PrintAug. 21--PROVIDENCE -- Homeowners need a congressional "stick" when trying to negotiate new mortgage terms with national loan servicing companies as a way of avoiding foreclosure, witnesses told U.S. Sen. Sheldon Whitehouse at a Senate subcommittee field hearing Thursday morning.
"I didn't have any leverage or anything of that nature," Joseph Verdelotti Jr., a plumber from West Warwick, told Whitehouse, a Rhode Island Democrat.
Verdelotti said he and his wife bought a house in 2006, near the height of Rhode Island's real estate market. As home values have fallen and the family budget has tightened, the Verdelottis have faced a labyrinth of bureaucracy in trying to deal with the companies that service their mortgages.
"What is lacking in the system is not a carrot; what is lacking is a stick," said John Rao, a lawyer with the National Consumer Law Center and a resident of Newport.
The "stick" Rao and others advocated Thursday was what is known as "cram down," a process that would allow federal bankruptcy judges to rewrite the terms of a mortgage as part of bankruptcy proceedings.
Rao said that a similar provision years ago that applies to family farms prompted a dramatic rise in the number of cases in which banks renegotiated farm mortgages without the farmers ever having to file bankruptcy.
Such modifications, as cram downs are more formally known, were considered last year when Congress enacted bank bailout legislation. "Even though bankruptcy modification would spare the community the terrible costs of foreclosure, the mortgage banking industry invested millions of dollars to lobby against this reform and has so far been able to prevent its passage," Whitehouse said in opening remarks.
He said that mortgages on primary residences stand apart from all other loans in that bankruptcy judges cannot modify them. He said the bankruptcy court can modify all other contracts, including vacation home mortgages and loans for cars and jewelry and corporate loans.
Whitehouse and several of the witnesses stressed that smaller community banks have generally been more responsive to borrowers in financial trouble. Homeowners need additional leverage primarily with large, national companies that "service" mortgages that are owned by investors. The mortgage servicing companies collect monthly payments, initiate foreclosure on delinquent borrowers and handle other tasks for the investors.
Whitehouse held the field hearing of the Senate Judiciary Committee's Subcommittee on Administrative Oversight and the Courts, of which he is the chairman, at the Rhode Island Housing office. Before Whitehouse's hearing, about 10 people staged a protest outside Rhode Island Housing. They support state "Just Cause" legislation to require banks that foreclose on rental properties to allow tenants who are current on their rent to remain in the buildings. The protesters oppose a compromise version of the legislation, which has passed the Senate, but not the House, that, they say, would reduce tenants' rights, not only from the Just Cause proposal, but from current law.
"We're here to say we don't want this compromise that only helps the banks," said Fred Ordonez, executive director of Direct Action for Rights and Equality, one of the groups that organized the protest.
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