[Senate Hearing 111-269]
[From the U.S. Government Publishing Office]
S. Hrg. 111-269
MORTGAGE MODIFICATIONS DURING THE FORECLOSURE CRISIS
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HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
AUGUST 20, 2009
__________
PROVIDENCE, RHODE ISLAND
__________
Serial No. J-111-42
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Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York JON KYL, Arizona
RICHARD J. DURBIN, Illinois LINDSEY GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Bruce A. Cohen, Chief Counsel and Staff Director
Matt Miner, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Whitehouse, Sheldon, a U.S. Senator from the State of Rhode
Island......................................................... 1
WITNESSES
Bodington, Susan, Deputy Director for Planning, Rhode Island
Housing, Providence, Rhode Island.............................. 10
Burlingame, Jeffrey, Firefighter, Woonsocket, Rhode Island....... 5
Pollock, David, Homeowner, Cranston, Rhode Island................ 7
Rao, John, National Consumer Law Center, Boston, Massachusetts... 13
Verdelotti, Joseph, Jr., Licensed Electrician, West Warwick,
Rhode Island................................................... 3
SUBMISSIONS FOR THE RECORD
Bodington, Susan, Deputy Director for Planning, Rhode Island
Housing, Providence, Rhode Island, statement................... 25
Burlingame, Jeffrey, Firefighter, Woonsocket, Rhode Island,
statement...................................................... 31
Pollock, David, Homeowner, Cranston, Rhode Island, statement..... 34
Rao, John, National Consumer Law Center, Boston, Massachusetts,
statement...................................................... 37
Verdelotti, Joseph, Jr., Licensed Electrician, West Warwick,
Rhode Island, statement........................................ 61
MORTGAGE MODIFICATIONS DURING THE FORECLOSURE CRISIS
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THURSDAY, AUGUST 20, 2009
U.S. Senate,
Committee on the Judiciary,
Washington, DC
The Committee met, Pursuant to notice, at 10 a.m., U.S.
Senate, Committee on the Judiciary, Rhode Island Housing,
Providence, Rhode Island, Hon. Sheldon Whitehouse presiding.
OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
FROM THE STATE OF RHODE ISLAND
Senator Whitehouse. Well, good morning everyone. This is an
official field hearing of the U.S. Senate Subcommittee on
Administrative Oversight and the Courts of the Senate Judiciary
Committee.
I want to open by thanking Susan and everybody else at
Rhode Island Housing for hosting us here this morning.
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 in Rhode Island and what can be done for
the millions of families in our state and across the Nation who
are 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 proved fruitless.
As you recall, we included in the bailout legislation a
requirement that the Treasury work to modify the mortgages it
purchased as part of the TARP, but then the administration
decided not to purchase toxic assets as they had initially
proposed. The money instead went directly to banks, and since
the Treasury held no mortgage-related assets to modify, Wall
Street won and Main Street lost.
Democrats in Congress led by Senator Durbin of Illinois
tried unsuccessfully to include in the TARP legislation a
provision that could have kept millions of families in their
homes at zero cost to taxpayers. This proposal would have
corrected an anomaly in the bankruptcy code that prohibits
judges from modifying primary residents' mortgages, the way
they can modify every other type of contract from mortgages to
vacation homes to car and jewelry and corporate loans. Even
though bankruptcy modification would spare the community, the
terrible cost of foreclosure, the mortgage banking industry
invented hundreds of millions of dollars to lobby against its
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 folks 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
residential foreclosures. These homeowners faced this
foreclosure wave with minimal assistance from their government.
The new administration has tried to address the foreclosure
crisis. Through the Treasury's Making Home Affordable programs,
President Obama encouraged loan services to start modifying
mortgages. While these programs so far have kept 230,000
families in their homes through trial modifications, it is
becoming increasingly clear that Congress must do more to
address what is a worsening crisis.
As you will hear from one of the witnesses today, there is
evidence that the worst of the foreclosure crises is not behind
us. Just as the wave of foreclosures from subprime mortgages
begins to subside, a new wave of potential foreclosures tied to
rate resets on other mortgage instruments is lurking just
around the corner.
The Center for Responsible Lending estimates 9 million
families may lose their homes to foreclosure from 2009, this
year, through 2012. At their current rates, the Treasury's
voluntary programs will only assist 2 million or fewer families
during that period.
It is clear to me that Congress must do more to help
struggling homeowners and specifically that we need to take
another serious look at the Durbin proposal to allow bankruptcy
judges to modify the terms of mortgages on principal residences
the way they can on every other loan.
If we fail to break the vicious cycle of foreclosures,
falling home values and declining tax revenues, we may end up
mired in recession for years to come.
Before concluding my opening remarks, I want to acknowledge
the hard work of my senior senator, Jack Reed in preserving and
creating affordable housing in Rhode Island and across the
country. It is a privilege for me as a new senator to work
alongside such a champion of accessible housing and fair
mortgage practices.
I look forward to hearing the views of today's panel on
this proposal and others. Joseph Verdelotti, Jr. of West
Warwick 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 leave their home. I
would add that he gave extremely powerful testimony in
Washington recently and we are privileged to have him come down
to Washington to share his views.
Jeffrey Burlingame and his wife Rachel purchased their home
in Woonsocket in 2006 and have also struggled to keep up with
payments. Mr. Burlingame, a firefighter, will discuss his
difficulties in obtaining more reasonable mortgage terms from
his loan servicer. I can't see Jeffrey without thinking of his
mother, Barbara, who was a great leader in the state and a
great friend to many of us.
David Pollock of Cranston is a homeowner who also invests
in rental properties. Mr. Pollock has a Bachelors Degree in
Business Administration from the University of Massachusetts at
Amherst and an MBA from Boston University. Mr. Pollock has
already received a foreclosure notice on his residence and is
working hard to save it.
Susan Bodington is Deputy Director for Programs at Rhode
Island Housing. Ms. Bodington joined Rhode Island Housing in
1991 and has served as Director of Housing Policy. She holds a
BA in Economics from Smith College.
Finally, John Rao of Newport is an attorney with the
National Consumer Law Center in Boston who focuses on consumer
credit and bankruptcy issues. The National Consumer Law Center
performs research and trains attorneys who serve low income
consumers.
Mr. Rao was appointed by Chief Justice Roberts to serve on
the Federal Judicial Conference Advisory Committee on
Bankruptcy Rules. Mr. Rao earned his degrees from Boston
University and the University of California Hastings College of
Law.
So without further ado, why don't we begin with Mr.
Verdelotti, and why don't you proceed. Thank you very much
again for being here and sharing your experience with us.
STATEMENT OF JOSEPH VERDELOTTI, LICENSED ELECTRICIAN, WEST
WARWICK, RHODE ISLAND
Mr. Verdelotti. Chairman Whitehouse, thank you for the
opportunity to testify here today. This is the second time this
summer that you have invited me to tell my story before the
Senate Judiciary Committee. I am grateful for your attention to
my case.
My name is Joe Verdelotti, Jr., and I am a licensed
electrician from West Warwick, Rhode Island. My wife, April,
works at the Rajoines Medical Center in Providence, Rhode
Island. We have been married for nine and a half years and have
known each other for nearly 20 years.
We have one daughter, Brooke, who is nine and two sons.
Lorenzo who is six, and Gianna just celebrated his first
birthday a few months ago.
Needless to say, we have quite an active household. On
January 26, 2006, we purchased an 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 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 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
electrician'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 hour health care premiums have increased.
In addition, we just learned that we will lose the Columbus
Day holiday and will not be paid for days at the end of
December unless we use our vacation time.
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 under water. It is
just 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 HUD 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 the debt service about our
situation.
In the end, their only advice to her was to consider a
roommate, get a part-time job, contacted 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 service 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 disappointment blow. The
agent informed me that we 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 26th, 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 and
find out the status of our hardship application. But all she
got was the run around.
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 from 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.
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
packet. She informed them 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 the
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 made 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 Make Work Pay
tax credit took effect. So now I 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
to keep our home, it becomes a win/win solution for everyone.
We keep our home, the banks avoid the cost of foreclosure and
the community avoids a hit to property values and tax
collections.
Senator, please do something to help struggling homeowners
like my wife and I. Thank you again for the opportunity to tell
my story.
Chairman Whitehouse. Thank you, Mr. Verdelotti. I
appreciate it very, very much.
Mr. Burlingame.
STATEMENT OF JEFFREY BURLINGAME, FIREFIGHTER, WOONSOCKET, RHODE
ISLAND
Mr. Burlingame. Senator. Good morning, Senator Whitehouse
and thank you for the opportunity to be here today. My wife
wanted to join us but she was unable to attend due to work. She
works as a freelance technician for a TV station in Boston.
My wife and I bought our home on May 24, 2006 for $319,000.
The house was appraised at approximately $350,000. We believe
this was around the peak of the real estate bubble.
Since we did not have money for a down payment, we took out
two mortgages, a so-called 80/20, the 80 percent mortgage
carried a 7 percent fixed interest rate for 3 years. After June
1st, 2009 that interest rate could change once per calendar
year with a minimum rate of 7 percent and a maximum rate of 13
percent.
The 20 percent mortgage was a 9.25 percent fixed rate with
a balloon payment. This means that the entire remaining balance
would be due on June 1st, 2036.
According to the city of Woonsocket's tax reevaluation, our
home is worth $247,100. This means we have lost nearly 30
percent of our home's value in 3 years.
On March 31, 2008, my wife and 30 of her colleagues were
given layoff notices from their employer, the Boston TV
station. Two months later she began working as a freelance
broadcast technician at another Boston television station.
While we had hopes she might be able to get hired full time
somewhere, the television market nationwide suffered major job
losses and cutbacks. This has made her chances of securing a
full-time job in her field virtually impossible.
Fortunately, my career is secure. I'm a firefighter with
the city of Woonsocket. I will complete my 12th year of service
on February 23rd, 2010.
On September 25th, 2008, my wife and I were able to
refinance our 80/20 mortgage with Wells Fargo into one 6
percent fixed rate 30-year mortgage. In October of 2008, my
wife experienced a lack of hours at her freelance job. She was
forced to collect unemployment while working only 1 to 2 days
per week. Our take home pay dropped by about $300 per week.
On December 11, 2008, we suffered another financial blow.
My wife seriously injured her wrist while riding on a shuttle
bus. Her only choices were to either live with the pain for the
rest of her life or undergo a partial or possibly full wrist
fusion. We decided to go with the surgery which she had on
March 12, 2009.
Due to the nature of her job, my wife was unable to work
for 2.5 months. During that period we lost close to $10,000 in
pay. On April 17, 2009, we requested a loan modification with
Wells Fargo. We hired an attorney to help us through this
process.
On April 23, 2009, we submitted our financial information
and all necessary paperwork. On May 11th, 2009, we received a
letter from Wells Fargo stating that our account was in review.
One week later my wife logged onto Wells Fargo's website to
submit our June mortgage payment as she has done several times
prior. She quickly realized that our online privileges were
suspended. She called Wells Fargo and stressed to them her
concerns about not being notified in the change of our online
status. After all, we were still getting email notifications of
new statements to view, but we were now blocked from viewing
them. We were never notified of this change. They didn't send
us anything.
Wells Fargo issued a verbal apology and told her to mail
the check to them. Against her better judgment, she sent the
payment that day via the U.S. mail without certification or
return receipt. She called Wells Fargo on June 1st and she was
told there was no record of her payment and to call the post
office.
My wife told them she was going to call every day until she
had confirmation that a payment was received. They told her
that wasn't necessary, to call at most once a week. They told
her we had until the 15th of June to submit the payment or a
late fee would be assessed.
On June 8th, we decided to put a stop payment on the check
and to pay the bill over the phone. On June 16th, Wells Fargo
attempted to cash our canceled check. According to our records,
we would have been 1 day late. Fortunately we paid by phone.
For the July and August payments, we sent our mortgage
check via certified mail. Even though it took several days for
Wells Fargo to clear the check, at least we had proof and peace
of mind that it was there.
While our account was in review, we received mail
correspondence and phone calls from Wells Fargo asking us for
more information. We received approximately four phone calls on
different days of the week asking us for more information. Each
and every time we told the person who was calling us that we
had retained a lawyer and all questions and requests for
additional information should go through that office.
Each and every person said they were unaware we had a
lawyer, but none of them asked for our lawyer's contact
information. They repeated their request for information, and
when we refused to speak with them, they hung up.
On July 4, 2009, our loan modification from Wells Fargo was
denied. They cited this request would be outside of your
investor guidelines. Our lawyer's office told us Wells Fargo
said we had an $800 a month deficit in income which is why we
were denied, and we didn't qualify for the next step. On July
14th we resubmitted our request since my wife's hours at work
increased. Since then, our lawyer contacted Wells Fargo and
questioned them about how they generated our financial
information and the accuracy of it.
Our lawyer discovered that they were looking at an old
credit report, ignoring our financial worksheet and said we had
a second mortgage and we owed almost $2,000 a month on car
payments. We do not have a second mortgage and our car payments
total well under $2,000 a month. As of today, our file is still
under review.
My wife and I are working hard to retain our home. It seems
to us that Wells Fargo would rather foreclose upon our house
than follow the law and renegotiate our mortgage terms.
In closing, we can only hope that President Obama's Making
Homes Affordable Act is followed by all lenders as it was
intended to be. My wife and I thank you for the opportunity to
tell our story here today. We urge you to consider bankruptcy
reform among other ways to make sure loan companies work to
keep people in their homes. Thank you, Senator Whitehouse and
God bless America.
Chairman Whitehouse. Thank you, Mr. Burlingame.
Mr. Pollock.
STATEMENT OF DAVID POLLOCK, HOMEOWNER
Mr. Pollock. Chairman Whitehouse, thank you for inviting me
to testify this morning. I am here to present my personal
experience attempting to get a loan modification on my home
mortgage service by Wells Fargo.
In 2008, I had a dramatic decline in earned income from
real estate commissions as a real estate broker and the
misfortune of owning real estate investments that were under
water.
Although I have extensive real estate finance experience,
navigating the Wells Fargo process was extremely time consuming
and continuously full of conflicting and incorrect information.
Since 2002, I have been in my own business to purchase,
renovate and sell multi-family real estate in the Providence
area and have also worked as a real estate sales person.
In 2005, I purchased two multi-family buildings in
Cranston. The mortgages on both buildings are serviced by Wells
Fargo. Fannie Mae is the investor. In 2007, I sold my then
residence in Lexington, Massachusetts and moved into a unit in
one of the Cranston properties located on Armington Street.
In December, 2008, my Armington Wells Fargo mortgage
payment of $3,500 had become unaffordable. With a high 7
percent interest rate that had been established when the
property was non-owner occupied and the property value having
declined by 50 percent, I thought the bank would modify the
loan.
With excellent credit and being current on all debts, I
contacted Wells Fargo with the goal of avoiding any bankruptcy.
I submitted detailed financial statements with a hardship
letter. Wells Fargo arranged a moratorium on the loan with no
payments required until May.
I had the understanding that at the end of the moratorium,
my interest rate could be lowered, the loan term could be
extended, and principle could be written down to market value.
During those months, I never received a call from Wells
Fargo, nor had any account executive working with me to
determine an acceptable plan. The few times that I did call
from February through April, I was told my loan was under
review for modification.
Since I did not have an answer at the end of the
moratorium, the Loss Mitigation Department told me to resubmit
all information to start the process again. I called and spoke
to a Wells Fargo Loss Mitigation representative who told me
that the package had been received and was submitted for
review.
I was told that I needed to call every week to find out the
status. I called almost twice a week through June and was told
every time that my application was under review and there was
nothing more that I could do than continue to call every week
and ask about the status.
It was very frustrating to not know what changes I should
make that could change my finances such as selling a property
for a loss or getting a salary job to be able to meet
qualifications for one of the loan modifications.
On June 4th, I received a foreclosure letter from Harmon
Law Offices on my Armington loan. I called both the Harmon
office and Wells Fargo. Wells Fargo told me that the
foreclosure process will continue while my loan is being
reviewed for modification. I was told that if I paid the
outstanding balance owed of over $17,000, they would cancel the
foreclosure sale.
That was not possible for me since I did not have that much
cash. I later became aware that all the information I submitted
on May 1st was actually never looked at or entered into the
Wells Fargo computer system.
Now, 6 months after this process began, I had little time
to make more dramatic changes to my financial situation. Nobody
told me back in January that I needed to meet certain financial
criteria for a loan modification.
Since June, I have spent huge amounts of time every couple
of days calling Wells Fargo. Every time I speak with a new
person and ultimately get different information. I received
conflicting information numerous times. I spoke with people in
the foreclosure, short sale, loss mitigation and customer
service departments. In all cases, I could not get one person
who was in charge of my account. I could only speak with
representatives who would make notes and read something from a
computer screen.
On July 9th, a supervisor in Loss Mitigation was the first
person I ever talked with that seemed helpful. I found out that
I had been rejected from the review program a week earlier,
even though no one ever called to tell me or inform me the
times that I did call.
I found out that I was rejected because I made too much
money. All my rental income was mistakenly counted twice. She
once again corrected errors that had been entered into my
financial statements and once again requested that I be
reviewed for a loan modification.
Two hours later, a negotiator called me for the first time
ever. She did not have the information for the loan on my
residence, but rather the loan on the other investment
property. She said I didn't qualify for any programs because my
income was too high. I once again told her to correct the
financial information. They too had counted all my rental
income twice.
Then she put me in a program to pay half of my mortgage
payment for 6 months with the goal of a lower interest rate and
term extension. I implored her to be in charge of my Armington
loan, but the best she could do was to email the Armington
negotiator to call me.
Two weeks later I spoke with another supervisor who needed
to correct the same income information on my financial
statement. I now learned that there were two separate computer
systems that did not share information.
If you were under review, they entered information into one
system, and if you were not under current review, your
information went to another software program.
Three days before the foreclosure scheduled on Friday,
August 14, just a few days ago, the sale was postponed. On
Friday morning, Fannie Mae called to tell me that they approved
a loan modification based on 31 percent debt to income in order
to lower my interest rate to 5 percent in the new payment
starting in November.
Later when I called Wells Fargo, I was told that a payment
agreement was being sent out for me to make my current payment
of $3,500 a month for 3 months.
After the 3 months, I would need to submit new financials
for a loan modification to be reviewed. The Wells Fargo
customer service representative did not know anything about the
information that Fannie Mae had told me just that morning.
Since the Fannie Mae modification was solely based on my
income and expenses, I asked Wells Fargo to tell me what was in
their system. I could not understand how they had come up with
a surplus of almost $650 when a couple of weeks before I had a
monthly loss of almost $1,000.
After I did a detailed review, I discovered that the Wells
Fargo numbers did not include any cost for the investment
property mortgage payment which Wells Fargo also services.
At the moment, I do not think that the Fannie Mae
modification with a decrease in my mortgage payment by $600 is
affordable. With an outstanding balance on my Armington loan
close to $430,000 and a market value near $200,000, I need to
consider all alternatives.
If my loan servicer won't agree to write down the loan
closer to the market value, I might have to do a short sale,
move out and the new owner can happily afford to live in my
home with only a $200,000 mortgage.
Like thousands of homeowners in Rhode Island, I continue to
be penalized for having bought property at the peak of the
housing bubble. Senator, please help us stay in our homes.
Chairman Whitehouse. Thank you, Mr. Pollock.
Ms. Bodington.
STATEMENT OF SUSAN BODINGTON, DEPUTY DIRECTOR FOR PLANNING,
RHODE ISLAND HOUSING
Ms. Bodington. Thank you. On behalf of Rhode Island Housing
and our partners, we'd like to thank you, Senator Whitehouse,
for the opportunity to present this testimony.
I'd like to provide a synopsis of the impact of the
foreclosure crises in Rhode Island, the impact it has on Rhode
Islanders. My goal is to outline what we are doing and what can
be done to help those at risk of losing their homes during this
confluence of financial, housing and unemployment crisis which
has been called the Perfect Storm.
Rhode Island ranks 10th in the Nation for foreclosures and
the numbers continue to climb as lenders act on a backlog of
recent defaults. In addition, the unemployment rate in Rhode
Island is over 12 percent. It is much higher than the national
average and is continuing to go up. It has been projected to
reach 13 percent and it is also projected that it might take
another 5 years for that unemployment rate to go back down to
normal rates.
Third, there is a decline in property values as a result of
this housing crisis which has exacerbated the situation for
many homeowners. In several Providence neighborhoods, we've
seen depreciation by as much as 60 percent of the appraised
value and depreciation in urban communities surrounding
Providence on an average of 35 percent. So these three factors
are severely impacting the housing market in Rhode Island.
The past 6 months have been particularly difficult for
Rhode Islanders from a housing perspective. Foreclosure
initiations increased by almost 44 percent during the first 6
months of 2009 compared with 2008. That's an estimated 5,600
plus Rhode Islanders who received notification that foreclosure
proceedings were initiated on their homes. We know that over
1,000 Rhode Islanders actually lost their homes to foreclosure
in the first 6 months of 2009 alone.
More than 7 percent of Rhode Island mortgage holders are
severely delinquent according to the most recent data that is
from the Mortgage Banker's Association. It is noteworthy to see
that Rhode Island Housing's mortgage delinquency rate using the
same statistics is only at 1.96 percent. There is a significant
difference there which is attributed to conservative lending
practices that we've always practiced, a mission based strategy
to help Rhode Islanders make safe and informed decisions to buy
and keep a safe and healthy home that meets their needs.
While the rate of homeowners losing their homes is indeed
very troubling, we also need to be aware that that is only part
of the story. For every homeowner that loses their home, there
are a number of other families who had been renting in these
multi-family properties who have also lost their homes, some of
them multiple times, and have had to move.
Up until very recently, these renters received no advanced
notification at all, as is done for homeowners. We'd like to
thank Congress for legislation that was recently passed that at
least allows and requires that tenants have at least 90 day
notice before they are asked to move. The problem will still
exist. We still have many tenants having to move out of their
property.
Finding a new affordable home to rent is not easy after a
foreclosure or for those tenants. Although we are seeing a
dramatic decline in values in some areas, it is still
difficult. When you compare wages in Rhode Island to housing
prices, we are second only to Hawaii in the size of that gap.
It is very difficult for renters and for former homeowners to
be able to afford rents.
In addition, during the first 6 months of 2009, 41 percent
of the sales in Rhode Island were for distressed properties,
either foreclosures or short sales. When you take those out of
the mix and look at the actual price of homes sold that were
not distressed sales, the average price was still at $235,000
throughout the state, and that is not affordable to most Rhode
Islanders.
What are we doing to help? Rhode Island Housing's Help
Center is assisting more Rhode Islanders than ever since
opening our doors in 2007. We have assisted more than 5,000
Rhode Islanders, 3,226 in the past 12 months alone.
We have a whole team of counselors who are experienced
lenders and mortgage servicers and they are dedicating their
time to helping any Rhode Islander who comes to our door.
On average they are spending 8 to 10 hours working with
each client. Each one has their financial situation assessed to
help them understand their options and to develop a plan of
action. Each situation is unique.
Our counselors help homeowners through foreclosures,
whenever possible to avoid foreclosures or to look at their
options if that's not possible.
Many times we are helping homeowners and renters recover
from the loss of a home and looking for other housing
opportunities and linking them up with services in the
community.
To date, the Help Center has had outcomes for 1,900
customers who have completed going through counseling, and
there are a whole variety of outcomes that are possible.
Anything from mitigation to bringing their mortgage current to
refinancing. As I said, every situation is unique and it has
its own solution.
We currently have 808 client files that are being reviewed
for workout with service and 125 modification plans that have
been processed through the Home Affordable Modification
Program, HAMP, and are currently in a 3-month trial period.
Due to the high volume in that program since last winter,
the largest lenders that we're dealing with have very slow
response time and have continued delays in communication and in
responding to our counselors. Even where they appear to really
be trying to work with our lenders, it is still taking 60 to
120 days to get a response and work out any kind of
modification.
Although the program was introduced in March, we are just
beginning to see some modification plans being approved. We are
hopeful that that is a sign that approval of those will
accelerate, but we are still seeing a lot of problems in
communicating with financial institutions. It is a very long
process, it is very frustrating for homeowners and our staff is
very experienced in working with servicers, but it is still a
long process.
More than ever it is important for homeowners to contact a
HUD-approved counseling center like Rhode Island Housing within
the state for assistance, whether they are looking for a
modification or looking for help with their mortgage.
We have a couple of examples. I will give you just one. It
was a single woman struggling to pay her adjustable rate
mortgage that came to our help center. She was ten payments
behind. She negotiated with her lender who had offered her a
fixed rate loan at 10.6 percent plus $5,000 down payment to
modify her loan and it would have increased her payments by
$400 a month. Clearly she already couldn't pay the mortgage
that she had.
Having come to our Help Center, we were able to negotiate
with the servicer and after 3 months of negotiating, we were
able to get her a fixed rate of 7.5 percent and we were able to
extend her payments and reduce her monthly payment from what
she currently was trying, struggling to pay by $450. So those
negotiations although they are long and they are complicated,
they have been successful in many cases.
What more can we do? Despite our tireless efforts and the
efforts of our partner agencies in the community, there remains
much work to be done to recover from the ongoing foreclosure
crisis.
It is more crucial than ever that the Federal Government
continue to fund housing counseling services in the community
which have played a vital role in helping Rhode Islanders keep
their home or find alternatives.
In addition, we need to seek out new opportunities to
provide gap funding for homeowners who can't make their
mortgage payments but need additional support to qualify for a
loan modification.
As we work to keep Rhode Islanders in their homes, we need
access to a wide variety of mortgage restructuring options,
providing flexibility to increase loan terms to 40 years,
provide short-term interest only payment periods for FHA
insured loans would give us more tools with which to work.
As we continue to focus on recovery from the crisis, our
ability to work collaboratively and cooperatively with banks,
mortgage lenders and servicers in modifying loans in a manner
that truly helps homeowners address the situation while we
still protect the interest of the lenders is critical.
As I mentioned earlier, the current workout process is very
arduous. It takes months when working with lenders. In short,
it simply does not work in the majority of cases and cannot
work for the volume that's in the pipeline.
One solution to address the process delays would be for
Congress to implement reasonable modification plan time limits
for authorization and assignment to a negotiator and a maximum
of 60 days to complete approval of a modification.
Bankruptcy reform could provide the incentive or pressure
to expedite workouts and collaborate more effectively, but it
should be structured in a way that does not penalize
responsible lenders who have made fair loans that were in the
best interest of the customers when the loan was made and who
have worked with their customers compassionately to keep them
in their homes.
While some lenders, especially locally based financial
institutions are working diligently and efficiently with
borrowers to modify loans and keep families in their homes, our
Help Center's experience with some large national lending
institutions has been for less productive.
Significant delays in communication and slow processing
times can result in a negative outcome for the homeowner along
with additional hardship and stress for the homeowner and the
entire family.
We appreciate your commitment, Senator, to this issue and
we thank you for giving us the opportunity to share our
experiences with you and we look forward to continuing to work
with you to address this crisis.
Senator Whitehouse. Thank you very much. Finally
Mr. Rao.
STATEMENT OF JOHN RAO, NATIONAL CONSUMER LAW CENTER, BOSTON,
MASSACHUSETTS
Mr. Rao. Senator Whitehouse, thank you for holding this
hearing and for inviting me to testify about the voluntary loan
modification programs and the potential role for bankruptcy
courts in solving foreclosure crisis.
Senator Whitehouse. Just one technical matter. As you know,
your full statement will be entered into the record of the
proceeding. I understand you'll make a shorter statement than
the full statement you provided.
Mr. Rao. We are now 3 years into the foreclosure crisis,
and sadly there have been no signs of improvement. The
statistics are grim and Ms. Bodington has told us about what is
happening in Rhode Island. Nationally approximately 300,000
homes are going into foreclosure every month.
The first quarter of this year we saw that there were 2
million homes in the foreclosure process and an incredible 25
percent of subprime mortgages are seriously delinquent.
All of these statistics are record breaking and suggest
that we are facing the greatest foreclosure crisis since the
great depression.
Senator Whitehouse mentioned that the projections are for
there to be 9 million foreclosures in the next 4 years. This
may well underestimate the problem as recent reports indicate
that there may even be greater problems or a new wave of
foreclosures that will take place concerning what are called
Alt A mortgages.
These are mortgages that were generally given to buyers
with higher credit scores than subprime borrowers but were made
with nontraditional underwriting standards. Often they were
just stated income loans.
One rating agency, Standard--last month downgraded the
ratings for the mortgage backed securities for these Alt A
mortgages that were made in 2005 to 2007 based on the higher
unemployment rates and the continuing problems in the housing
market. So I think that is going to be a serious problem that
we are absolutely going to need to deal with.
The administration's HAMP program, the loan modification
program, has attempted to overcome problems with the earlier
voluntary programs. While it may be still too early to judge
the success of hamp, so far the results have not been
impressive.
In fairness to the administration, there is only so much
that a voluntary program can do to overcome some of the
structural barriers that prevent services from modifying loans.
The first HAMP progress report is now in. During the first
4 months, again, as Senator Whitehouse mentioned, approximately
230,000 trial modifications have been made. This is a small
part of, again, as I mentioned, the number of foreclosures that
are going into, homes that are going into foreclosure every
month.
But what is probably more of concern is that there are some
mortgage servicers who are just not even putting a dent into
the number of homeowners eligible for HAMP. Bank of America,
Wells Fargo, Aquin and Wachovia, while they have an estimated
according to the Treasury figures, 1.2 million homeowners who
are 60 days delinquent who would be eligible for the
modification program, they have only extended modifications or
trial modifications to 2 to 4 percent of that eligible group.
There is another servicer with 37,000 potential homes that
are about to be in foreclosure who has made no modifications at
all. The Treasury, the major problems with the HAMP program are
as follows. Large numbers of homeowners have been told that
they are not eligible for HAMP or are being steered by the
services to non-HAMP, non-Treasury approved modifications.
For example, 37 percent of Chase's recent trial
modifications were not HAMP modifications because they claimed
that the borrowers were not eligible for the Treasury program.
This raises many questions. Why are so many homeowners being
turned down for the Treasury HAMP modification? How many other
borrowers have applied and were completely denied
modifications? And what are the terms of these non-HAMP
modifications that a large number of homeowners are getting.
This leads to the next problem which is the lack of
accountability. Like the witnesses have said today, homeowners
are not told whether they were processed for HAMP modification
or some other modification. They are not even given
confirmation that their application is complete. In many cases
they are not even given an answer at all.
If they get an answer, they are not told the reasons why
they were denied a HAMP modification. The HAMP program itself
does not require servicers to give this essential information.
Homeowners have encountered many bureaucratic problems,
again, like the witnesses have said today. Homeowners files are
routinely lost or shuffled between departments in the servicers
operation. Homeowners and housing counselors report waits of
months to hear back for review of a trial modification.
A recent story in the Providence Journal reported that a
homeowner had submitted 99 pages of documents to support her
application for a modification and 4 months later still has not
heard back as to whether she has been approved.
Another major problem is with the problem of negative
equity and the fact that these modifications do not have
principle reduction. It is not required under the HAMP program
and it is not happening.
The recent banking regulatory agencies reports for the
first quarter show that of the Fannie and Freddie mortgages
that were modified as well as private securitized mortgages,
none of them involve principle reduction. The only principle
reduction occurred in some of the loans that are called
portfolio loans that some of the smaller banks hold themselves.
Even that was minuscule, only at about 5 percent.
Negative equity, as Ms. Bodington has said, is a big issue
in Rhode Island. There are so many homeowners who owe more on
their mortgage than the property is worth. The statistics are
that it is likely that nationally that likely that 48 percent
of homeowners who have negative equity before the housing
market begins to improve sometime as projected in 2011.
The problem of course with negative equity is there are
things happening all of our lives, we lose a job, we need to
relocate and you need to sell a property, sell your home. If
there is negative equity, you just can't do that. You are
locked, you are basically trapped in your house.
More seriously, homeowners have no leverage to obtain a
HAMP modification. Servicers are not even required to stop
foreclosure proceedings as what happened with Mr. Pollock. They
continue to process the foreclosures as they are handling the
modifications and that increases foreclosure expenses, it can
add thousands of dollars to the amount that the homeowner needs
if they actually modify.
What is really lacking in the system is not a carrot. What
is lacking is a stick. That leads to my final points, Senator
Whitehouse, which is to discuss very briefly some of the
advantages of having a bankruptcy option available to amend the
bankruptcy code.
Unlike other enforcement mechanisms that the Department of
Treasury or Congress might consider that would be subject, they
will be subject to legal challenges and costly government
administrative costs, bankruptcy court ordered modifications
have been tested to withstand constitutional and administrative
challenge.
There is already a court system in place that would oversee
these modifications without the use of taxpayer dollars. It
would also provide homeowners with a legal right to a
modification even if the servicer claims that their
securitization documents don't allow modifications.
As mentioned, HAMP's greatest weakness is ensuring
sustainable modifications, and that is probably because it
doesn't involve principle reductions. The availability of the
cram--right in bankruptcy in Chapter 13 which is to reduce the
mortgage holder's claim to the value in the property. It is not
to do it lower than that, but to reduce it to the true value of
the property.
That will encourage services to do principle reductions
outside of bankruptcy. That is certainly the case when Congress
quite a few years ago allowed this cram down right for family
farmers, for those who had farms. Many farm banks began to
voluntarily reduce the principle on modifications without the
farmer even needing to go to bankruptcy court. So that's a good
example of how once it is in place, the voluntary efforts will
improve.
Cram down would allow homeowners in foreclosure to repay
their mortgages under fair and reasonable terms and to fully
protect the mortgage holder, and again they would receive
adequate protection.
Finally, a loan modification in Chapter 13 is provided for
assistance for families who for one of many possible reasons
are just not able to obtain a HAMP or other modifications. By
being closely tied to HAMP as was proposed in the Senate bill
and the bill that has been considered in both the House and the
Senate in the past, it would allow servicers, it would really
get servicers to work with homeowners and to make prompt
decisions on their modification requests.
Just finally, it also deals with the fact that homeowners,
many of the homeowners who are facing foreclosure have other
debt that they are dealing with, maybe credit card debt and so
forth, and the modification programs currently the Treasury
program simply says if you have all this other debt, go to
credit counseling, but doesn't have a way to address it.
At least for the homeowners who are in the worst financial
situation, a Chapter 13 bankruptcy would allow them to deal
with their mortgage plus dealing with their other debts. That
would be likely to prevent these modifications from re-
defaulting.
So many good reasons why we ought to consider a bankruptcy
option. Thank you, Senator Whitehouse, for giving us this
opportunity to testify today.
Senator Whitehouse. Thank you very much. I want to turn to
our personal witnesses first, but I don't want to leave your
testimony without taking the opportunity to emphasize a point
that you made at the end. I just want to make sure that you
confirm it.
You have heard from these three gentlemen who lived through
nightmares of bureaucracy and you heard Ms. Bodington describe
the process is arduous and long and frustrating and a real
ordeal for folks.
You indicated that if we were to pass the amendment that
would allow a primary residence mortgage to have a principle
reduced in bankruptcy the way every other loan can be, that
there could be benefit to customers without ever needing to go
near a bankruptcy court.
I want to just reemphasize that point with you because I
think that is one of the key reasons we are trying to do this.
We are not trying to drive Americans into bankruptcy to get
this benefit. We are trying to send a market signal so that the
nonsense that these servicers are engaged in stops and the only
thing that will make them stop as you said is less carrot and
little bit more stick. If they know that somebody can go to a
bankruptcy court and get the relief that they need the way they
can for any other kind of mortgage, the way the banks
themselves can if they get in financial trouble and need their
loan restructured, that it can work for the whole industry and
the people like Mr. Verdelotti and Mr. Burlingame and Mr.
Pollock could all be beneficiaries of this without ever having
to go near bankruptcy court.
Mr. Rao. It's absolutely the case in my years, many years
of when I had previously been a litigating attorney and was
working at Legal Services.
When you are ever trying to negotiate something, when the
other side knows that there are options available which may be
worse for them, it makes them come to the table to negotiate
it. It always has that effect.
Right now homeowners don't have that ability to say to the
bank, well, if you won't modify this, if you won't be serious
in your negotiations with me, there is another option which I
can take. That was, again, this has been born out in truth with
the example of the farmers who were able, the Chapter 12 was
modified, amended to allow them to modify their mortgages. Once
that change happened, many more voluntary modifications which
involved principle reduction occurred.
Senator Whitehouse. Mr. Verdelotti, you have heard what Mr.
Rao just said. You have had your own experience.
Based on, as I recall from your testimony, you and your
wife basically on a tag team basis handing each other the phone
as you had to cope with the three kids and your jobs and all
that sort of stuff, you were on the phone for a single longer
than 5-hour segment just on one occasion.
They claimed that you had not mailed in your package until
you were able to show them a receipt showing that yes in fact
you had mailed it in. Not only that, they had received it and
at that point they had changed their story to say oh, well the
package was evidently lost then.
There was a 2-day turnaround. Everything else had taken
forever, but there is a 2-day turnaround between when they get
one package and when you get a denial.
Based on all of that, how seriously do you think the
institution that you are dealing with took negotiating with
you, how much leverage did you feel you had in those
negotiations?
Mr. Verdelotti. None. I didn't have any leverage or
anything of that nature. I didn't get any sympathy from them.
Aurora turned around my denial in 2 days. Citimortgage, it took
forever. It actually went to the Executive Unit and that didn't
take much longer. It took maybe a week for them to actually
tell me that I make too much money for them to help me, and
Aurora tells me the exact opposite which we make not enough.
Senator Whitehouse. And they're looking at the exact same
information?
Mr. Verdelotti. Correct.
Senator Whitehouse. Mr. Burlingame, you had a couple of
observations that I wanted to highlight. One that you thought
you had to send them your materials by certified mail in order
for proof and peace of mind. That's not a sign of a very
trusting relationship with your servicer, is that correct?
Mr. Burlingame. That is correct.
Senator Whitehouse. I mean, do you feel that they were
being cooperative and helpful on the other end of this? How
would you describe the experience you had with your servicer in
terms of how they treated you and whether you felt that they
were friend or enemy?
Mr. Burlingame. When my wife and I started this process, we
obviously ran into some difficulties quickly. I remember saying
to my wife, I said Rachel, I said, there is no way you are
going to tell me that a big company like Wells Fargo, somebody
is sitting in a room somewhere holding--saying we got them.
I honestly can't say that I believe that anymore. I truly
believe that there was some intentions on their part, for lack
of a better term, play games with us. They had our check, they
knew they had our check. They chose not to apply it.
Senator Whitehouse. Now, let me go back to your testimony.
You said on May 11th you received a letter from Wells Fargo
stating that your account was in review and then 1 week later,
Rachel logged onto Wells Fargo's Web site and then you said she
sent the payment that day via U.S. mail. That is several
paragraphs later.
That refers back to the 1 week after May 11th. So you are
talking about having mailed the check in the week of May 18th,
correct?
Mr. Burlingame. Correct. My wife handles a lot of this.
Senator Whitehouse. But she would have mailed it, what your
testimony refers to is she would have mailed it approximately
in the week of May 18th.
Mr. Burlingame. Correct.
Senator Whitehouse. And then they said they didn't get it,
and it is due the 15th of June. So if they cash it on the 16th,
you are technically in default.
Mr. Burlingame. It is due June 1st. They give you that 15-
day period.
Senator Whitehouse. Grace period.
Mr. Burlingame. A grace period.
Senator Whitehouse. So you know that, you know two things.
You mailed it the week of the 18th.
Mr. Burlingame. Right.
Senator Whitehouse. They said that they didn't have it, but
they sure as hell cashed it on June 16th, that 1 day that put
you outside of the grace period.
Mr. Burlingame. Right.
Senator Whitehouse. Or at least tried to if you hadn't
stopped payment on it.
Mr. Burlingame. Right. Fortunately she was right on the
ball with this. We put a stop payment on the check and we paid
by phone.
Senator Whitehouse. Between this and between the magically
missing file that Mr. Verdelotti sent in, it begins, there
begins to emerge a whiff of gamesmanship and manipulation
through all of this. What would your feeling be? You are the
ones who experienced it firsthand.
Mr. Verdelotti. Yes. It seems like they are doing this, you
know, to make things harder. I mean, if we are having a hard
time doing this, what is everybody else doing? Everybody is
going through the same problems right now.
We need that step. We need something to make them move
along most definitely. This seems intentional.
Senator Whitehouse. And why would it make sense, John, why
would it make sense for a servicer to want to discourage
participation in the process with all these different games and
I assume that what happens at that point is if you give up, you
mail in the keys, you go to foreclosure and, you know, that is
the outcome that they force you toward.
Whose interest is it, in whose interest is it to have the
property go to foreclosure?
Mr. Rao. Well, Senator Whitehouse, it's a great question
and I don't know what the real answer is. It doesn't really
make any logical sense for this to be happening, but there are
so many different ways in which servicers have financial
incentives that are counter to what homeowners and especially
modifications are that----
Senator Whitehouse. So the servicer might be looking at
financial outcomes for the servicer that are better if the
homeowner goes into foreclosure than they are if they continue
to work with the homeowner and put them back onto a salvageable
footing?
Mr. Rao. There certainly seems to be that. I mean, they are
recovering all of their costs, you know, interestingly from the
investors of the mortgagees if it goes to foreclosure. They do
recover those.
The cost of processing these modifications, the Treasury
program for the first time does give them some money, but it's
not clear that they see that as being enough of an incentive.
And there are admittedly a lot of administrative costs that the
Department of Treasury has imposed upon them.
Quite frankly, I think they may see this as it is just
better to have the house go to foreclosure and we'll get our
costs back and it might hurt this investor, but at least we are
OK. We are not going to get reimbursed for our cost to make
sure that the modifications are processed properly.
Senator Whitehouse. Mr. Pollock, you are an obviously
experienced investor in the real estate market and a
professional in this field. Your experience doesn't seem to
have been any better.
No account executive was ever assigned to work with your
account as I understand it until very, very late when finally
somebody in Loss Mitigation appeared willing to take a little
bit of responsibility.
At one point you were advised that you had to resubmit all
the information and start the process all over again even
though presumably they already had all the information and you
found it extremely time consuming and continuously full of
conflicting or incorrect information.
Ultimately you discovered that all the information you had
submitted was actually never looked at or entered into the
Wells Fargo computer system. Again, how would you categorize
the manner in which you were treated by the servicer through
this process?
Mr. Pollock. I think it's extremely unfair and it is
possibly because of two reasons. One, I guess I could imagine
somebody is massively disorganized because when I was in the
banking industry, everybody had their own clients. So if I had
just one asset manager who was in charge of my account, then
that person would make sure they had all the information on me.
In the Wells Fargo procedure, it is as extreme opposite as
you can get because you could never speak to this person who is
actually in charge of your account.
Senator Whitehouse. Ms. Bodington, you make a very
interesting point in your testimony. You say that the current
workout process is very arduous and takes months. You say that
it simply does not work in the majority of cases. Then you say
something more interesting. You say that it cannot work for the
volume of cases in the pipeline.
So something is going to have to change if this is going to
be effective, correct?
Ms. Bodington. Yes. I think it is a guess on our part, but
I think we are seeing, I think our counselors have the same
frustration with the amount of time it takes, getting
responses, getting to talk to someone who actually has
responsibility for a loan and can take some action.
But some of that problem I think with the larger banks,
we're making an assumption that some of it is confusion based
on there is so much in the pipeline, there are so many loans
nationally that need to be modified that even a very large
institution even with the best intentions we are seeing
conflicts between departments having different information as
you've heard from some of the homeowners.
I think our staffers are seeing all of the same problems
with the system. We are getting modifications through. We are
seeing homeowners with modifications that we think that they
can afford and they will be able to keep their home, but it's a
very, very difficult process.
Senator Whitehouse. And that's even with your experienced
staff here at Rhode Island Housing assisting them. This is not
them out on their own accomplishing this. This is with your
expert assistance.
Ms. Bodington. Yes.
Senator Whitehouse. And even then it is long and
frustrating and arduous.
Ms. Bodington. Yes. Any homeowner on their own trying to
work their way through the system, it would be very difficult
without some help from an experienced counselor, and even then
it's a very difficult process.
Senator Whitehouse. So for Mr. Burlingame to have turned to
the advice of a lawyer makes perfect sense in terms of the,
assuming the lawyer has some expertise in this area in terms of
it not be just him and his wife trying to sort it out against
the bank.
Ms. Bodington. Yes. I think homeowners really do need help
with it, and there are a number of counseling agencies in Rhode
Island where homeowners can get that kind of help and they can
actually get it for free.
Fortunately there is some good funding coming out of
Washington through Neighbor Works for counselors in the
community. But this is a very complicated process and
homeowners really do need help with it.
Senator Whitehouse. And without your help, in the example
that you gave, the so-called help that the servicer offered
would actually have increased the woman's mortgage payment by
nearly $400 a month.
Ms. Bodington. That's correct.
Senator Whitehouse. That's a very interesting kind of help
when a person is struggling with a mortgage payment, isn't it?
Ms. Bodington. Yes. But fortunately there was a solution
for that woman there. A number of, I think each case needs to
be individualized and take a look at what they can actually
afford. I don't know whether the financial institutions have
adequate staffing to take the time to really look at that or
not.
In that particular instance, fortunately we were able to
offer an alternative plan that did work.
Senator Whitehouse. You did note in your testimony another
point that I'd like to emphasize, you have perceived a distinct
difference between the local banks and the big national banks
in terms of the quality of the interaction between your clients
and customers and them.
Do you think that is just a question of sort of local
community sentiment? Or does it also relate to the portfolio
issue that Mr. Rao referred to that if they actually have held
the mortgage, they are in a better position to consider
reducing its principle and adjusting its terms than if they are
a servicer for a bunch of investors all over the world who they
don't even know who have bought that mortgage up in strips?
Ms. Bodington. Yes, I think that's an important
distinction. I think its local financial institutions that
service some of their own loans, and Rhode Island Housing, we
service all of our own loans, who are able to meet with our
customers and work out modifications.
So part of it is volume and part of it is just having that
local presence and being responsive to residents when they do
need help.
Senator Whitehouse. And that's why you have less than 1/3
of the delinquency rate of statewide.
Ms. Bodington. Yes, correct.
Senator Whitehouse. It is a point worth making in this
hearing and in our community that to the extent local banks are
involved and to the extent that loans have been held by those
banks in the portfolios, you see a far, far, far smaller
problem and the kind of mistreatment that Mr. Verdelotti, Mr.
Burlingame and Mr. Pollock have been treated to appears to be
associated with and was in each of their cases associated with
national banks that don't have that local touch.
Ms. Bodington. I think the local smaller institutions have
much lower foreclosure rates, have far fewer issues, and when
they do have issues, they are better equipped to be able to
work with homeowners and keep them in their homes.
Senator Whitehouse. Mr. Rao, let's try to put ourselves for
a moment in the shoes of the servicer and assume that they are
in some way trying to do the right thing here. All evidence at
this hearing to the contrary.
But if they are servicers and somebody's mortgage has been
turned around and resold and has been carved up into all these
strips that we've read about and then each of those strips have
been sold to investors in different funds all over the country
and all over the world, if you are the servicer and you are on
the phone and you have got Mr. Verdelotti or Mr. Burlingame or
their spouses on the phone, you have got two parties to the
equation there who in theory could work it out except that
somebody actually owns that mortgage.
What happens when that group can never be assembled and the
servicer can never get a decision out of the investors? Does
that affect this problem?
Mr. Rao. Yes, it absolutely does affect the problem. The
services do have some general guidelines that are provided in
the agreements which set up these trusts, and they vary from
trust to trust.
Generally they are given some guidelines with regard to
some minor modifications. But certainly when it comes to things
like the modifications that many homeowners need, and
especially involving the possibility of principle reduction,
they are reluctant to do anything like that without getting
authority from investors.
The problem is that there is no one to turn to. The way
these were structured for a lot of the tax reasons and so forth
is that they are supposed to be passively administered. There
is not supposed to be the trust, the actual owners of the
mortgage aren't really supposed to have involvement with the
day to day activities of these loans.
Senator Whitehouse. It was never really set up to be that
way.
Mr. Rao. It's a system that is set up not to deal with the
problem that we are facing today.
Just one other minor point. The other big issue is that we
are now asking these mortgage servicers, these are the
companies that were generally hired to collect payments and so
forth to, as part of this modification process, to effectively
underwrite these modifications.
They are asking for all this income documentation and
stuff. They never did that before. What is even more ironic is
that when many of these loans were made, the originating
lenders never asked for any of this information. So they are
actually asking for more information now to modify a mortgage
than they did when they originally made the loans.
Senator Whitehouse. I hear a lot of knowledgeable laughter
from the audience on that point. Rather wry laughter it sounds
like.
That is what you are referring to in your testimony. You
talk about the dynamic that leads servicers to refuse even loan
modifications that would be in the investor's best interest.
Mr. Rao. That's right.
Senator Whitehouse. Well, I think I will call this hearing
to a conclusion. I want to thank all of the witnesses for their
testimony and for their expertise and for their commitment.
I particularly want to thank Mr. Verdelotti, Mr. Burlingame
and Mr. Pollock for sharing their stories. It really makes it
real when people like you are willing to come in and walk us
through what you have been through.
As Ms. Bodington said, these are tough times in Rhode
Island and a lot of families are struggling. There are a lot of
those late night conversations when the kids are in bed and mom
and dad have to sit around the kitchen table and figure out if
they can make it another month.
That's a lot of stress, and losing a home is about as
stressful as you can get. Particularly if it's a home with
children in it. So for this industry to add into that equation
what every single person, both you from your personal
experience and you both from your more general expertise have
described as a true nightmare of bureaucracy, that's a lot to
add into it as a very already difficult mix.
As a lawyer and somebody who has seen workouts in various
forms, in the business community people don't treat each other
this way. If you really need to get into the court, and I see
some heads nodding. If you really need to get into the court to
get it done, then you have a judge and ultimately the decision
gets made and there is no more nonsense and everybody knows
about it.
That is one of the benefits that judges provide. They
provide a decision and it is over and the long ordeal is
finished. People who aren't present and don't want to show up
for a voluntary negotiation, it doesn't matter. If they don't
show up, they lose. You force the process. There is some real
value to that. Knowing that that is coming, businesses make
deals and they negotiate their way through and they get out.
When these banks were in trouble, they were eager to
renegotiate all of their loans. So it seems to me that this
would be fair to look further at this.
I take Ms. Bodington's statement that we have to be careful
in looking at the principle reduction aspect of the bankruptcy
loan modification to not target, for instance, the small local
banks who are in fact granting these modifications, who are in
fact working with people who did in fact make responsible loans
in the first instance. Organizations like yours whose default
rate shows that you made responsible loans from the get go and
that the statewide rate is multiple times higher than yours,
the delinquency rate. But it confirms for me the importance of
trying to fight our way forward for this.
Leaving it to bureaucracy and leaving it to the
unsupervised private sector simply doesn't seem to be making
the difference.
So you have all been very patient. If anybody has any final
closing words, I'd be happy to entertain them. But if not,
we'll consider this hearing of the subcommittee adjourned with
my gratitude to you for your testimony and my assurance that it
will be in a meeting when we get back to Washington and pursue
this issue.
Clearly if, as Mr. Rao has suggested, there is a second
wave of foreclosures coming, it will continue to be an
important issue. As Ms. Bodington has suggested, we are still
in our wave of foreclosures here, so this is not something that
is just in the past. We really need to cope with this and I
thank you for your help to us.
The hearing is adjourned.
[Whereupon, at 11:18 a.m. the hearing was adjourned.]
[Submissions for the record follow.]
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