The Senate Judiciary Committee just wrapped up a hearing on HAMP, the foreclosure crisis and bankruptcy courts, presided over by subcommittee chair Sheldon Whitehouse. Only three other members of the Judiciary Committee managed to attend this hearing. Al Franken and Richard Blumenthal were there the whole time, and Republican ranking member Chuck Grassley poked his head in for a couple questions. If you want to know why we call it the forgotten foreclosure crisis, there’s your answer.

The hearing proposed using the bankruptcy courts for mediating foreclosure disputes, which is not necessarily cramdown but a way to get borrower and lender in a room together to deal with the problem. Frequently, the lender has no point of contact at their bank, and are basically at the mercy of servicer software which generates hidden fees and foreclosure notices and spits out failures of the net present value test. One homeowner in the hearing has been waiting 19 months on a loan modification. Whitehouse became visibly angry when talking about him. “When you have to come up with the same damn paperwork, and you talk to someone different every time you call, after 19, 20 months of that it’s pretty frustrating,” he said. “That could be broken simply by getting people in a room.”

Al Franken put an exclamation point on this, by mentioning the form letter he received from Ally Financial when he wrote to them about robo-signing problems. “It’s nice to see to see that Ally doesn’t treat homeowners any worse than they treat a Senator.”

And it’s not a isolated incident for servicers to string along the borrower with a loan modification until you reach a point where they cannot pay. As I’ve shown in my Portrait of HAMP Failure series, it’s far too commonplace to see gross violations of HAMP go without sanction from Treasury, and to see servicers work diligently to trap the borrower in unfavorable positions which lead to foreclosure.

In the long run, it’s just bad business to not modify loans and keep some revenue flowing, as Robert Drain, a US bankruptcy judge from New York and one of the witnesses, said. However, the servicers have a completely upside-down business model where they can derive more income from foreclosure than putting their customers into a loan modification.

As Rep. Brad Miller said to Dylan Ratigan yesterday, as long as we have a system that’s voluntary on the part of the banks, absolutely nothing will change. I would add that as long as we have a system with no penalties for non-compliance or criminal malfeasance, nothing will change. Rep. Miller says it best, however:

But until we get something in place that is not entirely voluntary for the banks, we just are not going to get an orderly resolution of the household debt tied up in mortgages. And people just feel tormented like they’re a mouse captured by a cat. I mean they are in torment over mortgages they cannot pay and cannot get out of and they keep getting offered modifications that just deal their mis-payments into a new – into the principal or pushes them back at the back end of the loan, but doesn’t get them into something they can afford, that helps them actually have some equity in a home.

…the system has become so complicated that it is easy for the banks and for the bank lobbyist from the banks, your people just to kind of fuzz it all up. I think the simple explanation is the right one. One of my favourite lines from Will Rogers was early in the new deal he said that President Roosevelt had explained the banking crisis so clearly that even the bankers understood it. And I think that’s the kind of explanation we need now, something that is not all in credit default swaps and all of the other complication that makes any normal human being’s eyes glaze over but is fairly straightforward. The banks have trapped people in debt, they can’t pay it and instead of dealing with it in a way that realizes – makes the banks recognize the losses that they’ve got, keeps people trapped in debt until the banks can get in better shape themselves.

Mandatory mediation services in the states are working to force more loan modifications, as are independent efforts like NACA and other consumer-advocate-led initiatives. States and cities that make mediations mandatory are experiencing far fewer foreclosures. People just need to know about the resources.

The Huffington Post has set up a series of mortgage madness meetups across the country for next week. Over 700 communities have already signed up for these meetups, set for Feb. 8. There’s an asymmetrical amount of information between the banks and the borrowers. Just talking to someone in the same situation as you can help a lot. Hopefully a good deal of information can be shared.

This is of course separate from the ongoing legal issues about chain of title. But if just a few people can be helped through information sharing and mediations, it would make a huge difference in their lives.

David Dayen

David Dayen