I'm Eric Stein, chief operating officer of Self-Help, a non-profit community development lender, and senior vice president of the Center for Responsible Lending. Thank you for having me here today to talk about bankruptcy solutions that could help prevent the massive home losses occurring today.
As a result of loans that never should have been made, 2.2 million families have already lost or will lose their homes and billions of dollars in wealth. These losses will hurt everyone, not just the families who lose their homes. For example, everyone with a $150,000 house who lives on a block with 3 foreclosures will lose $6,500 of their families' wealth. But if we take reasonable and constructive actions now, we can keep many families in their homes and make recovery easier for us all.
Bankruptcy is not a course to be taken lightly, but for the seven million families placed in exploding ARMs, very limited options are available. Few people have an income that rises by 40% in two years – that's the increase necessary to afford an exploding ARM after it resets. The slow-down in housing appreciation makes it much harder to sell or refinance to get out of a bad loan. Only a fraction of borrowers will get sustainable work-out plans from mortgage servicers. For many families struggling with exploding ARMs, declaring bankruptcy is the only alternative to losing their home.
The problem is that current bankruptcy laws actually prevent homeowners from recovering. Subprime loans have pushed millions of households under water; unless Congress acts quickly, our current laws will ensure that they drown.
Let me give a very brief overview on some of the obstacles our bankruptcy code presents for families facing foreclosure:
First, our bankruptcy laws actually exclude homes from relief, and specifically work against sustained homeownership.
The problem involves loan modifications. For virtually all secured loans, bankruptcy allows courts to change the loan terms to make them affordable. These loan modifications help all parties, including lenders and investors, since no one benefits when a borrower defaults. For example, courts can "strip down" a car loan to its current value, and place any remaining debt on an equal footing with other unsecured debts. Courts can also reduce interest rates, payment amounts, extend the term beyond the 3 – 5 year bankruptcy plan, or convert adjustable-rate to fixed-rate loans.
Modifying loans is a very useful remedy, but, unfortunately, not for homeowners. Today's bankruptcy law specifically bars courts from modifying just one class of loans and one type of asset—home loans that are a family's primary residence.
This makes no sense: A home is by far the most important asset a family owns. Bankruptcy courts can modify loans on corporate real estate, investor properties, the primary residences of farmers, and rich families' second or third homes. Why should the primary residence owned by an average citizen be excluded?
Another example: The law allows people in financial difficulties to keep some of their possessions by paying the creditor the market price, but they are not allowed to do this with their home. Again, this makes no sense.
Another hurdle faced by homeowners is the requirement to receive credit counseling before they can file for bankruptcy. This unnecessarily slows the process of seeking relief, often when foreclosure is imminent and every day counts.
Once a homeowner successfully files for bankruptcy, another potential obstacle is exorbitant fees imposed during the bankruptcy process. Under today's law, a low-income senior citizen can emerge from bankruptcy after years of struggling to cure a debt, only to find they are behind on their mortgage payments due to new costly fees.
Although the current bankruptcy code is convoluted, the good news is there are simple solutions for fixing it. We have outlined our proposals in detail in a joint memo issued with my colleagues here today, but let me mention a few highlights here:
First, the bankruptcy code must stop excluding home loans from remedies that are available on other less important debts. Congress must permit mortgages to be modified to make them affordable – just as other loans may be modified during bankruptcy. We should also give families the right to pay the liquidation value of their home and keep the home.
Second, the law should permit homeowners to file for bankruptcy as soon as possible, without being hindered by a non-productive counseling requirement intended for other purposes.
Third, homeowners should be able to seek bankruptcy relief without the possibility of facing exorbitant interest rates or excessive fees during the bankruptcy period. Courts should be permitted to judge whether fees are indeed excessive.
I'll be glad to talk about these recommendations in more detail during the question-and-answer period. Thank you.
Read the Joint Memo on Bankruptcy Reform.
Read the Joint Press Release.
Read statement from Allen Fishbein, Director of Housing and Credit Policy for the Consumer Federation of America.
Read statement from Henry Sommer, President of the National Association of Consumer Bankruptcy Attorneys.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.