judges may simply add “complexity to the inevitable at the lending industry’s expense.” Finally, he argued that “if Congress allows the judiciary to allow bankruptcy judges to modify mortgage debt the change may cause other perverse incentives among both lenders and borrowers, as the Bankruptcy Reform of 2005 did previously.” Citing Elizabeth White’s “Bankruptcy Reform and Credit Cards”, Mr. Mason noted that less debtor-friendly bankruptcy laws did not result in consumers borrowing any less. Rather, “when less debt could be discharged in bankruptcy, lending become more profitable and lenders increased [the] supply of credit.” Similarly, Mr. Mason argued that “rather than reducing lenders’ incentives to supply too much credit to debtors who are likely to become financially distressed, reformers seek to maintain incentives for consumers to borrow but penalize lenders for meeting consumer demand.” In addition, the bifurcation of debts through judicial modification will essentially take away real value from the lender now and will accrue to the borrower in the future. In light of these arguments, Mr. Mason concludes that the Administration should not remain committed to a “change at all costs” agenda.
Ms. Sangree began by stating that “Baltimore is a case study of the damage that has befallen cities in the absence of aggressive federal enforcement of this nation’s civil rights laws.” According to Ms. Sangree, Baltimore and other American cities with large non-white populations and a history of racial segregation are vulnerable to predatory lending practices due to (1) a history of denying minorities access to credit and (2) a history of racially segregated living patterns. She focused most of her remarks on the City of Baltimore’s pending lawsuit against Wells Fargo alleging discriminatory mortgage lending practices.