[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 5679, THE FORECLOSURE PREVENTION
AND SOUND MORTGAGE SERVICING ACT OF 2008
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 16, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-108
U.S. GOVERNMENT PRINTING OFFICE
42-720 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia KEVIN McCARTHY, California
DAN BOREN, Oklahoma DEAN HELLER, Nevada
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
EMANUEL CLEAVER, Missouri STEVAN PEARCE, New Mexico
AL GREEN, Texas PETER T. KING, New York
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
GWEN MOORE, Wisconsin, GARY G. MILLER, California
KEITH ELLISON, Minnesota SCOTT GARRETT, New Jersey
CHARLES A. WILSON, Ohio RANDY NEUGEBAUER, Texas
CHRISTOPHER S. MURPHY, Connecticut GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana JOHN CAMPBELL, California
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
C O N T E N T S
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Page
Hearing held on:
April 16, 2008............................................... 1
Appendix:
April 16, 2008............................................... 69
WITNESSES
Wednesday, April 16, 2008
Allnut, Jason, Vice President for Credit Loss Management, Fannie
Mae............................................................ 33
Bailey, Steve, Chief Executive for Loan Administration,
Countrywide Financial Corporation.............................. 53
Beckles, Ingrid, Vice President, Servicing and Asset Management,
Freddie Mac.................................................... 34
Caden, Judith, Director, Loan Guaranty Service, U.S. Department
of Veterans Affairs (VA)....................................... 9
Deutsch, Tom, Deputy Executive Director, American Securitization
Forum (ASF).................................................... 52
Gordon, Julia, Policy Counsel, Center for Responsible Lending.... 27
Kittle, David G., CMB, President and Chief Executive Officer,
Principle Wholesale Lending, Incorporated, and Chairman-Elect,
Mortgage Bankers Association (MBA)............................. 50
Maggiano, Laurie, Deputy Director, Office of Single Family Asset
Management, Federal Housing Administration, U.S. Department of
Housing and Urban Development.................................. 7
Schwartz, Faith, Executive Director, HOPE NOW Alliance........... 48
Stein, Kevin, Associate Director, California Reinvestment
Coalition...................................................... 29
Twomey, Tara, Senior Counsel, National Consumer Law Center (NCLC) 25
Wade, Kenneth, President and Chief Executive Officer,
NeighborWorks America.......................................... 31
APPENDIX
Prepared statements:
Carson, Hon. Andre........................................... 70
Allnut, Jason................................................ 72
Bailey, Steve................................................ 77
Beckles, Ingrid.............................................. 87
Caden, Judith................................................ 95
Deutsch, Tom................................................. 101
Gordon, Julia................................................ 114
Kittle, David G.............................................. 124
Maggiano, Laura A............................................ 134
Schwartz, Faith.............................................. 139
Stein, Kevin................................................. 154
Twomey, Tara................................................. 168
Wade, Kenneth................................................ 183
Additional Material Submitted for the Record
``Servicing Best Practices for Subprime Borrowers,'' an
insert from Countrywide and ACORN.......................... 188
Additional information submitted for the record by Judith
Caden...................................................... 193
Additional information submitted for the record by Laurie
Maggiano................................................... 198
Statement of Clifford J. White, III, Department of Justice... 199
A Letter of Support for H.R. 5679 to Chairwoman Maxine Waters
from various consumer law, civil law, and other
organizations, dated March 31, 2008........................ 210
Statement of the National Alliance of Community Economic
Development Associations (NACEDA).......................... 212
Statement of Professor Katherine Porter, University of Iowa
College of Law............................................. 214
Statement of the American Bankers Association (ABA).......... 221
H.R. 5679, THE FORECLOSURE PREVENTION
AND SOUND MORTGAGE SERVICING
ACT OF 2008
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Wednesday, April 16, 2008
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Representatives Waters, Cleaver, Green,
Ellison; Capito, Shays, Miller of California, and Neugebauer.
Also present: Representative Watt.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order. Good
morning, ladies and gentlemen. I would like to thank Ranking
Member Capito and the members of the Subcommittee on Housing
and Community Opportunity for joining me for today's hearing on
H.R. 5679, the Foreclosure Prevention and Sound Mortgage
Servicing Act of 2008.
Yesterday, RealtyTrac released data on foreclosures for the
month of March. The figures are sobering. Over 234,000
homeowners nationwide were hit with foreclosure filings, which
include default notices, auction sale notices, and bank
repossessions; this represents an increase of 5 percent since
February, and 57 percent compared to March 2007. Of these
filings, over 51,000 homes were actually repossessed by banks;
in other words, actually foreclosed upon, a 10 percent increase
over February. Year-to-date, such foreclosures have taken place
at a rate that is a shocking 129 percent greater than during
the same period last year. Clearly then we have not emerged
from the biggest foreclosure wave to strike this country since
the Great Depression.
Today's hearing is about strategies to prevent further
increases in foreclosures. I took a careful and comprehensive
look at the subprime mortgage and the subsequent foreclosure
crisis before introducing H.R. 5679, the Foreclosure Prevention
and Sound Mortgage Servicing Act of 2008. It became clear to me
early in this debacle that mortgage servicers hold the key to
any foreclosure prevention strategy. Simply put, they are the
direct point of contact for nearly all borrowers in the
contemporary mortgage market.
The vast majority of home mortgage loans do not remain on
the books of the bank or the financial entity that originated
them. Rather, they are typically bundled together and
securitized, and then sold in the secondary market as a part of
investment trusts in which the investors hold financial
interest in particular bundles or tranches of the underlying
mortgages. The trust then contracts them with the mortgage
servicer, which takes payments and is responsible for taking
all steps to address delinquency, including foreclosing on
behalf of the investment trust. Loss mitigation refers to a
range of activities that a mortgage servicer may offer a
homeowner as an alternative to foreclosure, including repayment
plans, loan modification, short sales, and deeds in lieu of
foreclosure.
On November 30, 2007, this subcommittee convened a field
hearing in Los Angeles entitled, ``Foreclosure Prevention and
Intervention: The Importance of Loss Mitigation Strategies in
Keeping Families in Their Homes.'' There homeowners,
homeownership counselors, legal aid attorneys, and local
government officials testified as to difficulties they
encountered in getting prompt, reasonable loss mitigation
action by the mortgage servicers. Witnesses described
challenges in finding and speaking directly to a person at the
servicers who was empowered to engage in meaningful loss
mitigation. Additionally, individual borrowers and even their
trained advocates found it difficult to obtain accurate
information on the status of their loans. Those that did
receive loss mitigation offers were sometimes required to waive
their legal rights or agree to pursue further complaints only
through arbitration.
Unfortunately, since that hearing, I have not been
satisfied with the progress made by the voluntary loss
mitigation efforts undertaken by the industry. I think the
rising foreclosure figures speak for themselves, although I
look forward to hearing from our witness panels today on that
issue.
Meanwhile, the data provided by industry to date has struck
me as opaque at best, in terms of whether distressed borrowers
are being offered sustainable repayment plans or loan
modifications that will remain affordable over the long term.
In my view, the fundamental problem is that the mortgage
servicers have no legal obligation to engage in reasonable loss
mitigation efforts to keep a borrower in delinquency in his or
her home even where that borrower may have been the victim of a
predatory or unaffordable loan. The only duty is to the
investment trust that holds the bundle of mortgages they
service. Simply put, absent a statutory duty of some kind, I am
concerned that consumers have little leverage with mortgage
servicers in the current crisis and will continue to lack it in
the future.
H.R. 5679, the Foreclosure Prevention and Sound Mortgage
Servicing Act, creates this enforceable legal duty.
Specifically, the legislation amends the Real Estate Settlement
Procedures Act, or RESPA, in the following ways:
First, it would permit foreclosures to proceed only after
reasonable loss mitigation. Loss mitigation analysis would be
required to consider the long-term affordability of the home
loans using the standard employed by the VA Loan Guaranty
Program, including analysis of junior liens and the borrower's
other secured or unsecured debt.
Second, it would provide fair compensation for a servicer's
loss mitigation activities. The bill ensures that mortgage
servicers have a monetary incentive to engage in loss
mitigation by authorizing reasonable fees for these activities.
Third, it would facilitate referrals to housing counselors.
Servicers are required to refer homeowners who are late on
their mortgage payments to HUD-certified housing counselors.
Fourth, it would institute comprehensive loss mitigation
activity data reporting. Servicers are required to report
various loss mitigation activities with specific geographical
designations just as lenders must report data on loan
originations under the Home Mortgage Foreclosure Act.
Fifth, it would strengthen the duty of servicers to respond
to a homeowner's request for information. Servicers must
provide timely responses to requests from homeowners and
housing counselors for payment histories, loan documents, and
loss mitigation documents. In addition, all servicers must
provide a toll-free or collect-call phone number that provides
the borrower with direct access to a person with the
information and authority to fully resolve issues related to
loss mitigation and undertake all loss mitigation activities in
the United States.
Lastly, it would better protect borrowers' legal rights.
Servicers may not condition a loan modification on a borrower's
limitation or waiver of legal rights. The bill would also allow
damage actions for individual violations and increases maximum
damages.
In sum, I believe that H.R. 5679 is a prudent piece of
legislation designed to balance the needs of lenders and
servicers and borrowers in an effort to reduce foreclosures. I
also see it as an important step in regulating what has been to
date a largely below-the-radar-screen and underregulated sector
of the mortgage industry.
With that, I will now recognize Ranking Member Capito for
her opening statement.
Mrs. Capito. Thank you, Madam Chairwoman, for scheduling
this hearing today on how to address the Nation's rising
foreclosure rates and whether the lending industry has all the
tools necessary to perform loss mitigation activities. As a
result of plunging home prices, many borrowers now find
themselves underwater, owing more on their home than it is
actually worth. Economists have estimated that some 8.8 million
mortgages are now underwater and expect that figure to rise as
housing prices decline further.
Some analysts believe that even if a percentage of these
borrowers can afford to make their mortgage payments, the
difference between what they owe on their houses and the home's
market value, a difference that has become known as negative
equity, may encourage these borrowers to walk away from their
homes. Some commentators have even gone so far as to say that
in these circumstances, it is in fact economically rational for
borrowers to purposefully default on these mortgages.
Investors have also found themselves affected by the
decline in home prices. The values of the mortgage-backed
securities they hold are not only threatened by greater risks
of default and foreclosure, the collateral that secures these
loans, these mortgages, is worthless, which in turn further
increases the risk of loss. As a result, investors have found
that the market for mortgage-based securities has become
increasingly illiquid with other investors reluctant to
purchase these securities because of the increased risk of
loss.
The climb in home prices has moved the discussion from ARM
resets, which have not been as sizeable as initially feared, to
discussions of negative equity and its relationship to defaults
and foreclosures. While I understand and share Chairwoman
Waters' goal of preventing foreclosures, it is important that
we take care as we consider legislative remedies such as H.R.
5679 to not make the situation worse.
Many who are testifying here today have significant
concerns about the unintended consequences of the provisions
included in this legislation; specifically, that H.R. 5679
could have a negative impact on the availability of credit and
the willingness of industry to enter into new mortgage
contracts. With investor appetite for U.S. mortgages in flux,
any legislative solution must not do additional harm and
further disrupt market liquidity.
There is concern that the provisions in this bill are
overly broad, burdensome, and could ultimately redefine
existing mortgage contracts. There is certainly enough
editorial comment on both sides of these issues, some urging
quick action, others making the case that action would only
further prolong the current mortgage crisis and exacerbate the
problem. I realize it is difficult to know how best to proceed.
Several weeks ago, much of the attention relating to the
mortgage crisis was focused on the pending resets and the
ability of homeowners to make their payments after the reset.
But recent reduction in rates have made the resets less of a
problem, although they are still a problem for some.
Today, as I mentioned earlier, the focus is more on those
homeowners who are underwater, families living in homes that
are worth less due to declining markets than the current
mortgage on their home. The change in focus serves to highlight
the importance of being cautious before taking action that may
only exacerbate the housing crisis and then weaken our economy.
I am anxious to hear from our witnesses today on the
current condition of the mortgage markets and foreclosure
statistics and how you are addressing these problems, what kind
of progress is being made to improve market conditions and to
help stem the tide of families facing foreclosure, and what
action is being taken by advocacy agencies and industry to
address this current mortgage crisis.
Again, I would like to thank Chairwoman Waters for her
continued interest in this issue, and I look forward to the
testimony of the witnesses. Thank you.
Chairwoman Waters. Thank you very much. I will now
recognize members of the subcommittee for opening statements.
First, we will have Mr. Cleaver for 2 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. I want to thank
you and Ranking Member Capito for holding this hearing. The
issues that are coming before us at this juncture are Herculean
when you look at what is happening around the Nation. In
particular, 20,000 foreclosures a week would suggest that we
have more than a casual problem. I happen to be one who
believes that we have to take some dramatic and drastic actions
to address a dramatic and drastic problem.
I listened to Ambassador Crocker this past week on NPR, and
one of the questions he responded to dealt with whether or not
al Qaeda was in Iraq before we arrived. He said, ``No, they
were not, but the reality is that they are there now; we have
troops there now and so what can we do except address the
problem that we find ourselves in now.''
Chairman Frank has laid out, I think, a very ambitious but
workable plan to deal with a major problem. There are a lot of
reasons we can choose not to do it. I mean, there are people
who actually lied about their incomes and purchased a home far
bigger than they could afford, and some people with terrible
credit who repeatedly missed their mortgage payments and found
themselves in trouble. But the truth of the matter is we are in
it now and we have to figure out a way to get out.
I think this happens to be the best way I have heard so
far, and so I am anxious to engage in some dialogue with those
of you who are testifying. Thank you for coming today, and I
yield back the balance of my time.
Chairwoman Waters. Thank you very much, Mr. Cleaver. Mr.
Green for 2 minutes.
Mr. Green. Thank you, Madam Chairwoman, and thank you to
the ranking member as well. I am pleased and honored to be here
today. I was also pleased to be in California when the
subcommittee met and we delved into these issues. It was quite
revealing because we had persons who actually had experiences
who were sharing with us their personal stories. I am looking
forward to hearing some of the concerns that were raised at
that hearing addressed at this hearing.
We heard concerns with reference to loss mitigation and the
whole question of whether or not there is an incentive to
perform loss mitigation or is there an inducement not to
perform loss mitigation. That is a serious question that has to
be addressed.
Also, we heard concerns about the HOPE NOW Alliance, and
the clarion call from the persons that we talked to was an
indication of a need for help now. And the question became
whether HOPE NOW was going to become a cure or was it some sort
of a lure, was it a long-term cure or was it a short-term lure
that would get persons to sign certain documents that might
cause them to find themselves in a position that would not be
to their best benefit in the long term, but doing so because
there was some short-term gain, meaning that they could stay in
their homes for a little while longer.
I am also concerned about the whole question of tranche
warfare. Apparently, there are some tranches that hold
positions that are antithetical to allowing some sort of
settlement, some sort of restructuring to take place, because
they have these superior positions and foreclosure in effect
can benefit some persons in certain tranches. So you have this
tranche warfare; higher tranches having one position, lower
tranches having another position.
These are the kinds of concerns that I think we have to
address at the hearing, but we need a bill, we need some sort
of act of Congress to ultimately propose solutions for the
questions that we can address at a hearing but we cannot
resolve without an actual piece of legislation from Congress. I
yield back the balance of my time.
Chairwoman Waters. Thank you very much. Mr. Watt, do you
have an opening statement for 2 minutes?
Mr. Watt. Thank you, Madam Chairwoman. I won't take 2
minutes. I just want to thank the Chair for allowing me to sit
in on this hearing. The luck of the draw on our subcommittee
assignments didn't allow me to get on the Housing Subcommittee,
but what I have been doing--I am not on the Capital Markets
Subcommittee either, but yesterday I attended a Capital Markets
Subcommittee hearing. I am here this morning because I want to
hear every idea that is out there to try to address this crisis
that we are in and try to get us out of it and try to save
homes in my congressional district, and particularly homes in
vulnerable communities. And while we have seen some progress,
we certainly haven't seen the kind of progress that we need to
see.
I think the chairwoman's bill will push further in the
direction that kind of impels all of the players to play a role
in solving this crisis. And anything we can do to do that, I
think, is advantageous. I thank the gentlelady for allowing me
to be here. I won't try to ask questions, but I did want to
hear the testimony of some of the witnesses. Thank you, and I
yield back.
Chairwoman Waters. Well, I thank you very much. And since I
must follow procedures, I will ask unanimous consent to allow
Mr. Watt to participate in today's hearing. Without objection,
certainly as much as he ought to. Also Mr. Watt, I want you to
know that I thought I heard you voluntarily removed yourself
from my Housing Subcommittee, and I take that personally.
However, I did sign up for your Committee on Oversight and
Investigations.
Mr. Watt. If the gentlelady will yield, I will go out of my
way to explain that.
Chairwoman Waters. I will yield to the gentleman so he can
defend himself.
Mr. Watt. I will defend myself. I think it was I had to
either get off the subcommittee or go through another hour of
rebidding the whole process, and I figured that I would come
and participate in your subcommittee as often as I could
anyway. You know I am your supporter and I will be here trying
to protect your back even when some of your subcommittee
members may not show up.
Chairwoman Waters. Well, I appreciate that. Thank you, Mr.
Watt. Mr. Shays for 2 minutes.
Mr. Shays. Thank you. I want to thank the chairwoman and
our ranking member for conducting this hearing. This is a huge
issue for the entire country and a very significant issue in my
district. I have three urban communities. Bridgeport, where I
live, is faced with the potential of many foreclosures.
Subprime loans are basically loans that are extended to people
whose credit may not be good or whose income may not be strong,
and it was an effort to get more people into the marketplace as
homeowners. So the general thrust of subprime loans is not the
issue; the issue is how they were extended. I am deeply
concerned that we do everything we can to minimize the number
of foreclosures so that people who were truly never involved in
this issue don't get pulled down with it.
We have, I think, a national interest, a regional interest,
in dealing with this issue and I am very grateful, Madam
Chairwoman, that you are conducting this hearing, and I don't
think we should be afraid to go wherever the truth takes us.
Thank you.
Chairwoman Waters. Thank you very much, Mr. Shays. At this
time, I will introduce our first witness panel: Ms. Laura A.
Maggiano, Deputy Director, Office of Single Family Asset
Management, U.S. Department of Housing and Urban Development;
and Ms. Judy Caden, Director, Loan Guaranty Service, U.S.
Department of Veterans Affairs. I thank both of you for
appearing before the subcommittee today. Without objection,
your written statements will be made a part of the record, and
you will now be recognized for 5 minutes. I will start with Ms.
Maggiano.
STATEMENT OF LAURIE MAGGIANO, DEPUTY DIRECTOR, OFFICE OF SINGLE
FAMILY ASSET MANAGEMENT, FEDERAL HOUSING ADMINISTRATION, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Ms. Maggiano. Thank you, Chairwoman Waters, Ranking Member
Capito, and members of the subcommittee. On behalf of Secretary
Jackson and Commissioner Montgomery, thank you for allowing the
Federal Housing Administration to participate in this hearing
to discuss the critical difference that sound servicing
practices can make in preventing mortgage foreclosures. This
dynamic is well-illustrated by looking at the highly successful
FHA loss mitigation program, which encompasses a series of
flexible workout options for managing seriously delinquent
loans, which we define as those that are 90 days or more past
due. These workout options are administered not by government
staff, but by FHA servicers. FHA, however, provides monetary
incentives to encourage servicers to use the program and
carefully monitors their performance. It is important to
stress, however, that although loan servicers have delegated
authority, participation is not optional.
Within 45 days of default, every delinquent borrower must
be provided with comprehensive written information about
workout options, including contact information for HUD-approved
housing counselors. Each borrower must be evaluated for loss
mitigation before the 90th day of default and servicers must
consider loss mitigation right up until the day of the
foreclosure sale if the borrower's financial circumstances have
changed.
To ensure servicer compliance, FHA has developed a
sophisticated ranking system. Top rank servicers are eligible
to earn extra incentives. And servicing lenders that don't use
loss mitigation seriously are subject to sanctions, including
fines equal to triple the cost of a foreclosure claim.
FHA's home retention workout options are targeted at
delinquent borrowers who want to keep their homes but who
require more than just a short-term payment plan to help them
regain financial footing. These include special forbearance, a
long-term repayment plan that provides one or more special
provisions such as a temporary reduction or suspension of
payments.
Mortgage modification: This represents a permanent change
in the mortgage that may include capitalization of delinquent
payments, reamortization of the term, or a change in the
interest rate.
And a partial claim: This is a loan provided by FHA in an
amount necessary to reinstate the delinquent mortgage. The loan
is interest free and is not due until the first mortgage is
paid off. This option provides up to 12 months of mortgage
payment assistance. Until recently this option was only
available through FHA, but Fannie Mae has just introduced a
home saver advance workout that is patterned on the FHA partial
claim.
For borrowers who are financially unable to keep their
homes, FHA provides pre-foreclosure and deed in lieu of
foreclosure options. These workouts relieve the borrower of the
mortgage debt without the emotional and social stigma of a
foreclosure sale. Unlike most investors, however, FHA provides
borrowers who utilize these disposition options with
compensation of up to $2,000 to help them transition to more
affordable housing.
The disposition options are important. FHA's commitment and
focus is on home retention. In Fiscal Year 2007, for example,
95 percent of all loss mitigation workouts allowed borrowers to
keep their homes.
The dual goals of the FHA loss mitigation program are to
help FHA borrowers and to maximize losses to the insurance
funds. The program is successfully achieving both goals. Last
year alone, FHA helped 85,500 seriously delinquent borrowers
retain homeownerships. And these are not temporary fixes. FHA
has an 87 percent long-term success rate with loss mitigation.
As foreclosure prevention has increased, there has been a
corresponding reduction in foreclosure claims.
Contrary to the incorrect report in last Sunday's
Washington Post, the percentage of FHA insured loans that
terminated in foreclosure has decreased every year for the past
3 years, from 1.64 percent of all FHA loans in 2004 to 1.42
percent in 2007. And in terms of preserving the financial
integrity of the funds, the $158 million paid in home retention
claims last year resulted in $2 billion in loss avoidance.
The FHA loss mitigation program is a prime reason that FHA
loans are considered safe and affordable. For too long,
however, borrowers who would have benefited from an FHA loan
were steered to higher risk subprime products. Fortunately,
many of these borrowers now have the option of refinancing into
FHA Secure. Under this program borrowers who became delinquent
as a result of an interest rate reset have the option to
refinance to FHA. And as of April 15th, 158,000 borrowers have
closed on a fixed rate FHA Secure loan.
Just last week in this hearing room, Commissioner
Montgomery announced additional mortgage assistance for
subprime borrowers who are a few payments late or who have
received a voluntary mortgage principle writedown. With this
new flexibility, FHA Secure is expected to assist 500,000 at-
risk borrowers by the end of December 2008.
In closing, I would like to again thank the committee for
its thoughtful consideration of loss mitigation. The
Administration is committed not only to helping American
families achieve homeownership, but also to helping them
preserve it.
[The prepared statement of Ms. Maggiano can be found on
page 134 of the appendix.]
Chairwoman Waters. Thank you very much. Ms. Judy Caden.
STATEMENT OF JUDITH CADEN, DIRECTOR, LOAN GUARANTY SERVICE,
U.S. DEPARTMENT OF VETERANS AFFAIRS (VA)
Ms. Caden. Good morning, Madam Chairwoman, and members of
the subcommittee. I appreciate the opportunity to appear before
you today to discuss the underwriting standards used by VA's
Loan Guaranty Program, the loss mitigation tools available to
our borrowers over the course of their loans, including
guidance given to loan servicers, and performance data of loans
guaranteed by VA over the past 10 years.
Lenders underwriting VA loans must ensure that the
contemplated terms of repayment bear a proper relation to the
veteran's present and anticipated income and expenses and that
the veteran is a satisfactory credit risk. VA's credit
standards employ the use of residual income deadlines and debt-
to-income ratios in determining the adequacy of the veteran's
income.
Residual income is the amount of net income remaining after
deduction of debts and obligations and monthly shelter
expenses, to cover family living expenses such as food, health
care, clothing, and gasoline. VA considers minimum residual
income as a guide. It does not automatically trigger approval
or rejection of a loan, instead, underwriters should consider
it in conjunction with all other credit factors. If residual
income is marginal, underwriters should look to other
indicators, such as the applicant's credit history and in
particular whether and how the applicant has previously handled
similar housing expenses. However, an obviously inadequate
residual income alone can be a basis for disapproving a loan.
We also use a borrower's debt-to-income ratio to compare
total monthly debt payments to gross monthly income. A ratio
greater than 41 percent generally would require close scrutiny
of the loan package. This is also a guide and lenders are to
consider that in conjunction with all other credit factors. And
in practice, it is a secondary underwriting factor to residual
income.
The committee also requested that I describe VA's guidance
given to mortgage servicers regarding loss mitigation for loans
guaranteed under the VA Loan Guaranty Program. In 1994, we
published a VA servicing guide which states that we expect
every realistic alternative to foreclosure which may be
appropriate in light of the facts in each case to be explored
before a loan is terminated. The guide provides specific
information on extended repayment plans, forbearance, loan
modifications, short sales, and deeds in lieu of foreclosure.
Over the years, VA has also taken an active role in
supplementing the servicing of private loan holders by
attempting to contact veteran borrowers when their loans are
reported as being seriously delinquent. We provide financial
counseling and assistance in developing reasonable repayment
plans which are then proposed to the private loan servicers.
Our efforts in fiscal year 2007 resulted in foreclosure
avoidance of more than 57 percent of the seriously delinquent
loans. We helped arrange more than 8,000 repayment plans or
other forbearance agreements in cases that otherwise would have
gone to foreclosure and thereby avoided claim payments
estimated at more than $181 million.
In February of this year, we published an extensive
regulatory package that was a result of a business
reengineering effort to assess the servicing of VA loans. The
goal was to improve service to veterans by standardizing our
internal operations while also recognizing best practices
within the mortgage servicing industry. We have developed
procedures to ensure that servicers will utilize the full range
of alternatives previously considered by VA in its supplemental
servicing in order to help veterans mitigate potential losses.
That new environment is called VALERI, which is VA Loan
Electronic Reporting Interface. And under those regulations we
have definitions for repayment plans, special forbearance
assistance, and we have described the conditions for
consideration of loan modifications, short sales, and deeds in
lieu of foreclosure. We are also going to provide incentives to
servicers who properly follow those guidelines and offer those
alternatives.
Lastly, the committee asked that I describe the performance
of loans guaranteed under the Loan Guaranty Program under
recent standards, including the number and percentage of loans
ending in foreclosure. The numbers are in my written statement,
but I will summarize by just saying that the VA program has
fared well in recent years with regard to foreclosure rates.
According to data from the Mortgage Bankers Association, the
quarterly delinquency rate for VA loans during the past 5 years
has steadily declined while the rate for other loan programs
has increased. And during that same period, the percentage of
VA foreclosures has decreased while the rates for other
programs has increased.
This concludes my testimony. I do appreciate the
opportunity to speak before you today, and I would be pleased
to answer any questions you may have.
[The prepared statement of Ms. Caden can be found on page
95 of the appendix.]
Chairwoman Waters. Thank you very much. I will recognize
myself for 5 minutes for questioning. Ms. Maggiano, I would
like to make sure that I understand exactly who the servicers
are, as well as their relationship to FHA. Who do you contract
with to provide servicing activities?
Ms. Maggiano. FHA does not contract directly with anyone.
FHA, unlike GSEs, doesn't actually own loans. We insure those
loans against default. So an originator would either service
their own loans or they may sell the servicing rights to their
loans. There are currently 1,200 FHA approved servicers in the
United States. However, 8 of them have 75 percent of the
business.
Chairwoman Waters. So if you are guaranteeing loans from
Countrywide, for example, Countrywide would be responsible for
servicing their own loans because they also provide servicing
to other entities, is that right?
Ms. Maggiano. Countrywide may service some of their own
loans, they may sell the servicing rights to some loans that
they actually own, or they may service on behalf of other
holders of the mortgage.
Chairwoman Waters. Is Countrywide one of the big eight you
just referred to?
Ms. Maggiano. Yes, ma'am.
Chairwoman Waters. So they do a lot of servicing--
Ms. Maggiano. Yes, they do.
Chairwoman Waters. --of their own loans that were
originated by Countrywide, is that right?
Ms. Maggiano. That is correct.
Chairwoman Waters. All right. Now, having said that, you
have a responsibility to ensure that the loan originator whose
loans you are guaranteeing and whose loans are being serviced
by the same originator are doing a credible job?
Ms. Maggiano. Yes, ma'am.
Chairwoman Waters. And if not, you have the ability to fine
them, is that right?
Ms. Maggiano. That is correct.
Chairwoman Waters. Now, tell me who you fined in the last 2
years and how much were those fines?
Ms. Maggiano. Madam Chairwoman, I don't have that
information with me, but I can provide it.
Chairwoman Waters. Ms. Maggiano, have you fined anybody? I
don't want you to put me off.
Ms. Maggiano. Yes.
Chairwoman Waters. You have had some fines?
Ms. Maggiano. There have been servicing violations.
Chairwoman Waters. Just one second, because this is in the
record.
Ms. Maggiano. Yes, ma'am.
Chairwoman Waters. My question to you is, are you aware or
do you know of any of your servicers who have been fined by you
who were not in compliance with your rules and your guidelines?
Ms. Maggiano. I personally cannot give you any names.
However, we do have an aggressive servicing audit program. We
audit servicers every 18 months.
Chairwoman Waters. Do you have anybody with you today who
can help you with that information?
Ms. Maggiano. I am sorry, but I don't.
Chairwoman Waters. Did you bring anybody with you who could
help you with that information?
Ms. Maggiano. No, but I would be happy to provide it to the
committee.
Chairwoman Waters. Do you think there have been any fines?
Ms. Maggiano. Yes.
Chairwoman Waters. About how many do you think there have
been?
Ms. Maggiano. Madam Chairwoman, I can't answer that
question.
Chairwoman Waters. But you do think there have been some?
Ms. Maggiano. Yes, ma'am.
Chairwoman Waters. All right. That is very good. Thank you.
Let me ask you also, listening to Ms. Caden describe the
servicing of veterans leads me to believe that they may have
guidelines for their servicers that may be a little bit or much
more directed and provided than you do. Let me ask Ms. Caden,
who are your servicers?
Ms. Caden. Well, like FHA, we don't contract. The loans are
guaranteed, so it is whoever is holding the loans. Countrywide
is a large servicer. Wells Fargo has the most. They are our
biggest servicers of VA loans.
Chairwoman Waters. And do you have the ability to fine?
Ms. Caden. I don't believe we fine. We do audit. We do look
at what they are doing. What we are trying to do now is build a
program of incentives and disincentives for doing proper
servicing.
Chairwoman Waters. So right now, while you are trying to
build a program for incentives and disincentives, let us take
Countrywide, for example, have your audits shown that they were
not doing a good job or they could be doing a better job or did
you caution them, did you do anything in working with
Countrywide as a servicer to say something is wrong, we don't
think that you are doing the kind of mitigation that we think
can help keep people in their homes?
Ms. Caden. I would have to go back and look and see, but I
don't think we have taken them to task. In fact, I think
Countrywide has been doing an adequate job on the VA loans that
they service.
Chairwoman Waters. That is why they have so many
foreclosures?
Ms. Caden. Well, I don't believe that so many foreclosures
are on VA loans, on the VA guaranteed loans. It may be on other
parts of their portfolio.
Chairwoman Waters. All right. I am going to turn to the
ranking member. But let me just say to both of you, you knew
you were coming here today, and it seems to me you would have
come armed with the kind of information that can help us to
learn about how this business works. Unfortunately, our
regulators don't have any responsibility to regulate the
servicers, and we have to learn the best way that we can. We
are picking information out of people to learn this servicing
business, and I really don't like the idea that you can't tell
me how you monitor and oversight your servicers.
Mrs. Capito.
Mrs. Capito. Thank you, Madam Chairwoman. I would like to
make a bit of a distinction here the way I heard your
testimony. Both FHA and VA, you both stated in your opening
statements that the rate of foreclosure for both of your loans
had actually gone down over the last, I think you both said,
did you say 5 years? In light of the fact that many, and we
heard earlier that 57 percent, you know nationwide 57 percent
more mortgages are in foreclosure than were at this time than
last year, am I correct to assume that these would not in a
general way, not to say you don't have foreclosures, but FHA
and VA guaranteed loans are not a part of that 57 percent
increase?
Do either of you have a comment on that?
Ms. Caden. I will go first. VA loans are not considered to
be subprime, and that is where most of the problems are. We
have always underwritten, as I described, using the credit
underwriting standards that we have. So I don't believe that we
are part of the big problem right now. In fact, our loans have
performed very well.
Ms. Maggiano. FHA has a very standard loan product. And we
don't have balloon loans, we don't do interest only, we don't
do stated income, we don't allow many of the risk factors that
were inherent in many of the subprime products that caused them
to have the high default rates that they have.
Mrs. Capito. Are many of your loans then considered
underwater? I think this may be a distinction here, because an
FHA loan, a traditional one has been--what was the max on the
property until we made it larger in the stimulus package?
Ms. Maggiano. The standard was about $230,000 and then it
was higher, up to $340,000 in high-cost areas.
Mrs. Capito. But in consideration of, say, my area, that
would certainly cover the grand majority of every home in my
district. But I would say in a lot of places in California,
that doesn't even scratch the surface.
Ms. Maggiano. We have a very small loan portfolio in
California, so yes.
Mrs. Capito. And then, a final question. In looking at the
chairwoman's bill and then in responding to what Ms. Maggiano
had said about what you are moving forward with--and I hope we
can get those statistics, maybe you can get them before the end
of our hearing because we have two more panels on the
servicers--would you say that the VA--oh, no, I wanted to ask
about the VA loan guarantees, so I am going to switch over
here. Would you say that the loan guarantee of 41 percent debt-
to-value ratio--or what is it called, debt-to-loan ratio--
Ms. Caden. Debt-to-income ratio.
Mrs. Capito. Yes, debt-to-income ratio. Has that worked
well for you? Is that a little bit lower than what the VA has?
What do you have to say about that, because I believe that is
part of the chairwoman's bill as well?
Ms. Caden. It is a little bit lower than what FHA--I think
they have a 43 percent ratio. We think it has worked well. And
I think in combination with that, with looking at the residual
income guidelines that we use with the general underwriting
standards that we use, as I said VA loans have performed very
well so we think it has been working.
Mrs. Capito. My final question: I actually forgot the other
question. You probably figured that out. When you talked about
your responses that you had, you talked about making sure that
people are being directed toward FHA counselors, you talked
about making sure that the servicers are paying attention and
sitting down before you get into the 90 days of delinquency.
Does that match pretty much what is already in this bill? I
mean, do you feel like those are--and have you stepped up those
rates since the spotlight has been on the foreclosure
situation?
Ms. Maggiano. There are many provisions in the bill that
are extremely similar to written FHA policy with respect to
loss mitigation, so yes, there is quite a bit of similarity.
There are also some areas that are different. Have we stepped
it up? We work very closely with our servicers to encourage
them to continue to use loss mitigation, we do constant
training of servicers and nonprofit housing counselors, and so
we carefully monitor use of the program.
Mrs. Capito. Is this a joint effort? Do FHA and Fannie Mae
and Freddie Mac all get together and talk with the servicers at
the same time, do you do it individually or is this an
industrywide effort?
Ms. Maggiano. There certainly is some amount of discussion
between the GSEs and the agencies, but that tends to be not
directly related to the servicers. We talk together about
various policies and where we are going and sharing best
practices. But in terms of providing specific guidance, we have
a very different program and we all have fairly unique loss
mitigation characteristics. As I indicated earlier, we have a
special program which has been incredibly effective for FHA
borrowers where we will actually loan them the money to
reinstate their loan and carry back a second note, but that
note has no payments due.
Mrs. Capito. Until the first one is paid off?
Ms. Maggiano. Yes, until the first one is paid off. So it
doesn't impact the ability to service the first mortgage.
Mrs. Capito. Thank you.
Chairwoman Waters. Thank you very much. Mr. Cleaver.
Mr. Cleaver. Thank you, Madam Chairwoman. The loss
mitigation is, I think, very helpful to those who are trying to
maintain their homes, and this is certainly a better option
than foreclosure. I am becoming concerned as I read more about
who is involved and the fact that there is no regulation of the
servicers. And if there is no regulation of servicers, can you
tell me what the fee schedule is like, what it is based on?
When Countrywide, Bank of America, or Wells Fargo are engaged
in loss mitigation, how do they develop their fee?
Ms. Maggiano. My remarks on loss mitigation were specific
to loans insured by the FHA.
Mr. Cleaver. I understand.
Ms. Maggiano. And we do have regulation.
Mr. Cleaver. Let me ask it another way.
Ms. Maggiano. Certainly.
Mr. Cleaver. Do you think we should have regulations over
the servicers, those who are engaged in loss mitigation?
Ms. Maggiano. The Administration has not taken a formal
position on this bill.
Mr. Cleaver. Okay. Not the bill. Do you think we should
have some kind of regulation? I mean, they are regulated
because they are banks. But I am talking about for the
particular services they provide, there are no regulations.
Ms. Maggiano. I think it is a worthwhile discussion. I
don't think that we have an opinion on whether or not having a
nationwide loss mitigation program of that magnitude is the
appropriate course of action, but certainly it is a worthwhile
discussion.
Mr. Cleaver. I want to go to the seminar that government
employees go to that teach you how to do that; you know, go all
the way around the question. That is really great. I mean, I
admire almost all of the people who do it. There are a couple
who can't do it well, but you do it well. The loss mitigation
program, which I support, and FHA's loss mitigation program is
required?
Ms. Maggiano. Yes, sir.
Mr. Cleaver. How do you think a loss mitigation program
would impact the current crisis if it were a nationwide
mandatory loss mitigation program for all existing loans,
including those not guaranteed by FHA?
Ms. Maggiano. I believe very strongly in the importance of
loss mitigation in keeping home buyers in their homes.
Mr. Cleaver. Would it reduce foreclosures if we--this is
the same question. Would it reduce foreclosures if we
implemented it nationwide, including the existing loans and
those not guaranteed by FHA?
Ms. Maggiano. It certainly has reduced foreclosures in the
FHA portfolio, absolutely. What is very different in this
particular marketplace is the huge impact of substantial
amounts of negative equity and what to do with that negative
equity. And that is not an issue that we have had a problem
with in the FHA portfolio specifically.
Mr. Cleaver. So, is that a ``yes?''
Ms. Maggiano. I don't have a crystal ball. I can't tell you
what the outcome would be.
Mr. Cleaver. What do you think?
Ms. Maggiano. Loss mitigation is very important. And
clearly, the more loss mitigation the more likely we are to see
borrowers be able to retain homeownership.
Mr. Cleaver. That is a yes. Thank you. I yield back the
balance of my time.
Chairwoman Waters. Thank you very much.
Mr. Shays.
Mr. Shays. I am still formulating my question. You have
more Democratic members, so I will wait two more rounds. I am
sorry, I didn't see you. I am going to pass. I am going to ask
questions in a bit.
Chairwoman Waters. Mr. Neugebauer.
Mr. Neugebauer. Okay. Thank you. One of the things that I
think is kind of interesting, that we have to kind of
discriminate in terms of what the roles of servicers are in
this process. And I think some people have been talking about
certain companies that have higher foreclosure rates. That
doesn't necessarily have anything to do with their servicing
capability. Would you say that is a true statement?
Ms. Maggiano. Yes, I would say that.
Mr. Neugebauer. Because people who service mortgages may be
servicing mortgages that they didn't originate. And so a lot of
the problems that are in our mortgage dilemma today really are
more about origination than servicing. Would you say that is
true?
Ms. Maggiano. I think certainly origination is a major
factor. I think good servicing can ameliorate some of the
mistakes of origination, but certainly not all of them.
Mr. Neugebauer. But your relationship with a servicer
generally only kicks in when they are beginning some process of
loss mitigation at that particular point in time, is that
right?
Ms. Maggiano. Primarily. FHA certainly has guidelines that
servicers must follow for all performing loan servicing
functions as well.
Mr. Neugebauer. You have to be approved to be one of your
servicers?
Ms. Maggiano. Absolutely.
Mr. Neugebauer. So you have a certain criteria for them to
follow?
Ms. Maggiano. That is correct.
Mr. Neugebauer. One of the things--I think we have all kind
of been on a witch hunt here, I think some of us, not me
particularly, but others who are looking for who is to blame
for all of this, and we kind of started looking around trying
to find that person to blame. I think the thing about the
industry is that I haven't heard of anybody saying that there
is a huge problem with servicing in this country. In fact, over
the break I sat down with a number of companies that say today,
as far as loss mitigation goes that if someone, if a borrower
will call their mortgage company today and make some effort to
offer up some kind of a solution here, that most all of those
companies are interested in working with the borrowers. But
that primarily most of the people who are getting foreclosed on
today, and this was a quote from a company that handles a lot
of loss mitigation for some very big mortgage holders, that in
most of the mortgages that they are foreclosing on, they never
hear from the borrower, that the borrower just doesn't return
their call. And so it is really hard to do loss mitigation with
someone who won't--you know, that is a two-way street.
Would you agree with that?
Ms. Maggiano. I do agree with that. And in my remarks, when
I said that servicers must evaluate a borrower for loss
mitigation before they are 90 days past due, they can only do
that if they have been able to reach the borrower. Most
servicers, certainly FHA servicers, use a variety of techniques
to attempt to reach borrowers including predictive dialers and
unusual types of mailings. Most of our servicers, if not all,
are members of the HOPE NOW Alliance--I believe you will hear
from them later--and they have developed some really aggressive
targeted mailings to delinquent borrowers to try to get them to
contact the servicer, because without that contact you can't do
a workout in a vacuum.
Mr. Neugebauer. Are either one of you aware of, and maybe
this question was asked a while ago, but I didn't hear the
answer, have you ever removed someone's privileges to be a
servicer while you have served in the capacity you are in?
Ms. Caden. For VA, no, we have not.
Ms. Maggiano. I don't know the answer to that. I have not
been involved in removing someone's privileges, although there
have been a number of entities with FHA approval to originate
and service that have been removed from our program. I haven't
been personally involved in that activity.
Mr. Neugebauer. What is the role that--maybe you can
explain. In other words, you are the guarantor of these loans,
but then other people hold and own these loans or made an
investment in them. What latitude contractually do you have in
working with the people who actually hold that note on being
able to provide certain modifications or loss mitigation
without violating the rights of the person who holds that note?
Ms. Caden. For VA, we work with the servicer and we would
work with the veteran; and, as I said in my statement, we have
been fairly successful in working with a veteran and the
servicer, the holder of the loan, to work out loss mitigation
efforts, loan modifications, repayment plans, that type of
thing. Basically, we just do it in tandem with them.
Mr. Neugebauer. But it has to be in concurrence with a
servicer.
Ms. Caden. Yes.
Chairwoman Waters. Thank you very much.
Ms. Caden. I should say that there are some cases in which
we evaluate the veteran and we will do what we call refund the
loan, and we will buy the loan back, and then they will have a
VA direct loan at that point. So we will do that in certain
cases.
Mr. Neugebauer. May I just have a quick follow-up?
Have you done that a lot here lately?
Chairwoman Waters. Mr. Cleaver. Please, we have to move on.
We have to be out at a certain time.
Mr. Green, I am sorry. Please go ahead.
Mr. Green. That is quite all right. Thank you, Madam
Chairwoman.
Let me start by making a basic statement, and hopefully I
will get some agreement on it. Is it true--and I am speaking to
the representative from HUD, if you would kindly pronounce your
last name for me, please?
Ms. Maggiano. ``Maggiano.''
Mr. Green. Ms. Maggiano, is it true that while you don't
have a perfect paradigm, you have perfected a paradigm that
produces lower foreclosures, in your opinion?
Ms. Maggiano. Yes, sir.
Mr. Green. And is it true that the reason you believe this
paradigm works as effectively as it does is because the basic
premise that it is built upon is one of home retention?
Ms. Maggiano. Yes.
Mr. Green. And is it true that you have a contractual
agreement with your servicers, a codified agreement that
requires certain things if a borrower falls into the class of
possibly being foreclosed upon?
Ms. Maggiano. Yes.
Mr. Green. Would these things that are codified that must
be done include special forbearance, mortgage modification,
partial claim adjustments, pre-foreclosure sales, and deeds in
lieu of foreclosure? Would these be the essence of what must be
done when--or options that are available as opposed to
foreclosure?
Ms. Maggiano. Those are certainly the options that are
available. It is important to make a distinction that we
delegate to servicers the responsibility to evaluate the
borrower.
Mr. Green. Agreed, but let me intercede. You also have
something else. Along with that delegation, you have the power
to punish.
Ms. Maggiano. That is correct.
Mr. Green. Now, that is for an FHA loan.
Ms. Maggiano. Yes, sir.
Mr. Green. Let's talk about a loan that is not FHA. For our
conversation, we will call it conventional. In the conventional
market, do we have the same paradigm in place? I assume your
answer would be no? Same paradigm as FHA?
Ms. Maggiano. FHA has no authority.
Mr. Green. I agree with you. I am not asking now whether
FHA has authority. I am asking if the paradigm that FHA employs
is the same paradigm that is employed in the conventional
market. Or maybe it should be reversed. Is the conventional
markets paradigm the same as FHA's? I assume your answer is
``no.''
Ms. Maggiano. Actually, it is not ``no.'' All of the loans
that are--where Freddie Mac and Fannie Mae are an investor,
those loans also are subject to very, very similar loss
mitigation programs with oversight and monitoring by the GSEs.
As a matter of fact, we--
Mr. Green. Is the power to punish there?
Ms. Maggiano. Yes.
Mr. Green. Is that power to punish employed?
Ms. Maggiano. You'll have to ask the representatives of the
GSEs when they speak.
Mr. Green. So, in your opinion, the paradigm that includes
special forbearance, mortgage modification, partial claim, pre-
foreclosure sale, and deed in lieu of foreclosure is the same
paradigm being employed in the conventional market?
Ms. Maggiano. Not exactly the same, but a similar paradigm.
As I mentioned in my remarks, partial claim is a rather
unique workout structure that, until very recently, was really
only employed by FHA; and Fannie Mae has adopted something not
exactly the same but similar. But both of the GSEs have very
strong and aggressive workout tool boxes, and they do monitor.
Mr. Green. Then the question becomes, if I may, if the
paradigms are the same or similar, why are the results so
vastly different?
Your contention might be that you received a product that
is not the same as the product that the GSEs received. Is that
a fair statement?
Ms. Maggiano. Yes.
Mr. Green. Meaning 3/27s, 2/28s, prepayment penalties, and
no-doc loans, you did not receive these products? Is that your
contention?
Ms. Maggiano. That is correct.
Mr. Green. And as a result of the lack of those products,
your contention is that the results are different?
Ms. Maggiano. I believe that would be my conclusion, yes.
Mr. Green. Do the GSEs, by way of conventional loans,
monitor the servicers to the same extent that you do? You have
indicated clearly that you have a very close relationship with
the servicers.
Ms. Maggiano. Yes.
Mr. Green. Do we have that same circumstance?
Ms. Maggiano. I don't wish to speak for the GSEs. They will
be testifying later in the morning.
Mr. Green. Would that monitoring make a difference, in your
opinion?
Ms. Maggiano. Monitoring always make a difference, yes.
Mr. Green. Finally, if I may, tell me quickly about your
debt-to-income residual analysis, please.
Ms. Maggiano. We--were you referring to VA or--I didn't
mention debt to income.
Mr. Green. My time is up, and I will yield back. Thank you.
Chairwoman Waters. Thank you very much.
Mr. Shays, are you ready now?
Mr. Shays. Thank you.
Mr. Green, she is a tough chairman.
Mr. Neugebauer, you had a question.
Mr. Neugebauer. I thank the gentleman.
I just wanted to follow up, because I think you made a very
good point a while ago, that you were about to make, which is
that the Veterans Administration has the ability to repurchase
a loan. That the servicer doesn't agree to that, you think it
is in the best interest of the veteran, and so that you can
repurchase that.
Ms. Caden. Right, and we do that after going through an
evaluation of the veteran's financial picture, what is going on
right now. If we think there is a chance for them to maintain
that home and the loan payment, we can do that.
Mr. Neugebauer. Do you do that a lot?
Ms. Caden. I can provide for the record the numbers of what
we have done. I wouldn't say it is a lot, but it is fairly
significant.
Mr. Neugebauer. Say that again?
Ms. Caden. Significant.
Mr. Neugebauer. I thank the gentleman. I yield back.
Mr. Shays. Thank you.
I want to get into this issue. I am deeply concerned, like
the rest of us are, about the impact of foreclosures. I am
deeply concerned that it strikes me the banks force you to go
into foreclosure, to be delinquent before they negotiate with
you, which seems nonsensical to me. So this is what I want to
know first: If your loan is divided into three parts, the
servicer has the right to negotiate loss mitigation. Is that
correct, first?
Ms. Maggiano. Yes.
Mr. Shays. Leave your microphone on, thanks.
Secondly, does that right extend to writing down the
interest rate or writing down the principal?
Ms. Maggiano. The servicer certainly is allowed to write
down the interest rate, but FHA will not reimburse them for
that interest rate, the cost of that interest rate reduction.
They could also write down principal, but FHA does not have the
authority to reimburse them for principal reduction.
Mr. Shays. Let me understand. So there is no motive for
them to do that?
Ms. Maggiano. No, the motive for them to do that, and
again--
Mr. Shays. Give me the short version.
Ms. Maggiano. There needs to be a real distinction between
FHA and other products. Because FHA has nearly 100 percent loan
guarantee.
Mr. Shays. So there is really no incentive for the servicer
to negotiate?
Ms. Maggiano. Well, there is an incentive for the servicer
to negotiate, because we provide them financial incentives, and
we monitor their performance.
Mr. Shays. I don't know what ``monitoring their
performance'' means, but let me ask you this: What right does
the borrower have? Do I have the right to say that I want to
negotiate before I am delinquent?
Ms. Maggiano. For FHA-insured loans, a servicer may not
refer a loan to foreclosure until they have evaluated the
borrower for loss mitigation.
Mr. Shays. I don't know what that means, but please answer
my question.
Ms. Maggiano. I am sorry.
Mr. Shays. Does the borrower have the right to negotiate
with the service provider before they go into default?
Ms. Maggiano. The borrower always has the right to discuss
whatever they wish with their service provider.
Mr. Shays. Does the borrower have the right to demand that
they negotiate with them before they go into default? Because
we are hearing that they say, don't call us until you are in
default.
Ms. Maggiano. Again, I am trying to relate this to an FHA
insured--
Mr. Shays. No, I hear you.
Ms. Maggiano. And we don't tend to have the interest rate
reset issue where payments are going to skyrocket next week and
people are concerned about the impact of those increased
payments on their ability to make their--
Mr. Shays. You have less potential foreclosures, right?
Ms. Maggiano. We have potential foreclosures for different
reasons. Our borrowers tend to have more issues with
unemployment, with health--
Mr. Shays. Someone is out of work. They can't pay. Do they
have the right to call up and expect that they will be treated
humanely?
Ms. Maggiano. Yes.
Mr. Shays. And that the service provider will say, well,
let's talk about when we do about this, or do they say, we
can't help you until you are in default?
Ms. Maggiano. I am sorry. I do understand your question,
and they absolutely have the right to have the servicer treat
them with respect.
Mr. Shays. What happens if the service provider doesn't?
What if the service provider says, we are not talking to you
until you are in default?
Ms. Maggiano. I haven't--that hasn't been raised.
Mr. Shays. I will tell you why it has been raised for me.
It may not be your loans, but the bottom line is I had two
forums on this in my district, and I have had people testify
they wanted to not be in default, wanted to deal with this
issue, and they were told, don't call us until you are in
default. It may not be an FHA loan, but--
Ms. Maggiano. That is certainly not guidance we would ever
give our servicers.
Mr. Shays. Madam Chairwoman, I know my time has run out,
and I don't want you to treat me any nicer than anyone else. I
hope that we really have a good discussion about this issue.
Chairwoman Waters. Thank you very much, Mr. Shays.
Mr. Ellison.
Mr. Ellison. Thank you, Madam Chairwoman, for having this
important hearing.
Ms. Maggiano and Ms. Caden, one of the major goals of H.R.
5679 is to ensure that loss mitigation efforts by servicers
result in offers to distressed borrowers, be they repayment
plans, loan modifications, or some other options that are
sustainable for the longer term. The key to such long-term
sustainability, it seems to me, is whether the resulting
payment plan is affordable to the borrower, barring some other
significant drop in income. Can you help me understand if and
how HUD and VA make this evaluation for their servicers?
Ms. Maggiano. FHA has a financial evaluation requirement;
and servicers, when they are evaluating a borrower for any of
the options, even if it is a pre-foreclosure sale or a deed in
lieu, must gather the borrower's income and expenses and use
that in a formula that we have published in writing to
calculate what we call surplus income, and that is the income
over and above their household living expenses and their other
debts like car payments that they need to make that they have
available to support a repayment plan. It is not acceptable in
FHA to put a borrower into a repayment plan if you cannot
demonstrate that they have sufficient surplus income to make
that plan.
Mr. Ellison. I wonder if you could perhaps put a finer
point on your response, and I am wondering if you could be very
concrete in describing the debt-to-income and residual-income
analysis your agencies undertake in determining whether a
particular loss mitigation offer is workable.
For example, I have heard the VA requires at least $200 in
residual income be left over after a borrower's household
expenses, including payments on all secured and unsecured debt,
are taken into account and that would be a good standard across
the industry. So could both of you provide details of your
agency's DTI and residual-income analysis for loss mitigation?
Ms. Caden. I would be happy to provide that in more detail
for the record.
But, basically, we don't have a standard such as the one
you mentioned of the $200. There is no hard-and-fast rule, and
residual income is looked at as a guide. It is mainly used,
both residual income and the debt-to-income ratio, at the time
of loan origination. That is part of the underwriting standards
to make sure a veteran can afford the loan they are attempting
to get for the house they are trying to buy.
We would expect servicers to use the same guidelines, but
there is no hard-and-fast rule of the $200 over or under.
Mr. Ellison. Thank you very much.
I had more questions right in front of me, and they just
disappeared. I don't know what happened to them. I have too
much stuff sitting here, I guess.
I do have a question that I didn't write out, and it is off
the cuff. And that is, so FHA has a requirement to do
mitigation services. That is FHA. But what about the rest of
the industry? You guys only address about 40 percent of the
industry, am I right about that? What other incentives are in
place for the non-FHA mortgages, those trusts, those PSA trusts
to do loss mitigation?
Ms. Maggiano. Again, FHA provides loss mitigation for FHA-
insured loans only. The GSEs have very similar programs for all
of the loans that they either own or securitize, that are
securitized through them. And then I am not aware of any formal
overarching loss mitigation program for loans that don't fall
within those categories. However, most of the investors, also,
it is clearly in their interest to keep borrowers in their
homes. So there are loss mitigation requirements in many of the
trusts.
Mr. Ellison. One of the reasons I was kind of surprised
when it sounded like there was the provision, the so-called
cram-down provision--I am sure you guys know what I am talking
about--when we were going to try to give bankruptcy judges the
power to restructure debt going forward on a primary residence.
There was a lot of resistance to that.
My thought would be, you know, why would there be
resistance to that? I mean, we want people to stay in their
homes, and most people will, out of their own incentives, try
to do loss mitigation. But for those who don't, there is a
social purpose in trying to make sure people can stay in their
homes. Why then doesn't Congress--why wouldn't this be a good
idea?
Could you help me understand some of the push-back? Not
that it is your responsibility, but just in terms of your
expertise in the field, would you mind sharing your ideas on
that with me?
Ms. Maggiano. Well, I believe the primary objections that I
have heard are that it would sort of undermine the sanctity of
contracts and prevent mortgage originators from being willing
to enter into contracts over which they thought other people
then had control.
Mr. Ellison. But we have always--I think I'm done.
Chairwoman Waters. Thank you.
Mr. Miller.
Mr. Miller. Thank you, Madam Chairwoman.
Welcome. I know it is hard answering questions based on
somebody else's bill, but the bill requires the mortgagees of
mortgages that are in default to basically do a number of
things. These things are called ``reasonable loss mitigation
activities.'' These activities can be waiving of late fees,
penalty charges, engaging in prepayment plans, or writing down
the principal for the loan. Does a lender have to basically
fulfill one or all of these things to be in compliance with
``reasonable mitigation activities?''
Ms. Maggiano. Again, I can speak only to the FHA portfolio,
and they absolutely must consider all of our options in a
priority order in order to be considered to be doing--
Mr. Miller. Let's say somebody bought a $300,000 home, and
the rate was 6\1/4\ percent, but now they can only afford a
$250,000 home at 5\1/4\ percent. What are your options?
Ms. Maggiano. I--
Mr. Miller. That is a tough one. You have to engage in
reasonable loss mitigation activities based on the criteria
that is defined and that is part of the criteria, so what will
you do when that situation arises?
Ms. Maggiano. FHA's loss mitigation program is based on
keeping as many borrowers in their homes as possible.
Mr. Miller. Based on this bill, as defined in this bill,
the language, and that is the circumstance placed before you,
what would you have to do? Not what you do currently, but what
do you have to do based on this bill? That is what we are
talking about.
Ms. Maggiano. I am sorry. I don't think I understand the
question.
Mr. Miller. Do you understand the language in this bill?
Ms. Maggiano. Yes, sir.
Mr. Miller. That is considered reasonable loss mitigation
activities, and you have to do these things.
Now let's say a person owns a $300,000 home. They bought it
for $300,000, and they were paying 6\1/4\ percent interest, and
they are in default and 3 months behind in their payment. Now
you are trying to deal with this. You look at their capability
based on income, and they can only afford $250,000, and they
can only afford to pay 5\1/4\ percent interest. How would you
deal with that?
Ms. Maggiano. The way I read the bill, it was not clear to
me whether or not a servicer would be required to provide a
repayment plan or a loan restructure based on the borrower's
ability to pay, regardless of what that ability was.
Mr. Miller. But the language says, such as waiving all late
fees and their penalty charges, engaging in a repayment plan
and writing down the principal for the borrower. That is in the
language of the bill.
Ms. Maggiano. Yes.
Mr. Miller. If you have to comply with that criteria, how
will you do that? Because it says, writing down the principal
for the borrower and engaging in a repayment plan. If they can
only afford 5\1/4\ percent interest and they can only afford
that on a $250,000 loan, how do you accomplish that?
Ms. Maggiano. FHA does not have a--it is not our intention
to keep every borrower in their home. We do a very aggressive
job in home retention, but the reality is that there are
borrowers who can't afford the home they have.
Mr. Miller. I am not trying to argue with you. I am trying
to understand the language and how you can apply it. It says
``includes writing down the principal for the borrower.'' It
includes that.
Ms. Maggiano. Right.
Chairwoman Waters. Will the gentleman yield?
Mr. Miller. Sure.
Chairwoman Waters. Affordability is only one criteria that
you have to consider. It does not mandate that you would have
to write down that loan. It deals with reasonableness, business
sense. That is what it deals with.
Mr. Miller. That is what I am trying to figure out, what is
considered reasonableness?
Chairwoman Waters. I think to ask that in a vacuum without
all of the information before you places the witness at a great
disadvantage.
Mr. Miller. I have great respect for you, and you know
that. And I have read this bill, and I can't come to a
reasonable conclusion of how we do it. And when I can't come to
a conclusion on how we do it, I try to ask a professional who
is a witness in the industry based on language that is in the
bill. And when the language in the bill says, such as waiving
all late fees, penalty charges, engaging in repayment plans,
and writing down principal for the borrower, that is very
specific. But when I can't determine how we do that--
Chairwoman Waters. We will have some people on another
panel who will help to show you how it is done. While the
witnesses before us today talk about the standards that they
have developed in order to instruct their services, they are
not doing the workouts themselves.
Mr. Miller. Yes, but the standards that currently exist are
being changed.
Chairwoman Waters. No, the standards are not being changed.
You will find that the standards differ. We happen to have
before us today FHA and VA, and we are hearing about their
standards. You have servicers who are working with completely
different standards, and we will hear some of that today.
Mr. Miller. Is HUD currently writing down the loan amounts?
Ms. Maggiano. No, we do not have regulatory authority to do
that.
Mr. Miller. Do you currently write down interest rates?
Ms. Maggiano. FHA does not write down interest rates.
Mr. Miller. So, Madam Chairwoman, that is the problem.
Chairwoman Waters. No, it is not the problem.
Mr. Miller. Well, let me finish. The language says that
they should do these things.
Chairwoman Waters. No, the language does not mandate that
they do anything that is not reasonable.
Mr. Miller. But it defines reasonable as--that is what we
need to get to.
Chairwoman Waters. All of those are different things that
would be criteria that could be considered.
Mr. Miller. Then they are reasonable.
Chairwoman Waters. Your time is up.
Mr. Miller. Okay.
Chairwoman Waters. Thank you very much.
Mr. Watt.
Mr. Watt. Thank you, Madam Chairwoman.
Ms. Maggiano, you know, Representative Green used to be a
judge, and I love the precision of his questions. But
Representative Cleaver earlier stated that witnesses who come
over here must take a lesson at answer avoidance, and perhaps
the most adept at doing that are the folks from HUD. Even with
the precision of Representative Green's questions, you managed
to miss a category.
You have FHA and VA loans. You have conforming loans that
the GSEs back. All of those categories have some form of
mitigation arrangement. And most of them, at least VA and FHA,
have some specific guidelines to get the loan. Most of the GSE
conforming loans have some specific guidelines. You have to
document income. You have to do all the things.
And then you have a third category--which is the one that
you missed--which is the nonconforming loans that are not VA,
not FHA, not GSE-backed at all. And those are the ones that
have the highest rates of default in this crisis, isn't that
right?
Ms. Maggiano. Yes.
Mr. Watt. Those are the ones that have the least amount of
obligation to mitigate in this market, isn't that correct?
Ms. Maggiano. I can't speak to their obligation, because--
Mr. Watt. You know they are not under FHA's mitigation
standards.
Ms. Maggiano. That is correct.
Mr. Watt. And you know they are not under the GSE
mitigation standards, and we know that the loans were written
outside--substantially outside any regulatory framework. They
are the most risky loans, and yet they have the least amount of
obligation to mitigate, and that is the circumstance that we
are in.
So I guess the question I am asking is, under those
circumstances, if you assume all of that to be the case--and it
is okay for you to assume that, because it is true--
Ms. Maggiano. Yes.
Mr. Watt. --would a reasonable approach be to apply this,
some standards of mitigation, perhaps the ones in this bill,
perhaps the ones that FHA applies, perhaps the ones that the
GSEs apply to that third category of people who have no
obligation to mitigation? Would that be a reasonable approach,
do you think?
Ms. Maggiano. Yes.
Mr. Watt. Okay, all right.
With that, Madam Chairwoman, I am happy to yield back to
the Chair.
Chairwoman Waters. Thank you very much.
If there are no other members here to ask questions, we are
going to thank our panel for being here today and thank them
for helping us to learn more about how mitigation works,
particularly in their own agencies, and helping us to
understand the standards that you have set, and we certainly
are going to use these as guidelines as we talk to some of the
other persons responsible for servicing. Thank you very much.
Some members may have additional questions for the panel
which they may wish to submit in writing. Without objection,
the hearing record will remain open for 30 days for members to
submit written questions to these witnesses and to place their
responses in the record.
Thank you. The first panel is dismissed.
I would like to call the second panel to the witness table.
I am pleased to welcome our distinguished second panel: Ms.
Tara Twomey, senior counsel, National Consumer Law Center; Ms.
Julia Gordon, policy counsel, Center for Responsible Lending;
Mr. Kevin Stein, associate director, California Reinvestment
Coalition; Mr. Kenneth Wade, president and chief executive
officer, NeighborWorks; Mr. Jason Allnut, vice president for
credit loss management, Fannie Mae; and Ms. Ingrid Beckles,
senior vice president, Freddie Mac.
Thank you for coming today. We will ask you to keep your
testimony to 5 minutes. You do not have to read the testimony
if you do not wish. You can basically concise it.
Ms. Tara Twomey, senior counsel, would you begin our panel?
STATEMENT OF TARA TWOMEY, SENIOR COUNSEL, NATIONAL CONSUMER LAW
CENTER (NCLC)
Ms. Twomey. Yes. Good morning, Chairwoman Waters, and
members of the subcommittee. Thank you for inviting me to
testify today.
My name is Tara Twomey and I am an attorney, currently of
counsel at the National Consumer Law Center. On a daily basis,
NCLC provides assistance on consumer law issues to legal
services, government and private attorneys representing low-
income clients. Prior to joining NCLC, I was a clinical
instructor at Harvard Law School, where my practice focused on
foreclosure prevention.
As we all know, we are facing the worst foreclosure crisis
since the Great Depression. The statistics for 2007 are grim,
and the outlook for 2008 is not any brighter. The consequences
of the mortgage market meltdown have not only ripped through
Wall Street, but they are taking a heavy toll or Main Street.
For nearly a year now, the financial services industry has
been encouraged to meet this growing foreclosure crisis by
scaling-up voluntary loan modification efforts. Unfortunately,
the magnitude of the problem continues to dwarf the industry
response. And we would suggest to you that the reason that
voluntary measures have fallen short is because the mortgage
servicing industry, that is, the servicers and the industry to
which they belong, is fundamentally broken when it comes to the
needs of borrowers.
Mortgage servicers have two primary goals: The first is to
maximize their own profit; and the second is to maximize the
return to the investors. In the name of cutting costs and
maximizing profits, the needs of the borrowers are too often
sacrificed.
And what recourse do the borrowers have? Very little. They
do not get to choose their mortgage servicer. They do not get
to choose the subcontractors that the mortgage servicers hire
to deal with the borrowers. They cannot vote with their wallets
or their pocketbooks. They cannot change the mortgage servicer
if they are dissatisfied. Even refinancing will not necessarily
protect a borrower from a bad or abusive servicer, because they
may end up with the same servicer again.
For borrowers, the first hurdle in the loan modification
process is finding a live person who can provide reliable and
consistent information, a person who has the authority to make
decisions about the homeowner's loan.
To date, industry efforts to staff loss mitigation
departments have been woefully inadequate. We know that leaving
homeowners to navigate a maze of voicemail is less expensive,
that it cuts costs for the servicers and improves their bottom
lines. But borrowers deserve better. We know that, under
current regulations, mortgage servicers can ignore borrowers'
requests for information, they can ignore borrowers' disputes
about their accounts, and they can still proceed with
collection activities, including foreclosure.
We know that pushing homeowners into repayment plans is
cheaper and easier for mortgage servicers. A recent Mortgage
Banker's Association report finds that repayment plans
outnumber the loan modifications by an 8:1 ratio for subprime
adjustable rate mortgages. Even recent numbers from HOPE NOW
show little progress in long-term or life-of-loan
modifications. We know the disparity and bargaining power
between financially distressed homeowners and mortgage
servicers present new opportunities for abuse.
We are pleased to support H.R. 5679, which recognizes these
industry shortcomings and will align mortgage servicers'
interest with those of borrowers trying to save their homes.
Industry may say that the burdens of this bill are too
great. We believe that the industry claims that H.R. 5679 will
reduce market liquidity are overstated. Providing clear
guidance to mortgage servicers on how to determine how much a
borrower can afford to pay should give investors comfort that
long-term modification will be successful.
H.R. 5679 requires servicers to provide borrowers with
timely, competent, and consistent information about their
loans. It requires that borrowers be permitted to speak to
someone who has authority to modify their loan, if that is
appropriate. Is it too much to ask that a borrower be able to
obtain competent and consistent information about their loan?
We say no.
H.R. 5679 requires servicers to resolve borrowers' disputes
before foreclosing on them. We don't think that is too much to
ask.
H.R. 5679 requires servicers to engage in reasonable loss
mitigation, to focus on home savings options instead of home
losing options. Is that really too much to ask? We don't think
so.
We commend you, Chairwoman Waters, for introducing a bill
that addresses some of the systemic problems in the mortgage
servicing industry, for introducing a bill that will provide
real benefits to homeowners, and for introducing a bill that
can save millions of homes without costing the government a
penny. We look forward to working with you and other members on
the subcommittee on H.R. 5679 and other mortgage servicing
issues. Thank you.
[The prepared statement of Ms. Twomey can be found on page
168 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Gordon.
STATEMENT OF JULIA GORDON, POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Good morning, Chairwoman Waters, Ranking Member
Capito, and members of the subcommittee. Thank you for inviting
me to speak about the Foreclosure Prevention and Sound Mortgage
Servicing Act of 2008, a bill that my organization supports.
I am policy counsel at the Center for Responsible Lending,
a nonprofit, nonpartisan research and policy organization
dedicated to protecting homeownership and family wealth. We are
an affiliate of Self-Help, which consists of a credit union and
nonprofit loan fund.
For the past 28 years, Self-Help has focused on creating
ownership opportunities for low-wealth families, primarily
through providing more than $5 billion of financing to 55,000
low-income and minority families who otherwise might not have
been able to get loans.
Self-Help's experience suggests that the high rate of
foreclosure in the subprime market cannot be explained solely
by the slightly higher risk of lending to people with blemished
credit. In our experience, while homeowners may fall behind
temporarily on mortgage payments, they will make every effort
to catch up and hold onto their home if the lender and servicer
are committed to working with them.
While Self-Help's delinquency rate is similar to that of
many other subprime lenders, its foreclosure rate is under 1
percent, far lower than other subprime lenders, in part because
we only sell 30-year fixed-rate, fully amortizing loans, and in
part due to our strong corporate emphasis on loss mitigation
aimed at keeping homeowners in their homes.
The foreclosure crisis continues to gather steam. We are
now seeing 20,000 subprime foreclosures every single week. Each
foreclosure represents an incalculable loss to the individual
family, but the effects go far beyond that. For each
foreclosure, lenders and investors lose money, property values
in neighborhoods decline, crime increases, community tax bases
are eroded, and millions of Americans who depend on the housing
sector lose jobs and income. What is more, the worst is yet to
come.
The rate of foreclosure on subprime hybrid ARMs will
continue to rise throughout this year, but even after that rate
begins to level out, we face a second and possibly even larger
wave of problems.
Beginning in 2009, we will see a large spike in reset in a
type of loan called a payment option ARM. These loans permit
homeowners to opt for a monthly payment that does not cover
either principal or interest. They can continue to pay these
rates for a set number of years or until the loan reaches what
is called a negative amortization cap, usually 110 or 115
percent of the original loan. At that point, the loan resets,
and the homeowner suddenly has to pay a much larger monthly
payment. These resets are not tied to interest rates in the way
that subprime hybrid ARMs are, and the current decline in
interest rates is not likely to change the shock of these
resets very much.
The fact that these loan balances are growing while overall
home prices are declining is a recipe for disaster. This wave
of loans will be even harder to refinance than the current crop
of hybrid ARMs, and most of these loans are the not confined to
the subprime market.
While we applaud the voluntary loss mitigations now taking
place, as Ms. Twomey noted, they are simply not reaching the
critical mass necessary to extend the tide of foreclosures. A
working group of State attorneys general and bank commissioners
estimates that only 24 percent of seriously delinquent
borrowers receive the assistance they would need to prevent
foreclosure.
While the HOPE NOW Alliance reports that loss mitigation
activity in the first quarter of this year has risen
significantly from the first quarter of 2007, servicers have
still not been able to get ahead of the escalating crisis.
According to the numbers, although 1.8 million loans were
delinquent by 60 days or more in the first 2 months of 2008, in
that time, only 114,000 received permanent loan modifications,
and just under 200,000 received a temporary repayment plan.
There are many reasons why servicers don't engage in loss
mitigations. Many get paid more for doing foreclosures than for
doing loss mitigation, some fear investor lawsuits and tranche
warfare, and many simply face a staff's training and capacity
issue. But no party right now has the leverage to push them to
do better.
Homeowners have no choice in selecting a servicer. If the
servicer doesn't provide them with the help they need, they are
not able to take their business to a different servicer.
Typical market incentives are absent here. That is why this is
an appropriate area for the government to step in with
legislation.
As a final note, I would like to mention that even if this
bill passes, there are going to be loans that cannot be
modified by the servicer even when the homeowner qualifies for
an affordable solution. Most frequently, this will be when
there is a conflict between senior and junior lien holders. In
those cases, we believe it is crucial to permit bankruptcy
courts to adjust the mortgage if the borrower can afford a
market rate loan.
In conclusion, we believe that this legislation is a
narrowly tailored proposal that will provide an effective tool
for reversing the downward cycle of losses in the mortgage
market. We commend the subcommittee for focusing on loss
mitigation, and we urge the committee to include in this bill
the broader foreclosure prevention package. Thank you.
[The prepared statement of Ms. Gordon can be found on page
114 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Kevin Stein.
STATEMENT OF KEVIN STEIN, ASSOCIATE DIRECTOR, CALIFORNIA
REINVESTMENT COALITION
Mr. Stein. Madam Chairwoman and members of the
subcommittee, I want to thank you very much for holding this
important hearing today and for inviting us to testify.
My name is Kevin Stein, and I am the associate director at
the California Reinvestment Coalition. We are a statewide
advocacy group comprised of 250 community-based organizations
throughout California. We work to increase access to credit in
underserved neighborhoods throughout the State and to fight
predatory lending practices.
The main point I want to make today is that our current
framework for preventing subprime foreclosures which relies on
voluntary industry efforts is not working, and our working
families and their communities are suffering as a result.
Today, one of the most important conversations that takes
place day-to-day is between loan servicers and their borrowers
or their representatives, and, amazingly, in the subprime
market, there are virtually no rules and no oversight and no
consistent data that relates to these critically important and
life-changing conversations: Will a family be able to stay in
their home or not?
In light of a large disconnect we were hearing between what
the loan servicers were telling us and what we were hearing
from borrowers and from counseling agencies, we conducted a
survey to find out what exactly was happening on the ground. We
were able to talk to 38 home loan counseling agencies who had
served over 8,000 consumers in the month of December alone. The
results of the survey were sobering, and I will share a few key
findings:
First, servicers were not modifying loans for long-term
affordability. Not one counseling agency reported that the
industry was modifying loans for the long term. Agencies
reported that where they were able to get loan modifications,
they were for about 1 year, which merely postpones the problem.
Second, and I guess most compellingly, the outcomes for
borrowers are poor and unacceptable. Foreclosure was the number
one outcome cited by counseling agencies. And, again, these are
folks who have expertise, hopefully have some relationship with
servicers, have borrowers who have the wherewithal to come find
them, and a shocking 72 percent of these agencies reported
foreclosure as a very common outcome. Fifty percent reported
short sales, which was the second most common outcome and, in
our view, not a good outcome. Loan modifications came in with
only 17 percent of groups reporting that these were common
outcomes.
Third, outreach to borrowers is poor, despite what lenders
have said. A surprising 91 percent of groups said that, in
their experience, servicers were not reaching out to borrowers
before rates reset, to the Congressman's point. And when that
happened, they were often told to call back when the borrower
was in default.
Fourth, servicers are hard to work with. We listed in our
report--we reproduced the comments from counseling agencies. I
will read some:
One, they do not return calls;
Two, they take 30 to 60 days to give us a written answer;
Three, they require their own authorization to release
information forms;
Four, they take too long to assign cases;
Five, they keep changing officers when cases are assigned;
Six, they give wrong information regarding the loan;
Seven, you always have to re-fax and explain the situation
to different people;
Eight, customer service sends us to the wrong department;
Nine, they hang up; and
Ten, they are never willing to work any details.
In anticipation of this hearing, I tried to check back in
with folks in the last few days to confirm, since the study was
based on December experiences. Unfortunately, we hear a lot of
the same problems repeating themselves.
A few things I will pull out. Counseling agencies and legal
services offices are reporting seeing a lot of loans which are
clearly unaffordable and never should have been made, including
an increasing prevalence of spotted broker fraud--being told to
call back by the servicers when the borrowers are in default,
despite industry pronouncements to the contrary--and being
strung along by servicers who say a borrower can get a loan
modification, only to later decline the modification right
before foreclosure.
And a growing concern in light of data that is being
reported is that borrowers are being pushed into loan
modifications and workouts that are, in the words of some of
the counseling agencies, either ridiculous or make no sense. We
are hearing more about this, of so-called loan modifications
and workouts that are really not in the best interests of the
borrower; and, unfortunately, we believe it would be reported
as a loan modification by servicers.
This experiment with voluntary industry initiatives has
failed, and hundreds of thousands of borrowers are falling
through the cracks into foreclosure. H.R. 5679 will help
borrowers remain in their homes by creating an obligation on
the part of loan servicers to act reasonably and by requiring
detailed reporting on loan servicing outcomes.
I appreciate the analogy to the Home Mortgage Disclosure
Act. We think that when light is shed on industry practices,
the effect will be better industry practices.
Madam Chairwoman, thank you for the opportunity to testify.
We look forward to working with you to keep borrowers in their
homes and to help communities.
[The prepared statement of Mr. Stein can be found on page
154 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Kenneth Wade.
STATEMENT OF KENNETH WADE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NEIGHBORWORKS AMERICA
Mr. Wade. Thank you, Chairwoman Waters, and members of the
subcommittee. Thank you for inviting us to be here to share
with you some of the things we are doing and our perspective on
this very challenging issue we are all facing on the
foreclosure front.
We are involved in a broad variety of efforts out there. We
are working with anybody and everybody, both nationally and
locally, in order to address this very challenging problem. We
are in partnership with the Housing Preservation Foundation to
support the toll-free number that homeowners can call, and our
network is one of the referral sources that they refer
consumers to when they need a face-to-face counseling.
We are members of the HOPE NOW Alliance which has been
convened by the Department of the Treasury, and you will hear
more about their efforts as well, recognizing that working with
the industry is obviously something we felt we had to do to get
a handle on this issue.
We are encouraging borrowers to reach out through outreach
efforts that we are conducting through our National Ad Council
campaign, designed to reach those consumers who have been
difficult to reach. And since the launch of that Ad Council
effort in June of 2007, we have had more than 12,500 public
service announcements. The estimated value of those ads are
about $16 million, and they have been targeted in 126 of the
200 media markets that are hardest hit by foreclosure.
We also were named in the Fiscal Year 2008 Consolidated
Appropriations Act to administer a national foreclosure
mitigation counseling program. We are pleased to be able to say
that, within 60 days of enactment, we were able to award $130
million to 130 organizations that were eligible through that
legislation to support foreclosure prevention counseling. That
is, basically, counseling that will be available all over the
country.
And then, we are working on a new tool that we think will
greatly aid the counselors in their ability to develop
solutions that will help keep borrowers in their home. We have
a secondary market organization of ours called Neighbor Housing
Services of America. They have developed what we are calling a
best-fit tool that we are rolling out today. That tool will
allow counselors to assess a borrower's ability to pay in an
automated way.
It will also be able to provide an automated valuation of
the borrower's current property and allow the counselor to
propose or to do a number of ``what if'' scenarios to help
determine how you can best create a loan solution that would
keep that borrower in their home, including whether they
qualify for any of the existing refinance products that might
be out there, whether they be those offered by the FHA or local
State housing finance agencies.
And it will allow the counselor to do ``what if''
scenarios, so that if you reduce the interest rate by ``X,''
will that meet the borrower's ability to pay? Or if you reduce
the principal by ``Y,'' or do some combination thereof?
One of the challenges that the counseling community has is
their ability to develop an automated way to interface with the
servicers and do this in a more efficient manner.
Despite all that is going on, and the many things that we
and others are doing, I would like to highlight five major
challenges:
One, I would concur that there is still a challenge that we
hear from our members about servicer responsiveness. I think
the scale and scope of the challenge obviously has grown much
beyond what any of us would have imagined, and I think the
challenge to the servicing industry to keep pace with that
seems to be a challenge.
Two, there does seem to be a language of standardization
around approaches and rules to loan modifications that
counselors will reasonably be able to expect that they can
recommend to servicers and allow a consumer to stay in their
home.
Three, we also have identified that the counseling
community does not have a sustainable funding model to help
support quality counseling. Thus far, most of the counseling
has been supported by public funds and charitable
contributions. The industry--we are working very closely to
come up with a means by which the industry will share some of
the cost of this counseling.
Four, we also are very concerned about the disparate impact
that the foreclosure problem is having, and then we also
recognize that there is a rising problem with foreclosure scams
that are taking advantage of consumers while promising to try
to keep them in their homes.
Five, we also think that, basically, the best remedy is
good pre-purchase counseling. Our own loan performance bears
that out. Loans from our network performed 10 times better than
subprime loans, 4 times better than VA and HUD loans, and
slightly on par with prime loans.
Thank you for providing me the opportunity to say a few
things today, and I look forward to answering any questions you
might have in the course of this hearing.
[The prepared statement of Mr. Wade can be found on page
183 of the appendix.]
Chairwoman Waters. Thank you very much.
We have two more witnesses to give their testimony, and
then we are going to have to break for the vote, and we will
return for the questions for this panel right after we take the
votes on the Floor. I don't know exactly what the time is for
each of those votes. I will ask my staff to inquire so that I
can give you some reasonable speculation about exactly when we
will return.
With that, we will go right to Mr. Jason Allnut. Thank you.
STATEMENT OF JASON ALLNUT, VICE PRESIDENT FOR CREDIT LOSS
MANAGEMENT, FANNIE MAE
Mr. Allnut. Thank you, Chairwoman Waters, Ranking Member
Capito, and members of the subcommittee. I appreciate the
opportunity to be here today to describe Fannie Mae's
foreclosure prevention practices. I will share with you our
view on how our loan servicing practices can best be directed
to reducing foreclosures that are damaging families,
neighborhoods, and local communities across the country.
Fannie Mae has been investing in mortgage credit for 70
years, through many housing cycles, and the collective
knowledge and expertise of those many decades are reflected in
our loss mitigation practices. Underlying all of our efforts in
that area is a simple principle: As a holder of mortgage credit
risk, our interests are, in fact, closely aligned with those of
the borrower.
Our loss mitigation efforts are undertaken in close
partnership with our loan servicers, who have the most direct
and meaningful contact with borrowers having trouble making
monthly payments. I would like to outline the way in which our
servicing relationships operate and how our policies and
tactics around foreclosure prevention are working today.
First, Fannie Mae continuously monitors and measures
servicer loss mitigation activity. For Fannie Mae, that means
granting servicers as much leeway as possible to prevent
foreclosure, while at the same time monitoring and rewarding
their activities to make sure foreclosure prevention is
occurring in accordance with our policies.
To accomplish this, we lay out the results we want and work
with servicers to come up with the best possible tactics to
achieve them. We do not require a standard one-size-fits-all
workout. Rather, Fannie Mae leverages a combination of monthly
servicer score cards and on-the-ground presence to ensure
foreclosure prevention performance and compliance.
Our close monitoring of servicers, setting targets for
their results and the regular feedback we receive from them has
led to some important changes in our policies. For instance,
since the market turmoil began last summer, servicers have
requested 18 operational changes to resolve prior loans without
prior approval from Fannie Mae. We have granted all 18. These
changes have helped streamline the process and empowered
servicers to resolve problems more quickly.
Second, we offer cash incentives to servicers to pursue
alternatives to foreclosure, but we also pay foreclosure and
bankruptcy attorneys to reach out directly to delinquent
borrowers. As many have reported, borrowers don't necessarily
respond to letters from a servicer, but may respond to a letter
from an attorney, and we pay the attorney to prevent a
foreclosure, not just to conduct it.
Third, we pursue a variety of ways to work with a
delinquent borrower to prevent the foreclosure.
But, historically, our most effective method has been a
renegotiation of the terms of the loan or a loan modification.
As noted in our annual report for 2007, Fannie Mae worked
on more than 37,000 troubled loans last year. The majority,
about 70 percent, were loan modifications.
The choices we make with our servicers and borrowers on the
types of loan workout options we pursue are designed for the
best long-term outcome. In other words, they are not designed
to ``kick the problem down the road.'' In fact, of the
modifications, forbearances, and repayment plans we made
between 2001 and 2005, only 9 percent of those workouts
ultimately went to foreclosure.
The affordability standards we use when doing a loan
workout is fairly straightforward. Our servicing guidance
allows servicers to create an affordable plan whereby borrowers
are required to have at least a $200 residual after monthly
expenses are subtracted. The reworked loan needs to be
sustainable, and it must allow for unexpected household
expenses. A broken water heater is the rule of thumb. The final
outcome must meet a basic test: Can the borrower sustain the
payments over the long term?
As I said in my opening, these loss mitigation practices
reflect the long experience we have in preventing foreclosure.
But they also are a reflection of the long-standing
underwriting practices of Fannie Mae and the basic safety and
sustainability of our loans. The vast majority of our
business--close to 90 percent of our entire single family
mortgage book--is made up of fixed-rate mortgages with strong
credit scores and plenty of borrower equity.
Before I close, I would like to offer a few points on the
legislation currently under consideration by this committee,
specifically H.R. 5679. We share Congress' concern that the
tide of troubled loans has made it more difficult for servicers
to address the growing need of borrowers who want foreclosure
alternatives.
My view on legislation remedies to this problem is informed
by my own experience at Fannie Mae. We have dedicated the time,
people and resources needed to work through tens of thousands
of problem loans since the market turmoil began last year.
Loans are made one at a time, and loss mitigation happens one
loan at a time. Creating a legislative standard for loss
mitigation activities prior to a foreclosure may actually have
unintended consequences by making solid loss mitigation
activities, negotiated between a borrower and a servicer, less
flexible. It could create an added cost to an already expensive
process and ultimately, we believe, make home mortgages more
expensive.
I want to thank the committee again for inviting me here
today. With that, I would be happy to answer questions. Thank
you very much.
[The prepared statement of Mr. Allnut can be found on page
72 of the appendix.]
Chairwoman Waters. Thank you. Ms. Ingrid Beckles.
STATEMENT OF INGRID BECKLES, VICE PRESIDENT, SERVICING AND
ASSET MANAGEMENT, FREDDIE MAC
Ms. Beckles. Madam Chairwoman, Ranking Member Capito, and
members of the subcommittee, good morning. My name is Ingrid
Beckles, and I am the Vice President of Servicing and Asset
Management for Freddie Mac. As you know, historically Freddie
Mac's guarantee and securitization activities have centered
around the conforming conventional prime market. Freddie Mac's
mortgages continue to perform very well relative to other
market sectors despite the turmoil in the market. At year end
2007, only 1 in about every 150 Freddie Mac mortgages were
seriously delinquent or in foreclosure compared to about 1 in 7
subprime mortgages; this is less than \2/3\ of 1 percentage
point, or about 65 basis points.
So while we may be experiencing relatively low
delinquencies, Freddie Mac is not immune to the worsening
conditions of the overall housing market. At Freddie Mac, we
start from the proposition that a foreclosure is not in
anyone's best interest, not the lender, not the investor, and
certainly not the homeowner or the community. This is also the
proposition underlying H.R. 5679. We know from experience that
the earlier the servicer and the borrower begin to work out
their delinquency, the more likely the borrower will be able to
avoid foreclosure. For that reason, we emphasize early and
frequent intervention with delinquent borrowers as early as the
first missed payment. In 2007, we worked out \2/3\ or 3\1/2\
times as many mortgages as we had to foreclose upon.
Under our seller servicer guide, which is our basic
contract with our servicer, we require, not just recommend,
that our servicers work with borrowers to try to resolve
troubled loans prior to foreclosure. As a result, in 2007, we
entered into approximately 50,000 workout situations last year,
nearly 1,000 per week, where we prevented a family from losing
their home. This is an exceptionally high proportion of our
significantly delinquent portfolio which stood at 79,000 at the
end of 2007. Our workouts fall into three categories:
forbearances; repayment plans; and modifications.
In every case, we want the borrower to be able to sustain
the workout based on the circumstances at the time the family
enters into that workout. When we do a loan modification, for
example, we not only assess the borrower's current income and
other debts, but also whether the family's other living
expenses, such as food and fuel, are such that the modified
loan will be sustainable. We want to ensure that the family has
a sufficient cushion. Our guideline is 20 percent of disposable
income, to cover unanticipated expenses that might otherwise
force a loan back into default. Since a workout must be
sustained based on the borrower's present financial situation,
we do not support H.R. 5679's requirement that the
affordability be assessed on the income information derived at
origination. Rather, our approach, which uses current financial
information, has given us a very low redefault rate. And in
fact, our loans have a success rate of 80 percent.
My staff and I work with our servicers every day to ensure
that we can do the best job possible for our delinquent
borrowers. We have found, however, that while mandates may
provide clarity, the best way to encourage effective
delinquency management is to combine carrots with sticks. We,
therefore, reinforce good behavior by providing financial
incentives on a per loan basis for completing repayment plans,
modifications, and foreclosure alternatives. These incentives
are in addition to the fees that we pay the servicers
contractually for our mortgages. We also absorb these
incentives rather than pass them on to our already distressed
borrowers because we believe that they are cost effective in
the long run.
In 2007, we paid approximately $12 million in incentives to
the servicers for performing this good work. We concur with the
objective of H.R. 5679 to ensure that every delinquent borrower
has a reasonable opportunity to work out his or her loan prior
to foreclosure. We do not, however, believe that it is
necessary to create an affirmative statutory duty that imposes
particular loss mitigation activities on the entire mortgage
market. Such a measure could add unneeded costs and complexity
to delinquency management.
And moreover, no matter what standard is chosen, be it
Fannie Mae, Freddie Mac, FHA, or VA, the standard in the
underlying principles may not be equally effective to all
borrowers at a given point in time. In the long run, a Federal
standard could chill innovation, discourage some investors from
getting into the mortgage market, and ultimately raise costs
for all borrowers. We are committed to working with Congress,
the Administration, our customers, and other industry
participants to find and implement effective solutions to this
very difficult problem. Thank you for the opportunity to
address the subcommittee and I look forward to questions.
[The prepared statement of Ms. Beckles can be found on page
87 of the appendix.]
Chairwoman Waters. Thank you very much. The committee will
stand in recess. We ask you to be patient; we should return in
about 30 minutes.
[Recess]
Mr. Cleaver. [presiding] I think, as you can see, the
chairwoman is on the Floor. She is managing a bill. And we are
going to proceed with questioning. And hopefully, you heard me
earlier apologize, as you can see, Chairwoman Waters is on the
Floor and should be back shortly. But we are going to proceed.
Your time is valuable and we wanted to go ahead and try to
minimize the time away from saving people. Let me begin the
questioning. I raised questions earlier with the first panel
about whether or not there was any value in spreading a program
across the country that seems to be valuable to FHA so far. And
so loss mitigation seems to have some great value. Let me ask
you, Ms. Twomey, do you think there would be value in us having
such a mandatory program all over the country?
Ms. Twomey. Yes.
Mr. Cleaver. You know, I like that ``yes,'' because we
don't get those normally.
Ms. Twomey. I thought you might appreciate that.
Mr. Cleaver. I do. I think everybody does, including the
Judge, I think. The other issue that I raised that I am
interested in getting all of your feedback on is the whole
issue of regulation. Those who are involved with the loss
mitigation are not normally regulated in what they do, except
for the banking portion of their portfolio. Is there any
downside to some form of regulation? Ms. Beckles?
Ms. Beckles. I think that we have to be careful with how we
go about applying regulation. We have practices at Freddie Mac
that we find are doing a very good job at managing
delinquencies and keeping people in their homes, which is the
objective of your regulation. I do believe there are sectors of
the market that would require further attention and possibly
regulation. But I think that if we spread a broad knife across
all industry players, especially those who are performing the
objective that you seek, it would be detrimental to those who
are doing well.
Mr. Cleaver. Let me amend my question about whether or not
the servicers should be regulated. Do any of you have any idea,
as you answer the first question, how the fee schedule is
developed for the servicers?
Ms. Twomey. I might take a crack at that one. Servicers are
generally compensated in three different ways through the
pooling and servicing agreement, which is the agreement that
governs the relationship between the servicer and the
investors. And the three different ways that servicers are
generally compensated are, one, a servicing fee. And the
servicing fee is based on the outstanding principle balance of
the loan pool. So they take a fractional interest in all the
monies that they collect. And that is their primary source of
income. Their second source of income is what is called float
income, which is derived from short-term overnight investments
of their deposits. And then they get fees; late charges,
property inspection fees. All of these things servicers
generally get to keep. I don't think that there is in most
pooling and servicing agreements a specific fee allocated,
unlike some of the FHA or Freddie, some kind of fee incentive
for doing loan modifications.
There is not a line item in these pooling and servicing
agreements that says if you do a modification, you get $500, or
whatever it is. And so that has created a problem. There is no
incentive for mortgage servicers, there is no financial
incentive certainly in a majority of the market for them to do
these types of work-out arrangements. They are focused on their
servicing fee, their float income, and getting as much in these
ancillary fees as they possibly can. I am not sure if that
directly answers your question.
Mr. Cleaver. It does answer the question. Yes, Mr. Allnut.
Mr. Allnut. I would only clarify by looking at the same
revenues that were just outlined, the servicing fee is only
paid on performing loans. The float is only paid when a
borrower pays. And the late fees and other ancillary fees are
only received when a borrower reinstates from a late status. If
a borrower goes through to foreclosure there is a disincentive
on servicing fees, a disincentive on float and a disincentive
on ancillary fees. And on top of that Fannie Mae, as well as
Freddie Mac, pay a servicer $200 if they do a repayment plan,
$500 if they do a modification, and zero if they go to
foreclosure. So from a revenue standpoint, I think the
alignment is closer to what we all hope it is, which is keeping
a borrower in their home, in their mortgage, versus taking that
borrower to foreclosure.
Mr. Cleaver. Anyone else?
Ms. Beckles. I just want to agree with Mr. Allnut that our
servicing structure is probably a little bit higher than that.
But we do pay $250 for repayment plans. We pay $300 to $700 for
our modifications. We even pay them to help a borrower in what
H.R. 5679 would call secondary loss mitigation for deeds in
lieu and short sales when the borrower cannot remain in the
home upwards of $1,100. So our incentive to the servicer is
really to work this situation out and not go to foreclosure.
And on top of that, like Mr. Allnut, Freddie Mac also incents
their foreclosure attorneys because many times that is the only
person that a distressed borrower will contact because they
really see that the rubber is meeting the road here despite the
efforts of the servicer. So we actually incent our foreclosure
attorneys, not just to proceed with foreclosure. So take that
incentive away, work with the borrower on working out the
product and getting them back in touch and in a performing
state with their servicer.
Mr. Cleaver. Yes, Mr. Stein.
Mr. Stein. So if your question was broader, if it is the
case that what they describe relates to the GSE purchase loans,
most of the loans that were problematic to begin with and that
are going into foreclosure are these private label securities.
And so if it is the case that there is no clear incentive for
servicers on those loans to do modifications or engage in loss
mitigation, and there are basically no rules to say that it
should happen, then I don't know that we should be surprised
that it is not happening.
I think that is why this bill that is being put forth is so
important. And on kind of the general concern about regulation
and access to credit, this is kind of a frustrating argument to
hear, because we have been hearing it over and over again for
years from the industry, that if there is too much regulation,
it is going to dry up access to credit. And I think they have
been very successful in making that argument. So successful
that we have had a basically unregulated insufficiently
regulated mortgage market for years. That is why we have the
problems we have today; the loans that were originated weren't
sufficiently regulated.
Now they have all gone into default and foreclosure. The
investors are scared. And that is why we have a liquidity
crisis, because there is a crisis of confidence on the part of
the investors because we didn't have sufficient regulation to
begin with. So we think reasonable regulation around
origination and reasonable regulation around servicing would
bring back investors and bring back some sanity to the market.
Mr. Cleaver. Following that line of thinking, the brokers
are not regulated either, which are the first people who, I
will try to say this diplomatically, the people who, in many
instances, took advantage of financially illiterate home
buyers. What is to prevent--my final question, what is to
prevent less desirable companies from becoming servicers? I
mean, we have some reputable companies involved, like Wells
Fargo, Citibank, and Bank of America. What is to prevent
``Joe's Home Company'' from becoming involved?
Ms. Twomey. I think the question is less desirable from
whose perspective; the investors or the borrowers? The
investors really control this game. And the investors want to
make sure that a servicer is going to maximize their return.
And so they are not going to let ``Joe's Servicing Agency,''
that has no experience servicing loans, sign up to be the
servicer in a pooling and servicing agreement. They want to
make sure that that investor or that servicer has the
institutional capabilities to meet their needs. The problem is
that doesn't necessarily help borrowers because borrowers don't
choose at all.
Mr. Cleaver. The paranoia exists today because of what has
happened. And so I am just interested in, and I think our
responsibility is not to do any damage to the lenders, but I
think the ultimate responsibility is just to protect the
borrowers. That is why I am inclined to think that something
related to regulation should occur. Every hearing we have,
without exception, when we are dealing with this issue we hear
recollections are a bad thing, that it will destroy the
country, cause the Super Bowl to move to another continent.
I mean, it is the worst thing to happen when we listen to
people. By now, the mantra has become one that irritates.
Congressman Green.
Mr. Green. Thank you Mr. Chairman, and I commend you on how
well you have acclimated to your new station in life. Let me
ask questions to the panel as a whole, if I may. And if you
would, you may respond by raising your hand. Does everyone
agree that aside from FHA and the GSEs, we have other
institutions that are involved in this market, what we are
calling subprime, that are making loans and having homes
foreclosed on and that these institutions--well, let us just
find out if you agree that market exists. If you agree that it
exists, would you raise your hand, please? Okay. Is there
anybody who doesn't agree that it exists? I am asking you aside
from conforming conventional loans, do you also have
nonconventional conforming, conforming nonconventional?
Ms. Twomey. The answer is ``yes.'' What is interesting is
that Countrywide or Wells Fargo or any of these lenders that
you have heard service for GSEs and service for Fannie and FHA
also service the subprime loans.
Mr. Green. I understand. But we all agree that they exist.
I just want to make sure that nobody assumes that they don't
exist.
Ms. Gordon. Can I add one other comment?
Mr. Green. Well, let me just do this. For the record, all
persons agree that they exist. Do you agree that there are a
substantial number of foreclosures in this market? Everybody
agree? Raise your hand if you would, please? Good. For the
record, everybody has raised their hand. Do you agree that this
market is, when compared to FHA and the GSEs, not nearly as
regulated? Do you agree that they are not as regulated as FHA
and GSEs? Do you agree that they are not regulated? Yes, Ms.
Holmes, do you agree that they are not regulated? Excuse me,
that is Ms. Beckles. Do you agree that they are not regulated
to the extent that GSEs and FHA?
Ms. Beckles. Based upon the outcome, they appear not to be.
Mr. Green. Well, do you have any empirical evidence of
actual regulation?
Ms. Beckles. I don't spend time studying the other markets.
Mr. Green. So your answer would be no, you don't have it,
is that correct?
Ms. Beckles. I do not have empirical evidence.
Mr. Green. All right. That will be sufficient. Thank you. I
did not hear from Mr. Allnut. You did not respond.
Mr. Allnut. I have no empirical information one way or the
other.
Mr. Green. As to whether they are regulated or not, okay
now, given that you have no empirical evidence, Mr. Allnut, why
do you defend that of which you have no empirical knowledge?
And I would ask the same thing of you, Ms. Beckles. You have no
empirical knowledge of their regulations, but you defend the
notion that they should be regulated, or am I incorrect and you
do not defend that?
Ms. Beckles. I am not making that assumption.
Mr. Green. Excellent. Okay. You do not defend. So then let
me ask now of the entire panel, if they are substantially
unregulated when compared to the others, would you agree that
some regulation can be of help? If so, would you kindly raise
your hand? Okay. I have three persons. Are you a yes or a no or
a maybe? That would be Mr. Wade, is that right?
Mr. Wade. Yes. I just wanted to clarify that the way we
experience it, there is no question the inconsistencies create
a challenge for the consumer and those trying to help the
consumer.
Mr. Green. I understand. But do you agree that if all
markets were regulated to the extent that FHA was regulated
that we would probably have fewer foreclosures?
Mr. Wade. Well, I do agree that if standards were in
place--
Mr. Green. You know how FHA is regulated?
Mr. Wade. Absolutely.
Mr. Green. Would we have fewer foreclosures?
Mr. Wade. If the same products--
Mr. Green. If FHA requires the same products.
Mr. Wade. So, if--
Mr. Green. Assume whatever you like as it relates to FHA.
But if they were regulated to the same extent that FHA is
regulated, would we have fewer problems?
Mr. Wade. There would be fewer problems.
Mr. Green. So again, let me ask, do you think that some
regulation would help these markets, this market that is
apparently not regulated to the extent that FHA and their GSEs
are regulated? If so, would you raise your hand please. Okay.
Now we will get back to Mr. Allnut.
Mr. Allnut, you have no empirical evidence of what their
standards are yet you conclude that no regulations should apply
to them, is this correct?
Mr. Allnut. No that is not my conclusion.
Mr. Green. Well, if it is not your conclusion, and I say
some regulations, and you don't agree with some, then some
would include a scintilla to some large amount. But you don't--
I have to conclude that you wouldn't even want a scintilla of
regulation?
Mr. Allnut. That is not my conclusion.
Mr. Green. So you would want some?
Mr. Allnut. What I am suggesting is that the regulations
that Fannie, Freddie, HUD, and VA abide by have to do with
products that are available to the marketplace, and had those
same regulations been applied to this other category that you
are talking about, many of the products that are out there
right now would not be out there and could have a positive
impact on the rate of--
Mr. Green. Well, you are in agreement with me then?
Mr. Allnut. Yes.
Mr. Green. All right. For the record, Mr. Allnut is in
agreement. Now let us go to Ms. Beckles. Is it your opinion
that there should be no regulations with reference to this
market?
Ms. Beckles. Freddie Mac's opinion is probably that there
should be some form of--
Mr. Green. Well, if you say ``some,'' then your hand should
have gone up with the others.
Ms. Beckles. I think there is a difference between
regulation, statutory requirements and oversight.
Mr. Green. In your mind, define it however you like. Should
there be some regulation?
Ms. Beckles. There should be something.
Mr. Green. Something. Can we call that thing
``regulation?''
Ms. Beckles. I am not sure how you are going to define
regulation. There should be some things--
Mr. Green. You define regulation in your mind as it relates
to your business and then apply it to this question. Some
regulation of the market that has an overwhelming majority of
problems, should there be some?
Ms. Beckles. I believe that there should be oversight and
consequences.
Mr. Green. Okay. Does oversight entail regulation and
consequences? Isn't that a form of regulation? Let me ask you
this: Is it hard to say regulation as it applies to this
market?
Ms. Beckles. It is hard to say regulation when at times
regulation is taken with a broad brush and does impede
practical business.
Mr. Green. Okay. But let us not talk about impeding
practical business. Let us just talk about a market that we
conclude has not been regulated to the extent that FHA has and
whether there should be some regulation given that this is the
market where we have the problem? Should there be some?
Ms. Beckles. There should be some form of oversight and
consequences in management.
Mr. Green. Okay. I am going to define oversight and
consequences as regulations. With that definition, should there
be some regulation?
Ms. Beckles. Yes, there should.
Mr. Green. Thank you. And I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you very much. I would like to
yield myself some time to raise some questions. Before I get
into some of the questions that I prepared to ask you, I need
to be educated some more about this business. Let me ask Fannie
and Freddie. You have underwriting standards, is that right?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And you have loan originators such as
Countrywide, is that correct?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And you buy the products, you buy the
loans from Countrywide on the secondary market?
Ms. Beckles. Yes, ma'am. Those that meet our standards,
yes, ma'am.
Chairwoman Waters. Those that meet your standards?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And some of those loans--well, all of
your loans are serviced by Countrywide and others, is that
right?
Ms. Beckles. By Countrywide and others, yes, ma'am.
Chairwoman Waters. So Countrywide is servicing some of the
loans that you picked up from them?
Ms. Beckles. That we purchased from them.
Chairwoman Waters. That you purchased from them; they are
servicing some of those?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. All right. They meet your standard for
the loan origination?
Ms. Beckles. And for the loan servicing, ma'am.
Chairwoman Waters. How does the loan servicing that they do
for you compare with loan servicing they do on loans that they
would keep in their portfolio? Is there a difference?
Ms. Beckles. Well, I cannot comment as to what they do on
the loans that they keep in their portfolio or that they sell
to other people. But they are required to follow our strict
standards. We monitor their performance. We actually model our
loans loan-by-loan to determine their probability of default.
We put those into their call campaigns. They use our models to
drive their call campaigns to make sure that we are reaching
out to borrowers. And then we compensate them when they do
successful workouts to keep borrowers and loans.
Chairwoman Waters. Describe to me how the loans that you
have picked up from Countrywide perform in relationship to
foreclosure, what is the percentages?
Ms. Beckles. One moment, I do not have specific lender
percentages. I have some State information. But on the whole,
they are performing at par with their peer groups, I can tell
you that. Because they are one of our largest customers and we
do look at our larger customer performance. So our loans are
performing on par with our peer groups.
Chairwoman Waters. Well, that is not good enough. Let me
just say this.
Ms. Beckles. Our overall foreclosure rate is--
Chairwoman Waters. For Countrywide loans.
Ms. Beckles. If they are performing on par?
Chairwoman Waters. For Countrywide loans, that is all I
want to know.
Ms. Beckles. Countrywide loans are performing on par, which
is less than 100 basis points.
Chairwoman Waters. I want the exact information. And I
guess I will have to write and ask you for it, because you
obviously don't have it with you today.
Ms. Beckles. I did not bring lender specific information,
ma'am, but I can certainly get it.
Chairwoman Waters. This is important. We have a crisis out
there in America. I have been to areas not only in my own city,
but in Cleveland, Ohio, and Detroit, Michigan, where whole
blocks are boarded-up, and other people who are living on those
blocks, their values are being driven down, the homes are not
being taken care of, they are being vandalized. We have a
really serious problem.
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. Obviously, Countrywide emerges big in
this problem. Do you understand that?
Ms. Beckles. I do understand that, ma'am.
Chairwoman Waters. Okay. So it is reasonable that when you
are coming here, you would know that we would want to ask you
about your relationship with Countrywide and the performance
level of Countrywide.
Ms. Beckles. Our relationship with Countrywide is very
strong. They perform on par with their peers, and that is a
very good group of folks. As they are a large customer, you
would think that they would drive down our overall performance
rate and they are not. So when I say that they are performing
on par, they are not aberrant to our average or 90-plus
foreclosure rate.
Chairwoman Waters. I am going to ask you some specific
information that obviously you don't have today. But let me ask
you this, do you know whether or not the loans that were
originated by Countrywide are originated by a combination of
individuals who either are hired or contracted with by
Countrywide in California? For example, we have licensed and
unlicensed brokers. Were your loans, any of your loans,
originated by unlicensed brokers with Countrywide?
Ms. Beckles. I will have to get that information for you,
ma'am. I am focusing on the servicing side, so I will get that
information to you.
Chairwoman Waters. Let us get to servicing.
Ms. Beckles. Okay.
Chairwoman Waters. You have standards?
Ms. Beckles. Yes, we do, ma'am.
Chairwoman Waters. And they are monitored?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And they are audited?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And you have written documentation on
the auditing of the servicing that Countrywide is doing for
you?
Ms. Beckles. Yes, ma'am.
Chairwoman Waters. And you can make that available to this
committee?
Ms. Beckles. Yes ma'am.
Chairwoman Waters. We shall require of you, we will ask of
Freddie and Fannie, to give us that information. We want to
take a look at what you do. Now, how many times have you
determined that Countrywide was not in compliance with your
servicing standards?
Ms. Beckles. We haven't found that--okay. How many times
have we determined? They have an acceptable rate of performance
on our audit. That means that they do have some outliers, just
like any other mortgage servicer. And when we find outliers in
the performance of the servicing duties, we develop work plans
with them, we give them correspondence, and we go onsite and
actually train them on how to improve or remediate that
performance. Their inability to service properly for us also
affects their ability to receive the incented compensation
because they will not perform well on their workout status if
any of our servicers are not following our standard.
Chairwoman Waters. Do they subcontract any of the servicing
they do for you?
Ms. Beckles. I beg your pardon, ma'am?
Chairwoman Waters. Do they subcontract any of the servicing
they do for you? They service for you. Do they hire other
people, do they have contractual relationships with others who
are doing servicing for you?
Ms. Beckles. To my knowledge, Countrywide uses
Countrywide's employees on the Freddie Mac portfolio.
Chairwoman Waters. Fannie Mae?
Mr. Allnut. Same question?
Chairwoman Waters. Same question. Do they subcontract, does
Countrywide subcontract its servicing?
Mr. Allnut. I focus on the borrower contact aspect of who
Countrywide uses for servicing and those are Countrywide
employees.
Chairwoman Waters. So your answer is either you don't know
or no they do not subcontract out their servicing?
Mr. Allnut. The portions of the work that they do that I
oversee are not subcontracted out.
Chairwoman Waters. Okay. Well, let us talk about the work
that maybe you don't oversee directly, but because you are a
smart employee, you know what goes on around you. Do you know
or have you heard that they subcontract out any of their
servicing? Have you heard any of that from anybody, maybe from
somebody who sits next to you, works in the same area that you
work in, who is doing what maybe you don't do, but it is
connected to servicing?
Mr. Allnut. No, I have not.
Chairwoman Waters. So you don't know, is that it?
Mr. Allnut. No. No, I have not heard through conversations
or elsewhere that Countrywide subcontracts out the servicing
portion of their responsibilities.
Chairwoman Waters. Okay. For either of you, whether it is
Countrywide or any of your other servicers, have you heard that
they utilize foreign operations to do some of the servicing?
Have you heard that some of the servicing that is done by
Countrywide or any of your other services is actually being
done from India or anyplace else?
Mr. Allnut. I have had conversations with servicing
management at Countrywide relative to their desire to use
offshore call centers.
Chairwoman Waters. Not their desire. I don't care about
their desire. I want to know whether or not they are doing it
and whether or not you know about it?
Mr. Allnut. I am not familiar with them doing it today, and
I have voiced my perspective that they not do so.
Chairwoman Waters. So you had a conversation with them
because you heard they were interested in doing it?
Mr. Allnut. I heard that there was a possibility that
Countrywide was looking into offshoring early borrower contact
and voiced my concern and opinion that was not in the best
interest of our borrowers.
Chairwoman Waters. Okay. So you know that they don't do
that for Fannie Mae; they are not doing offshore contracting
for services?
Mr. Allnut. That is correct.
Chairwoman Waters. And the same thing for Freddie Mac?
Ms. Beckles. Freddie Mac, yes, ma'am.
Mr. Allnut. That is my understanding.
Chairwoman Waters. Now, I want to hear about the
incentives.
Ms. Beckles. Okay.
Chairwoman Waters. You have alluded to incentives, and this
is one reason why you know they are doing the best job that
they could do. Would you explain those incentives to us?
Ms. Beckles. Certainly, ma'am. We measure our loans and
model our loans based upon their probability of default. Those
models are used to drive call campaigns. So since we have
access to all of our loan data and can track the progression of
a loan we can determine how well or how the loans are moving
through their performing cycle, as well as their default cycle.
We measure our servicers based upon their ability to mitigate
losses to the borrower and to the organization.
Servicers are ranked according to their effectiveness at
doing this. So on a loan-by-loan basis we watch the population
of loans that become early stage default such as, you know, day
one after 30 and watch its movement through the pipeline. And
based upon our models, we give them benchmarks that say you
should not be exceeding these thresholds, and when you do you
get disincented for exceeding thresholds at each of the major
categories.
Chairwoman Waters. How do you get disincented?
Ms. Beckles. The first way they get disincented is that
they don't get as many points. I know that sounds pretty
mundane, but the points add up to their tier ranking. If you
maintain a Tier 1 or Tier 2 standard, which is basically an
industry standard, you are able to get delegations of
authority, which means that you can respond to borrower
situations more quickly.
Chairwoman Waters. Let us back up. Now, hold it for one
second. I think it is very important, because like I said,
since we have no regulation of mitigation services, we don't
know this stuff.
Ms. Beckles. That is fine. I am sorry. I did not mean to go
so fast. I apologize.
Chairwoman Waters. When you talk about Tier 1 or whatever
else you just said, you are basically explaining to us that if
you do a good job, you get more flexibility--
Ms. Beckles. You get more flexibility.
Chairwoman Waters. --to work out--
Ms. Beckles. To work out product.
Chairwoman Waters. --and to do modifications?
Ms. Beckles. And to do other foreclosure alternatives, yes,
ma'am.
Chairwoman Waters. So that if they are not in the top tier,
as you alluded to, they are doing servicing and doing
modifications with less flexibility and less authority, and
some of those people whom they are servicing don't have the
advantage of the flexibility because this servicer is not in
the right tier, is that correct?
Ms. Beckles. What happens, unfortunately, is that if they
are in a lower tier, that means that they are not effective at
mitigating losses and doing workouts for the borrowers. And in
those cases, we work with them to bring them back up. So we
look at case files to understand why they are missing hand-
offs. In many cases, the reason that a servicer is not able to
catch a borrower before foreclosure is because sometimes they
miss the hand-off between the collection call and the loss
mitigation activity. So we go through all of that with a fine
tooth comb to help them see where they can harvest more
borrowers who want to stay in their homes and have the
potential to stay in their homes through a workout of some kind
of foreclosure alternative.
Chairwoman Waters. Okay. I get it. You don't have to go any
further. And I am going to--Mrs. Capito, I was out. Have you
not had an opportunity? I am understanding more than I thought
I was going to get out of understanding, of trying to
understand how mitigation works. I have a lot more questions. I
will ask some of the financial institutions that are here
today. But I am more convinced than ever that mitigation needs
regulation. Mrs. Capito.
Mrs. Capito. Thank you, Madam Chairwoman. I would like to
ask Mr. Wade a question about NeighborWorks America. This came
up in a hearing we had last week when we were--you know, a lot
of the emphasis is on good sound home counseling, financial
counseling to keep people in their home, to get them into a
mortgage, on the beginning, the end, the middle, the whole
deal, and I know that you are very involved with this. The
money that we put into the economic stimulus package, I
believe, had financial counseling money.
Mr. Wade. Yes.
Mrs. Capito. Can you give me the amount of that? I can't
remember.
Mr. Wade. $180 million.
Mrs. Capito. $180 million. What has been the result of
that? I will tell you what kind of disturbed me was the
gentleman from Ohio said that NeighborWorks had gotten the
money, then he applied on the benefit of 18 housing counseling
agencies in Ohio for the money. And all I am thinking is
administrative fee, administrative fee and what is going down
to the actual person who needs the help. Can you explain to me
how that works?
Mr. Wade. Absolutely. That is a good question. The
legislation was pretty specific about how the money could be
allocated. Of the $180 million, we were required to only use 4
percent, up to 4 percent to administer the program.
Mrs. Capito. That is just NeighborWorks, though?
Mr. Wade. That is just NeighborWorks America. There were
three classes of eligible applicants: State housing finance
agencies; HUD-approved national intermediaries that do housing
counseling; and then NeighborWorks organizations. We were
required to set up an application process. Those folks applied.
And we awarded within the 60 days that we were required to make
at least $60 million worth of awards, we awarded a little more
than $130 million of the $180 million.
Mrs. Capito. And what was that deadline date?
Mr. Wade. Well, it was 60 days from enactment, so it is 60
days from December 26th. We announced the awards within that
timeframe. We were only required to get a minimum of $50
million awarded. We awarded $130 million. Of the awards that we
made, the groups could only use a--well, let me just clarify.
The amount that groups could use to administer the program was
capped.
So there were limitations on what any of the national
organizations could use to administer the program. And then the
funding that went to the NeighborWorks organizations, there was
no allowance for any administrative costs in that case.
Mrs. Capito. Okay. Thank you. You mentioned in your, I
think it was you who mentioned in your testimony, foreclosure
scams?
Mr. Wade. Yes.
Mrs. Capito. Could you just give me a short--what should
people be watching out for; things in the mail, on the
telephone?
Mr. Wade. It is always that people are being approached.
Many times people go to the registry of deeds, the people who
are perpetrating the scams, find out what people have been,
where there have been foreclosure filings. They approach those
folks. And there are two main things that end up happening at
the end of the day on the negative. They either end up taking
possession of the home from the borrower without their
knowledge, usually with the premise that they can help save
them from foreclosure, sometimes disclosing that they have to
take short-term possession of the property in order to cure the
foreclosure, oftentimes the consumer being asked to sign a
paper not being clear that they are signing the home over to
someone else.
And then the other general circumstance that we see are
people whose equity is taken from them in the context of the
notion that they are going to help cure the foreclosure. So
those are the two major things that we see.
Mrs. Capito. A question for Ms. Gordon.
Ms. Gordon. Yes.
Mrs. Capito. I wasn't here for your testimony. At least I
didn't hear all of it. In it, you mention a self-help
organization where you actually do lend money separate and
apart from your research?
Ms. Gordon. Correct.
Mrs. Capito. What is your foreclosure rate and delinquency
rate on those loans?
Ms. Gordon. The foreclosure rate on our loans, which are
all to what you would consider a prime population, is under 1
percent.
Mrs. Capito. Under 1 percent. And do you have a--does
somebody service your loans for you?
Ms. Gordon. Yes. We do have a company that does servicing
for us. We work very closely with them. And in a situation
where the servicing company is having trouble for whatever
reason in helping the homeowner come to a resolution that will
help them remain in the home, we will often step back in as the
lender and try to help work it out as well.
Mrs. Capito. Now, is that a servicing organization that is
affiliated with you, or is it separate and apart? Is it one of
the 1,200 that are FHA approved? What is the name of it?
Ms. Gordon. You know, I don't know the name of that. I can
get that to you. But they are a separate organization, although
not one of the large servicers that we have been talking about.
Mrs. Capito. Okay. I think that is it for me. Thank you.
Chairwoman Waters. Thank you very much. All members
having--Mr. Cleaver, you had your chance too. Thank you very
much, panel. Thank you for being patient and waiting for us to
return after having gone to the Floor. Actually, we could do
this for hours because there is so much information that we
need to learn. I am pleased to have some of our consumer
advocates here who are concerned about this area of servicing
and who have gathered a lot of information. We will continue to
work with you and get advice from you about what we can do to
assist our homeowners in staying out of foreclosure.
To our friends here who do not think we need to do
anything, let me just say that we have to pursue this. We have
to pursue this because servicing is unregulated. And it appears
that the complaints are overwhelming about the lack of being
able to reach anybody on the telephone, the lack of being able
to talk with anybody before a foreclosure actually takes place,
and also what appears to be in some cases, we have to continue
to investigate, that servicers are actually making a profit on
foreclosures. So we have to continue to investigate this and
see what we can do to provide some assistance to our
homeowners. Thank you all very much for coming.
The Chair notes that some members may have additional
questions for this panel that they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses, and to place their responses in the record. The
panel is dismissed.
I now welcome our third panel: Ms. Faith Schwartz,
executive director, HOPE NOW Alliance; Mr. David G. Kittle,
CMB, president and chief executive officer, Principle Wholesale
Lending, Incorporated, in Louisville, Kentucky, and chairman-
elect, Mortgage Bankers Association; Mr. Tom Deutsch, deputy
director, American Securitization Forum; and Mr. Steve Bailey,
senior managing director, Countrywide Financial. I would like
to thank you all for being here today. I would like to ask you
to present your testimony. You don't have to read all of your
testimony; you can condense it and concise it. You will have 5
minutes.
We will start with Ms. Faith Schwartz.
STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW
ALLIANCE
Ms. Schwartz. Chairwoman Waters, and Ranking Member Capito,
thank you for the opportunity to testify today. My name is
Faith Schwartz, and I want to tell you about the HOPE NOW
Alliance's real progress to reach out to at-risk borrowers and
find solutions to prevent foreclosures. The HOPE NOW Alliance
is an unprecedented broad-based collaboration among
homeownership counselors, lenders, investors, mortgage market
participants, and trade associations that is achieving real
results. From July 2007 through February 2008, nearly 1.2
million homeowners have avoided foreclosure through the efforts
of HOPE NOW members.
HOPE NOW has also brought more of the industry together in
this effort. And as of April 10th, the Alliance's 27 loan
servicers represent over 90 percent of the subprime market, a
vast majority of the prime market. We have strong participation
from respected nonprofits led by NeighborWorks America, the
Homeownership Preservation Foundation, and HUD counseling
intermediaries. HOPE NOW has a three-pronged approach to
preventing foreclosure, and it is reaching homeowners in need,
counseling homeowners in need, and assisting homeowners in
need.
Under reaching homeowners in need, a major challenge is
that borrowers in trouble are reluctant to ask for help; 50
percent of the borrowers who go into foreclosure never
contacted their servicers for help. We are working to
drastically reduce those numbers and help as many troubled
homeowners as possible to avoid foreclosure. HOPE NOW has an
aggressive monthly direct mail outreach campaign to at-risk
borrowers. This effort is in addition to the thousands of
letters already underway from individual companies to their
customers.
Since November, HOPE NOW has mailed out 1.2 million letters
in an attempt to reach the most at-risk borrowers. On average,
20 percent of those receiving the HOPE NOW letters do contact
their servicer, and there was zero contact before these
letters. In addition, the Homeownership Preservation Foundation
reports that in the first quarter of 2008, over 11 percent of
the people calling the hotline heard about it from a HOPE NOW
letter. HOPE NOW has launched homeownership preservation
workshops in a series of public outreach events across the
country to reach more at-risk borrowers and provide them with
an opportunity to meet in person with their loan servicer or a
HUD-certified counselor to develop a workout solution. We have
held three events in California, as well as forums in Ohio and
Pennsylvania, reaching over 1,400 borrowers in person. In
Philadelphia, HOPE NOW reached 328 homeowners at risk for
foreclosure.
Present were 14 mortgage servicers who participated and
local counseling organizations, such as the Philadelphia
Unemployment Project, the Urban League, Advocates for Financial
Independence, and ACORN Housing. We have had very positive
feedback from the homeowners who attended these events.
Homeowners have shared the following: ``It gave me hope that I
will survive; we received a reduction in our payment and were
not meant to be belittled or intimidated; without your help, we
would have lost our home; and I am too choked up to talk.''
This month, we are continuing the outreach in Atlantic,
Milwaukee, Indianapolis, and Chicago, and we are working with
Members of Congress and other officials from those areas to
promote those events and will continue to do so.
For counseling homeowners in need, HOPE NOW is actively
providing nonprofit counseling to homeowners through the
Homeownership Preservation Foundation's HOPE Hotline, which
connects the homeowners with 450 trained counselors at HUD-
certified nonprofit counseling agencies. Counseling is free,
and it is offered in English and Spanish 24 hours a day, 7 days
a week.
To date, the HOPE Hotline has received 632,000 calls, with
over 250,000 calls in the first quarter of 2008. We greatly
appreciate the Dear Colleague letter that Chairwoman Waters,
Ranking Member Capito, Chairman Frank, and Congressman Bachus
sent to the House Members to remind them of the HOPE Hotline
and the dedicated service or phone numbers for consumers.
Assisting homeowners in need--HOPE NOW members are
providing help to at-risk homeowners through loan modifications
and repayment plans and targeted efforts such as Project
Lifeline to freeze forecloses in a method for fast track
modifications based on the American securitization framework.
From July 2007 through February 2008, again, nearly 1.2
million homeowners avoided foreclosure through these efforts of
HOPE NOW members. Subprime workouts totaled 717,500 workouts,
including 485,000 repayment plans and 232 loan modifications.
HOPE NOW members do understand that workouts must be viable,
more than a short period of time, workouts including loan
modifications and repayments help borrowers avoid foreclosure
and stay in their homes and servicers are rapidly increasing
their efforts and were modifying subprime loans during the
fourth quarter at triple the rate of that of the third quarter.
The increase in the number of loan modifications shows that
this effort is real and it is seeking the best solutions for
borrowers. HOPE NOW is measuring and reporting on our results
and helping homeowners. We are continuing to gather data on
these results, and this is an enormous undertaking, but we are
confident that we will be able to systematically inform you and
that will help measure what servicers are doing to support
homeowners.
In conclusion, the members of HOPE NOW are committed to
producing results. Loan servicers joining HOPE NOW agree to a
statement of principles on reaching out and helping distressed
homeowners remain in their homes. My written statements
contains those principles which include contacting borrowers
early, and having a dedicated hotline, e-mail address and fax
number available to all HUD-approved counselors.
In February, we released a list of loan numbers on HOPE NOW
servicers that consumers can call to receive assistance. This
is a serious effort and it will continue until the problems in
the housing market and the mortgage market abate. It is neither
a silver bullet nor a magic solution, but HOPE NOW is helping
homeowners, and we will continue to report on that progress to
assist homeowners in distress and to prevent foreclosures
whenever possible. Thank you for inviting the HOPE NOW Alliance
to testify today and I am happy to answer any questions.
[The prepared statement of Ms. Schwartz can be found on
page 139 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Kittle.
STATEMENT OF DAVID G. KITTLE, CMB, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PRINCIPLE WHOLESALE LENDING, INCORPORATED,
AND CHAIRMAN-ELECT, MORTGAGE BANKERS ASSOCIATION (MBA)
Mr. Kittle. Good afternoon, Chairwoman Waters, Ranking
Member Capito, and members of the subcommittee. Thank you for
the opportunity to discuss the loss mitigation process. The
bill before us, H.R. 5679, seeks to specify and require certain
procedures to reduce the level of foreclosures. All of us are
focused on the same goal; keeping people in their homes. Such a
goal serves the interest not only of borrowers, but also of our
own members and the communities where they do business. That is
why MBA is a founding member of the HOPE NOW Alliance. And as
of the end of February, we have helped nearly 1.2 million
troubled borrowers establish affordable mortgage payments.
Mortgage servicers have done this through informal forbearance,
repayment plans, and loan modifications; all forms of loss
mitigation.
As we seek to do more to help ease this crisis, MBA is
eager to partner with Congress to finish work on FHA
modernization, GSE reform, housing tax incentives, and
expanding the use of tax advantaged mortgage revenue bonds to
include refinancing. When Congress completes work on these
important initiatives, it should avoid taking action that would
inadvertently increase interest rates or borrowing costs,
constrain the availability of legitimate offers of credit, or
that would encourage borrowers not to make mortgage payments.
While a considerable effort is being made by lenders,
borrowers, and public officials to avoid foreclosures, we all
recognize there will be cases where the goal cannot be
achieved.
Ultimately, the mortgage contract rests on two pillars:
First, the promise of the borrower to pay; and second, the
ability of the lender to rely as a last resort on the value of
the house the borrower has pledged as security for the loan. It
is the pledging of the house as security that makes mortgage
credit considerably less expensive than unsecured consumer
debt. The rate of interest on mortgage loans is significantly
lower than the rate on unsecured consumer loans. If borrowers
are deprived by legislation of the ability to reliably pledge
their homes as security for mortgage loans, it is probable that
rates they pay for mortgage credit will approach the rates paid
for unsecured credit. In evaluating the legislation, we believe
that Congress should ensure it enhances borrowers' chances to
remain in their homes; does not deprive investors of the value
of their investments; and preserves for all consumers the
benefits of reasonably priced mortgage credit by maintaining
the essential elements of the mortgage contract.
Our review of H.R. 5679 revealed that there are a number of
elements of the bill that fail one or more of these criteria.
First, the bill would authorize borrowers' counsel to use
qualified written requests to block foreclosure indefinitely.
Second, the bill's overly prescriptive loss mitigation
provisions could increase the cost of mortgage credit for
future borrowers. Third, mandating debt-to-income ratios on
first loans would require holders of first liens to subordinate
their economic interest to the interest of junior lien holders
and unsecured creditors, which may be the source of the
borrower's inability to stay current on the mortgage payments
in the first place. Fourth, prescribed and detailed mitigation
procedures would deprive lenders of the flexibility required to
negotiate effectively with borrowers to achieve a manageable
debt payment schedule. And finally, the bill would impose
expensive and time consuming paperwork requirements on lenders
without any corresponding benefit to the borrower.
Though we are committed to working with you to improve H.R.
5679, the harmful provisions in this bill currently outweigh
its potential benefits. Thank you for the opportunity to appear
before you, and I look forward to your questions.
[The prepared statement of Mr. Kittle can be found on page
124 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Tom Deutsch.
STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE DIRECTOR, AMERICAN
SECURITIZATION FORUM (ASF)
Mr. Deutsch. Thank you, Madam Chairwoman, Ranking Member
Capito, and distinguished members of the subcommittee. My name
is Tom Deutsch, and I am the deputy executive director of the
American Securitization Forum. I very much appreciate the
opportunity to testify before this subcommittee again on behalf
of the 370 member institutions of the ASF and the 650 member
institutions of the SIFMA. These members include all of the
major lenders, servicers, underwriters, and institutional
investors and all forms of mortgage and asset-backed
securitization throughout the country.
Since I last testified before this subcommittee on November
30, 2007, in Los Angeles, California, a significant amount of
progress has been made by the industry to help struggling
homeowners stay in their homes. One very significant initiative
was launched on December 6, 2007, less than a week after your
hearing, Madam Chairwoman. On that day, the ASF announced, and
President Bush and Secretary Paulson supported and endorsed,
the ASF streamlined loan modification framework for industry
servicers to fast track subprime ARM borrowers into interest
rate loan modifications in certain circumstances. The ASF
framework uses objective criteria to determine the continued
affordability of subprime loans based on such factors as the
borrower's payment history, credit standing, owner occupancy,
and amount of home equity. The primary purpose of the ASF
framework was to address the rising tide of subprime ARM
borrowers who may not have been able to meet their higher
payments at their initial reset.
Most subprime 2/28s and 3/27 borrowers pay a fixed
introductory rate for say 2 or 3 years and then adjust to a
floating rate, based on 6-month LIBOR thereafter. Importantly,
since the ASF framework was announced, 6-month LIBOR has
dropped precipitously from 5 percent on December 6, 2007, to
2.6 percent as of today, April 16, 2008. What has really
changed then for subprime ARM borrowers since December 6th is
that every single resetting subprime ARM borrower in America
has experienced the equivalent of a 2.5 percent loan
modification through the normal contractual functioning of
their mortgage note.
As a result, the average subprime ARM borrower has had
little or no rate increase at their reset. Falling rates, then,
have obviated the need to make systematic contractual rate
modifications for these subprime ARM borrowers which largely
explains why an even more significant increase in industry
contractual rate modification activity hasn't been observed
over the past few months. But let me turn, Madam Chairwoman, to
some of our views and perspectives on your proposed bill, H.R.
5679.
We fully agree that all servicers should engage in
reasonable loss mitigation activities, which is described
above. Servicers are already contractually obligated to engage
in these activities for the benefit of security holders. But
the new Federal duty that the bill would propose is
unreasonably compelling, all servicers nationwide to rewrite
existing mortgage and pooling and servicing agreed contracts
solely to benefit borrowers in default rather than to act in
the best interest of security holders as the mortgage and PSA
contract specify. By analogy, it would suggest that all forms
of repayment on consumer credit should be measured not by what
the borrower has agreed to pay, but instead ultimately, by what
the borrower can pay at any time during the life of the loan.
This bill then, we believe, disregards the original loan terms
to which the borrower agreed as well as the servicer's
obligations under the pooling and servicing agreements to
institutional investors.
Now as a general matter, we have very strong concerns with
any legislation that would retroactively abrogate or interfere
with previously established private contractual obligations. We
believe the bill would do just that, and that it would
fundamentally alter the contractual obligations of pooling and
servicing agreements to require servicers to be the agent of
the borrower, rather than the MBS institutional investors or
loan portfolio manager.
Changing the standard would alter the commercial
expectations of investors and would seriously undermine the
confidence of investors and the sanctity of contracts, which
are the bedrock to extension of consumer credit in the process
of securitization. Any legislative intervention into otherwise
valid legal contracts threatens the stability and predictable
operation of contractual legal framework supporting our capital
markets system.
While we fully support and encourage servicers to meet
their contractual obligations to engage in reasonable loss
mitigation, we have very significant concerns about this bill
from the very premise that it starts from, that is, that
mortgage contracts should be modified to serve solely the
borrower's interests rather than the interests of the original
contractual obligations that the borrower has agreed to
fulfill.
A shared goal of participants in the mortgage financing
markets is to keep people in their homes. Unfortunately, there
is no comprehensive solution that will fix all the current
problems in the mortgage market today and the current home
price correction. Market participants have and continue to
collaborate and work towards developing coordinated solutions
to the current issues in the mortgage financing market.
Recognize it is essential to balance the interests of borrowers
and investors while preserving the significant benefit of the
continued availability of mortgage and consumer credit. I thank
you very much for the opportunity to testify here on behalf of
our members, and we look forward to working with you, Madam
Chairwoman, and this committee to develop even more solutions.
[The prepared statement of Mr. Deutsch can be found on page
101 of the appendix.]
Chairwoman Waters. Thank you.
Mr. Steve Bailey.
STATEMENT OF STEVE BAILEY, CHIEF EXECUTIVE FOR LOAN
ADMINISTRATION, COUNTRYWIDE FINANCIAL
Mr. Bailey. Good morning, Madam Chairwoman, Ranking Member
Capito, and subcommittee members. Thank you for the opportunity
to appear here today to discuss the efforts of servicers like
Countrywide to help families prevent avoidable foreclosures.
Countrywide has long been a leader in providing home retention
solutions to our borrowers.
Today's market conditions have created unprecedented
challenges for servicers and mortgage investors, in developing
new approaches to mitigating losses for security holders while
keeping as many borrowers in their homes as possible. We know
that foreclosures are financially and emotionally damaging to
our customers and very costly to us and the security holders.
Because of the high financial costs of foreclosures, we cannot
emphasize enough that as a matter of basic mortgage servicing
economics, foreclosure is always and absolutely the last
resort. The home retention personnel who report to me at
Countrywide fully comprehend the human implications of
foreclosure.
They are committed to doing all they can to help keep
families in their homes whenever possible. We don't have a loss
mitigation division. We have a home retention division. We
don't have a workout department. We have a hope department.
There is a campaign in our home retention division called the
Life Behind the Loan that focuses on connecting and humanizing
conversations and circumstances, such as learning the names of
the children. I know from personal experience that it is
euphoric to tell a customer that you have a plan for them to
save their home. It is equally heartbreaking to tell a borrower
that they may lose their home. Last November, we testified
before the House Financial Services Committee and before a
housing subcommittee field hearing. At that time, they had just
announced a number of new ground-breaking home retention
programs. Today, I want to update you on the impact of those
initiatives and what effect they have had on our efforts to
keep families in their homes.
During the last 6 months, we have completed more than
91,000 home retention workouts, saving an average of more than
15,000 homes each month from foreclosure. That compares to an
average of 6,700 home retention workouts during the first 9
months of 2007. In short, the pace of activity in the past 6
months is more than twice the pace of the first 3/4 of 2007.
Just last month, we completed 16,500 home retention plans, a
nearly 150 percent increase compared to March a year ago.
Moreover, that increase was driven by an almost 600 percent
jump in loan modification plans from 1,800 in March of 2007 to
almost 13,000 last month.
Clearly, the efforts of our home retention team are paying
off. Let me explain. Through October of last year, the average
number of completed foreclosures each month had been steadily
increasing over an extended period. However, since October,
when we announced our new programs, the number of completed
foreclosures has actually leveled off and has slightly
declined. While it is too soon to tell if this 5-month period
will become a long-term trend, we will continue to do all we
can to help every borrower we can. We directly associate the
dramatic increases in workouts with the leveling and declining
of the foreclosure completions in our portfolio.
In addition to sharply increasing the pace of workout
completions, we have also become more aggressive in the types
of workout plans completed. During the last 6 months, loan
modifications have become the predominant form of workout
assistance at Countrywide, accounting for nearly 70 percent of
all home retention workouts, while repayment plans accounted
for less than 20 percent. While previously rare, rate relief
modifications now account for almost 43 percent of all loan
modifications. The majority of these rate relief modifications
have a duration of at least 5 years. They are targeted to
borrowers experiencing payment difficulties caused by
disruption of income or other financial stress as well as a
result of rate resets.
We have also continued to expand our outreach initiatives
and partnerships in order to ensure that every customer who
needs help is reached. In addition to our NACA partnership,
which we discussed with the committee last fall, we have
strengthened our relations with NeighborWorks America, the Home
Ownership Preservation Foundation, and the National Foundation
for Credit Counseling. And in February 2008, Countrywide signed
a national counseling partnership and best practices agreement
with ACORN. Countrywide remains committed to helping our
borrowers avoid foreclosure whenever they have a reasonable
source of income and a desire to remain in the property.
Foreclosure is always a last resort for Countrywide and the
investors in the mortgage securities we service. I am happy to
respond to your questions at the appropriate time.
[The prepared statement of Mr. Bailey can be found on page
77 of the appendix.]
Chairwoman Waters. Thank you very much.
I thank you, Ms. Capito, for allowing Mr. Cleaver to ask
his questions first. He has to leave for another meeting. Mr.
Cleaver.
Mr. Cleaver. Let me thank you, Madam Chairwoman, and the
ranking member. I have another committee hearing. I apologize.
Mr. Deutsch, this is a general question. What is
objectionable about the Chair's legislation? And say it in as
few words as possible.
Mr. Deutsch. Sure. I think the bill has been characterized
as servicers being required to engage in reasonable loan
modification activity. I think we share that goal. There is no
question about that.
Mr. Cleaver. Okay. I have another committee hearing. Just
tell me--
Mr. Deutsch. Sure. But what the bill does is define what is
reasonable loan modification activity and then it goes into
great specificity.
Mr. Cleaver. Who should define that?
Mr. Deutsch. I think what is defined currently under the
contractual arrangements is that either the holders of those
mortgage notes, whether that is in a loan portfolio or whether
that is in a securitization trust, is those servicers are
acting on behalf of the holders of those mortgage notes.
Mr. Cleaver. So you are saying, leave it like it is.
Mr. Deutsch. Correct.
Mr. Cleaver. In spite of the fact that we have 20,000
foreclosures a week.
Mr. Deutsch. I believe there is a lot of--
Mr. Cleaver. And we are having a negative impact on the
world economy. And we are just going to continue the way things
are going?
Mr. Deutsch. I believe there are a lot of solutions out
there, and I believe the industry is working very hard on a
number of different solutions. But this solution will restrict
significantly the availability of credit on an ongoing forward
basis.
Mr. Cleaver. Just give me one of your solutions.
Mr. Deutsch. Well, I think the first one, as I mentioned in
my testimony--
Mr. Cleaver. That is the Chair's solution. That was the
Chair's solution that you were getting ready to mention.
Mr. Deutsch. No. I was going to mention the solution that
the ASF put out on December 6th, that would address any
adjustable rate mortgages and any higher interest rate resets
that those would address to be able to fast track or streamline
those into loan modifications. Other areas that I might suggest
would be FHA modernization, for Congress to complete the
modernization of that Act. I would also suggest mortgage
revenue bonds, that those be allowed to push through to allow
more borrowers to be able to access affordable credit for
refinancing.
Mr. Cleaver. Okay. Some people suggest that we may end up
with as many as 8 million foreclosures. What about those 8
million people?
Mr. Deutsch. Well, I think that is a very high estimate on
the number of foreclosures.
Mr. Cleaver. Okay, let's say there are 200. That means
there are 200 human beings, families who no longer possess a
home--200 humans.
Mr. Deutsch. Right.
Mr. Cleaver. I would say we are actively pursuing as many--
to prevent as many foreclosures as possible. But I would be
remiss if I didn't say that not every foreclosure is
preventable.
Mr. Cleaver. You said--I am sorry?
Mr. Deutsch. I would be remiss in saying I didn't believe
every foreclosure was preventible.
Mr. Cleaver. Okay. I think everyone--well, I agree that
they are not. Some people bought homes who shouldn't. But I
don't know if you were here earlier when I talked about the
fact that we are forced to deal with things the way they are.
Mr. Deutsch. Correct.
Mr. Cleaver. And the way things are, we have millions of
people who are going to lose their homes. Don't you agree?
Mr. Deutsch. I think there will be a significant number, as
there historically has been a significant number of people who
go through the foreclosure process.
Mr. Cleaver. And what do we do about those people?
Mr. Deutsch. I think we continue working--to work with
every one of those borrowers to be able to try to find a home--
a sustainable solution for those homeowners to stay in their
homes. But again, as we--
Mr. Cleaver. Okay. Because time is running out, what do we
do? If you are suggesting to me that I shouldn't support the
Chair's bill, what should I do?
Mr. Deutsch. Right, well I just walked through a--
Mr. Cleaver. I know you did. And I am asking you about the
people whose homes are being foreclosed even as we speak. What
do we do about them?
Mr. Deutsch. I think if a number of those initiatives were
passed through the Congress, that many of those borrowers would
be helped.
Mr. Cleaver. If this bill is approved?
Mr. Deutsch. If many of the other things that I discussed
were to pass, many of those borrowers would receive assistance.
Mr. Cleaver. Have you made any attempt to work with the
Chair and her staff about your recommendations?
Mr. Deutsch. Absolutely. I think there has been a lot of
activity by the industry to work with the House Financial
Services Committee generally on a number of these--on all of
these issues.
Mr. Cleaver. Yes. I have to go. You know, the frustration
for me is that there does appear to be an absence of
intentionality about dealing with people who are hurting. I
mean, it seems as though many in your industry are interested
in nothing that would regulate anything or anybody, which means
that it can happen again. And it troubles me that we don't seem
to have the anxiousness to help people who are losing their
homes every day. I mean, we did not receive much outrage from
the financial services industry when Bear Stearns was bailed
out. The objection comes when we begin to deal with human
beings, those human beings who live down the street from me on
Gregory Boulevard in Kansas City. What about them? What do I
tell them in my neighborhood meetings?
Mr. Deutsch. Well, Mr. Cleaver, my folks live in Kansas
City, and I would be very concerned about any foreclosures in
my folks' neighborhood in Kansas City. I believe it is very
important that any and all foreclosures be addressed by
servicers in the best way they can and to do--to engage in a
reasonable loss mitigation. But I don't believe that those
should be created and new standards and Federal duties of care
should be created after the fact that would allow borrowers to
potentially stay in their homes when they can't simply afford
at any payment to stay in those homes.
Mr. Cleaver. I am sorry. I have to go. Thank you.
Chairwoman Waters. Mrs. Capito.
Mrs. Capito. Thank you, Madam Chairwoman. I thank the
panel. I have a couple of questions. First, Mr. Bailey, in the
panel before this one, there was quite a bit of conversation
about servicers. And Countrywide is a major servicer of
mortgages, yours and others, correct?
Mr. Bailey. That is correct.
Mrs. Capito. The chairwoman made a statement or question
that possibly servicers could make a profit from a foreclosure
or profit by people going under. Could you respond to that
statement and clarify that? Or your opinion on it?
Mr. Bailey. Sure. I will make two points. The first one, I
think Mr. Allnut touched on pretty clearly. The way that
servicers make money, it starts with borrowers making payments.
So if you don't have a borrower who makes a payment, you don't
obtain any service fee. And as they went through, you don't
obtain any income that continues through any sustainable time.
If you just look at the general finances of foreclosure,
whether it is your own loan and portfolio or one that you are
servicing for another, just the raw numbers, the credit loss
that will be suffered through a foreclosure that is avoidable
dramatically outweighs any kind of income that might come
through a foreclosure, revenue of any kind. But in general, the
fees and the compensation to a servicer and when payments are
not flowing from a customer. So there is no general incentive
to do that.
Mrs. Capito. Thank you. So it would be an accurate
statement to say that that if a person is delinquent or if a
loan is going bad or a mortgage is going bad, that is really
not to anybody's advantage, certainly not to families and the
individuals that we are all trying to keep in their homes. But
you don't see that as a profit-making venture?
Mr. Bailey. Well, again first, it leads to a credit loss
for someone, either if you hold it in your portfolio or whoever
you are servicing for. That credit loss will be significant.
Any short-term thinking that there would be some kind of desire
or incentive to pursue a foreclosure when a workout was
available, there isn't any income from that. So you don't get
any payments, you don't get any reimbursement. But you do build
costs and those costs then are not reimbursed. You also are
advancing payments to the investor generally. If you make
significant errors in loss mitigation, you risk having your
servicing pulled, your risk not being reimbursed for your
advances. You risk punitive damages, depending on what the
contract says. There is no incentive to stop the stream of
income.
Mrs. Capito. Okay. Thank you. Ms. Schwartz, quickly, on
wonderful statistics on what you are all doing with the HOPE
NOW Alliance, I have referred a lot of people and try to talk
about it publicly quite a bit. When you are working on a
workout or trying to help somebody, how do you get to the point
that, this is a person who has lost a job or is having a tough
time or they are in an adjustable mortgage and they can no
longer make the payments, how can you differentiate that person
from the person who maybe bought a house knowing that they
weren't ever going to be able to fulfill their commitment, but
were relying on the real estate going up, or this was their
second home, or they got a higher appraisal, took the money,
and bought a boat.
Well, these are the kind of people that I think taxpayers
don't want to see--well, there are two different types of folks
there. How do you differentiate that?
Ms. Schwartz. Well, first of all, the HOPE NOW Alliance is
just an aggregation of all these servicers and the contracts
are with the servicers and the borrowers. And between them one
by one.
Mrs. Capito. How would you help them differentiate?
Ms. Schwartz. Typically, and why we are tracking repayment
plans and modifications is that repayment plans might be for a
temporary or short-term disruption, whether it is 3 months, 1
year, something has happened or changed in the borrower's
circumstance versus when a modification occurs, it could be at
a higher rate. They can't afford the higher rate, and it is
clear. That is an affordability issue. That is more than a
short-term disruption. And you may see some appropriate
modifications happening in those circumstances. So the
workouts, as Tom Deutsch spoke to, are on behalf of investors.
And everyone's interests are quite aligned right now in that
the best thing to do is work through avoiding foreclosure and
keeping people in their homes. And we are outpacing
foreclosures through these workouts, whether they are repayment
plans or modifications. And it is loan level and I don't speak
for all the servicers, and that is very individual with the
contracts.
Mrs. Capito. Right. Okay. Thank you. And Mr. Kittle, next
week, the committee will be considering legislation that
provides a mechanism for lenders to write down problem loans
and refinance and do a FHA loan. Are you familiar with that
proposal? And could you make a comment on that?
Mr. Kittle. Excuse me. FHA Secure, FHA modernization?
Mrs. Capito. Yes.
Mr. Kittle. We think it is an excellent program. We
actually have--to go just slightly on a tangent--we have over
200 individual members in Washington, D.C., today and tomorrow
who will be on Capitol Hill promoting Chairwoman Waters' FHA
modernization bill. So we have something here that we can agree
on, something that we can support. And we think FHA
modernization, GSE reform, FHA Secure, all of those programs
will go a long way toward helping us. But it will help long
term, not provide a quick short fix.
Mrs. Capito. All right. Thank you.
Chairwoman Waters. Thank you very much. Let me just take a
few minutes here to raise some questions.
I think it was Mr. Kittle who just said--are you supporting
the Barney Frank draft bill that would do a couple of things,
it would support FHA being able to refinance when there has
been a write-down on a mortgage? I think it is about 85 percent
and it would also appropriate maybe up to $15 billion that
would go to cities and maybe counties and States in order to
assist in purchasing foreclosed properties, rehabbing them and
putting them back on the market. Have you taken a look at that?
Mr. Kittle. Yes, ma'am. And we are still considering that.
We have not come out with a position on it but we worked very
closely with Congressman Frank over the years and have a great
relationship with him.
Chairwoman Waters. So you are not supporting the bill as of
now?
Mr. Kittle. We have not come to an opinion either pro or
con for it.
Chairwoman Waters. Ms. Schwartz.
Ms. Schwartz. Yes.
Chairwoman Waters. Did I hear you in your testimony say you
sent out 1.2 million notices or alerts of some kind?
Ms. Schwartz. The servicers agreed under HOPE NOW
letterhead to send out to at-risk borrowers whom they have not
been able to contact, 60 days or later in delinquency, the no-
contact borrowers, and we sent in 4 months 1.2 million letters
to those borrowers at risk of foreclosure, yes.
Chairwoman Waters. And that is the same number of borrowers
that you have been able to help, 1.2 million?
Ms. Schwartz. Yes. In aggregate. And what we are measuring
that is from July through February, just to get a snapshot of
where the market was and where it is today and what is moving
through the loss mitigation. So those are additional at-risk
borrowers who could be going into foreclosure.
Chairwoman Waters. Let me see if I understand how you work.
We have an alliance of the financial services industry, which
includes some nonprofits, banks, securitizers, everybody. And
do you think you are doing an adequate job without any
government support or intervention?
Ms. Schwartz. I think for an industry alliance that has
come together--
Chairwoman Waters. No, no, no. Do you?
Ms. Schwartz. Yes. I think we are doing adequately. Can we
do better? Sure, we can.
Chairwoman Waters. You don't think the government needs to
do more? Like Mr. Frank's bill that would get these properties
rehabbed and back on the market, helping to stabilize the
market with the support of government, you don't think you need
that?
Ms. Schwartz. You know what, I actually don't comment on
any of the legislation because I represent a very broad variety
of people. And what I do, my job is to keep HOPE NOW focused on
what we can do today with today's laws.
Chairwoman Waters. Well, every day--I don't know what the
numbers are. I wish someone would tell me. Every day we are
getting information about increased numbers of foreclosures. It
seems there is no end in sight. And you think you are handling
that well enough and the American people should be appreciative
and understanding of that because you are doing a great job?
Ms. Schwartz. Actually, in our testimony, I was quite clear
that this is not a silver bullet. This is about people coming
together and seeing what we can do to do better and to raise
standards and bring more focus on the contacting borrowers who
are not calling the servicers, working with housing counselors
who will help--
Chairwoman Waters. Where do you get your numbers from about
how many people you have served? Some of the organizations that
you have worked with, you have asked them, some of the
nonprofits, others you have asked them, how many, what did you
do? How do you compile that?
Ms. Schwartz. The actual loss mitigation data is from the
HOPE NOW servicers, which comprises the majority of the
mortgage market. This is the most comprehensive set of mortgage
industry data in loss mitigation that is available. And it is a
voluntary alliance and I see it in aggregate. It is released
monthly, and we will have State and national data. I am happy
to walk through that any time with you.
Chairwoman Waters. Well, I am not so sure I want to do that
because it is not audited information. I mean, I have asked
some of our regulators: How do you know what HOPE NOW is doing?
How do you document that? How do you audit that? Nobody is able
to tell me how it is done. And I am getting some disjointed
information about how you collect the information. First of
all, you are telling me that you basically get it from the
servicers--
Ms. Schwartz. Yes.
Chairwoman Waters. --who tell you what they are doing, and
from others?
Ms. Schwartz. From their servicing system.
Chairwoman Waters. A combination of the counseling and the
modifications that have been done by some of the nonprofits and
the workouts and modifications that are being done by the
servicers.
Ms. Schwartz. Right.
Chairwoman Waters. This is where you are compiling this
information.
Ms. Schwartz. That is right.
Chairwoman Waters. All right. Let me go over something. You
state that 5,607 of 80,652 subprime ARMs rescheduled to reset
in January or February are not paid in full through refinancing
or sale received loan modifications, and 60 percent or 3,334 of
them received modifications for 5 years or longer. And I guess
I have two questions. First, do you think that a rate of long-
term--of long-term loan modifications of subprime ARMs of 4
percent, 3,334 out of 80,652 is sufficient to stem the tide of
foreclosures?
Ms. Schwartz. Well, those numbers, Chairwoman Waters, are
because the rate environment has decreased, and that was based
on the streamlined modifications that Tom Deutsch has testified
to. We can do more, and we want to do more. But we are trying
to report every month no matter what the data says. So whether
we will be disappointed or not disappointed, we are going to
report the actual data. So we inform the public and inform
Congress and everyone what is going on in the market. I think
that is additive. I think 5,000 borrowers who get a
modification is better than no borrowers getting one under
those circumstances. And more importantly, we showed in January
and February that modifications and repayment plans exceeded
300,000 loans for prime and nonprime borrowers.
Chairwoman Waters. Let me stick with the ARMs that I am
talking about. What evidence do you have that the remaining
77,318 resetting ARMs, which presumably are subject to
repayment plans, some other loss mitigation offer, or nothing
at all, are affordable for the short and long term for the
borrowers?
Ms. Schwartz. Well, all of the repayment plans or the
modifications are presumed to be affordable because it is
between the borrower and the servicer and they are reworking
loans so that they are sustainable. It is in no one's interest
to have a redefaulting modified loan or a short-term repayment
plan for servicers. It is a high cost to keep going back time
and time again, and they will go back if it redefaults to look
at another solution. But it is in no one's interest to the
first time have no one get it right.
Chairwoman Waters. Let me go to Countrywide and ask you,
you heard a description from Freddie Mac about its servicing
arrangements that they have with you. And they talked about the
tiered system. Are you familiar with that?
Mr. Bailey. Yes.
Chairwoman Waters. And how many tiers are there in the
contract?
Mr. Bailey. There are four possible tier rankings.
Chairwoman Waters. Describe those tier arrangements for us.
Mr. Bailey. Well, they are generally set off of points that
you receive for different levels of effectiveness within a
range of different servicing functions. So you receive points
for or points against, based on your performance in those
different categories. And then depending on how many points you
receive, it stacks up to which tier you would achieve.
Chairwoman Waters. Okay. What do you receive points for?
Mr. Bailey. Things like doing effective workouts, staying
effective in the foreclosure process, reporting, things of that
nature.
Chairwoman Waters. What you have is a tiered system. And I
can't tell from talking with you right now what the incentives
or disincentives really are. But you get some points. And if
you are high up in the system, the tiered system, you get
points. You get a certain number of points. But if you are low
in the system and you are not getting the points, let's say,
that means you are not doing a good job, whatever a good job
is, but the people whom you service don't know whether or not
you are good, bad, or indifferent. But those people just get
bad services. Those people don't get fired, they don't get the
contract separated. You just go and work with them and try and
make them better. Is that what you do?
Mr. Bailey. What Freddie Mac would do with us or any
servicer, first the incentive reimbursement that you would get,
for example, for doing workouts, if you were the top tier, you
would get the full reimbursement--
Chairwoman Waters. Are you getting paid because you have
stopped the foreclosure?
Mr. Bailey. Yes. Essentially if you do effective servicing,
Freddie Mac, you are entitled to those incentives.
Chairwoman Waters. No. No. That is not my question. My
question is, are you getting paid because you have stopped a
foreclosure? Or are you getting paid because the criteria that
is evaluated shows that you did a good job, whether you stopped
the foreclosure or not?
Mr. Bailey. No. One of the key measurements in stopping
foreclosures is performing loan workouts compared to the
foreclosures that proceed.
Chairwoman Waters. Are these tiers spelled out in the
contract?
Mr. Bailey. Yes. They are clear.
Chairwoman Waters. Okay. I would like to request from you
copies of the contracts that you do with Freddie and Fannie.
Mr. Bailey. Sure.
Chairwoman Waters. And they should be one and the same. I
think I have one more question that I would like to--well, I
won't raise a question at this time. We have other members who
need to ask questions. Mr. Green.
Mr. Green. Thank you, Madam Chairwoman. Let me go quickly
to Mr. Deutsch. Am I pronouncing that correctly, sir?
Mr. Deutsch. Correct.
Mr. Green. It is good to see you again. We were together in
California. You talked about the 3/27s and 2/28s, and you
mentioned LIBOR and how under the current conditions with LIBOR
having declined to the extent that it has, this means that when
the ARMs adjust, people will be paying something lower than
they actually are paying currently. And you seem to indicate
that this will act as a means by which the mitigation that we
are looking for will take place and hence, things are getting
better and there is no need to do more.
My concern with your perception is this--the 3/27s and 2/
28s don't end right away. We are talking about 27 additional
years of adjustable rates or 28 additional years of adjustable
rates. And as a result, if we don't do something now when these
loans can adjust and have them refinanced into a fixed rate,
all we do is say, you are really doing well now, but 2 years
from now, you could very well be paying twice the rate that you
are paying currently. Do you agree?
Mr. Deutsch. I agree. And that is why I would say that
right now, the American Securitization Forum is working
feverishly to put together a proposal where our framework would
be extended to where not only would existing rates but if LIBOR
rates were to rise again on subsequent rates--
Mr. Green. Well, I am glad you said that because you left
the impression with me and I suspect many others that because
of the current conditions, the 3/27s and 2/28s were going to be
okay. They are really not okay. And we agree that they are not
okay. There is still a problem there. All right. You and I are
familiar with the term tranche warfare, aren't we?
Mr. Deutsch. Correct.
Mr. Green. And you and I agree that in tranche warfare, we
have some people who have positions that are superior to
others.
Mr. Deutsch. Correct.
Mr. Green. And those people who have positions that are
superior to others, there are some who literally don't take the
same--to use some highly technical terminology, the same hit
that others will take if foreclosure takes place.
Mr. Deutsch. Correct.
Mr. Green. And when this occurs, then you have the tranche
warfare which means you have people in different tranches who
are at odds with each other.
Mr. Deutsch. Correct.
Mr. Green. And some will say, I am really not eager to see
you do anything to adjust the loan such that it impacts my
position because I paid more money to have a superior position.
And if it goes to foreclosure, I really don't want to see that
happen. I love everybody. But I have already taken care of that
by locating myself in a superior tranche. True?
Mr. Deutsch. Is that a question?
Mr. Green. Yes. Isn't that true? Because you are in a
superior tranche, you may not be--you can withstand foreclosure
to a greater extent than a person in an inferior tranche.
Mr. Deutsch. I think the general characterization is
accurate. I would say there are two things that are different
from that characterization, though. I think one is that a
servicer who is acting on behalf of all of the security holders
is making that decision, and they are doing that in the best
interest of all the security holders. I think secondly, most of
the loss triggers have been breached at this point. So it is
irrelevant as to whether you would foreclose or not. The people
in the lower tranches effectively will have nothing.
Mr. Green. Exactly. But the people in the superior tranches
still have a vested interest.
Mr. Deutsch. I would disagree.
Mr. Green. You are saying people in the superior tranches
don't have a vested interest?
Mr. Deutsch. I would say the lower-rate tranches--
Mr. Green. Vested interest is the operative phrase.
Mr. Deutsch. The lowered rate of tranches at this point has
been extinguished. So there is no tranche warfare between
somebody whose interest has been extinguished--
Mr. Green. You are saying that there is no tranche warfare
because you don't have two--
Mr. Deutsch. You don't have two people fighting. You have
one person left.
Mr. Green. I agree. Let me go on quickly. And in that
sense, yes. But in the sense that the person who still remains
has an interest. Do you agree with that?
Mr. Deutsch. The person who remains has a very strong
interest at avoiding foreclosure.
Mr. Green. Strong interest at avoiding foreclosure. But if
that foreclosure takes place, that person still has some
benefit from the foreclosure, some benefit not 100 percent of
what the person may have had invested.
Mr. Deutsch. They will still receive some proceeds but they
are a lot lower proceeds than the loan would perform.
Mr. Green. Okay. Let me go quickly now to another point.
With reference to ex post facto regulation, Mr.--is it Bailey?
Mr. Bailey. Yes.
Mr. Green. Mr. Bailey, you oppose ex post facto regulation,
right? Ex post facto, meaning after the fact regulation.
Mr. Bailey. Yes.
Mr. Green. Okay. Just for edification purposes, would you
oppose--you opposed it because you don't want to infringe on
contracts that are already made, right?
Mr. Bailey. It would make it difficult to enforce.
Mr. Green. Well, just for edification purposes, what about
regulation that is not ex post facto? Do you oppose that as
well?
Mr. Bailey. I don't mean to run on. I will say no, I don't.
But I would back up. Regulation--
Mr. Green. I only have a little bit of time. Ex post facto,
you oppose. But if it is not ex post facto, you may be able to
live with some kind of regulation if it is not ex post facto.
Mr. Bailey. Yes, absolutely.
Mr. Green. Mr. Deutsch, you would be able to live with some
kind of regulation that is not ex post facto?
Mr. Deutsch. I would agree if, on a going forward basis,
you look at something and it makes sense.
Mr. Green. Madam Chairwoman, may I ask one more question?
Chairwoman Waters. Quickly.
Mr. Green. To Countrywide, quickly, I want to ask you, in
your servicing portfolio, what percentage of it emanates from
GSEs?
Mr. Bailey. If I combine GSEs, FHA, VA, and prime--
Mr. Green. I want GSE segregated along with the FHA and put
them in one lump in the VA and then the others.
Mr. Bailey. Okay. Well, are you trying to get after what is
subprime?
Mr. Green. Yes.
Mr. Bailey. Okay. Subprime makes up about 8 percent of our
portfolio.
Mr. Green. 8 percent. That 8 percent is not performing as
well as the FHA and those that are through the GSEs, is that
correct?
Mr. Bailey. Correct.
Mr. Green. Okay. And sometimes when we talk about these
things, we tend to confuse these with our questions and our
answers, which causes us to have a convoluted opinion as to
what is really happening in your portfolio. True?
Mr. Bailey. True.
Mr. Green. Okay. Thank you.
Chairwoman Waters. Thank you very much.
Mr. Green. I yield back.
Chairwoman Waters. Mr. Ellison.
Mr. Ellison. We are under a time constraint, so I am just
going to go quickly.
Ms. Schwartz, a few questions about HOPE NOW. HOPE NOW data
reveals that about 1.8 million loans were delinquent by about
60 days or more during the first 2 months of 2008, and about
346,000 went into foreclosure. However, only about 114,000
received modifications. That means that more than 3 times as
many borrowers entered foreclosure as received loan
modifications. Further, HOPE NOW projects that more than 2
million loans are estimated to enter foreclosure in 2008, up 37
percent from 2007. Does this not suggest to you that the
Administration's programs designed to address this crisis are
just dwarfed by the sheer magnitude of it?
Ms. Schwartz. We are clearly in a crisis, and there is a
magnitude of housing issues to address. I would like to clarify
two things. I think you are confusing foreclosure starts with
actual foreclosures. Less than 50 percent of loans that go to
foreclosure starts go into foreclosure and foreclosure sale, so
actual workouts exceed foreclosures monthly. And certainly,
year-to-date, that is the case.
While the Administration, Secretary Paulson, and the
Secretary of HUD strongly urged the industry to get together, I
would like to comment that this is--there is no money from the
government in this. This is everyone coming together. We do
have industry trade groups coming together. We have disparate
interests who seemingly didn't always talk, talking together.
We have workshops with nonprofit counselors.
Mr. Ellison. On that score, can you share data or provide
data on who is paying for the services provided by HOPE NOW? Is
that published data?
Ms. Schwartz. No. The only collections for HOPE NOW is from
the servicers, and it is a very lean overhead. There are only
three of us on payroll. This is all a voluntary effort.
Mr. Ellison. I know that. So who are the three servicers?
Ms. Schwartz. No. All servicers pay a nominal fee really to
make sure that we have someone who is helping coordinate the
effort. All of the committee work, all of the heavy-duty
resources comes from the industry, across the industry to chair
the committees, et cetera, to keep us moving in the same
direction. It is not a--
Mr. Ellison. I guess my question is that, so--
Ms. Schwartz. I would like to add, servicers also do pay
for counseling sessions, and we are working with the investor
market to also invent a new model to pay for servicing in the
market in addition to the government funding that is coming.
Mr. Ellison. I am just asking, do you have a list of which
servicers and how much they contribute?
Ms. Schwartz. I have a list of servicers, and the--
Mr. Ellison. That is fine. Could you share that with us?
Ms. Schwartz. 27 servicers.
Mr. Ellison. We will get together and get that then.
Ms. Schwartz. Okay.
Mr. Ellison. And then my last question before we have to
run is, in your recent press release, you indicated that 1.2
million loan workouts have been completed by HOPE NOW servicers
since July 2007.
Ms. Schwartz. Right.
Mr. Ellison. How many of these workouts were permanent loan
modifications?
Ms. Schwartz. You know, I don't have that data. But of a
recent survey on the 2/28, 3/27 ARMs from February backwards,
we requested that servicers tell us how many of those were 5
years or greater, and we did get over 60 percent in that
number. But just a point to make on that, whether it is 2
years, 3 years, or 5 years, if that has taken a pause in
foreclosure, has adjusted somewhere someone has been in
foreclosure and now is in a modification, a servicer can go
back and will go back if circumstances need to, to go and work
with that borrower 2 years later if need be.
Mr. Ellison. Are you willing to provide me with the
information on how many were permanent loan modifications?
Ms. Schwartz. As I said, the answer I have is 60 percent or
greater of the survey I took where I have no loan level data on
that.
Mr. Ellison. Okay, well, we have 3 minutes to go vote, so I
am going to submit some written questions to you. And Madam
Chairwoman, can I count on some responses?
Chairwoman Waters. Oh, yes. We have questions that
certainly are going to submitted, and we will get those
responses.
Mr. Ellison. All right. I thank all the panelists. I had
questions for everybody, but time ran short.
Chairwoman Waters. Thank you very much. I have just one
question: Is there a fee for modification or workout to the
borrower? From anybody? Servicers?
Mr. Bailey. No. Especially in subprime, there is no
modification--
Chairwoman Waters. No. Don't parse it. Is there a fee for
modification to workout?
Mr. Bailey. There can be a fee in some investors, yes.
Chairwoman Waters. Thank you very much. Let me just thank
all of you for your testimony. We are learning a lot. We have a
lot more questions, so we will continue to have more hearings.
The Chair notes that some Members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
I thank you. The panel is dismissed.
But before we adjourn, without objection, the following
written submissions will be made a part of the record of this
hearing: A letter of support for H.R. 5679 from various
consumer law, civil law, and other organizations; a statement
from the American Bankers Association; a statement from
Professor Kate Porter, University of Iowa; and a statement from
the National Alliance of Community Economic Development
Associations.
We will have staff provide those submissions. Thank you
very much. The hearing is adjourned.
[Whereupon, at 2:28 p.m., the hearing was adjourned.]
A P P E N D I X
April 16, 2008
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