Good morning, and welcome to this online forum. I’m Brad Miller, and I’m here with Linda Sanchez —and when I say here, I mean Linda is sitting on the other side of my desk in front of an open laptop. Linda and I introduced legislation to allow bankruptcy courts to modify home mortgages, which will be the topic of the forum today. Also joining us are Professor Elizabeth Warrren, who is well know to readers of TPMCafe; Bob Lawless, also a law professor and a blogger, in his case at creditslips; Adam Levitan, a law professor at Georgetown; and Hale Stewart, a recently-engaged Houston lawyer well known at DailyKos and at his own blog as “Bonddad.�

The law professors are welcome to ask questions on the understanding that their questions not bring back unpleasant memories of law school for Linda, Hale or me.

The foreclosure rate is already the worst it’s been in twenty-five years, and soon will be the worst it’s been since the Great Depression. According to Lehman Brothers, about 30 percent of the subprime loans made last year will end in foreclosure. Probably more than two million American families will lose their homes to foreclosure in the next couple of years, and with their homes, they will lose their membership in the middle class, probably forever.

None of this should come as a surprise. Here’s what’s happened in mortgage lending in the last couple of years, based on a summary of industry statistics by the Center for Responsible Lending:

Approximately 28 percent of all mortgage loans made last year were subprime, compared to eight percent in 2003. About 90 percent of the subprime mortgages made in 2005 and 2006 had adjustable rates with an adjustment after just two or three years. The typical adjustment in the interest rate was from about seven percent to 12 percent, resulting in an increase in monthly mortgage payment of 30 to 50 percent. There was no reason to believe that more than a tiny fraction of those borrowers would enjoy substantially more prosperous circumstances in two or three years. About 70 percent of subprime loans have prepayment penalties, 75 percent have no escrow for taxes and insurance, and almost half (CRL estimates between 43 and 50 percent) were “without fully documented income.� The vast, vast majority of Americans can easily document their income by payroll records, employer verification, bank statements or income tax returns, and the interest rates on loans with less than full documentation are substantially higher.

The mortgages were designed to become unaffordable, so the borrower would have to refinance again, paying up front costs and fees for the next mortgage and a prepayment penalty to get out of the last mortgage. As long as the value of homes kept appreciating, it all worked exactly as intended—the various players in mortgage lending ended up with the increased equity in homes, not the middle class families who lived there. But when housing stopped appreciating, the music stopped.

No, the people with subprime mortgages aren’t people with “problem� credit. According to the Wall Street Journal, 55 percent of subprime borrowers qualified for prime loans. And no, the loans were not “innovative mortgage products� that lenders offered to encourage home ownership. Only about one subprime mortgage in ten is to purchase a first home, and 72 percent of subprime mortgages were refinances. Professor Warren has written about how the mortgage practices steer homeowners into predatory loans, and so have I.
I’ve worked in Congress for five years on legislation to reform mortgage lending, but we have a more immediate problem: what can we do to help the families now facing foreclosure?

It turns out we’ve been here before. The Great Depression began on the farm before it began in the factory. Millions of family farmers borrowed against their farms to try to ride out the depression. When farm prices didn’t improve, they had no way to pay their mortgages.
Woody Guthrie was writing about family farmers losing their homes to foreclosure in the lyrics to "Pretty Boy Floyd�:

Now as through this I ramble
I see lots of funny men
Some will rob you with a six gun
And some with a fountain pen.
But as through life you travel
As through your life you roam
You won’t never see an outlaw
Drive a family from their home.

Congress first passed bankruptcy legislation in 1934 to help family farmers avoid losing their farms and their homes to foreclosure. The legislation was temporary, and after the Democratic Congress extended the legislation a couple of times, the Republican Congress elected in 1946 let it expire. But after another epidemic of family farm foreclosures, Congress enacted legislation in 1986 that is now a permanent part of the bankruptcy law. When I asked around early this year about what Congress could do to help middle class families escape foreclosure, a couple of bankruptcy judges suggested that Congress could just let bankruptcy courts modify home mortgages the same way bankruptcy courts can modify mortgages on family farms.
So Linda and I introduced a bill that would do just that. If the mortgage exceeds the value of the home, the court can limit the debt secured by the home to the value of the home and treat the rest as unsecured. And the court can then set a term of up to thirty years and an interest rate of prime plus a couple of points for risk—still a subprime loan, but not a predatory loan.

According the CRL, the legislation would make it possible for 600,000 or so families to save their homes from foreclosure. The chief economist for Moody’s thinks that’s an exaggeration—probably only 500,000 families would save their homes under the legislation.
Okay, so let’s get started.