Prepared Statement of Ranking Member Chuck Grassley
Senate Committee on the Judiciary
Executive Business Meeting
“Limiting Investor and Homeowner Loss in Foreclosure Act”
March 31, 2011
Mr. Chairman, at our last meeting, I didn’t have a chance to fully express my concerns with the bill itself, as we moved directly into a discussion of the amendments.
I’d like an opportunity to say a few words about the bill, and the concerns I have with it. I think it’s very important to discuss the concerns with the bill and the bankruptcy loss mitigation programs it authorizes.
There are significant and real concerns about the mandatory mortgage modification programs being run by bankruptcy courts. There are concerns about how these programs are being administered and how they will damage our already fragile economy.
Our nation is experiencing some difficult times. We must get the economy moving in the right direction.
But our efforts must be well and fully thought out. As part of our responsibilities to our fellow citizens, we must carefully examine how relief proposals will impact the economy as a whole, and how these proposals will impact future generations of Americans.
I have concluded that this bill, allows bankruptcy courts to operate mortgage modification programs in a manner that could damage our economy, the housing market and the availability of credit.
I can’t support the bill. I won’t take the risk with our economy.
One concern with these mandatory programs -- and with the bill that authorizes them -- is that they provide judges with the opportunity to force banks to cram-down home mortgages -- that is to reduce the principal amount of the debt.
Indeed, the procedures for the program in the Middle District of Florida expressly state that one of the topics for the negotiations will be reducing the principal amount of the loan; in other words, -- a cram-down.
That’s something that even the Obama administration doesn’t condone.
More specifically, creditors have dozens and perhaps hundreds of cases pending before the same bankruptcy judge. Consequently, creditors may be forced to agree to concessions to satisfy local bankruptcy judges or face sanctions for not negotiating in good faith.
Although they provide judges with the authority to sanction a party for not negotiating in good faith, the procedures for these bankruptcy programs do not define what constitutes good faith negotiations.
Indeed, this bill is standardless.
It authorizes bankruptcy judges to operate --- loss mitigation programs. But the bill doesn’t define what a loss mitigation program is and that term isn’t defined elsewhere in the Bankruptcy Code. It’s certainly not a common dictionary term.
If this bill is enacted, the different, local procedures for each and every one of these loss mitigation programs, --- as written by bankruptcy judges and as changed by them whenever and however they like --- will be federal law.
The procedures for the Rhode Island bankruptcy court’s program are 12 pages long. They’ve been amended three times since the program was established.
The procedures for the program in the Southern District of New York are 8 pages long. They’ve been amended at least once.
The Middle District of Florida has two pages describing its program.
The Vermont bankruptcy court program has parties participate in the state court program, which was established by a Vermont state statute.
It is these dozens of pages of procedures which make up these programs that are actually what is before this committee. These procedures and the Vermont statute are what will become federal law, not just the one and half page bill.
There are 94 federal judicial districts. Each has a bankruptcy court. So, we could end up with 94 different local procedures, all of which will be federal law under this bill.
So at our last markup, Senator Kyl was correct to raise concerns and ask questions about the undefined good faith and sanctions provisions in these procedures. This bill makes those procedures, including the good faith and sanctions provisions -- federal law. Those provisions can be used by judges to coerce lenders to cram-downs or near cram-downs.
There is also a constitutional concern with the bill.
Article One of our Constitution entrusts the lawmaking power exclusively to Congress, not to the judicial branch. Despite this fundamental constitutional mandate, this bill gives bankruptcy judges a blank check to literally write and rewrite the law and run these programs however they please.
And whatever rules the judges create for these programs, that instantly becomes federal law.
That’s not how our government is meant to operate under our Constitution.
There’s also a real danger of judicial activism with these programs. Judicial activism comes in many forms. There should always be a reluctance to give unelected judges new and discretionary powers.
In this instance, once the authority for these programs is established by statute, they will spread. Bankruptcy judges, who will not be subject to any oversight, will be able to use indirect pressure and the complicity of mortgage servicers to achieve cram-downs or near cram-downs.
That leads to another concern with these mandatory bankruptcy programs. It’s that these programs encourage mortgage servicers to violate their contractual and fiduciary obligations to the ultimate owners of the mortgages.
Servicers have an incentive to breach their contractual and fiduciary duties to the investors by agreeing to modifications below governing guidelines. That’s because they believe that participation in these mandatory bankruptcy modification programs, and the resulting court approved settlements, immunizes them from liability to investors.
Indeed, some supporters of the bill tout providing servicers with a defense to liability as one of the benefits of these programs.
Because the overwhelming majority of mortgages are held or ultimately held by the federal government, via Freddie Mac and Fannie Mae, taxpayers will suffer if judges effectively impose cram-downs or near cram-downs.
American taxpayers hold the entire credit risk in the current housing market.
Taxpayers will suffer if the billions of dollars in home loans, ultimately held or underwritten by the government, are not collected and if they are not collected in a reasonable amount of time. So the damage that these mandatory bankruptcy programs inflict will be inflicted on the American taxpayers.
Some believe that the government can just write-off the debt from these mortgages or not collect on it. I certainly don’t agree with that misguided notion.
Clearly, writing off the billions of dollars of home loans held by the government would have a devastating impact on our economy.
Another concern with the programs is that by delaying foreclosures, mandatory bankruptcy programs will create a de facto moratorium on foreclosures. As a result of the delays and the modifications effectively imposed by the programs, credit will become more difficult to obtain and far more expensive.
The negative effect of mandatory bankruptcy programs is especially troubling for small and community banks, who are portfolio lenders, because they will directly suffer the consequences of cram-downs or a foreclosure moratorium.
Small and community banks will suffer because they continue to directly hold the loans. The money loaned out is from their depositors. Those depositors are our neighbors. They are American taxpayers.
If small and community banks can’t collect on those loans and if they can’t do so in a reasonable time, their assets are frozen and may be lost. That’s money that can’t be loaned to another would-be home buyer or to someone trying to start a new business. That’s money that can’t be used to create jobs. Ultimately, if the loans can’t be collected, those banks will likely fail.
And again, the money from the small and community banks is their depositors’ money. They are entitled to get it back with interest. If the loans are not collected, their money will be lost.
The supporters of S.222 have not even acknowledged the damage that these mandatory bankruptcy programs could do to our fragile economy. They certainly haven’t produced any economists or other experts to rebut this significant concern.
By contrast, at the hearing on the bill, we offered the testimony of Professor Anthony Sanders, a Distinguished Professor of Real Estate Finance at George Mason University and Eric Grossman, a Legal Fellow from The Heritage Foundation.
They outlined the concerns with the bankruptcy court programs and the great damage that the programs can do to our economy.
Specifically, Mr. Grossman explained in his response to follow up written questions that:
“[T]he policies underlying [S.222] are troubling and should give any Member of Congress pause. …, [T]he bill appears designed to authorize and encourage bankruptcy courts to adopt mandatory [Loss Mitigation Programs] that serve to coerce lenders to agree to loan modifications that they would not accept voluntarily. ...
"These programs threaten many severe and negative consequences, … S. 222 is a bill that would slow recovery of the housing market and housing prices, while making it more difficult for responsible families to obtain mortgage loans in the future. A Congress that does not share those goals and that seeks to speed recovery and expand homeownership would not enact S.222.”
I also question the need for authorizing yet another government program.
These mandatory bankruptcy programs are duplicative of other government programs already in place. In particular, at least 25 state or local governments have mortgage mediation or modification programs for homeowners at risk of foreclosure.
Also, the Home Affordable Modification Program, --HAMP --- a program implemented by the President Obama in 2009, already addresses the issues raised by supporters of the bill. Through the Home Affordable Modification Program, the government has made available 75 billion dollars in funding to help homeowners at risk of foreclosure.
Now there are many documented problems with the Home Affordable Modification Program. And some believe that it is a failure and should be ended. That may be so.
But President Obama’s Home Affordable Modification Program is in place and 75 billion dollars have been allocated to it. Before I vote to authorize yet another government program to address the same problem, I believe that we need to either fix or end the Home Affordable Modification Program.
In the end, I have to question do we really need another government program, especially given the risks from these mandatory bankruptcy programs?
I don’t think we do and I won’t take the risk with our economy.
So I urge my colleagues to vote against this bill.