Countrywide Home Loans, Inc.
Subcommittee on Commercial and Administrative Law
House Judiciary Committee
March 18, 1998
Good Morning Chairman Gekas, Congressman Nadler, and distinguished Members of the committee. I am Tom Boone, Managing Director of Portfolio Services for Countrywide Home Loans, which is headquartered in Calabasas, California. It is my pleasure to come before you to discuss H.R. 3150, The Bankruptcy Reform Act of 1998.
For those of you who are not familiar with Countrywide, we are the largest independent mortgage lender in the country. We originate approximately $50 billion in loans and service 1.74 million, equal to $182.7 billion in loans. Of the 1.74 million loans, 19,977 are in foreclosure and 16,462 are in bankruptcy. Therefore, the bankruptcy issue is of great concern to Countrywide and we are very supportive of the efforts you and your colleagues have taken and view the legislation introduced as positive steps toward major reform in bankruptcy abuses.
The Bankruptcy Crisis
We believe it is critical to reverse the increase in consumer bankruptcy filings, which has exceeded 1.3 million in 1997, an all time high.
The rise of bankruptcies is of particular concern because it is happening during a time of economic growth. In the past, the bankruptcy rate reflected a general decline in the economy, or problems in a particular region or economic sector. For example, filings grew in the 1980's because of a collapse of several real estate markets, including my state of California; also high unemployment in some regions, the decline in manufacturing, and instability in interest rates were all factors. By contrast, there is no identifiable economic cause of the current acceleration of filings.
Countrywide supports the societal benefit of providing relief for those who truly are unable to pay their debts because of justifiable, unforeseen circumstances. At the same time, it must be recognized that the effect of bankruptcy on home mortgage lenders ultimately affects the cost of residential mortgage loans, credit availability, or both. In making pricing and underwriting decisions, mortgage lenders consider the frequency of bankruptcy filings, the delays caused by filings, the amount of debt recovered in a bankruptcy, and the legal fees and other transaction costs involved. Delays are of a particular concern to mortgage lenders because they can lead to the deterioration of the residential property securing the mortgage loan, which is maintained by the debtor with little or no stake in the property. Often, by the time the automatic stay is lifted by the bankruptcy court and the lender is permitted to foreclose and sell the residence, the proceeds of the sale are insufficient to pay the mortgage loan in full.
Lenders who want to remain in business spread their mortgage loan losses to other borrowers in the form of higher interest rates. Any changes in the bankruptcy system that decrease the number of personal bankruptcies will ultimately reduce the cost of home mortgages to consumers and will benefit creditworthy home buyers who are seeking home mortgage financing.
There are a number of bankruptcy abuses that prevent mortgage lenders from foreclosing on a residence, even when it is certain the debtor is unable to pay the mortgage debt. Attached to this testimony are cases (Appendix A) which illustrate the reason mortgage lenders are concerned with abusive filings. In one situation, there are twenty cases purporting to affect our property. Those twenty cases are on one mortgage loan. This caused the foreclosure process to be delayed by more than a year. There are several similar examples. The debtor causes the delay by using the simple technique of repeatedly conveying a partial interest in the mortgaged property to a third party, who then filed for bankruptcy relief under Chapter 7. The filing by the third party triggered an automatic stay, delaying foreclosure on the property by two to three months. When the judge dismissed the Chapter 7 filed by the third party, the debtor simply found another transferee to whom a partial interest was conveyed and who filed under Chapter 7 following the conveyance, again triggering the application of the automatic stay to the mortgage property. This practice of transferring partial interests in the mortgaged property to third parties, who in turn file a bankruptcy petition to delay foreclosure, has become more common in the last several years.
Another example of fraud is rent skimming schemes. In these cases not only are we a victim, but sadly, the borrower is taken advantage of in two ways - first by paying money that never gets to the lender, and second by losing their home through foreclosure. In this example, the debtor (entity) files bankruptcy against several different mortgage loans. The borrower will receive some sort of solicitation stating they can receive assistance with their financial problems. The borrower then begins to pay this entity every month. The person at this entity, unbeknownst to the borrower, will file bankruptcy on the borrowers' mortgage loan and eventually the residence will be foreclosed. In the example we are providing for you, the debtor (entity) has 10 filings on 10 different mortgage loans. Countrywide would be delighted to present additional case histories to the Subcommittee or its staff upon request.
Your bill, Mr. Chairman, addresses the above-described filing abuses. Section 121 of H.R. 3150 amends section 362 of the Bankruptcy Code to provide that if a case filed by the debtor under Chapters 7, 11 or 13 was dismissed, and if the same debtor files a second case within a year of the dismissal, the automatic stay will terminate within thirty days of the filing of the second case unless the court extends the stay upon a finding that the second case was filed in good faith.
In addition, Section 121 of H.R. 3150 also addresses the situation in which a debtor transfers undivided interest in secured property to third party transferees by permitting the bankruptcy judge to grant in rem relief, (in rem is a technical term used to designate proceedings or actions instituted against the thing) from the automatic stay. Properly applied, the in rem relief would prevent third party transferees who file a petition in bankruptcy from delaying foreclosure on property covered by in rem relief because the automatic stay would not apply to the covered property.
Countrywide feels that Section 121 should be strengthened to discourage abusive filings by including the following provisions:
First. To further discourage a debtor from filing numerous petitions, the provision in Section 121 requiring that the automatic stay be lifted in thirty days if a petition is filed by a debtor within one year of the dismissal of prior case should be expanded to provide that the automatic stay will not apply if the debtor files "x" number of cases which are dismissed within a specified period of time. For example, the automatic stay would not apply if a debtor filed a third petition within one year of the dismissal of a case. This approach would discourage a debtor from continuously filing bankruptcy petitions to take advantage of the 30 day stay that is available in Section 121 as currently drafted. At some point, repetitious filings should be treated as being so abusive that the debtor is not entitled to the benefit of the automatic stay.
Second. To further discourage third party transferees from filing successive petitions in bankruptcy to delay foreclosure on property covered by an order granting in rem relief from the automatic stay, Section 121 should be revised to provide that the in rem relief applies to all parties with an interest in the property.
The language in Section 121 providing in rem relief from the automatic stay currently provides that the in rem order will not apply to a third party holding an interest in the property covered by the order unless the third party:
· Had reason to know of the in rem order at the time the party obtained an interest in the property covered by the order, or
· Was notified of the commencement of the proceeding for relief from the stay, and at the time of the notification, no case in which the third party was a debtor was pending.
Requiring that a third party have knowledge of the entry of an in rem order or notice of a proceeding for relief from the stay as a condition to imposing in rem relief against that party will not significantly curtail the third party transferee abuse described above and documented in Appendix A. For example, a debtor could deed fractional interests in property to three parties without consideration prior to the entry of an in rem order or the commencement of a proceeding for relief from the stay. The third parties would not be covered by the in rem order because they would not have reason to know of the order at the time their interests were acquired (even if their interests were acquired after the order was entered, they would not have reason to know of the order if the interests were transferred before the order was recorded and they are not "notified" of the motion in which the in rem order was granted because the creditor could not have known of their existence at the time the motion was filed). In this example, each of the third party transferees could successively file a petition in bankruptcy and cause the automatic stay to apply to the property covered by the order granting in rem relief.
Innocent third parties with a legitimate interest in the property subject to an in rem order can be protected. The court is not required to enter an in rem order under Section 121. It is in the judge's discretion. If a third party has a legitimate interest in the property and that is properly recorded - or the judge is advised of that interest by the debtor - the judge can elect not to enter the order or can identify the innocent parties who would not be subject to the terms of the order.
In a number of jurisdictions, bankruptcy judges currently grant unrestricted in rem relief when faced with abusive third party filings. The in rem language in Section 121 as currently drafted would restrict the scope of those orders and could impede the ability of lenders, trustees and title companies to go to sale on property covered by an in rem order entered under Section 121 as currently drafted.
Language suggesting changes to Section 121 reflecting Countrywide's comments is set out in Appendix B.
Countrywide has few cramdown cases, but we share the mortgage lending industry's serious concern with the problem. A cramdown is a court-ordered reduction of a loan balance, in which the secured claim - the amount due on the mortgage loan - is reduced to the amount of the lien that does not exceed the market value of the property. Recent decisions have held that a lien on a residence securing a mortgage loan is subject to a cramdown in certain circumstances.
In addition, the lender's remaining lien under a cramdown is subject to restructuring as a secured claim in the Chapter 13 plan, which can significantly reduce the loan value. There have been cases in which a conventional mortgage loan with equal monthly payments to maturity was converted into one with small monthly payments and a large balloon payment at maturity - which realistically the borrower could not be prepared to be able to pay.
Mr. Chairman, Countrywide would like to thank you and appreciates the opportunity to come before you and share our views and concerns regarding these bankruptcy issues. These issues have a critical effect on the residential mortgage industry and more important, the homeowner. We look forward to working with you and the other Members of this committee and the staff to developing legislation that will bring positive reform in bankruptcy abuses.