[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] LOAN MODIFICATIONS: ARE MORTGAGE SERVICERS ASSISTING BORROWERS WITH UNAFFORDABLE MORTGAGES? ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION __________ FEBRUARY 24, 2009 __________ Printed for the use of the Committee on Financial Services Serial No. 111-6 U.S. GOVERNMENT PRINTING OFFICE 48-677 WASHINGTON : 2009 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gov Phone: toll free (866) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina RON PAUL, Texas GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois BRAD SHERMAN, California WALTER B. JONES, Jr., North GREGORY W. MEEKS, New York Carolina DENNIS MOORE, Kansas JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West WM. LACY CLAY, Missouri Virginia CAROLYN McCARTHY, New York JEB HENSARLING, Texas JOE BACA, California SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas AL GREEN, Texas TOM PRICE, Georgia EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina MELISSA L. BEAN, Illinois JOHN CAMPBELL, California GWEN MOORE, Wisconsin ADAM PUTNAM, Florida PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota KEITH ELLISON, Minnesota KENNY MARCHANT, Texas RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan CHARLES A. WILSON, Ohio KEVIN McCARTHY, California ED PERLMUTTER, Colorado BILL POSEY, Florida JOE DONNELLY, Indiana LYNN JENKINS, Kansas BILL FOSTER, Illinois CHRISTOPHER LEE, New York ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota JACKIE SPEIER, California LEONARD LANCE, New Jersey TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho JOHN ADLER, New Jersey MARY JO KILROY, Ohio STEVE DRIEHAUS, Ohio SUZANNE KOSMAS, Florida ALAN GRAYSON, Florida JIM HIMES, Connecticut GARY PETERS, Michigan DAN MAFFEI, New York 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 THADDEUS G. McCOTTER, Michigan AL GREEN, Texas JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri GARY G. MILLER, California KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas JOE DONNELLY, Indiana WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts Carolina PAUL E. KANJORSKI, Pennsylvania ADAM PUTNAM, Florida LUIS V. GUTIERREZ, Illinois KENNY MARCHANT, Texas STEVE DRIEHAUS, Ohio LYNN JENKINS, Kansas MARY JO KILROY, Ohio CHRISTOPHER LEE, New York JIM HIMES, Connecticut DAN MAFFEI, New York C O N T E N T S ---------- Page Hearing held on: February 24, 2009............................................ 1 Appendix: February 24, 2009............................................ 61 WITNESSES Tuesday, February 24, 2009 Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage Servicing...................................................... 30 Erbey, William C., Chairman and Chief Executive Officer, Ocwen Financial Corporation.......................................... 28 Evers, Joseph H., Deputy Comptroller for Large Bank Supervision, Office of the Comptroller of the Currency...................... 7 Gardineer, Grovetta, Managing Director, Corporate and International Activities, Office of Thrift Supervision......... 6 Gross, Michael, Managing Director, Loan Administration Loss Mitigation, Bank of America.................................... 32 Hemperly, Steven D., Executive Vice President, Real Estate Default Servicing, CitiMortgage, Inc........................... 35 Lawler, Patrick J., Chief Economist, Federal Housing Finance Agency......................................................... 9 Morris, Vance T., Director for Single Family Asset Management, U.S. Department of Housing and Urban Development............... 4 Sheehan, Marguerite, Senior Vice President, Chase Home Lending, JPMorgan Chase................................................. 33 APPENDIX Prepared statements: Waters, Hon. Maxine.......................................... 62 Ellison, Hon. Keith.......................................... 66 Coffin, Mary................................................. 67 Erbey, William C............................................. 70 Evers, Joseph H.............................................. 80 Gardineer, Grovetta.......................................... 100 Gross, Michael............................................... 111 Hemperly, Steven D........................................... 120 Lawler, Patrick J............................................ 126 Morris, Vance................................................ 146 Sheehan, Marguerite.......................................... 152 LOAN MODIFICATIONS: ARE MORTGAGE SERVICERS ASSISTING BORROWERS WITH UNAFFORDABLE MORTGAGES? ---------- Tuesday, February 24, 2009 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 2:42 p.m., in room 2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the subcommittee] presiding. Members present: Representatives Waters, Lynch, Cleaver, Green, Clay, Ellison, Donnelly, Driehaus, Kilroy, Maffei; Capito, Marchant, Jenkins, and Lee. Chairwoman Waters. This hearing of the Subcommittee on Housing and Community Opportunity will come to order. Good afternoon, ladies and gentlemen. I would first like to thank the ranking member and the other members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing on loan modifications: ``Are mortgage servicers assisting borrowers with unaffordable mortgages?'' Today's hearing is the first in a series of hearings to provide Congress with an in-depth understanding of loan modifications, including their benefits and challenges. In the next few months, the subcommittee plans to hold further hearings on this issue, including an examination of the White House plan to modify loans and an investigation of the for- profit loan modification industry. Today we have before us several key regulatory agencies and mortgage servicers who are going to tell us about their efforts to assist borrowers with affordable mortgages. In addition to learning about their loan modification efforts, I hope this hearing will also serve to educate members about some of the fundamentals of the mortgage servicing industry, including how servicers are licensed, what kinds of contracts they have with investors, and how they receive payments for servicing loans. I believe that this basic information is critical to understanding how the number of loan modifications can be increased. I hope that our witnesses will be able to educate the subcommittee in this regard. Loan modifications changing the terms of the loan are essential to ending the foreclosure crisis. According to RealtyTrac, in 2008, 2.3 million households were in some stage of the foreclosure process, an 81 percent increase from 2007 and a 225 percent increase from 2006. The foreclosure crisis shows no signs of slowing down, with Credit Suisse estimating that 8.1 million homes will enter foreclosure over the next 4 years. However, while the pace of loan modifications has increased, repayment plans which simply tack the missed payments onto a loan, thereby delaying the inevitable foreclosure until a later date, still offers more than other kinds of loan modifications. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, in the third quarter of 2008, new loan modifications increased by more than 16 percent to 133,106, while new repayment plans increased by 11 percent to 154,649. I am concerned that mortgage servicers simply aren't doing enough loan modifications. I am interested to hear the mortgage servicers before us today discuss what barriers or capacity issues are preventing them from performing more loan modifications and preventing foreclosures. And if capacity is an issue, I would like to hear about how we can streamline the modification process so that we can prevent foreclosures quickly and efficiently. Since day one, I have been a supporter of enacting a systematic modification program. On the first day of the 111th Congress, I introduced legislation, H.R. 37, the Systematic Foreclosure Prevention and Mortgage Modification Act of 2009, to put such a plan in action. I am also concerned about some of the redefault rates on modified loans. According to the OCC and the OTS, modified loans have been redefaulting at rates of 37 percent within 3 months after modification and 55 percent within 6 months after modification, with the rates of redefault seeming to vary by the type of loan and the entity servicing it. In modifying loans, servicers must ensure that the new loan is more affordable to the borrower than it was before the modification. It makes little sense and benefits no one to modify a loan and to have it still be unaffordable for the borrower. It also makes little sense to do a slight modification, such as lowering the interest rate by a quarter of a point, for example. That makes the loan slightly more affordable, but still out of the reach of the borrower. The type of loan modification being offered is also important to ensure that the modified loan is affordable for the borrower. Credit Suisse has found that principal reduction modifications have lower default rates than other kinds of modifications. If this is the case, I would expect for mortgage servicers to perform more of those kinds of modifications. I am aware that principal reduction comes with a significant cost for the investor; however, that cost is substantially less than letting the loan enter foreclosure. Before I close, I would like to comment on the modifications that have yet to occur. There are millions of families out there who are struggling with their mortgages. They have tried to contact some of the servicers who will be testifying today, and they have not been able to get through or to reach the right person. I have experienced firsthand the challenges faced by borrowers who want to stay in their homes and who want to get current on their mortgages, but they either can't get their servicers to pick up the phone, or they get wrong, misleading, or unapproved information. I have called the servicers myself and waited hours for someone to answer, I have been misdirected and disconnected, and I understand the frustration borrowers have. It is unacceptable, and I think homeowners deserve better. I am very interested in hearing from today's witnesses on how they plan to improve their capacity and their outreach to ensure that the borrowers reaching out to them for help are able to receive the help they need. I am looking forward to hearing from our two panels of witnesses on the benefits, the challenges, and the expenses involved in modifying loans. I would now like to recognize our subcommittee's ranking member to make an opening statement. Mrs. Capito. Thank you, Madam Chairwoman. And I would like to thank the chairwoman for convening this afternoon's hearing. The difficulties in the housing market are central to the health of our overall economy. Some States have been affected more deeply by those difficulties than others. I know that many of my colleagues representing States that have been hardest hit by foreclosures have constituents who are struggling to make ends meet; however, we must be careful to those who are making their payments on time so that they would not be unfairly burdened. Whatever form of assistance this committee produces must be equitable to the almost 92 percent of American families still making those payments on time. I am looking forward to hearing from our second panel this afternoon to learn more about their efforts to do loan modifications. We will be hearing from five different institutions, many of whom have different approaches to working out loans and different problems with working out those loans. I believe it is important for this process to remain in the private sector as much as possible. Another proposal that has been put forth is to modify the terms of the loan in bankruptcy court, commonly referred to as cramdown. I have already expressed my concern in this committee about the effect this proposal will have on the Federal programs like FHA/VA and RHS. Additionally, I have concerns about the effect that this will have on the flow of credit on an already unsteady secondary market. Recently, I joined Mr. Bachus, the ranking member of the full committee, as well as our counterparts on the House Judiciary Committee, in sending a letter to the Treasury Secretary expressing our desire to work in a bipartisan manner to narrow changes in the bankruptcy law. Today's hearing will shed greater light on the current status of loan modifications as well as to educate members about the process and any potential improvements. I would like to thank again the chairwoman for bringing us together this afternoon and I look forward to hearing the testimony of our witnesses. Thank you. Chairwoman Waters. I now recognize Mr. Green. Mr. Green. Thank you, Madam Chairwoman. I would like to associate myself with the comments that you made. I thought that you were quite thorough in expressing concerns, and I adopt your language. I do want to add only this: That there is concern with reference to the defaults. When compared to loans held by servicing banks, the default rate is 35.06 percent after 3 months. Loans held by private investors, the default rate is 42.28 percent after 3 months. There seems to be a disparity that I am sure we can examine and understand why it exists. I have my suspicions, but it will be more than appropriate to receive empirical evidence of what is actually going on from this panel. So I thank you very much, Madam Chairwoman, and I yield back the balance of my time. Chairwoman Waters. Thank you very much. Ms. Jenkins for 2 minutes. Ms. Jenkins. Thank you, Madam Chairwoman. I know that many Americans are honestly struggling to pay their monthly mortgage payments. Unemployment is on the rise, yet more than 90 percent of homeowners are still able to scrimp and save enough each month to pay their mortgage. Congress and government agencies have thrown billions at the crisis, yet we have little to show for it. Many people inside the Beltway appear willing to reward lenders who sold irresponsible loans and reward people who purchased houses that were too expensive. How is this fair to those American families who made cuts in their monthly budget and still pay their mortgage on time? We may see later this week on the House Floor a proposal to allow bankruptcy judges to cramdown mortgages. While the goal of the proposal, to help more folks be able to stay in their homes, may be admirable, when we see redefault rates at 55 percent in only 6 months, is this really solving the problem? I am eager to hear from today's witnesses to see what we can work toward to find effective solutions. I yield back the remainder of my time. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you very much. We have no more opening statements. I am pleased to welcome our distinguished first panel. Our first witness will be Mr. Vance Morris, Director for Single Family Asset Management, U.S. Department of Housing and Urban Development. Our second witness will be Ms. Grovetta Gardineer, Managing Director, Corporate and International Activities, Office of Thrift Supervision. Our third witness will be Mr. Joseph H. Evers, Deputy Comptroller for Large Bank Supervision, Office of the Comptroller of the Currency. Our fourth witness will be Mr. Patrick J. Lawler, Chief Economist, Federal Housing Finance Agency. Thank you for appearing before the subcommittee today, and, without objection, your written statements will be made a part of the record. You will now be recognized for a 5-minute summary of your testimony. Mr. Morris. STATEMENT OF VANCE T. MORRIS, DIRECTOR FOR SINGLE FAMILY ASSET MANAGEMENT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Mr. Morris. Madam Chairwoman, Ranking Member Capito, and members of the subcommittee, on behalf of the Department of Housing and Urban Development, I would like to thank you for the opportunity to speak about FHA's loss mitigation practices, and in particular loan modifications practices. I am the Director of the Office of Single Family Asset Management. I am responsible for managing the servicing and loss mitigation activities of FHA-insured mortgages and also the Real Estate Owned activities. My office responsibilities include establishing and updating general servicing guidelines for FHA lenders, helping homeowners remain in their homes while overcoming difficulties that cause mortgage defaults, monitoring lenders for compliance with loss mitigation requirements, and managing and selling single-family properties acquired by HUD. These activities are instrumental in maintaining the FHA insurance fund, which currently has over 4\1/2\ million insured loans at a value of $534 billion. In 1996, HUD completed a study titled, ``Providing Alternatives to Mortgage Foreclosure: A Report to Congress,'' which formed the basis of our loss mitigation program. During the same year we introduced our loss mitigation program with the primary objective of keeping homeowners in their home in the event of a serious default, finding effective solutions to cure defaults, and reduces to the losses to the government by effectively finding alternatives to foreclosure. HUD's most utilized loss mitigation tool is loan modification. Loan modifications account for nearly 60 percent of FHA's loss modification activity annually. Loan modifications are intended to bring the delinquent borrower current. This is done by either reamortizing the loan up to 30 years, changing the interest rate both up and down, and adding the delinquency into the loan modification. In most cases when a lender modifies the loan, they modify the term, and the rate is unchanged. In other cases the interest rate may increase or decrease. Typically, though, after the loan modification, the borrower's payment increases slightly, on average $22. The increase is due to the fact that the arrearages were included into the loan balance, so it causes a slight increase in the mortgage payment. Over the past 12 years, through the end of January 2009, FHA lenders have completed over 324,000 loan modifications. The numbers vary from year to year. For example, in Fiscal Year 2008, 58,000 loan modifications were done by FHA lenders. We estimate that there will be a 12 percent increase this year to 65,000 loan modifications. The loan modification process is fairly simple. The lender reviews the borrower's qualifications prior to the loan becoming 4 months past due. The borrower sends financial information to the lender, who performs an analysis and determines that the information is independently verified as correct, and then determines if the loan modification would benefit the borrower. If so, the loan modification--the lender at that time sets the rate, and a term, and the terms of the modification. The lender then sends the documents to be executed by the borrower, and the modification is recorded, and the loan is brought current. For completing the loan modifications, HUD provides an incentive fee to the lender of $750, plus we pay up to $250 in title work. HUD measures the effectiveness of its loss mitigation action by determining if the loan ended in foreclosure 24 months following that action. According to our Office of Evaluation, this is the best measure, because past 24 months, if a loan goes in default, there were other actions or activity that caused the default. By that measure, home applications are an effective tool, because over 85 percent of our loans that were modified, 24 months following that loss mitigation action were still not submitted for foreclosure. This is not to say that our loans do not redefault. We do have an annual redefault rate of modified loans of 35 percent. However, we continue to work with the borrowers to avoid foreclosure. Just because a person has one loss mitigation action, that does not preclude us from continuing to work with the borrower. In closing, HUD is requesting new authority to enhance partial claim authority to enable FHA to buy down mortgage balances. The buydown amount would be reported as a second mortgage, but it would be a tool that would make the payment affordable to the borrower. The Administration is developing changes that would allow FHA to assist homeowners with reductions in income that are more than just temporary in nature. Again, I want to thank you for the opportunity to explain FHA loan modifications. I am prepared to answer your questions. [The prepared statement of Mr. Morris can be found on page 146 of the appendix.] Chairwoman Waters. Thank you very much. Ms. Gardineer. STATEMENT OF GROVETTA GARDINEER, MANAGING DIRECTOR, CORPORATE AND INTERNATIONAL ACTIVITIES, OFFICE OF THRIFT SUPERVISION Ms. Gardineer. Good afternoon, Chairwoman Waters, Ranking Member Capito, and members of the subcommittee. I am Grovetta Gardineer, Managing Director for Corporate and International Activities at the Office of Thrift Supervision. Thank you for the opportunity to testify on behalf of OTS about loan modifications and how best to keep more American families in their homes. The importance of this topic is hard to overemphasize. Turning back the tide of home foreclosures is an essential element in combating the economic crisis confronting this Nation and much of the rest of the world. Foreclosed homes spell tragedy for the uprooted families, they harm neighborhoods by driving down property values, and they add downward pressure to already depressed home values in communities. Although about 90 percent of all home mortgages in this country are being repaid on time, the remaining 10 percent that are delinquent or in foreclosure represent a historically high number and a contagion in our economic system. My written testimony goes into detail about the efforts the OTS has made, both in partnership with other Federal banking regulators and on its own, to prevent foreclosures. In the time I have this afternoon, I will emphasize just a few aspects of those efforts, but the key point I want to make is that OTS initiatives to reduce foreclosure are not new. They extend back nearly 2 years, and they are continuing today. Just 2 weeks ago, OTS Director Reich urged OTS-regulated institutions to suspend foreclosures on owner-occupied homes until the home loan modification program in the Administration's financial stability plan is finalized. Since then, OTS leaders have continued their work on the interagency team, led by the Treasury Department, to develop the details of this modification program. On February 20, 2008, almost 1 year ago to the day, the OTS unveiled the foreclosure prevention plan that identified three elements that are key to a successful loan modification program: an expedited process; an affordable monthly payment; and an approach to dealing with underwater mortgages in which borrowers owe more on their mortgages than their homes are worth. These elements were included in the legislation eventually passed by Congress. OTS has also been a central player first on its own and later in partnership with the Office of the Comptroller of the Currency in gathering for the first time extensive validated loan-level data on about 60 percent of all mortgages in the United States. The data have already yielded valuable insights and will enable us to gauge which modification strategies work best for affordable, sustainable solutions. With this useful yardstick for measuring progress, policymakers will know with greater precision where to focus scarce resources to achieve the most success. The next OCC-OTS Mortgage Metrics Report scheduled for release next month will reflect an expanded data collection effort to zero in on the elements that make loan modifications work. The scope of this effort is broad, covering more than 34 million loans. The two agencies have made sizable commitments to this project, and we intend to stick with it, especially since so many families are being forced to pack up their American dreams of homeownership. The OTS remains committed to continuing its efforts until the foreclosure crisis is over. Thank you again, Madam Chairwoman, for your commitment to this important issue, and I look forward to answering your questions. [The prepared statement of Ms. Gardineer can be found on page 100 of the appendix.] Chairwoman Waters. Thank you very much. Our next witness, please. STATEMENT OF JOSEPH H. EVERS, DEPUTY COMPTROLLER FOR LARGE BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY Mr. Evers. Chairwoman Waters, and members of the subcommittee, on behalf of the Office of the Comptroller of the Currency, thank you for holding this hearing and inviting the OCC to testify on this important topic. My name is Joe Evers. I am a national bank examiner, and I currently serve as Deputy Comptroller for Large Bank Supervision. In that capacity, I am responsible for large bank analytics. Over the past year, I have led the OCC's project to develop more comprehensive and timely data on mortgage lending and servicing activities of national banks. This project, known as Mortgage Metrics, is now a joint undertaking of the OCC and the Office of Thrift Supervision. Since as early as 2005, the OCC has encouraged national banks to work with troubled homeowners to prevent avoidable foreclosures and meet the needs of creditworthy borrowers. Since then, the OCC has joined other regulators to urge banks to continue to implement effective programs to prevent avoidable foreclosures and to minimize potential losses. Several years ago, we realized the importance of obtaining more detailed information about the performance of mortgages held in the national banking system. This was done to both aid our supervisory activities and to incent servicers to implement effective programs to prevent avoidable foreclosures and to minimize potential losses. We have continued these efforts, particularly with respect to increasing affordable and sustainable modifications, and that improved information we are obtaining is helping in that effort. Clearly more must be done to address this challenge. The OCC supports the Administration's Homeowner Affordability and Stability Plan. This new plan takes significant steps towards addressing these issues, and we are taking additional steps as well. The Mortgage Metrics project represents an unprecedented effort to collect detailed information on the performance of loans serviced by institutions supervised by the OCC and OTS. Our quarterly Mortgage Metrics Report was first published in 2008. The Mortgage Metrics Report now covers approximately 90 percent of the first-lien mortgages serviced by national banks and thrifts, and represents over 60 percent of all mortgages in the United States. Our report for the third quarter of 2008 gathered a vast amount of data on the effectiveness of loan modifications. It showed an unexpectedly high percentage of borrowers receiving loan modifications in the first and second quarters of 2008 were past due on the new loan modification payment terms. An examination of these results led to our decision that more detailed information was required to enhance our analysis. Since then we have been working to collect additional details on how different types of modifications have changed monthly principal and interest payments resulting from modifications. We plan to present expanded information on actual changes in monthly principal and interest payments resulting from loan modifications in the next quarterly Mortgage Metrics Report due out in March. Further details on modifications are planned for subsequent reports. My written testimony addresses these efforts in more detail and the specific issues raised in your letter of February 17th by describing: one, our efforts to improve the understanding of loan modification performance through our Mortgage Metrics data collection effort; two, findings from our most recent Mortgage Metrics Report, including what we have learned about loan modifications; three, current challenges facing effective loan modifications; and four, our ongoing efforts to encourage responsible lending and appropriate loss mitigation activities, particularly achieving affordable and sustainable loan modifications. Again, thank you for holding this important hearing. I look forward to answering your questions. [The prepared statement of Mr. Evers can be found on page 80 of the appendix.] Chairwoman Waters. Thank you very much. Now, we will have Mr. Patrick Lawler. STATEMENT OF PATRICK J. LAWLER, CHIEF ECONOMIST, FEDERAL HOUSING FINANCE AGENCY Mr. Lawler. Chairwoman Waters, Ranking Member Capito, and members of the subcommittee, thank you for the opportunity to testify on behalf of the Federal Housing Finance Agency. My name is Patrick Lawler, and I am Chief Economist of the FHFA. Today the country faces an enormous challenge to stabilize the housing market. This morning we announced that our House Price Index declined 3.4 percent in the fourth quarter last year. That is twice the average rate of decline in the previous four quarters. Many borrowers are in trouble on their mortgages, or soon will be. To address this need, FHFA and the housing GSEs are actively working on foreclosure prevention. This is a major component of FHFA's efforts to ensure the housing GSEs fulfill their mission of providing liquidity, stability, and affordability to the housing market. The housing plan outlined last Wednesday by President Obama includes a prominent role for Fannie Mae and Freddie Mac. My testimony today will summarize recent initiatives already underway to promote effective loan modifications and the new policies announced last week. FHFA began in September a foreclosure prevention report, which is a transparent review of key performance data on foreclosure prevention efforts. These monthly and quarterly reports present data for more than 3,000 approved servicers on 30.7 million first-lien residential mortgages serviced on behalf of Fannie Mae and Freddie Mac of which 84 percent are prime. The recently released November report shows that for the first 2 full months of conservatorship, October and November, the number of loan modifications increased 50 percent from the previous 2 months. These modifications were achieved using a customized, labor-intensive process. Currently, though, servicers are challenged by the sheer volume of borrowers requesting assistance in their ability to effectively and efficiently modify those loans. Accordingly, we have focused on new programs with the goal of reaching more borrowers more quickly and making it easier and faster to execute a loan modification. In November, FHFA announced the Streamlined Modification Program that was rolled out in December; 90,000 solicitations and modification offers were mailed to a targeted population of borrowers who had missed three payments. While responses to these letters are just starting to come in, early indications strongly suggest that several of the program guidelines should be liberalized to reach a broader population and to create a lower, more affordable payment. This feedback was shared with the Treasury Housing Team working on the Administration's homeowner affordability plan. In addition to the streamline program announced in November, the enterprises have taken many additional steps to help avoid preventable foreclosures. They have suspended foreclosures and evictions and developed programs to protect renters living in foreclosed properties. They are pulling loan files back for a second look before foreclosures, and they are working with credit and housing counselors. Recently FHFA has been pleased to work on the development of the Administration's plan. It is a major step forward in reducing preventable foreclosures and stabilizing the housing market. It aggressively builds on the FDIC's and our Streamlined Modification Programs. The key elements of the plan involve Fannie Mae and Freddie Mac. The enterprises will provide access to low-cost financing for loans they own or guarantee. This will help homeowners reduce their monthly payments and avoid foreclosure. It is designed for current borrowers who seek to refinance at a lower rate or into a safer mortgage, but who have experienced difficulties due to declining home values. Second, a $75 billion program will establish a national standard for loan modifications. Treasury will share a portion of the costs, which will provide financial incentives to borrowers, lenders and servicers. The enterprises will monitor servicer compliance with the plan's rules, and for those loans owned or guaranteed by Fannie Mae or Freddie Mac, the enterprise will bear the full cost of the modifications. Third, the Treasury will support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac. The Treasury Department will double the size of its preferred stock purchase agreements to $200 billion each. This increase should remove any possible concerns that investors in debt- and mortgage-backed securities have about the strong commitment of the U.S. Government to support Fannie Mae and Freddie Mac. In addition, the Treasury Department will continue to purchase Fannie and Freddie MBS, and is increasing the size of the GSEs' allowable mortgage portfolios by $50 billion each, to $900 billion, along with corresponding increases in allowable enterprise debt outstanding. Over the next several days, FHFA will continue working with the Administration and the enterprises to finalize the details and implement this program. I will be happy to answer questions. [The prepared statement of Mr. Lawler can be found on page 126 of the appendix.] Chairwoman Waters. Thank you very much. I will yield to myself 5 minutes for questions. My first question is to Mr. Vance Morris, Director for Single Family Asset Management, U.S. Department of Housing and Urban Development. You have, maybe not in your unit, but you have HUD counselors or certified counselors who are responsible for counseling and advising homeowners, first-time homebuyers, etc., and now they have included in their work working with homeowners who are in trouble and trying to help them get loan modifications. Do you think that the HUD-certified counselors have the training or expertise to really help with loan modifications? Mr. Morris. Well, Madam Chairwoman, to answer your question, it is a two-part answer. I think the housing counseling agencies have the training to effectively help the borrowers in trouble, because really they are advising, counseling, and providing alternatives. But the person who has the authority to effect the loss mitigation action is the servicer themselves. So you have a group of counselors who are funded, active, and well-educated, but you still have to get the actual work completed. It still has to go to the servicer, the analysis has to be completed, and then the action has to be taken. Chairwoman Waters. I understand that. And from what I have been able to see and understand about what is happening between the HUD counselor and the homeowner is the homeowners find the HUD counselors through nonprofits and churches and other kinds of things, but they have as many problems--the counselors have as many problems getting to the servicer and getting the servicer, if they get them, to do a loan modification. So I am trying to determine what is the most effective use of the HUD counselors, because my experience is they are not able to really facilitate the loan modifications. The servicers are not responding to them, I have discovered. So how can we best use these HUD counselors? Mr. Morris. I would hate to characterize it as not responding. What has happened from the feedback that I have gotten from the servicers is that we have established hotlines. There is a foreclosure crisis. So what happened is there is this gigantic influx of inquiries and activity that had been literally pushed on the servicers themselves. So as a result, based on this demand, it just seems like there is insufficient staffing to cope with all the inquiries and demands and loan modifications. So if you are asking what should we do with the housing counseling agencies, that is a hard question. Technically it is a separate section. It seems as though they are playing a proper role because the housing counseling agency does housing counseling for origination. Chairwoman Waters. In those activities some of them are good, particularly with first-time homebuyers, but I have yet to see the effectiveness of their role in dealing with foreclosures and helping to facilitate loan modifications by getting in touch with the servicer, helping to interpret to the servicer the particular case before them. You have homeowners with all kinds of problems related to that mortgage, and oftentimes they do need some help in interpreting to the servicers, once you get them, what the problem is with this homeowner. But the reason I ask this is because I am thinking about what to do about the HUD counselors in relationship to foreclosures, because we shouldn't fool each other that somehow they are being effective when it is not their fault, it is more the servicers' fault, because, as you are saying, they are overloaded or what have you. Let's move on to Ms. Gardineer. When did your agency begin to understand what was happening with the mounting foreclosures, and what took so long to get involved? Ms. Gardineer. Well, Chairwoman Waters, I would say that our efforts began to really focus on the mounting loan foreclosures--in April of 2007, we issued a statement that encouraged financial institutions to work with homeowners who were having difficulty making their payments. We encouraged them to reach out to those homeowners to try to modify and engage in prepayment plans at this point. Chairwoman Waters. Is that the extent of your authority to encourage? Ms. Gardineer. Well, with regard to that, Chairwoman Waters, we wanted to make sure that our regulated servicers understood that it was more prudent for them to reach out and make an effective modified loan as opposed to having a failure on both sides of the transaction that would result in a foreclosure. Chairwoman Waters. And If they did not do this? Ms. Gardineer. We would look through it through our supervisory process. Chairwoman Waters. Look at what? Ms. Gardineer. Look at their efforts to reach out to those homeowners. Chairwoman Waters. And if they did not do it? Ms. Gardineer. Are you asking would they be-- Chairwoman Waters. What is your authority? Ms. Gardineer. With regard to enforcement of this? Chairwoman Waters. Yes. Ms. Gardineer. I don't believe we have enforcement authority. Chairwoman Waters. I see. So when you talk about encouragement and doing whatever you can do to get them to work closely with the homeowner, that is the best you can do with the authority that you have; is that right? Ms. Gardineer. I would say that with respect to the creation of our Mortgage Metrics Report, which we have made a part of our supervisory process, we are looking to gain more information with regard to how effective the modifications are being done. And because it is a part of our supervisory process, and we will examine for this going forward, then I think our safety and soundness authority will cover our ability to take more effective action. When we look at the methodology and the data that we are gaining from this report, and by making it a part of supervision, we are helping to shape our supervisory expectations in understanding how servicers can do more and what they are doing in regard to what their current authority is, how we can look at how we can expand on that current authority, as well as helping them understand the parameters that we as supervisors and regulators expect. Chairwoman Waters. How long is it going to take you to include that in your supervisory responsibilities? You know, a lot of foreclosures are happening every day, and I guess the numbers that we saw here today, 2.5, or something like that, million. So how long is this is going to take you? Ms. Gardineer. As far as this being our third quarter, we released three quarters' worth of data, and with every release of the report and our analysis of the report, it allows us to see the information that we need to continue to understand the supervisory process and help shape this. We are in the midst of helping the Administration work out the details of the loan modification streamlined efforts to impact these foreclosures to see if we can stave them off earlier. We want servicers-- Chairwoman Waters. What should we do in the future to get in front of a problem like this? We are late. Ms. Gardineer. Well, I think in the past, Madam Chairwoman, we have looked at lagging indicators, we have looked at data that has been based on model estimates as opposed to what we are getting with our fellow regulator, the OCC, at this point. We are looking at original loan-level data, the actual loans of homeowners that are being serviced by these servicers, and enabled to do that, and our ability to now look at that data in real time, today, to see what is happening in a specific ZIP code, geographic location, FICO scores, income verification or employment, and how all of these impact an ability for a loan to perform for that borrower. This is the kind of information this helps us to get in front of the problem as opposed to looking at model estimates, which we have-- Chairwoman Waters. I have a great appreciation for that, but what you just told me gives me even greater worry. So I am going to move on to Ms. Capito. Thank you very much. Mrs. Capito. Thank you. Mr. Morris, can you explain to me, in your testimony you mentioned that in the refinancing, that $750 goes to the lender for a successful refinancing. Mr. Morris. $750 is just incentive payment for the cost of them doing the work. It has to be tied to cost by statute. So we have to be able to justify that they are experiencing the cost. It is the cost of them collecting the information, analyzing. Mrs. Capito. Is this similar, in your mind, to the incentive that the President has built into his program that he has put before Congress, or is this different, in addition to that? Mr. Morris. We have been operating our program since 1996. And I am just talking to you specifically about FHA's authority. Based on FHA's authority, according to our Office of General Counsel, when we pay an incentive fee, it has to be linked to some work that was actually performed. This is the fee structure for the work that was performed to complete the loan modification, plus the reimbursement for the title work. Mrs. Capito. If there is a 35 percent redefault rate recently, then every time, if you are redefaulting and you are going to come in to try to remanage the loan or refinance the loan, is there still a $750 payment every time that loan gets looked at? Mr. Morris. Yes, because the same analysis and due diligence is being done every time. A 35 percent default rate is not new. Mrs. Capito. That is over 10 years? Mr. Morris. Over the past 5 to 10 years that I have information, it is average, about that amount. Mrs. Capito. I would like to ask Mr. Lawler, you know, I think we encouraged folks who are in trouble, telling them, go to your lender, try to start working on a loan modification. My understanding of the President's plan is that the loan modifications have to be done by those loans that are held by Fannie and Freddie. How does a regular person figure this out? And what kind of outreach are you doing to make sure people are aware that they actually have this connection to those institutions? Mr. Lawler. There are two different parts to the President's plan. One deals with loan modifications, and for those it is not restricted to loans held or guaranteed by Fannie Mae and Freddie Mac. There is another part that involves refinances by borrowers who are current on their loans. Mrs. Capito. Let me just stop you right there. If you are current, you are refinancing; if you are in arrears, you are modifying? Mr. Lawler. Yes. Although you could qualify for a modification in some cases if you are current if there is a hardship, for example. Mrs. Capito. What is the difference between a modification and a refinance? Mr. Lawler. Refinance is just changing the interest rate, if the borrower qualifies for a new loan with a new maturity of 30 years or 15 years. Mrs. Capito. But you are modifying a loan? Mr. Lawler. You are paying off the first loan, and you are getting a brand new loan. Mrs. Capito. Okay. Mr. Lawler. The other is modifying the terms of an existing loan. Mrs. Capito. Which would change the interest rate or the length of time? Mr. Lawler. Or the principal amount or the way the rates are computed. Mrs. Capito. In the President's plan can you refinance or change the principal amount; is that within the purview of this plan? I don't believe it is. Mr. Lawler. It is within the loan modification plan, yes. There is a provision for that, and the Treasury will participate in some of the cost in that. Mrs. Capito. I see. Let me ask you another question about the kind of complaints I have heard. Mr. Lawler. If I could finish? Mrs. Capito. Yes. Mr. Lawler. If it is a refinance, then that part of the plan is only for loans that are held or guaranteed by Fannie Mae or Freddie Mac, and one way for the borrower to find out if that is the case, obviously, is to call Fannie Mae or Freddie Mac. But I think on March 4th, there will be more details about exactly how to find out. Mrs. Capito. I think that is confusing to a lot of people, because they naturally assume that wherever they got the loan or whoever they are sending the check to is going to be the person or the only person they will have to be aware of as they are moving through the process. I heard--and maybe you can help me with this. I heard complaints from people who are buying the first-time loan or trying to refinance, and they maybe have credit scores that are not up in the 700s, but they are still good credit scores, and that Fannie and Freddie are assessing fees, and began assessing fees more here recently, that are putting, again, the price of refinancing that mortgage out of reach for a lot of people. Can you help me with this? Mr. Lawler. Well, part of Fannie Mae and Freddie Mac's problems most recently has been that this risk was underpriced, and so they are trying to make new loans that are priced fairly, but fairly to them and fairly to the borrowers. And they have made more use of distinctions of relative credit quality of borrowers. The difference between a very high credit rating and a good, but slightly lesser credit rating is a matter of basis points, but that is a distinction that they are making. Mrs. Capito. Would that same standard be applied in the President's plan? Mr. Lawler. For the refinances, Fannie Mae and Freddie Mac will determine what terms those loans will be available on, and there will be more details March 4th. For the loan modifications, it is really a question of lowering payments, not raising anybody's payments. Mrs. Capito. So the answer is, not really. Mr. Lawler. Not for loan modifications. Thank you. Mrs. Capito. Thank you. Chairwoman Waters. With that line of questioning, if you would like, I will yield you an additional minute, because you have an additional loan modification type in the HOPE for Homeowners program that is a refinancing program. Maybe knowing the difference between that, the GSEs refinancing and the loan modification may help us all. Mrs. Capito. Now you have totally confused me. Well, I guess I am getting to in my original statement looking at the fairness equation of people who are refinancing or loan modification or however. I am mixing them all up together, but I realize they are not the same; that if that borrower comes in and is held to one standard, and that person maybe has been doing all the right things, paying, working with their debt, paying all their credit cards on time, all these sorts of things, and then you have another person who is coming in under a different set of circumstances are not going to be assessed these fees, so it is going to be easier for that person to stay in their home than maybe this other person to purchase a home in the beginning or to refinance. Mr. Lawler. Well, people who are current can qualify for the loan modifications if there is hardship, if there is a special need. Mrs. Capito. Beyond a poor credit score. Mr. Lawler. Beyond a poor credit score, right. Losing a job, for example. Mrs. Capito. Or an illness or something to that effect. Thank you. Chairwoman Waters. Thank you. Mr. Green. Mr. Green. Thank you, Madam Chairwoman, and I thank the witnesses for appearing today. My frustration with this process emanates from an inability to understand why people won't do what is in their best interests. All of the evidence seems to indicate that it is in the best interests of investors to restructure the loans and allow the borrowers to continue to make payments, but all of the actions are inconsistent with what is in the best interests of the investors. Would someone care to just give me a very terse comment on this in terms of why investors are not amenable to doing what is in their best interests? Ms. Gardineer. Congressman, I think the difficulty lies in the pooling and servicing agreement contracts that govern the securitizations that many mortgages have ended up in. Those contracts in terms generally allow for losses that would be incurred under those securities to be borne by the junior persons who have purchased into those securities, with the investors protected against such losses such that it appears as though they would be moving against their interest. But I think the contracts are written in such a way to guarantee that their interests are paramount and protected against those losses. Mr. Green. Is this when we have something called tranche warfare to develop? Ms. Gardineer. Yes, Congressman. Mr. Green. If we provide a safe harbor for the servicer, do we now overcome the consternation that servicer has by virtue of liability and exposure; is that going to be a part of the key to safe harbor? Ms. Gardineer. I think so, Congressman. Our servicers have communicated to us that there are both legal and accounting impediments to their ability to service those loans or modify those loans that are in those securitizations. Our reports have demonstrated that it is far easier and more effective to modify the loans that are in portfolio. There is great latitude and great ability to change all of those terms. However, there are legal concerns about the way the contracts govern what a servicer's abilities to reach into those securities pools and modify those loans are. So providing that safe harbor to give them some protection against the legal liabilities and making-- or having them being accused of doing something against the best interests of the trust I think would further the ability of the servicers to actually modify those types of loans. Mr. Green. Yes, sir? Mr. Evers. A little different perspective, particularly thinking of it from an investor's perspective. If an investor thinks the future path of home prices is going down, and if they are looking at modification activity, and those modifications are kind of just nipping and cutting at the edges, and there is a lot of redefaults on those, they are thinking they could have a bigger loss down the road. If the loan is modified and still ends up in foreclosure, and home prices still go down, they are thinking, I could have a bigger loss 18 or 24 months down the road than if I just foreclosed today at the current prices. Mr. Green. I see. Mr. Lawler. I can add one more. Investors typically analyze the problem from their own perspective, how many loan modifications is it in my interest to do, but we are in a situation now where the cost of foreclosures affect everybody else. There are substantial external costs that are not perhaps being fully taken into account, and the sort of broader social benefits of modifications may be greater than the benefits to the investor making the decision. Mr. Green. Because my time is about up, someone tell me quickly how or what percentage of the loans that are questionable and may go into default are ARMs that are about to reset? Does anyone know? Do we have a high percentage of ARMs that are about to reset, or have we gotten through the ARMs? Mr. Lawler. We have mostly gotten through that, the 3/27s and 2/28s. Mr. Green. Right. Mr. Lawler. Most of those hit the first reset date through last year. That was at one time the main cause of problems. Now we are past the hump on that, but we have a whole bunch of new problems. Mr. Green. Madam Chairwoman, I cannot see the clock. Do I have any time left? Chairwoman Waters. The discussion about whether we have gotten over the hump of the resets? I have been led to believe that we have yet to hit the height of the resets. That should be coming in 2009 and 2010. So would you please go ahead and pursue that question? Mr. Green. Thank you, Madam Chairwoman. Simply restating what the chairwoman has called to our attention, and I think what we were trying to get to is this: The ARMS and 3/27s, 3 years prior to this would take us to 2006 or thereabouts. You would still have a good number of those resetting at this time; would you not? Mr. Lawler. We still have some, but the biggest volume was in 2/28s. There was a bigger volume of 2/28s than 3/27s. So it is not that we don't have a good number coming up, it is that we are past the peak of them. That is what I meant. Mr. Green. I understand. My final question is this: If we provide the safe harbor, if we encourage loan modifications as opposed to refinance, if we provide an incentive by way of an emolument, meaning a payment of dollars for remodification, is this going to have a sizable impact on the problem, or will we find ourselves with so many loans to be modified that we won't have enough servicers to accommodate the persons who are seeking modification? Mr. Lawler. Certainly capacity constraints are a matter of concern. But we need to have a lot more modifications than we have been having. There is certainly room to do a lot more. We need to press that capacity. Mr. Green. Does that mean we will have to hire more people is the bottom line? Mr. Lawler. I think servicers will find that in many cases they will have a need for more people, and the incentive should make it possible for them to hire more people. Mr. Green. Thank you, Madam Chairwoman. I yield back. Chairwoman Waters. Thank you. Mr. Marchant. Mr. Marchant. Thank you for your testimony. If I were sitting back in my district watching this hearing, the summary that I would have taken away from the testimony is that HUD is studying and encouraging, the OTS is studying and encouraging, the Office of the Comptroller is studying and collecting data, and the Federal Housing Finance Agency is studying, evaluating, and implementing monthly and quarterly foreclosure reports. Now, nobody should be encouraged by that. In fact, there doesn't seem to be a workable plan in place. In HUD's case, they have a dual role of protecting; in fact, HUD cited a report in their study, and they cited a report that was made in 1996. And we are working off of a plan from 1996. In the case of the Office of Thrift Supervision, in many cases at the same time you are studying and urging your members and those that you supervise to modify, at the same time your examiners are out in those banks examining the very portfolios and the very loans that you are urging them to modify. And, in fact, if they do modify them, then they are put on a watch list, and they are required to reserve against those loans. So the very thing that you are urging them to do your examiners could very well penalize them for following through and doing. In the case of the FHFA, the Federal Housing Finance Agency, it is important. I will not argue that we have statistics and knowledge of the redefaults, etc., etc., but, in fact, all of the information that is brought forward in these reports actually reinforces, in my view, a lender's resolve probably not to modify and not to reset the mortgage, because what shareholder in any institution would urge its institution or board member would urge its institution to modify or extend or renew a loan that has one in three chances of relapsing? And, as was stated, it might be more beneficial to let them take the loss now, get the thing back on the market. So, Madam Chairwoman, the frustration on my part, and I know that everybody is concerned about it, is that we continue to pile study, letters, urgings, statistics, reports on top of reports, and in fact, your HUD counselors don't have anybody to turn to because we have as many disincentives built into the system to not modify and not extend and to foreclose than we have to do that. And it has been proven in the fact; it has been proven in the failure. I don't fault the attempts to come up with these programs, but it is very clear after, what, we have been working on it a year, that most of the things that we have tried have been counterproductive. So, thank you. Mr. Morris. Madam Chairwoman, am I allowed to--I just want to be accurate by my testimony. Can I make a comment? Chairwoman Waters. Please, yes, go right ahead. Mr. Morris. I am Vance Morris from the Department of Housing and Urban Development. The 1996 study that was referenced in the testimony was the basis for our loss mitigation program. By statute, if a lender does not engage in loss mitigation and they file a claim with us and we find out, we charge them 3 times the claim amount. That means if we paid $30,000 and they failed to execute loss mitigation strategies, if we paid them $30,000, they would have to pay us $90,000. We monitor lenders electronically. We review thousands of loan files per year. So we do have an active loss mitigation program. We would like to have more expansive authorities, but we are not in the study mode. We have been active in modifying loans, doing partial claims which brings people's arrearages current. We do special forbearances. And we have been very active with trying to actively manage our portfolio. So if I misspoke and made it seem that we are studying, we don't have a study program. We have an active loss mitigation program. Lenders are penalized if they don't follow the program. But we do like to see additional authority. Chairwoman Waters. We didn't misunderstand you. Mr. Marchant didn't misunderstand you. But we are quite frustrated because of what this country is experiencing. And when you talk about loss mitigation, we have discovered what some of these loss mitigation programs are in the banks. How do you regulate loss mitigation programs that are basically handled offshore? Mr. Morris. Well, the loss mitigation activities for FHA are currently not outsourced. It has to be done by an FHA- approved servicer. It is not an outsourced activity. Chairwoman Waters. I am sorry. So you are only speaking for the FHA? Mr. Morris. Yes, ma'am. Chairwoman Waters. Thank you very much. I am going to move on to Mr. Lynch. Thank you. Mr. Lynch. Thank you, Madam Chairwoman, and Ranking Member Capito. I want to thank the witnesses on this panel and others for coming to help this committee with its work. I want to go back to a point that Madam Chairwoman raised a little earlier, a good point. The Federal Reserve does a very good job in my district in terms of the data that they provide me. They can actually, the Boston office of the Federal Reserve, can actually tell me the number of mortgage resets that are going to happen in my district. Actually, by town, they can tell me these mortgage resets. And while right now, the mortgage resets are for the most part very low because the rates are low, the volume of those mortgages, as the Chair pointed out, in 2009 and 2010 are very high, and we really don't know what the picture will be at that point, although we heard Mr. Bernanke today say that rates would have to stay historically low for some time. More troubling for me, though, is what I am seeing now is, rather than reset-related defaults, I am seeing layoff-related defaults. People are getting thrown out of their jobs, and so a sound and stable mortgage is now in trouble. Here is my question. We have a provision that is being considered this week for a so-called cramdown provision, where a homeowner in bankruptcy would have the opportunity to have their mortgage modified in bankruptcy if the judge determined that was the right thing to do. If this cramdown provision succeeds, what impact do you see it having on the voluntary modification framework that you are dealing with, where--what I am saying is, are we going to see lenders and servicers incentivized to deal? Remember, it is all voluntary. Or are we going to see homeowners who are saying, I am so far underwater, I might as well just roll the dice, not go for a voluntary modification, and see what I can get out of the bankruptcy court? I know this is conjecture. It is opinion, but in your case, it is educated opinion. What do you think will happen if we do adopt that provision? Mr. Morris. Well, I looked at the legislation as well, and the net effect is still being ascertained by the Department. But your question refers to voluntary modifications. The authority that I talked about that we are requesting is additional authority to do larger voluntary modifications; it is actually called partial claim authority. We think with that authority, it gets us further ahead so someone would avoid bankruptcy, because it would actually be an alternative. Currently, the way our loss mitigation programs work, it helps you if you have a temporary but not permanent disruption in income. That means 12, 14, 16 months. But what is happening now, as you pointed out, Congressman Lynch, is that families are having permanent reduction of income. So we have to have a tool to bring the payment down to an affordable level. We are hopeful that we will get the authority to have this voluntary modification, then it will not push people to bankruptcy, because that will just cause the cascading effect of all the borrower's credit. Mr. Lynch. That is helpful. Could I get a couple more opinions on that, just different perspectives? Ms. Gardineer. Congressman, I think that what we are seeing with regard to the bill, I have looked at the Helping Families Save Their Homes Act, the proposal that will be on the Floor this week, and at OTS, we believe that another tool that would help us reach as many homeowners as possible if it is effectively done that can reach those homeowners would be a good thing. Whether or not this would incentivize servicers to engage in more modifications, I think that another point that Congressman Green raised is also important to note: Servicers are constrained by the contracts, the pooling of servicing agreements, that are in place with regard to securitizations. What we have seen from the data that we collect is that if there is a modification, a mortgage that is in portfolio, the modification is often far more sustainable because the powers to modify that loan are greater. Again, the ability to provide some legal insulation through additional legal action for the servicers would assist in that as well. So, again, the more tools that we see that can get to the most homeowners to effectively stave off the foreclosures is the better approach. Mr. Lynch. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you very much. Ms. Jenkins. Ms. Jenkins. Thank you, Madam Chairwoman, and thank you all for your testimony today. I would like to share with you an excerpt from an article I read recently in Business Week, and I would just ask maybe a few of you to comment on the problem it describes. Federal banking regulators reported in December 2008 that 53 percent of consumers receiving loan modifications were again delinquent on their mortgages after 6 months. A law professor, Allen M. White, says the redefault rates are high because modifications often lead to higher rather than lower payments. An analysis that White did of a sample of 21,219 largely subprime mortgages modified in November 2008 found that only 35 percent of the cases resulted in lower payments. In 18 percent, payments stayed the same, and in the remaining 47 percent, they rose. The reason for this strange result was lenders and loan servicers were tacking on missed payments, taxes, and big fees to borrowers' monthly bills. Now, it seems to me that payments that rise after the loan is modified is counterproductive. Could some of you just comment on this particular problem? Mr. Lawler. I would be glad to. The program that we have been working on with the Administration is designed specifically to avoid that kind of problem. It is specifically targeted at the debt-to-income ratios of the borrowers and working them down to 31 percent. In many cases, they will have been much higher. And so the whole focus is to make an affordable mortgage, not simply to tack on all the arrearages, to figure out how much that will amortize over to over the existing life of the loan. Mr. Evers. I just would add, there may be some cases where the loan payment may increase, and that may be a situation where it is a temporary credit repair strategy going on where the borrower has a temporary situation and, fees and stuff are getting rolled into the loan getting reset. But we want to know the answer to that question. We want to know if this is a pattern of practice, just how many of these types of mods are out there. That is why we are collecting changes in monthly payments before and after the mod to know what is going on, and then looking at the redefault rates for the various classes for loans where there has been an increase in payment, where there has been no payment change, and where there has been a decrease to get a better understanding of that. Mr. Morris. Congresswoman Jenkins, as I mentioned in my testimony, that is a correct statement. On average, after the loan modification, the average increase is about $22. And that is the result of the past due amount being put into the new loan balance. The reason why I keep emphasizing this is the way that the loss mitigation program is set up currently is to help people who have temporary reductions in income. So what the servicers do is, when they do the financial analysis, they analyze the payments so that they can determine that it is an affordable payment. What is happening now, though, there is a permanent reduction in income, so we need a way to effectively reduce the payment in a tangible way, and that is why we are requesting the additional authority, so we will have additional tools to assess people in this situation. Chairwoman Waters. I am going to turn to Mr. Cleaver at this point. Before I do, has there been a formal request for additional authority so that you could basically reduce the amount of the mortgage payment? Mr. Morris. I was looking at the legislation yesterday. It was written in the Help Families Save Their Homes Act. It was in that authority. But I don't know exactly at what stage it is, and I will follow up. Chairwoman Waters. We will take a look. Mr. Cleaver. Mr. Cleaver. Thank you, Madam Chairwoman. With some concern, perhaps even fear, that the redefault rate will be used by opponents to fight most of what some of us are interested in doing with either cramdown or loan modification, is there anything that we can do to reduce the redefault rate, considering of course, I mean, obviously, if you go by the percentages with the subprime primers generally having a redefault rate higher, is there a way that we can undergird them or do something to reduce that? Anybody? Ms. Gardineer. Congressman, I think that, as my colleague Mr. Evers said, one of the things that our mortgage metrics report after the release of the third quarter data showed the increase in the redefaults at the 30- and 60-day past due mark; we did go out for a broader data collection to look at how loans were modified that resulted in an increase in principal as well as payment, where there was no change to the payments, to reduce payments by 10 percent or less, or reduce payments by more than 10 percent. And our goal in getting that information and then sharing it with the Administration's working group, which our agencies are continually working to help find the right criteria that we believe we can get from looking at how these modifications were done so we can see which ones were more effective and what that structure was. In sharing that with the working group with the Administration and with Treasury, we hope to find that streamlined effort where we can show the most effective modifications as demonstrated from the information we get. And hopefully we will be able to look at the lower rates of redefaults and see a correlation between some of these criteria, and utilize that to give some structure to our servicers as far as trying to make the most affordable and sustainable modifications as opposed to the ones that could easily slip back into a redefault situation. In addition to that, I think it is important to note that we do see a correlation with unemployment as well as underwater mortgages. All of those things, I think, that we get the increased data and we share that with our fellow agencies, it allows us to have the ability to try to form that more sustainable mortgage and avoid those redefaults. Mr. Cleaver. Mr. Evers. Mr. Evers. I would just follow up on what Grovetta said. We have interagency retail credit company guidance, and in that guidance, it basically requires servicers to try to do one mod, not multiple mods for a borrower. And that is in there to make sure that they do the mod right and they are not doing multiple mods. And the only time they would do a multiple mod, if the borrower has some life-changing event, like loss of a job or unemployment or some medical problem or major loss of income. But the real issue is, do the mod right, install for affordable, sustainable payment, and structure it properly. Mr. Cleaver. Is there way to do this with triage? That is, can it also be done in a just way? Mr. Evers. In terms of doing more? Mr. Cleaver. No, no. Is there a way--I mean, there are some loan modifications that we--I think Ms. Gardineer has just done a little, some loan modifications that we should know are not going to work. And so there is--it is pointless to try to force it to work, and we actually feed the people, we feed our opponents when we do that because they use that to, you know, say you are throwing away money, and the whole 9 yards. And I like to feed everybody, but I don't want to feed my opponents. Mr. Morris. Congressman Cleaver, I think I can respond to that question. As I mentioned in my testimony, it is really not the redefault rate. It is really that you end up foreclosing. The cost between throwing someone on the street and doing another modification through FHA is $750. So we will spend another $750 to try to keep somebody in the home, because what happens is, 2 years after the fact, more than 85 out of 100 people are still in their homes, and we are saving a lot of money as opposed to saying, oh, the redefault didn't work this time; let's not try it again. What happens is it takes time for people to recover from change in household income. It could be a disability. And it is--because, like I said, the current tools now, you have to go back to essentially your full payment. So we do have the redefaults, but still we work with them again to make certain that it sticks. And for another $750, if we can save another 60 families from losing their homes, that is what we are doing. So your opponent is going to look at the redefault rate, but my question is, has a person still been living in the house 2 years after the fact? Because 2 years really is the measure that says they fully recovered from any type of activity. If something happens 5 years down the road, it is probably another life event. So the question, this is just my opinion, is, what happens to the family? Are they ultimately foreclosed? And is it worth $750 to try to keep somebody in their house by doing another loan modification? FHA says it is worth another $750. Mr. Cleaver. Thank you, Madam Chairwoman. Chairwoman Waters. Mr. Lee. Mr. Lee. I will try to be brief, but it is such an important issue, and I just want to touch on a few points because this has been such a major issue in my district. I have a district between Buffalo and Rochester, New York, and a very hardworking community who this group, we never really had a boom to bust in the housing market. And in some way, that has been a blessing because people have been able to, up until now, been able to stay within their homes. But we are now starting to see the job losses, and people who, through no fault of their own, now are starting to have issues, be it a medical illness or they had two incomes and a wife or husband has been laid off. And these are people who have been paying their credit cards. Every day in and day out, they have been meeting their mortgage payments, but it has been harder and harder. And the calls that I am receiving by the dozens is the fact that they are making their payments, and they now go back to their service provider--and I won't name names of the institutions--but some are finding, in some cases, are finding relief through a service provider A, but service provider B under no circumstances really has been willing to either remodify the loan amount, lower interest rates, or try to work with them. And it is very hard to go back to them and say, we don't have a policy. I would be curious to know, can we--and I know most banks do have a process in place, but it doesn't seem to be consistent. I would like to hear your views. Do we, without trying to hamstring, I am not a big believer in Big Brother, but do we have the ability to come with some standard uniform process so that we can tell those who are struggling that these are options that are available to you, those people who are struggling but are making their payments right now, to try to assist them? And then I have a follow-up. Mr. Lawler. This is something we are definitely trying to address in the program we have been working with the Administration on, and we will have further details on March 4th. What we are trying to do is set up a standardized program that can be adopted throughout the country, and that will include people who are extremely stressed and therefore in imminent danger of default even though they are currently making their payments. And we are very hopeful that this will work, as we are certainly directly trying to attack this problem. Mr. Lee. And in follow up to that, because that is the number one call, then the follow-up call is the fact that, again, these hardworking individuals are frustrated because I think they are worried a percentage of individuals who misrepresented their income who, be it in different parts of the country where there was escalating prices, where they took advantage of that system. And is there any way, because I don't think there is anybody who wants to, if someone was trying to do this for personal gain versus those who have been truly hardworking citizens, how do we protect and make sure that we are not bailing out those who are trying to make a profit from this housing issue? Ms. Gardineer. Just to follow up. We are also working with the Administration to develop this loan modification program. And key to that is going to be verification of things such as income and employment. We believe it is important not only to reach as many homeowners as we can to put them into sustainable affordable modifications, but to be able to verify the veracity of the information that the borrower provides to that servicer. But the uniformity that we are striving for, I think, gets to the heart of your first question, which is the disparity that may be incumbent upon different servicers and the approaches that they use to modify different loans, and going to servicer A, who is willing to use a certain set of criteria, but that may not be utilized by servicer B. Our hope is that we will be able to create the streamlined modification effort that is able to verify, to weed out fraud, to make sure that those who are owner-occupied properties are able to get that sustainable affordable modification that will allow them to stay in the home and avoid an avoidable foreclosure. Mr. Lee. Thank you. Chairwoman Waters. Thank you very much. Before I call on Mr. Clay, keeping in line with that testimony, Ms. Gardineer, I have seen loans that--mortgages that people got involved in, in 2006 and 2007, where they were predatory loans, and the interest rates were 9 percent, 9.5 percent, and I had one at 10.5 percent. When you are constructing a model that can be used to do modifications, is there some consideration given to the high price of mortgages when the interest rates were basically at 5 or 6 percent? I mean, could we say or is it advisable to recommend that all of those interest rates be reduced to 4.5 percent or something that would be consistent with somewhere what the mortgages would be today? Ms. Gardineer. Chairwoman Waters, I believe that part of the criteria that we are looking at may not be an across-the- board interest rate, but certainly looking at the home price depreciation as well as the interest rate at the time of origination and the payments that the borrower would be able to afford, looking at the debt-to-income ratio as well as the loan-to-value. So taking all of those things into consideration as well as the highest rates that may have been advanced at the origination, I think it is possible for us to come up with a streamlined approach that would indeed include a reduced interest rate in order to make that modification an affordable payment for that borrower. Chairwoman Waters. I do understand that, now, with the modification efforts that I have been involved in helping some of my constituents, all of those things are taken into consideration for the most part. But I was really asking about the reduction of interest rates based on what appears to be a predatory interest rate that was given at a time when the market interest rates were 5 or 6 percent, that you see, I mean, it just jumps out at you that this person is charged 10.5 or 9 percent. Wouldn't that kind of be an automatic reduction without all the other considerations? Ms. Gardineer. Congresswoman, I believe that you made an excellent point that I will take back to the working group this afternoon and include in our dialogue as we move towards our March 4th deadline to provide that criteria and the parameters for the servicers. But that is an excellent point that we should be considering as we move forward. Chairwoman Waters. I appreciate that, because I have run across a few of those. Mr. Clay. Mr. Clay. Thank you, Madam Chairwoman, and I thank the panel for being here today. Let me start with Mr. Lawler. Mr. Lawler, in your testimony, you state that it is important to note that when calculating and analyzing redefault rates, common definitions are required, and there is much debate within the industry as to what those definitions are, how redefault rates should be measured, and over what timeframes. I am curious as to how you would define redefault terms and definition. When reporting your data, what do you consider a modification, and is a repayment plan a modification? Mr. Lawler. A repayment plan that doesn't change the terms of the mortgage but simply when it can be paid is not a modification. If it were a major change like a change in the term from a 30-year mortgage to a 40-year mortgage, that would be a modification. If it is simply taking the existing amount owed and saying, you can make up payments that you are behind at the end of the 30 years, that would just be a repayment plan or redistributing those amounts owed so that your payment goes up. Those are just repayment plans. As far as the definitions of redefault, the key things are, how many days delinquent, and over what timeframe? So, for example, Mr. Morris is suggesting that if you are still in your house 2 years later, that probably shouldn't count as a redefault. Sometimes you don't have as long a period. You don't want to wait 2 years to see how you are doing, so you compute how the loans are doing that you modified in a more recent time period and you want to know, well, how many 30-day delinquencies do I have, how many 60-day, how many 90-day and so forth. Mr. Clay. Thank you for that response. Let me ask Mr. Evers. Mr. Evers. I just want to follow up on that. We agree that there needs to be clear, standard definitions. You need to have a clear definition of what is a mod and what is not. A repayment plan, an informal repayment plan is not a mod. A mod is when the contractual terms of the payment have been changed in writing. And we only count that when it is done; nothing before that, nothing informal. And then we track subsequent performance, post-modification. And we look at the number of payments the borrower has made subsequent to that. That is, in our opinion, the best way to get an apples-to-apples comparison in terms of monitoring performance of post-modification loans. Mr. Clay. Thank you for that response. How do we establish a guideline to ensure that we take into account the trend of the day that has several people in the household contributing to the mortgage payment? Many of these households stayed current in their payments until this current crisis. When considering a workout with the applicant, what do you include as gross income? Do you include the wife or other family members living in the home as additional sources of income if they are not on the mortgage? And anyone can take a stab at it on the panel. Ms. Gardineer. Congressman, currently, the person who is actually on the note is the--or the couple or whoever is actually on the original note, that is the income that is the measure by which you are looking at how to modify that loan. There can be, and we recognize and it is a continued topic of discussion in the working groups right now working on the Treasury and Administration plan, recognizing that there are many households with contributors to the monthly mortgage income that are not actually on the note and how to recognize or work within that structure to create an affordable modification. But the current legal requirements would limit our ability to look at only those who are actually on the note for repayment modifications. Mr. Clay. But you know that is not traditional. Ms. Gardineer. I do recognize there are many households, as you described, and the working group is aware of that as well. Mr. Clay. I think, Mr. Morris, you may be able to help me with this. Are we trying to force the choice of a modification over that of a refinance? The new charges added by Fannie Mae and Freddie Mac in December add up to about $15,000 to refinance costs for the borrower. Why is that? They have added up to 5 points. They have new terms like adverse market fee, adverse credit fee, and nonowner fee. Can you give me an answer to that? Do you know why? Mr. Morris. Candidly, Congressman Clay, I think Mr. Lawler would have to speak about the fees. Mr. Clay. Mr. Lawler, could you tackle that? Mr. Lawler. Certainly the fees on many mortgages have gone up. The risks have also gone up. It is a lot riskier to make a loan when the expectation is that the value of the collateral is going to decline over the period of the loan, than in a time when you expect the value of the collateral to get greater. And in recognition of that risk, it is necessary to make some charges. At the same time, whenever it is possible, a refinance is probably on average going to be more successful than a modification if the borrower can qualify for the refinance. Mr. Clay. But don't we want to kind of look at what is reasonable here? I mean, what is actually doable for the average consumer? Mr. Lawler. We certainly do. And the most important thing in that area that we can do is try to get the general level of mortgage interest rates down. Mr. Clay. Without Fannie and Freddie adding onerous fees and arbitrary fees? Mr. Lawler. I hope they are not arbitrary. Mr. Clay. I bet they are. I yield back. Chairwoman Waters. Thank you very much. As we wrap this up, and since you are making recommendations that supposedly will be unveiled on March 4th in the President's plan, I would like you to give some thought to the fact that I have run into constituents who say they are the victims of fraud. Even though all of us would like to think we are all responsible and we know what we are doing, I am told that certain individuals had income that was noted on the documents that was much larger than their real income, and that that is not what they told the loan initiator; and they placed it on there in order to get the loan funded, the mortgage funded. I am told that people did not sign certain documents. What do we do where there is an indication of fraud? How do we follow that up? And how do we help the homeowner, and how do we penalize somebody? I mean, that is something I would like to give some consideration to. And FICO scores. If you have an adjustable rate mortgage and the margin is, I don't know, 3 or 4 percentage points higher, and you obviously cannot pay that large a mortgage payment, and so you are delinquent, but you are trying to get a loan modification. If you were being considered, say, by, I don't know, Fannie or Freddie or anybody else who would consider your FICO score as part of those things you consider before you do the loan modification, what do we do about that? Should you be penalized for that now having damaged your credit while you are trying and you have been working very hard to do a loan modification so that you could keep your home and you could make payments that you could afford? So I would like you to give some thought to that. I would like to note 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. This panel is now dismissed. Thank you very much. I would like to welcome our distinguished second panel. Our first witness will be Mr. William C Erbey, chairman and CEO of Ocwen Financial Corporation. Welcome. STATEMENT OF WILLIAM C. ERBEY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, OCWEN FINANCIAL CORPORATION Mr. Erbey. Thank you, Chairwoman Waters, Ranking Member Capito, and distinguished members of the subcommittee. My name is William Erbey, and I am chairman and chief executive officer of Ocwen Financial Corporation, an independent mortgage loan servicer. First, let me thank you for the opportunity to participate in this hearing today. I share your sense of urgency to find a lasting solution to our daunting foreclosure crisis, a crisis that lies at the very heart of our economic problems and threatens millions of families with the loss of their American dream, their home. I applaud the leadership of the chairwoman and subcommittee members in relentlessly advocating, ever since the inception of this crisis, the need for bold action to assist homeowners with unaffordable mortgages and to prevent avoidable foreclosures. I also applaud President Obama, Secretary Geithner, and the President's economic team for answering the call for bold action in a matter of a few weeks into the new Administration by launching the Homeowner Affordability and Stability Plan. This plan includes a substantial loan modification component that is the subject of today's hearing. Prior government-sponsored loan modification initiatives were all good first steps in the right direction, but the President's new plan is exactly the kind of insightful and decisive action that is needed to make a material impact on the foreclosure crisis. As one of the few remaining independent mortgage servicers, Ocwen is very proud of our achievements in foreclosure prevention through loan modifications. We are not loan originators. We do not make mortgage loans. Rather, Ocwen is engaged as a loan servicer under contracts with mortgage investors, i.e., the securitized REMIC trusts. Currently, our servicing portfolio contains approximately 325,000 mortgage loans of which approximately 85 percent are subprime. Beginning in early 2007, we proactively prepared for an increase in mortgage delinquencies by increasing our home retention consulting staff by 50 percent. When the mortgage meltdown hit with full force later that year, we increased staff by another 35 percent and were the first in the industry to adopt an aggressive and comprehensive loan modification program. Our program reengineers lower mortgage payments that are both: (A) affordable for the homeowner; and (B) will return greater cash flow to investors than the net proceeds that would otherwise be realized in a foreclosure. Loan modifications crafted in this way are consistent with our contractual obligations and result in a win-win-win solution for all involved. The homeowner keeps their home; the investor avoids a substantial loss; and the loan servicer retains the loan in the servicing portfolio. Since the inception of the crisis, we have saved over 90,000 homes from foreclosure. And for investors, according to an industry study by Credit Suisse, Ocwen's loan modification program generates the highest cash flows by any servicer on 90-plus day delinquent loans, an amount that is twice the industry average. If loan modifications are to have an enduring impact, the reduced mortgage payments must be sustainable by the homeowners. The salient measure of success, therefore, is the redefault rate, i.e., the percentage of loans that go into default after modification. We are pleased to report that loan modifications engineered by Ocwen have a redefault rate of 19.4 percent compared to an industry average of 42.9 percent, according to the most recent report issued by the OCC and the OTS. The superior sustainability of Ocwen's loan modifications is the result of our customized approach that addresses homeowners' delinquencies on a loan-by-loan basis. By combining our proprietary loan analytics technology with behavioral science research, we first comprehensively re-underwrite each delinquent loan we service, i.e., the way it should have been done with the broker or the lender at origination. Second, we determine whether modification is both affordable by the homeowner on a sustainable basis and maximizes the net present value for the loan owner as compared to a foreclosure. And, third, we provide one-on-one financial counseling to the homeowner aided by interactive scripting engines to maximize the likelihood of their keeping current on the modified loan. Another key to sustainability is principal reductions where necessary to achieve affordability: 18.7 percent of our loan modifications include writing down of the loan balance. This allows us to help more distressed homeowners with solutions. As reported by Credit Suisse, Ocwen leads the industry with 70 percent of the industry's principal reduction modifications. Early intervention is critical to foreclosure prevention. Prevailing industry standards, as confirmed by the American Securitization Forum, make it clear that it is permissible to modify loans not only when the borrower is actually in default but also when default is imminent or reasonably foreseeable in the good faith judgment of the servicer. Adopting this standard, our early intervention unit has successfully avoided upwards of 9,000 foreclosures through proactive modifications. If a loan modification program is to have a material impact to redress the national foreclosure crisis, it must be scalable. Ocwen has invested over $100 million in R&D in building an automated large-scale platform that incorporates artificial intelligence, decisioning models, and scripting engines. This robust technology allows us to take on many multiples of the volume of delinquencies we have already cured in our portfolio. I would be remiss if I did not recognize the critical assistance provided to us by our nonprofit consumer advocacy partners. When, for whatever reason, a homeowner in distress does not respond to our letters or phone calls, we are unable to help them. Through grassroots outreach and educational initiatives, community groups, such as the National Training Information Center, Home Free U.S.A., National Fair Housing Alliance, National Association of Neighborhoods, National Council of LaRaza, St. Ambrose Housing Aid Center, and so many others, have greatly assisted us in making that key communication link with our customers. We have also recently established a relationship with National Community Reinvestment Coalition to broaden our homeowner outreach, and we will continue to support the foreclosure prevention efforts of the HOPE NOW Alliance. [The prepared statement of Mr. Erbey can be found on page 70 of the appendix.] Chairwoman Waters. Thank you very much. I must move on to Ms. Mary Coffin, executive vice president of Wells Fargo Home Mortgage Servicing. STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, WELLS FARGO HOME MORTGAGE SERVICING Ms. Coffin. Chairwoman Waters, Ranking Member Capito, and members of the subcommittee, I am Mary Coffin, head of Wells Fargo Mortgage Servicing. Throughout this crisis, the mortgage industry and the government have collaborated on ways to reduce foreclosures and stabilize the economy. The homeowner affordability and stability plan is yet another positive step in addressing these challenges. As further details of the plan are defined, we fully support striking the delicate balance between providing aggressive solutions for those in need and guarding against moral hazard. Last year, we made it possible for half-a-million families to purchase a home, and we refinanced another half-a-million families into lower mortgage payments. At the end of 2008, for 8 million mortgage customers Wells Fargo services, 93 of every 100 were current on their mortgage payments; and for the 7 who were not, we have worked hard at keeping them in their homes. Since our servicing is predominantly held by other investors, this has required gaining consensus to honor our contracts. Over the past year-and-a-half, we have delivered more than 706,000 foreclosure prevention solutions. We work with all of our customers, including those who are not in default, to determine if they qualify for a modification. They simply need to prove they have experienced a hardship that significantly changed their income and/or expenses. When we do modify a loan, about 7 of every 10 customers remain current or less than 90 days past due 1 year later. We connect with 94 percent of our customers who have 2 or more payments past due. To be responsive to requests for help, we have more than doubled our staff to 8,000 default team members, all U.S.-based. These times are unprecedented, and we certainly are not perfect, but we do our best. And we thank you for taking your personal time to reach out to us when our servicer does not meet the standards we have set so that we can immediately work to correct the situation. When the foreclosure crisis began 2\1/2\ years ago, the first customers challenged were those with subprime ARM loans. To address their needs, streamlined processes to modify these loans into fixed products were created. But, clearly, as the housing and economic crisis has compounded, servicers have needed to go deeper with modification tools to provide sustainable solutions. In the fourth quarter of 2008, we provided 165,000 solutions, including term extensions, interest rate reductions, and/or principal forgiveness. Also, given the unique nature of the Wachovia option ARM loans, we used more aggressive solutions through a combination of means, including permanent principal reduction in geographies with substantial property declines. In total, 478,000 customers will have access to this program if they need it. As the number of customers in need rises, Wells Fargo has advocated the creation of a standardized modification process that is aligned across all investors. The one described in the Administration's plan will significantly improve our ability to serve more customers and to set appropriate consumer expectations for a modification. According to third quarter 2008 FHA statistics, 56 percent of the Nation's 55 million mortgage loans are owned by Fannie and Freddie who are already aligned with this process. But more critical are the 16 percent held by private investors, which represent 62 percent of the serious delinquent mortgage loans. In the modifications we do today, loan terms are adjusted to achieve at least a 38 percent affordability target. By bringing borrowers to a 31 percent target as defined in the Administration's plan, we further increase the odds they can better manage their overall debt, thereby lessening the likelihood of redefault. Even though the details are not finalized, Wells Fargo has already begun to operationalize the standard modification program. We stood ready to assist our customers with information immediately following the President's announcement and our analysis to find those who may qualify is underway. We also will continue to stress the importance for FHA to be granted the authority to expand the 601 program to allow the assignment of mortgages to FHA and the payment of claims upon modification. We also support the recommended changes to HOPE for Homeowners. When asked what makes it difficult for us to help more borrowers, it is simply that their challenges are complex. Income disruption is at the root of the issue with many customers who are in variable or commissioned income situations that began destabilizing in the early part of the crisis, and the full impact of unemployment or underemployment is still unknown. While there are many tragic hardship cases, there are also people who got caught up in the excess of the growing economy and the real estate values who can no longer sustain the lifestyles to which they have become accustomed. No loan modification alone can solve this dilemma. In certain circumstances, counseling which considers full debt restructuring is required. In conclusion, we look forward to continuing to work with you on ways to turn the housing and mortgage industry around, and we will assist in any way possible to advance the issues we have addressed today. Thank you for your time. [The prepared statement of Ms. Coffin can be found on page 67 of the appendix.] Chairwoman Waters. Thank you very much. Our next witness is someone who has been here more than once, Mr. Michael Gross, manager and director for loss mitigation, Bank of America. What do you have new to tell us today, Mr. Gross? STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, LOAN ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA Mr. Gross. Madam Chairwoman, and Ranking Member Capito, I must confess, it is a pleasure to be here before you again. Chairwoman Waters. I bet. Mr. Gross. Good afternoon, and thank you for the opportunity to appear again to update you on our efforts to help families stay in their homes. As the country's leading mortgage lender and servicer, Bank of America fully appreciates its role in helping homeowners through these difficult times. We want to ensure that any homeowner who has sufficient income and the intent to maintain homeownership will be assisted using any and all tools we have available. Bank of America applauds the Obama Administration's Homeowner Affordability and Stability Plan's focus on assisting financially distressed homeowners with their mortgage payments using their refinancing and loan modification program. Ken Lewis, our chairman, has assessed the plan as very thoughtfully constructed, and believes it has a very good chance to make a significant and positive impact on today's crisis. We strongly support the Administration's focus on affordability in the loan modification processes in order to achieve long-term mortgage sustainability for homeowners. Bank of America recently announced a moratorium on foreclosure sales that is in effect until receipt of guidelines for implementing the President's plan. Simply put, we want to have every opportunity to help eligible homeowners who can be assisted by these new initiatives. We have already begun working with the Administration to develop guidelines for the implementation of the Homeowner Affordability and Stability Plan modification and refinance initiatives in order to ensure its success. The Administration's focus on affordability and sustainability is consistent with the approach that we have implemented which has led to more than 230,000 loan modifications for our customers in 2008 and 39,000 customers in January 2009 alone. In 2008, Bank of America committed to offer loan modifications to as many as 630,000 customers over the next 3 years to help them stay in their homes, representing more than $100 billion in mortgage financing. I would also like to provide a brief update on our mortgage business. We strongly believe that long-term recovery in the economy and housing markets relies upon lenders' responsibility and effectively providing loans to credit-worthy borrowers. In April, we will unveil our new Bank of America home loans brand. This launch will confirm our longstanding pledge to be a responsible lender and to help our customers achieve successful sustainable home ownership. Importantly, I want to emphasize that we are very much open for business and making new loans. In January, we produced $21.9 billion in new mortgages. We are now routinely publishing public updates on the Internet regarding our lending activity. Since I last appeared before Congress, Bank of America launched the Homeownership Retention Program. The program, launched in December, is designed to achieve affordable and sustainable mortgage payments for borrowers who financed their homes with subprime or pay-option adjustable-rate mortgages serviced and originated by Countrywide prior to December 31, 2007. The centerpiece of the program is a streamlined loan modification process designed to provide relief to eligible subprime and pay-option ARM customers who are seriously delinquent or at the risk of imminent default as the result of loan features, such as rate resets or payment recasts. The program's goal is the same as the President's: to reduce monthly mortgage payments to affordable and sustainable levels. I would also like to update the committee on additional progress we have made to date on our entire home retention operations. Since early last year, the home retention staff for Bank of America has more than doubled to nearly 6,000 staff members. We also are continuously improving the training and quality of the professionals dedicated to home retention. As we have learned through experience, early and open communication with customers is the most critical step in helping prevent foreclosures. In 2008, we participated in more than 350 home retention outreach events across the country. We are also proactively reaching out to customers by making more than 10 attempts per month to contact delinquent homeowners. In January alone, we placed nearly 12 million outbound calls. In addition to sharply increasing the pace of workouts, we have been more aggressive in the types of workout plans completed. Loan modifications are now the predominant form of workout assistants. In 2008, loan modifications accounted for nearly 75 percent of all loan modification plans. Of these loans, interest rate modifications accounted for approximately 80 percent of all of the loan modifications. I want to thank you for the opportunity to describe our ongoing home retention efforts. We recognize there is still much more to be done, and we look forward to working with Congress and the Administration. Thank you. [The prepared statement of Mr. Gross can be found on page 111 of the appendix.] Chairwoman Waters. Thank you very much. Ms. Molly Sheehan, senior vice president, Chase Home Lending, JP Mortgage Chase. STATEMENT OF MARGUERITE SHEEHAN, SENIOR VICE PRESIDENT, CHASE HOME LENDING, JPMORGAN CHASE Ms. Sheehan. Chairwoman Waters, Ranking Member Capito, and members of the Subcommittee on Housing and Community Opportunity, we appreciate the opportunity to appear before you today on this most important topic of helping homeowners. My name is Molly Sheehan. I work for the home lending division of JPMorgan Chase in housing policy. Chase is one of the largest residential mortgage servicers in the United States, serving more than 10 million customers located in every State of the country with mortgage and home equity loans totaling about $1.4 trillion. Chase is also one of the largest residential mortgage lenders, and we continue to make mortgage credit available even in these difficult times. We provide loans directly to consumers, and we purchase loans from smaller lenders so that they can lend to their customers. In 2008, Chase originated or purchased more than $105 billion in mortgage loans, even as mortgage applications declined significantly. At Chase, we are not only continuing to lend; we are also doing everything we can to help families meet their mortgage obligations and keep them in their homes. We believe it is in the best interest of both the homeowner and the mortgage holder to take corrective actions as early as possible, in some cases even before default occurs. We apply our foreclosure prevention initiatives to both the $325 billion of loans that we own and service, and the $1.1 trillion of investor-owned loans that we service. We expect to help avert 650,000 foreclosures, for a total of $110 billion worth of loans, by the end of 2010. We have already helped prevent more than 330,000 foreclosures, including modifying loan terms to achieve what we expect to be long-term sustainable mortgage payments. We are well underway to implementing the commitments we made in announcing our expanded foreclosure prevention plan last October. We have commenced mailing proactive modification offers to borrowers of Chase-owned option ARM loans at imminent risk of default. We have selected sites for 24 Chase homeownership centers in areas with high mortgage delinquencies where counselors can work face-to-face with struggling homeowners. We will have 13 of these centers in California and Florida open and serving borrowers by the end of this week. The other 11 around the country will be open by the end of next month. We have added significantly to our staff, and we continue to add more capacity in our operations to help struggling homeowners. We initiated an independent review process to ensure each borrower is contacted properly and offered modification prior to foreclosure as appropriate. We have developed a robust financial modeling tool to analyze and compare the net present value of a home foreclosure to the net present value of a proposed loan modification, which allows us to modify loans proactively while still meeting contractual obligations to our investors. We believe programs like ours are the right approach for the consumer, all consumers, and for the stability of our financial system as a whole. We support the Administration's proposal to adopt the uniform national standard for such programs and to encourage all sensible modification efforts short of bankruptcy as much as possible. As our CEO commented last week, we believe the Homeowner Affordability and Stability Plan announced by President Obama is good and strong, comprehensive and thoughtful. We think it will be successful in modifying mortgages in a way that is good for homeowners. Most particularly we applaud the fact that the plan focuses on making monthly payments affordable; will create a national standard and create fair and consistent treatment across the industry; and the standard will include verification of income and expense. We also applaud the partnership with government to reduce interest rates and payments for borrowers and the expanded ability of borrowers to take advantage of today's lower rates through refinancing. We look forward to working with the Administration, Congress, and others as we work forward on this plan. As we advised Chairman Frank and the members of the House Financial Services Committee on February 12th, we have stopped adding loans owned by Chase into the foreclosure process as the Administration's plan is being developed. Thank you. [The prepared statement of Ms. Sheehan can be found on page 152 of the appendix.] Chairwoman Waters. Thank you very much. Mr. Steve Hemperly, executive vice president, real estate default servicing, CitiMortgage. STATEMENT OF STEVEN D. HEMPERLY, EXECUTIVE VICE PRESIDENT, REAL ESTATE DEFAULT SERVICING, CITIMORTGAGE, INC. Mr. Hemperly. Chairwoman Waters, Ranking Member Capito, and members of the subcommittee, thank you for the chance to appear before you today to discuss Citi's loan modification efforts. My name is Steve Hemperly, and I am the executive vice president for CitiMortgage Real Estate Default Servicing. Citi services approximately 7 percent of the loans in the United States. In this enormous difficult housing market, Citi has moved aggressively to help distressed borrowers. We have a high degree of success in keeping borrowers in their homes when we are able to make contact with them and they want to remain there. Citi specifically focuses on finding long-term solutions for borrowers in need. In support of this, a key loss mitigation tool is loan modification. A modification agreement is typically used when a customer has a significant reduction of income that impacts his or her ability to pay and lasts beyond the foreseeable future. This agreement makes the mortgage more affordable for the customer. We have found modifications to be effective in helping borrowers manage through difficult times and avoid foreclosure. Citi has a specially trained servicing unit that works with at-risk homeowners to find solutions short of foreclosure and tries to ensure that, wherever possible, no borrower loses his or her home. Citi continuously evaluates each of its portfolios to identify those customers who can save money and reduce monthly payments and offers them timely loss mitigation solutions. We also provide free credit counseling, make loss mitigation staff available to borrowers or counseling organizations, and provide work-out arrangements and other options. In keeping with our commitment to help borrowers stay in their homes, we are implementing the FDIC streamline modification program for loans that we own where the borrowers are at least 60 days delinquent or where the long-term modification is appropriate even if the borrower is not yet delinquent. In November of 2008, we announced the Citi Homeowner Assistance Program for families in areas of economic distress and sharply declining home values. For those borrowers who may be at risk although still current on the mortgages, we are deploying a variety of means to help them remain current on the mortgages and in their homes. Citi's foreclosure prevention activities have good resolution rates for distressed borrowers whom we are able to reach. For example, for those going through the foreclosure process with whom we are in contact, we are able to help approximately 70 percent of them. However, we are not able to reach every one, and in those circumstances, there are limits to what we can do. To better meet the increased needs of the struggling borrowers we service regardless of delinquency status, we have dedicated significant resources to our loss mitigation area. We have stepped up our loss mitigation staffing by almost 3 times from last year, since last year's staffing levels, and we will be providing additional training to all of our staff. Additionally, as promised by our CEO, Vikram Pandit, to the House Financial Services Committee on February is 11th, Citi initiated a foreclosure moratorium on all Citi-owned first mortgages that are the principal residence of the customer as well as all loans Citi services where we have reached an understanding with the investor. The moratorium became effective February 12th and will continue until March 12th, before which time we expect finalized details on President Obama's loan modification program. Citi will not initiate any new foreclosures or complete pending foreclosures on eligible customers during this time. This commitment builds upon our existing foreclosure moratorium for eligible borrowers who work with us in good faith to remain in their primary residence and have sufficient income to make affordable mortgage payments. In order for policy makers, regulators, consumers, and market participants to better understand the extent of the current situation and our efforts to ameliorate it, we think it is important to share what we know. To assist in this effort, for the past four quarters, we have produced and publicly released our mortgage servicing report, which provides specific detail on our originations, delinquency trends, ARM resets, loss mitigation efforts, loan modification, foreclosures in process, and new foreclosures initiated. Our soon-to-be- released fourth quarter report will also include detailed information on our modification redefault rates for the first time. Our report will show that distressed borrowers serviced by Citi who received modifications, reinstatements or repayment plans outnumbered those who were foreclosed on by more than six to one in the fourth quarter. The number of borrowers who were serviced by Citi who received long-term modifications in that quarter increased by approximately 51 percent as compared with the third quarter. Our redefault rates, meaning the percentage of borrowers who have become 60-plus or 90-plus days past due at a given period of time after the loans are modified, do not exceed 23 percent for loans modified over the past year. For example, of the loans modified in the second quarter of 2008. Only 14 percent were 90-plus days past due 6 months after the modification. The fact that these borrowers are delinquent does not mean that will result in foreclosure. In fact, we will continue to work with those borrowers to make sure that we are able to find some kind of a long-term solution to keep them in their homes. I want to assure the committee that we share your interest in helping homeowners, and we strongly support this committee's leadership in foreclosure prevention and its tireless efforts to solve the housing crisis. Thank you, I will be happy to answer any of your questions. [The prepared statement of Mr. Hemperly can be found on page 120 of the appendix.] Chairwoman Waters. Thank you very much. I would like to start with Mr. Erbey. Mr. Erbey, you are an independent loan modification--a servicer, servicer, I am sorry. Who do you contract with? Who do you do business with? Mr. Erbey. Our customers are the securitization-- Chairwoman Waters. I can't hear you. Mr. Erbey. Our customers are the securitization trust. When Wall Street put together securities, they would contract with servicers to service those loans. That was our main line of business. Chairwoman Waters. And how do the customers who are in trouble find you? Mr. Erbey. We are a servicer much like the other bank-owned servicers. In other words, we send out bills and statements. We have call centers. We are not affiliated with the bank, and we do not originate mortgages, but we actually, whenever you take over a portfolio, you send out hello letters and you call the people up and verify the information with regard to that. So there is extensive contact with our customer base much like any other servicer would have. Chairwoman Waters. Have you found any claims of fraud by complaining mortgage holders that they were tricked, they were misled, that they did not sign certain documents, that they did not falsify, but it was done by a loan initiator? Mr. Erbey. Yes. Chairwoman Waters. And what do you do? Mr. Erbey. We try to basically, in all those cases, we try to basically re-underwrite that loan specifically to the person's ability to pay that for that loan and to get them on to a modification plan that is sustainable and get them going in a stabilized situation going forward. Chairwoman Waters. We don't have anything in the system to go after those loan initiators who appear to be guilty of some kind of fraudulent operation, do we? Mr. Erbey. Unfortunately, we do not. Chairwoman Waters. Do you think that is needed? Mr. Erbey. Yes, I certainly do. Chairwoman Waters. I appreciate that, thank you. Ms. Coffin, I thank you for being here today. You know of my experience with Wells Fargo. And I am appreciative for your CEO who sent us a letter apologizing for any inconveniences, saying this is not typical of the way your servicing operation works. Now let me understand that the Wells Fargo home mortgage servicing is separate from the bank; this is a separate institution or business, is that right? Ms. Coffin. Well, we are part of Wells Fargo. Chairwoman Waters. I cannot hear you. Ms. Coffin. Is the microphone on? Chairwoman Waters. Pull it closer. Ms. Coffin. We are definitely a part of Wells Fargo bank, so any customer who is in need of our services can either call our centers, can walk into any of our branches, can look through our Web sites. We are very connected with the banks. Chairwoman Waters. So you are only servicing Wells Fargo loans, is that right? Ms. Coffin. No, that is not correct. Chairwoman Waters. What other loans do you service? Ms. Coffin. We also service loans under ASE, which stands for America's Servicing Company, or to the loans, just like the gentleman from Ocwen just mentioned-- Chairwoman Waters. So you have contracts with investors also. Ms. Coffin. Right. Chairwoman Waters. The contracts you have with the investors, do they have clauses that prevent you from doing loan modifications? Do they set that out in the contracts with you that you sign sometimes? Ms. Coffin. There are a few. Chairwoman Waters. What percentage? Ms. Coffin. A very small percentage. Chairwoman Waters. I have run across this where I am told, sorry, there is nothing we can do, because we signed a contract with this investor where we said we would not use loan modifications as a way of servicing the customers. Ms. Coffin. When we do have those contracts today, in the current environment that we are operating under, we still reach out to those issuers and ask, based upon the net present value that we have calculated, if they would like us to do the modification. Chairwoman Waters. How many say, go ahead and do it? Ms. Coffin. Some do, and some don't. Chairwoman Waters. What do you think we should do about that? Should we support those kinds of contracts that will not give the servicer the opportunity to do a reasonable, credible loan modification? Ms. Coffin. As I stated in my testimony, what I think is most important right now is the Administration's plan that provides a standardized modification program that all investors should follow. Chairwoman Waters. All right. Now have you reduced the wait time on customers calling in to get some help? I waited over an hour or more. You know, that is a deterrent To people trying to get loan modifications. Ms. Coffin. I do understand. Chairwoman Waters. Have you increased the employment, so that you have more servicers? Ms. Coffin. Yes, we are. We continuing to hire all the time because of what is before us. And we strive for an 80 percent, which means within 3 to 4 rings, we hope to answer 80 percent of our calls, at all times, every day of the week. Chairwoman Waters. Who trains your servicers? Ms. Coffin. We do. Chairwoman Waters. There is no licensing of servicers. This is kind of an unregulated part of the industry. Is that right? Ms. Coffin. That is correct. We train them in-house. Chairwoman Waters. Describe their training. Do they train for 1 month, 2 months, a year? What kind of training do you give them? Ms. Coffin. 6 to 8 weeks, and what we normally do-- Chairwoman Waters. What kind of background do they have to have? Ms. Coffin. In our default shop, it is a collections background. What we are looking for is people who have understood how to solve problems for people who are stressed, who are in these type of situations with affordability issues. When we bring them first on and they are trained, we do a buddy system. We make sure that they are sitting-- Chairwoman Waters. What is a typical job they would have had prior to coming to your businesses? Ms. Coffin. A collections job or loss mitigation, which is people who help borrowers through modifying the terms of their loan. Chairwoman Waters. Any particular education? Ms. Coffin. No. Chairwoman Waters. Any particular requirement that they would have worked in a bank or worked with loans, mortgages? Ms. Coffin. What is most important to us is what we train them on in-- Chairwoman Waters. Yes, but that is not the question I asked you. I am asking about qualifications. I am trying to determine how you select and identify these people that you train for 6 to 8 weeks. Do they have to have any background in finance or in working with mortgages or anything like that? Ms. Coffin. We will always look for people with a background in finance. Chairwoman Waters. But they don't have to have one, is that right? Ms. Coffin. No. Chairwoman Waters. So you are training people who may come from almost anywhere for 6 to 8 weeks. Do you think they are able to take every aspect of this mortgage and make decisions about whether or not or what kinds of loan modifications? They have a lot of flexibility there. Ms. Coffin. We normally don't bring people straight in as we hire them and bring them straight into a loss mitigation area of our operation. What we will often do is bring them in, train them, put them in a buddy system, which means they will first answer what we call the easier questions, and what we do is continually move our well-trained people who now have had months, sometimes years, of experience and continue to move them to our area which takes more skill and is more complicated, which is actually working through the loan modifications. Chairwoman Waters. Thank you. Mr. Gross, we have talked about this before, and you know, it is a particular little problem with me. Your loss mitigation, you still have some offshore? Mr. Gross. Yes, we do. Chairwoman Waters. Why? Mr. Gross. Because we find that the job responsibilities that we have assigned to that staff, which is primarily customer-service oriented, answering questions that homeowners may-- Chairwoman Waters. Give us an example of where these offshore operation are? India? Mr. Gross. In India and Costa Rica. Chairwoman Waters. In India, we have people who are helping Americans who are in trouble who understand the system and what we are doing and are able to make decisions? Mr. Gross. No, that is not what I said. The people in India will receive calls from homeowners who are typically--the homeowner is calling in to make a promise to pay or to say a date specific on when a payment will be received. If they say, I am not able to make this payment this month and I am going to need long-term help, that call is immediately transferred back to State-side and will be worked by one of our State-side loss mitigation staff members. Chairwoman Waters. Well, what if I said to you, if you are going to get TARP money, you have to hire people in this country to do loss mitigation? Would you agree with that, since we are trying to create jobs? Why are you smiling? Mr. Gross. That was probably more of a grimace. I understand the question, but that is really outside my frame of reference. Chairwoman Waters. No, you have been here long enough to know that you were going to get this question from me. You always do. And I am sure you anticipated it. Mr. Gross. The-- Chairwoman Waters. It seems to me you would have come here today and said: You know, we appreciate the American citizens having given us so much money. We are coming back to ask you for more. We are going to take all of our offshore operations and bring them home and create jobs for the taxpayers who are underwriting us. Well, I have said that. The other thing about Bank of America, you talk about this home retention program. I discovered in doing loan modification implementation work with my constituents that you have several departments. Have you merged them all, or do I need to go through with you the different ways you can end up in several different departments at Bank of America when you are trying to get help? Mr. Gross. They have not yet been merged, but we are actively working on our phone systems to make sure that when you call in or a homeowner calls in, that they are immediately connected with the appropriate individuals. Chairwoman Waters. Well, how long is that going to take you? This has been going on for an awfully long time. If you call in and you say, I am late on my payment, you go one place. If you call in and say, I am not late on my payment, but I went to talk to somebody so I don't get in default, you go another place. If you call in and you say, I have a loan modification, but I may reach a default on it, you go to another place. So what is this home retention consolidation that you have when you still have all of these different departments that you send people to. Mr. Gross. The process that you described, when a homeowner calls in and they are current on their mortgage, they are automatically routed to our customer service environment, since the vast majority of those calls do not deal with delinquent payments; they deal with other questions. So when a homeowner calls in and reaches the customer service staff and says, I am not going to be able to make a future payment, and they need in-depth assistance, then that call will then be transferred to the home retention department, and that staff member will then work with that current homeowner on what their issues are. That process I do not envision changing. Chairwoman Waters. Well, let me just say this, the system that you use is confusing to constituents. I was on the phone with Bank of America for hours, and your people sent me all over the country to different departments. And nobody seemed to understand what I was asking. And if you have something called home retention, it seems to me it would be consolidated so that when someone called, they would not be transferred around to several different departments and that the people who were directing them to supposedly the correct department would know exactly what to do. So would you consider it fair for us to say to the President, you must do something to force the Bank of America to have a consolidated effort to help homeowners in trouble before they get any more TARP money? Mr. Gross. I am not prepared to comment on the TARP funds. What I will commit to is that within a very short period of time, we will deliver back to the committee an in-depth description of what we do and how we do it, so that you have a complete written understanding of our processes. Chairwoman Waters. Thank you very much. Ms. Sheehan, you--well, before I leave Mr. Gross, are you doing all of Countrywide's loan modifications? Mr. Gross. Yes, we are. There is still the Countrywide mortgage servicing operation that in April will be changing over to the Bank of America name. Chairwoman Waters. But right now, Countrywide is still doing some of its own servicing, is that right? Mr. Gross. They are, yes. Chairwoman Waters. Okay, and Ms. Sheehan, you also contract with other entities to do their servicing, is that correct? Ms. Sheehan. Yes, we do service our own loans as well as loans for third parties, including Fannie and Freddie. Chairwoman Waters. Would you give me an example of those third parties? Ms. Sheehan. Well, it is Ginnie Mae for FHA loans, obviously for our GSE loans, which the bulk of the portfolio is Fannie and Freddie. And then there are other private investors for whom we service-- Chairwoman Waters. So GSEs, Fannie and Freddie, are not doing their own? Ms. Sheehan. No, we do the servicing for them. They are the investor in the loan. Chairwoman Waters. Okay, all right. Mr. Hemperly, do you do servicing for anyone else other than Citigroup? Mr. Hemperly. We do. Our answer is very similar to Ms. Sheehan's that she gave for Chase. We do a substantial amount of servicing for GSEs, Fannie and Freddie, in addition to loans we service for the FHA and also our loans that we hold on balance sheet. Chairwoman Waters. My last question is, for those of you who do loan initiation and then sell those mortgages to Fannie and Freddie, you do the loan initiation, you sell it to Fannie or Freddie, then they give it back to you to do the servicing? Mr. Hemperly. Yes. We originate the loan. We deliver it to Fannie or Freddie, and we bore the loan on to our servicing system. So the loan is actually what we call servicing retained by us, and then we are responsible for all the servicing activities that occur on those loans. Chairwoman Waters. Fine, we need to take a look at that. And I would like to thank my members for indulging me. I appreciate it so much. Ms. Capito. Mrs. Capito. Thank you, Madam Chairwoman. Mr. Erbey, in your testimony, you mentioned that in your modifications, that you did a write down of the loan balances. Does that mean you write down the principal in some? Mr. Erbey. On 18.7 percent, yes. Mrs. Capito. 18.7 percent of your loan modifications you are writing down the-- Mr. Erbey. The principal. Mrs. Capito. Does anybody else here in their loan modifications write down the principal? Mr. Hemperly. We write down principal on occasion, not 18.7 percent of the time, though. Mrs. Capito. Like how many? Mr. Hemperly. It is a minority of the time. I don't have the percentages. It I think is probably less than 1 percent of the time. Mrs. Capito. Mr. Gross, you said you do? Mr. Gross. Yes, it is on a small amount, and if I could expand on that answer. We are contractually bound in most cases to present the investor for whom we service the loans the best return or smallest loss that we can. And in most cases, we can achieve a smaller loss or better return to the investor by doing an interest rate reduction, having an affordable and sustainable payment for the homeowner without having the principal reduction. Mrs. Capito. I understand that, but you were looking at a program here in the next--first of all, let me ask another question. Of all of you all on the panel, who has used or worked with the HOPE for Homeowners Program? Ms. Coffin. We have. Mrs. Capito. And how has that worked? Ms. Coffin. We have set up a separate segmented group who were fully educated on the HOPE for Homeowners program. We dedicated and analyzed our portfolios to look for those borrowers who looked like they were eligible. We proactively reached out with letter campaigns and calls to those borrowers, and then we began the screening process to find those borrowers who would actually be eligible. Unfortunately, we found very few under the current requirements of HOPE for Homeowners who met the standards. Mrs. Capito. My understanding is when you came, I am generalizing here, institutions have come before this committee before, showing great hope for the HOPE for Homeowners products as a way to help people who are in trouble. And it hasn't turned out that way, and that is deeply troubling to all of us here. I think part of it, and correct me if I am wrong, is part of it the write-down on the balance has prevented, maybe contractually, but otherwise because it is considered financially to your disadvantage to go this direction, so now the President's program is going to incent your institutions to do what Mr. Erbey's does 18 percent of the time? Am I interpreting the new program correctly? Mr. Hemperly. The new program, as I understand it relative to loan modifications, is not going to be very different from the program that we are headed towards currently with our commitments to the FDIC modification program. The FDIC program is essentially an affordability-based model, which is not terribly different than what we have done in the past. So we are headed down that path where we are going to try to get customers with affordable payments and they prove to us how much they make, and then, as a percentage of that, 31 percent, as a housing ratio, we give them an affordable payment to keep them in their home. That program is not terribly different at all from what we have done historically, and our redefault rates, we believe, are quite good. Mrs. Capito. And on the FDIC program, is there a fee when you write down principal? Mr. Hemperly. No, there is not a fee. Mrs. Capito. I mean, a reward payment of $1,000; I believe that is the program we are looking at. Mr. Hemperly. Well, on the Administration's program, my understanding is that there is an incentive fee to the servicers for booking loan modifications. The FDIC program is basically going to be for, our commitments there are for balance sheet held assets. There is no fee that we will collect under our current commitment to that program. The benefit that we get is, hopefully, we will get the kind of performance through that program that we have seen on our redefault rates that I shared in my testimony, that we believe keeping homeowners in their home is great for communities, and also we believe that it is the best way to minimize our own losses. Mrs. Capito. Let me ask you just a question out of the air, it just kind of hit me. You are talking to people every day who have mortgages who either are in trouble, anticipating being in trouble, and I am sure you are talking to your folks who are scrimping, saving, paying those mortgages everyday, are you hearing anything about what we are hearing in some fashion, is this fair? Is there a fairness quotient here? And I don't know if I am asking too much of an opinion here, but I would like to see if you have one on that and if you are hearing from your customers on that, who obviously are not going to qualify for any of these loan modification categories. Mr. Gross. I would say, yes, that we do hear this from our customers, the questions about the fairness issue. On the flip side of that coin, we hear from the same customers regarding the trauma that is caused in their communities and in their neighborhoods with the foreclosure events. And ours is a balancing act to try and make sure that we are as fair to all parties as we can possibly be. Mrs. Capito. Does anybody have-- Ms. Sheehan. I would say, we have had a similar experience in terms of hearing from current customers, but I also agree with Michael that we need to be focused on customers and communities. And I think we are concerned, all of us are concerned, about the impact of the foreclosed property destabilizing neighborhoods. Mrs. Capito. I share that concern as well. I think, and it is, as Mr. Gross said, it is a balancing act. It is difficult for the homeowner on the verge. It is difficult for the neighborhood. It is difficult for the family. And so we are trying to weave a solution here, and I appreciate you all coming here and testifying. Thank you very much. Chairwoman Waters. Thank you very much. Mr. Cleaver. Mr. Cleaver. Thank you, Madam Chairwoman. I would like to follow up on the Chair's questioning. If I could start with you, Mr. Erbey, and move down, do all of you have operations offshore? Mr. Erbey. Yes. Ms. Coffin. No, not for customer-facing. Mr. Gross. Yes. Ms. Sheehan. Not for customer-facing and loss mitigation. Mr. Hemperly. We have offshore operations, but we do not do any loss mitigation work offshore. Mr. Cleaver. I don't know if you realize how utterly disgusted the voters are with that. And it is ineffable, but I have to just say, it really creates a problem. Do you save money? Is this what the goal is? Ms. Coffin. I will make a comment to this. Wells Fargo has always been very strong about creating American jobs. The place that we do have offshore is in some of the technological areas where we could not find the appropriate number of people to help us with some of the automation of our systems. Mr. Cleaver. Like the dumb Americans couldn't-- Ms. Coffin. No, sir. Not at all. Mr. Cleaver. The stupid Americans? Ms. Coffin. No. Mr. Cleaver. I am not sure I understand. Ms. Coffin. It was a supply and demand. Mr. Cleaver. The demand was greater than the supply? Ms. Coffin. And we don't have it now, sir, but this was previously when there was a lot of infrastructure that we were rebuilding and looking for a lot of technological expertise, and everyone was in the demand for that at the same time. Many of our systems were all being retooled. Mr. Cleaver. So it is not a financial issue where you save money? Ms. Coffin. We do not use it for that. Mr. Cleaver. Is everybody else the same? Mr. Gross. If I could comment, the global operations for essentially the Countrywide service portfolio, this operation has been in existence for 3 to 4 years now, I believe. It might be a little bit longer. The size of the operation is actually a little bit smaller than it was a year ago. And in terms of staff that we have added during the subsequent period has all been added State-side. Mr. Cleaver. Okay. Mr. Gross. But, yes, the initial motivation when we opened these call centers a few years ago was based upon cost. Mr. Cleaver. Okay. I am going to tell Lou Dobbs on you people. But let me go back to the program as laid out by President Obama, the Administration, is herculean. What kind of beefing- up of the servicers will you need to accommodate this program? Has there been any look at the size of the staff that will be needed? I am thinking a part of this whole thing that we are doing is creating jobs. And I am wondering if jobs can be created also as we try to reduce this new burden on neighborhoods all over the country by hiring people to do the modifications. And obviously, based on what Chairwoman Maxine Waters is experiencing, there is a need for a larger staff. So has there been any time spent in trying to come up with an estimate on when the staffing needs will be? Mr. Gross. If I could, as far as what the staffing needs will be, will be somewhat difficult to determine until the final rules are published on March 4th, but I would also suggest to you that in the mortgage servicing loss mitigation process, this home retention process that we are all engaged in, under the President's plan, we should become much more efficient and effective than we are today because we are going to have a single standardized plan that we will be able to use across all different portfolios. Right now, we have a modification plan for FHA, a different one for Fannie Mae, a different one for Freddie Mac, and a different one for privately-issued securities. So this standardization should enable us to process many more modifications and workouts using the same staff, hopefully in a much faster timeframe. Mr. Cleaver. Thank you, Madam Chairwoman. Chairwoman Waters. Mr. Marchant. Mr. Marchant. My question is about the whole standardization of modification. It seems like Chase, have you gone to your biggest investors and gotten pre-authority to authorize, to do modifications, so that you don't have to handle it on a case-by-case basis? Ms. Sheehan. We have spent a lot of time working with our investors to make sure that they understand the modifications options that we wanted to be able to make available. Two of our biggest investors are Fannie and Freddie. They have recently come out with a new streamlined modification program, very similar to what many of us offer for our own portfolio. That was sort of the first step towards standardization. I do agree with Mary, though, that we still have situations, not that many, but we still have situations where individual, you know, pooling and servicing agreements may hamper our ability, and in those instances, we have to go out for permission on a case-by-case basis. Mr. Marchant. And the way I read the President's proposal is that this will only affect the GSEs, and it well affect your private label investors, so it is going to force the private investors to accept these modifications. Mr. Erbey? Mr. Erbey. That is still an open issue that was being discussed this morning. In our portfolio, more than 90 percent, we have no limitations on modification at all. There is about say 5 percent that it is affected by, you have to get approval by the related agencies; another 5 percent that you have to get individual investor approval. But the issue becomes one of, in terms of the implementation of the plan, are you required to apply it across your entire portfolio? And if so, what impact does that have on the contractual obligations that you have, no matter how small they may be? Mr. Marchant. So 90 percent of your investors or REMICs have already given you authority to modify? Mr. Erbey. The structures in our part of the market, they have migrated over time, so that the standard pretty much for any of the modern ones would be that it is the servicer's discretion to maximize that present value on the portfolio. Mr. Marchant. So, in your case, you have more discretion. Do you service any portfolio loans that you own? Mr. Erbey. Nominal, I mean very, very insignificant to our balance sheet. Mr. Marchant. Well, it sounds to me like the question is still, that I have about the modification process, is the hit of principal and whether you are allowed, whether in the new plan, the President's new plan, whether there will be a substantial write down in principal, or will all the modification be towards the 38, 31 percentages? Do you understand it could be a stepped process? You go to 38 first, you go to 31, then you go to the principal reduction? Is there any kind of a look-back provision if one of the spouses is unemployed, and then a year later, that spouse becomes re- employed, is there then a recertification at some point where that person will call and say, ``I have a job now, I no longer need this 31 percent or 38 percent?'' Is there a look-back, or is this a once-in-a-lifetime snapshot that will be taken? Ms. Coffin. There are, like Michael just spoke of, there are details of the program that still need to be completed. But there is--you don't do a look-back, that if somebody then gets back a job, you kind of unwind the modification-- Mr. Marchant. That is the way I read it. Ms. Coffin. We don't do that. But what we do in some cases is we may have to mod originally to a lower interest rate or other things to get to affordability, but then you can step that rate back up over a period of time. Mr. Marchant. So in the proposed, another piece of legislation that has the cramdown in it, how much more success--under what kind of a situation then would you put a person in a situation where they would not go this route instead of going to a bankruptcy route and put them in a position where they would make the decision to go the bankruptcy cramdown route as opposed to trying to go this route? Ms. Coffin. I would only tell someone they should go to bankruptcy as a last resort. What I applaud that the Administration has done is the standard modification program that should hold all of us accountable and provides expectations that say, if a borrower who is at risk comes to us, we now have the standard modification program. If, for some reason, that borrower cannot find a solution through that, then their final resort may be to go to bankruptcy, and this same standard modification program should be applied. Mr. Marchant. And this is an opinion question. Is a person who gets a modification at a greater risk of destroying long term their credit than a person who goes into bankruptcy? Mr. Gross. No, I think the modification approach is actually to the homeowners' benefit, that very quickly they will be showing current on their mortgage and that their credit score will improve dramatically. I think the bankruptcy option provides very serious negative implications for the homeowner on a long-term basis. Mr. Marchant. So if you were trying to prevent there from being a generation of borrowers who are forever doomed to be subprime borrowers in a world where there are no more subprime loans, would you go--if you were the government trying to push somebody towards a direction, you would push them more towards a modification, extended amortization instead of towards an easier route. Mr. Gross. Absolutely, we would hope that whatever legislation is enacted would in fact require homeowners to seek these modifications and to, in fact, prove that the modification was not attainable before the bankruptcy reduction was allowed. Mr. Marchant. Thank you. Chairwoman Waters. Mr. Green. Mr. Green. Thank you, Madam Chairwoman. Mr. Gross, let's continue with what you were just addressing, the cramdown. Is that something that can work in concert with what you are currently doing or, is it at odds with what you are doing? Mr. Gross. There are aspects of the current legislation which we find troubling. I would say that it can work as long as we put in sufficient safeguards that the homeowner works with their servicer and that the homeowner seeks available modifications before they do the bankruptcy cramdown route. Mr. Green. Is it your understanding that the current proposal has that language in it? Mr. Gross. I believe that the current proposal, and I apologize, I am not an expert on this, but I believe that the current proposal does contain some reference to it. I don't think that the requirements in there are as strong as we would like. There are probably a few too many holes in there that would allow homeowners to seek the bankruptcy option with minimal resistance. Mr. Green. If that aspect of it can be satisfied, would it then meet with your approval, ``your,'' meaning your company's approval, not your personal approval? Mr. Gross. Thank you. I think it would go a long way to that, because I think at that point what we would find is that we can effectively, especially under the President's new plan that we are all working on desperately right now to write the rules for or to assist in that effort, we want to have this new plan have a chance and to show the American public and to you that we can perform under this new plan and that the bankruptcy cramdown provisions that are currently being contemplated largely should not be needed. Mr. Green. Is your moratorium still in effect? Mr. Gross. It is. Mr. Green. Let me just ask the other participants. Do you have a moratorium in effect? If so, would you kindly extend a hand into the air? Anyone. So we only have--and you would not have one, is that right Mr.--is it Erbey? Mr. Erbey. It is Erbey. Mr. Green. You don't have one? Mr. Erbey. We don't have our own loans. Under the contracts that we have, we don't feel that we could have a moratorium. Mr. Green. Let me pause for a moment and thank all of you for the moratorium. It is something that I think is going to be a benefit to your businesses as well as to the consumers, so I thank you for the moratorium. How long will it stay in effect, Mr. Gross? Mr. Gross. It will stay in effect until the rules are published, which should be March 4th. From that point, what we would do is take the final rules, evaluate our portfolio to determine which homeowners who are at risk of foreclosure would in fact qualify, and then we will actively seek out those homeowners, offering them this plan, and we would reinstitute foreclosure proceedings after we either hear from the homeowner and determine that they are not eligible, that we cannot do it, or if the homeowner does not respond. Mr. Green. Ms. Coffin, how does yours measure up? Ms. Coffin. Our moratorium is in place until at least the 13th of March. We have announced that to our borrowers. And we have, as I said in my testimony, already proactively began to analyze our portfolio with the information and the data that we have about the program for both the refinance opportunities and the modifications. And what we will turn to first, once we understand more of details after the 4th of March, is we will first turn to the borrowers who are most seriously delinquent or on the verge of foreclosure sale and proactively reach out to them. Mr. Green. Mr. Hemperly? Mr. Hemperly. Our moratorium started on February 12th, and it will extend for 30 days through March 12th. We are also eager to see the Administration's plans. Hopefully, we will see them on March 4th, which should give us time to understand them before we would schedule any additional foreclosure sales. Mr. Green. Ms. Sheehan? Ms. Sheehan. We also announced our moratorium on February 12th. At that time, we announced it would be extended through March 6th. That was before we knew when the details of the program were going to come out. So we will this week reconvene and consider, based on the information we know now, what is the next step we should take to be fair to our homeowners. Mr. Green. Thank you. I yield back. Chairwoman Waters. Thank you very much. Mr. Clay. Mr. Clay. Thank you, Madam Chairwoman. Let me start with Mr. Erbey. Mr. Erbey, in your testimony, you propose two solutions for advanced financing to servicers. One proposal is to provide a $1 billion government infusion to minority-owned Robert Johnson Urban Trust Bank to establish a new operating division to provide advanced financing to servicers who commit to aggressive foreclosure prevention and loan modification measures. Currently, how many communities does the UTB service, or do you know? Mr. Erbey. I know of a handful, but I can't accurately describe that. Mr. Clay. Okay, give me examples of some. Mr. Erbey. They are in Florida, in the Orlando area. Mr. Clay. How would Mr. Johnson assist servicers with homeowner outreach to minority communities hardest hit, do you have any idea of how we he would pull that off? Mr. Erbey. I believe Mr. Johnson thinks he has quite a well-known name and reputation within the communities and that by being able to get out there and get the message out, that he would assist in that manner. Mr. Clay. Okay, all right. Thank you for that response. Ms. Coffin, when considering your total number of modifications, what percentage of them are modifications that produced a decrease in monthly payment of at least 10 percent? Can you give us that percentage in your reported modifications that fit that category? Ms. Coffin. I don't have that data directly here in front of me, but to state I think what is important about these modifications, and I heard the discussions earlier today, what is important to understand about whether the payment reduces or not are the circumstances of each of the borrowers that we work with. We have cases of borrowers where they come to us, and if you take the President's, the Administration's plan that they just announced and the affordability targets they have set, I tell you today we have many borrowers who have come to us who are already below those targets. What we still try to do is help them. And sometimes that is taking those payments. Sometimes it is the taxes that they have not paid on their homes. Sometimes it is payments they are in arrearage, and we do capitalize those, we re-amortize the loan and try to get them back into a performing loan. So I think, more than just stating the numbers, it is important to understand when and why we do that particular type of modification. Mr. Clay. So that may include making the terms longer? Ms. Coffin. It could make the term longer, but it could actually increase their payment if they have not paid their real estate taxes and they have significantly missed many payments. If they made no payment on their homes for 8 months, lets say, and not paid their real estate taxes, to get them back in a performing loan and have them stay in that home, we he have to do something with those missed payments and those missed taxes. Mr. Clay. Which means these people have to have employment, of course. Ms. Coffin. That is correct. Mr. Clay. Given the size of the program being proposed by the Administration, and the need to look at the ability of homeowners to sustain a modification, how large of an increase in manpower do you believe would be needed to get this job done? Do you have any idea? Ms. Coffin. I would support what Mr. Gross stated. We actually see the standard modification program, as laid out and what we know of it so far, will actually be much more efficient for us. We have never stopped and we didn't just because of the plan decide then to start hiring. We are continually in this kind of environment reforecasting and preparing months ahead. As you heard, you don't just hire these people and put them on the phone tomorrow. You have to go through the hiring and training phase. You want to make sure they have the expertise to actually help our borrowers. So we are forecasting months and months in advance, and we will continue to do that. But this actual plan, we believe, will make us more efficient for the reasons Mr. Gross stated. If we get a standard modification program, as we too serve Fannie, Freddie, FHA, multiple privates, if we got to one program and there was an accountability of what we were to move to a target of, it would be much more efficient for us. Mr. Clay. Anyone else on the panel? Ms. Sheehan. Ms. Sheehan. I would agree with what Mary just said. I think we do have 8 to 10 flavors right now of loan modification programs that are very complex. We have to go into databases, it complicates the training we talked about earlier, to be sure that the individuals understand all the different programs. So I believe it will be a tremendous benefit to servicers. I also would like to say on behalf of Chase that we are trying to look at different ways to deal with our borrowers, which is why we have started to set up our homeownership centers around the country. Not everybody is going to work well in a call center. In some cases, you need to do face-to-face. And we actually have seen some very preliminary but very positive results from the centers that are opening right now. Mr. Clay. Thank you very much for your responses. I yield back. Chairwoman Waters. Thank you very much. Mr. Ellison. Mr. Ellison. Thank you, Madam Chairwoman. And thank you to all of the witnesses. Is your servicing process different between cases where the servicers own the mortgage and where they don't own the mortgage? Can we start with you, Mr. Erbey? Mr. Erbey. Yes, certainly. We have almost no mortgages that we own ourselves. So essentially, our process is exactly the same. Every loan is treated individually. Mr. Ellison. How about by you, Ms. Coffin? Ms. Coffin. Yes, I will try to give you the spectrum. We obviously on, let's take the Wachovia option ARMs that we just acquired, we are going aggressive. Those are loans that we own. We know the geography in which many of them are located is extremely distressed, and so we are going aggressive with modification programs. But as soon as we learn from the programs that we develop and implement on that, we reach out immediately to private investors and other investors to share our learnings and hope that they will deploy throwing programs also. Mr. Ellison. Mr. Gross? Mr. Gross. I would concur with what Ms. Coffin has just said. One of the standard provisions in service pooling and servicing agreements-- Mr. Ellison. Mr. Gross, forgive me, but when you said you concur with Ms. Coffin, do you mean, when the servicer owns the loan, you are aggressive, and when you don't, you share the information because that is what I heard? Mr. Gross. Yes, and I was amplifying on that. One of the standard provisions in a servicing contract generally is that we will service loans for that investor as we would for those in our own account, which means that we will not give loans in our own book of business, loans that we hold for investment, any preferential treatment over loans that we service for them. Mr. Ellison. Ms. Sheehan, how do you view this issue? Ms. Sheehan. I would concur with both Mr. Gross and Ms. Coffin. Our core servicing processes are all the same. But when we come to loss mitigation and loan modification, we are more aggressive with our own portfolio loans for all of the reasons that we have been talking about today. Mr. Ellison. Sir? Mr. Hemperly. A similar answer. We service for a lot of the same people that are our competitors do. And we also feel that we have more flexibility on our own portfolio. I didn't get to answer the last question, but we also believe that a standardized approach that the Administration plan is proposing is also going to be a more effective way to deal with this situation, and it should be easier to train our folks on a standardized plan as well. Mr. Ellison. Can you tell me about what your outcomes have been when you have the loans that you own, loans that you don't, have you been able to--have you written down more or have you remodified more loans when you own them as opposed to the ones that you don't own? What has your experience been, is what I am asking? Mr. Erbey, you only have one kind? Mr. Erbey. Correct, we have modified about 20 percent of all loans in our portfolio. Ms. Coffin. To answer your question, and as I just stated, we just acquired the Wachovia option ARMs, which is where we are going the most aggressive. I think what is important to a redefault, and I know there is a lot of analytics and a lot of speculation on redefaults, as was stated earlier, coming to a common industry definition of redefault, which we would stand by that any loan that has been modified, and seriously redefaults, which means 90 days delinquent within a year, is our definition of redefault. And because these are new procedures that we are developing and applying against this portfolio, it will take a while for us to determine what the true redefault is compared to historical redefault rates. Mr. Ellison. Do you have any numbers so far on the difference between the remodified loans that you own and the ones that you don't? Ms. Coffin. Well, I want to be cautious that Freddie and Fannie and many of the privates who have worked with us are very aggressive. I don't want to leave today that-- Mr. Ellison. I am just trying to get a statistical understanding. Do you understand what I mean? Ms. Coffin. Between what we do in our portfolio, we are seeing a redefault rate that is probably lesser in our case that is lower than the 30 percent on average redefault, and you will so a little higher on those that do not go as significant in the modification terms. Mr. Ellison. Maybe I don't understand. Are you modifying more loans that you own than the ones that you don't? Ms. Coffin. I think the way I am interpreting this is we modify differently, not whether there is more or less; it is that we are modifying possibly differently. Mr. Ellison. But is there a numerical difference between the ones you own and the ones you don't? Ms. Coffin. No. Mr. Ellison. They are the same? Ms. Coffin. By numbers, just sheer volume? Mr. Ellison. Yes. Ms. Coffin. No. I mean, you would have to do that in relationship to the size of the portfolio. No. We are modifying. Like I stated earlier, there are very few of our contracts that don't allow us to modify. Mr. Ellison. So you modify the same number for the loans that you own and the ones that you don't? Ms. Coffin. The majority of the time, yes. On a ratio of how many loans we have, you still have to--if you want sheer numbers like 100 to 100, it would depend on the size of the portfolio and the number of loans that are in distress as a ratio. Mr. Ellison. All right. Well, do you have that information? Ms. Coffin. I don't have that right in front of me, but I can tell you that--I don't think there is a difference between that we can't modify. It is how we are modifying. What we are doing on the Wachovia loans is going more aggressive with the terms, such as principal forgiveness. Mr. Ellison. Okay. Mr. Gross. Mr. Gross. I apologize, I do not have the data that you are requesting at this time, but I would be glad to follow up with the committee afterwards. Mr. Ellison. Thank you, Mr. Gross. And, Ms. Coffin, I am assuming you would supply the information? Ms. Coffin. Yes. Mr. Ellison. Ms. Sheehan. Ms. Sheehan. Our servicer loans are much larger than our owned loans, so even if we are doing it proportionately the same, those numbers will be--the servicer numbers will be larger. But we would be happy to get that. Mr. Ellison. Thank you. We would request that. Thank you. Sir? Mr. Hemperly. We will pull the exact data for you as well. I believe that on a percentage basis, we do more deals on the loans that we hold on balance sheets than we do for others; and I think it is because we can do them earlier in the process in some cases than we can. And I think we have a little bit more flexibility to do that. But we will be happy to pull the numbers. Chairwoman Waters. Thank you very much. Mr. Donnelly. Mr. Donnelly. Thank you, Madam Chairwoman. Ms. Coffin, under Wachovia ARMs, when you look at them, what interest rate are you putting people--what product are you primarily putting folks into or trying to put folks into? Ms. Coffin. We are trying to get them into a fixed, but most importantly is when we see what the payment that they are currently able to afford, we are trying to keep them to that payment and modify the terms of the loan to get them to that payment. Mr. Donnelly. That is the ARM payment? Ms. Coffin. Yes. Mr. Donnelly. What is the average interest rate on those ARMs at the present time? Ms. Coffin. I am a little cautious in saying this because I don't have-- Mr. Donnelly. Ballpark. Ms. Coffin. I will say ballpark, 2 percent, maybe slightly higher. Mr. Donnelly. So what you are doing is looking at that payment and saying, what kind of product can we produce that will keep them in the house at about that number? Ms. Coffin. That is correct. Mr. Donnelly. How many of those do you have, of these ARMs, of these mortgages, the Wachovia? Ms. Coffin. The Wachovia that we inherited was $122 billion. Mr. Donnelly. I am sorry, the total number of homes. Ms. Coffin. The total of the portfolio, I believe it is approximately 350,000, I believe, 400,000. Mr. Donnelly. And how long does it take you to get to all of them? I mean, how do you prioritize that? Is it you look and say, this one is in trouble, they missed a couple payments, we had better get together with them? How long will it be before you get that cleaned up? Is it, these ARMs go off next month, so we had better do those first? Ms. Coffin. Let me be clear that much of this portfolio is performing. If they are current, we continue to look at them. We are looking for imminent default. We want to make sure that we are proactively trying to predict those loans that will probably have imminent default. But we are starting with the most serious and those that are close to foreclosure. We are looking at those whose ARMs are ready to recast, those who are delinquent, and those who look like we would predict imminent default. Mr. Donnelly. So say the ARM goes off in another month or 2 months, but they are performing. Those ones you would already be working with to try to get into a new product. Ms. Coffin. We are working across that entire portfolio very aggressively. Mr. Donnelly. So there is not going to be folks who look up and their ARM is about to go off in a week, and they haven't heard from you yet? Ms. Coffin. That is correct. Mr. Donnelly. Mr. Erbey, when you look at the loans that you have in your portfolio, are there red flags that you look at to indicate to you, this is one we have to work on? For instance, somebody who has been put into a 10.5 percent rate at 20 years, is that something you would look at and say, how do we rework this? Are those important figures to you, or is it only you look and you go, who is in trouble this month? Mr. Erbey. Well, you certainly sort your portfolio based on characteristics to try to do imminent default, where you think somebody will try to default and try to deal with it ahead of time, such as a reset or a very high-interest-cost loans. So you would proactively be approaching those individuals. The vast majority of the work, however, because of the type of portfolio we have, is spent on basically people who are already in trouble. Mr. Donnelly. I know you use mathematical models. Do your models tell you, here is the income that they have? Here is the interest rate? This isn't going to--you know, they are paying it now, even people who are current; we have to get into this one and get this fixed? Mr. Erbey. Yes. We run models that look at the person's ability to pay over time. So it is not just a snapshot of what can they do today; what are they able to do in the future? You also look at redefault probabilities as well as prepay probabilities and future housing prices. And so you are looking at pretty much three-dimensional vectors on all those factors. Mr. Donnelly. And this next question would be to the whole panel. I met with some mortgage folks earlier today and spent some time with them, and one of them was saying that one of the biggest problems they are having with modifying loans is some of the servicers. And, you know, this was not any of you folks, but some of the servicers that they would call, the servicers said, ``I have a pile 5-foot high on my desk; I am trying to get through them as quickly as I can. I haven't gotten to that one yet, and it may be a while.'' Are you facing those kind of problems, where they are coming so fast, the requests for modification, or the screening that you are doing is indicating this should be modified, that timewise it is tough to get to all of them? Mr. Gross. Mr. Gross. In all candor, yes. Obviously, the volumes of homeowners who are approaching us today looking for modifications at times can be overwhelming. One of the significant issues that I think most servicers are confronted with today is the volume of homeowners who are current on their payments, but are coming to us and seeking a modification, and trying to determine which of those homeowners is doing it based upon a true financial hardship either now or in the near future based upon some event that may have taken place--unemployment, a rate increase, something has occurred--versus those people who have heard many statements in the media about all of the modifications and principal reductions that are coming forward. And, unfortunately, we have a lot of folks who are coming forward saying, where is my deal? Mr. Donnelly. So you would have a form or like almost a test? Mr. Gross. We would have to go through and perform the analytics on each loan, getting the income and expenses and trying to determine from the homeowner what is the hardship that causes you to make this request? Mr. Donnelly. And would something like, I started out in an ARM, I am now locked in at 10 percent over the next 20 years, and it is very tight every month; is that the kind of situation? Mr. Gross. Absolutely. Yes. Mr. Donnelly. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you very much. Ms. Kilroy. Ms. Kilroy. Thank you, Madam Chairwoman. First, I would like to follow up on Ms. Coffin's answer regarding offshore employment and moving operations offshore, that Wells Fargo moved operations overseas because of a lack of qualified available IT personnel. I would like to suggest that Wells Fargo might want to take a look in my district in central Ohio where we have hundreds of IT persons, well-qualified, who have been laid off from various businesses, but including being laid off from major national banks; and before they were laid off, they were sent to India to train their replacements. Ms. Coffin. May I comment? I want to make sure that I am setting the right timeline of all this, and to be candid and honest with all of you, because I feel very strongly and I have known this, and have worked for Wells Fargo for over 11 years: It is one of their top principles that we create American jobs. And when I spoke, I wanted to make sure I was honest that it is that we do not go offshore. Where we have gone offshore in the past, not in this current unemployment environment--as a matter fact, I would probably have to state to you I would have to check whether we have anyone even in our technology today who is offshore. This was in our past, not maybe today. So I probably misstated that. Ms. Kilroy. I am glad to hear that correction, because what I heard and what I heard follow-up questioning was a comment that there weren't qualified people here. I also want to find out your philosophy or the emphasis of quickly liquidating assets that are deemed to be maybe unproductive versus working out with those homeowners. Of course, in my opinion, working out helps the community, stabilizes prices, and, to me, not only being a good social policy, I think ultimately in the long run is a good business policy. But I am concerned that Professor White at Vanderbilt recently told the New York Times that despite your testimony that you are aggressive on that, that Wells Fargo has modified few loans as a percentage of delinquent holdings. Would you like to comment on that? Ms. Coffin. Well, I am not sure if I remember that exact quote as you put it. I think you have to look at the nature of the makeup of our portfolio. Again, Wells Fargo's portfolio is predominantly investor owned; we do not own the loans. There is very little of our portfolio that we own as a balance sheet. And as I stated earlier today, I can give you this as fact, 8 percent of our portfolio is held by private investors, but they represent almost 70 percent of our serious delinquents, and they represent 50 percent of our foreclosures. Ms. Kilroy. And do you take a different approach to those loans than the loans that Wells Fargo has initiated? Ms. Coffin. I think it is not the approach we take to it. There is some because of the contractual obligations I spoke of earlier. But more importantly is how these loans were originated and who was put into these loans to begin with, which is the importance of responsible lending. These are loans that we did not originate; they are loans that we did not underwrite. These are loans where the companies reached out to us to do the servicing, and that is what we are doing. But many of these borrowers, we are not capable of finding an affordable situation. Ms. Kilroy. What period of time are you talking about for-- let me strike that. Are you aware that there were 31 complaints filed with the Ohio attorney general in 2007 alleging that Wells Fargo had refused to accept homeowners' offerings of their late mortgage payments? Ms. Coffin. You said 31? Ms. Kilroy. Thirty-one complaints filed with the Ohio attorney general. Ms. Coffin. That we were unwilling to accept? Ms. Kilroy. The late payments. That people were offering up their late payments, and Wells Fargo was refusing to accept their late payments. Ms. Coffin. I don't have the cases directly here in front of me, and I always love to state that it is very important, as I see in all the complaints that are brought to our attention, and I appreciate all of them that are, is that you have to look at the details case by case. Many of those that we find where if they are in a very serious or late stage of delinquency or foreclosure, and we are still looking at the income and expense analysis--every borrower that we look at is an income and expense analysis to find affordability. So just accepting late payments, if we still see that there is no chance of affordability with the modifications that we can do, we are avoiding the inevitable. Ms. Kilroy. Let me give you an individual situation reported in one of the local newspapers with respect to Wells Fargo for John and Sharon Vasquez, who bought a home in 1994 in Clintonville. And they had some ups and downs, once or twice fell behind, but they would typically get their payments back on track until they had a significant health issue. But even when the wage earner went back to work at the Postal Service, and they tried to work out a situation with Wells Fargo, initially the company refused the $5,000 that she offered. And then after that situation was worked through with the help of attorneys, they were required to pay--instead of $5,000, pay up $3,900 before the company would talk to them about restructuring the loan: A pre-payment of $3,900, and then we will talk to you about restructuring. They made that payment, and then the restructuring included terms that--included a balloon payment of $10,000 that was known that they can't pay. They are now in foreclosure proceedings. Also, I just had a concern. We talked a little bit about some of the refinancings or modifications that ended up with lower principal, and also you mentioned many that ended up with higher principal. Of course, my concern is that a home modification with a higher payment is far more likely to end up back in a redefault situation. Again, in the New York Times on February 19, Wells Fargo declined comment on increased principal charged to a Mr. Mitchell with back fees--fees, back payments, penalties. His principal was raised to above $300,000, his payments virtually unchanged, and he had to make an immediate $5,000 payment. He has now again fallen behind on his payments. So I guess I am not sure what the--exactly the philosophy is here, but it seems it is not necessarily liquidating the assets quickly, it is not keeping the people in their homes, because the terms and conditions were such that people were not going to be able to keep up with them one way or the other. Is the philosophy more of maybe getting whatever you can out of the mortgagee before foreclosure is initiated? Ms. Coffin. No. I can make that very clear, it is not trying to just take as much cash as we possibly can. And that is one of the reasons we won't receive partial payments. We want to make sure that if we establish what a true modification that is sustainable with affordable payments, and that those payments are made, that is a performing loan. And we will not take just partial payments because, again, we could be taking payments on something that ultimately is going to end up in foreclosure. In all of the cases that you mentioned, I want to be protective of privacy rights and what I can and can't say, so I would like to talk more generically. Any case that anyone brings to us, we will look under every detail and look at every piece of information. But until you understand the uniqueness of each of those cases, I think it is important to understand, for instance, there could be an example that the $3,900 being requested is for back real estate taxes. And if someone has not made a payment on their home in 6 months, and they have not paid their back real estate taxes, and we are looking at their income and expenses, it could be that we see they cannot afford the home. Ms. Kilroy. Let me ask you another question about refinancing and modifications, and that is, separate and apart from back taxes or penalty payments that were part of the mortgage, what kind of additional costs are there? We had some discussion of this with the earlier panel. What kind of additional fees are required of the home purchaser, the mortgager, in a refinancing in terms of title searches, title insurance, etc., things like that, appraisals? What requirements do you put on homeowners? Ms. Coffin. First of all, I am not an originator. I am on the servicing side of the business. Ms. Kilroy. But this would be for refinancing or modification. Ms. Coffin. I don't know that I can quote every last fee that is done on a refinancing, but I think what is more important is, I want to make this clear, that on a modification there is never a fee, ever. And I want to make sure our borrowers understand. There are some for-profit companies out there starting to charge them to get modifications for them, and they should avoid those. There is never a charge. I think I can say that for myself and my colleagues sitting here at the table. Number two, I think it is important that when working on a modification, if--I can state this for us, if there are late fees that are part of the back, those are waived. Ms. Kilroy. Is there a differentiation that you make in terms of a modification or refinancing in terms of those kind of fees? Ms. Coffin. Yes. Because a modification is taking the current loan in the state that it is in, it is usually a customer who is in a distressed situation, and you are trying to modify the terms of the loan to reach affordability for them. A refinance is usually a customer who has good credit and who wants to refinance to a lower rate, and they are trying to get out of the current loan they are in to get into a lower- interest-rate loan. Ms. Kilroy. So somebody who is working hard, playing by the rules, may be suffering some issues financially, but not in the foreclosure situation, not in the delinquency situation would be asked to pay these fees? Ms. Coffin. And that is also where I believe the Administration's plan is providing new guidelines to help more people to refinance into that program. And I believe the program in the Administration's plan is a streamlined plan that has very few costs associated with it. I don't believe it is even going to require an appraisal. Ms. Kilroy. The situation that I was referencing was somebody who e-mailed me what they said was a Wells Fargo streamlined plan, and the closing costs that were associated with the loan which would increase their principal slightly, lower their monthly payments slightly, shorten the years left on the mortgage, but the closing costs were 9 percent of the value of the house. That seemed to me a little bit extreme. Ms. Coffin. I would like--if you could, I would love to know the details of that e-mail and send it to us. I can have our staff look into it. That seems like something I would need to check with the group that does that. I am in charge of servicing. Ms. Kilroy. Thank you, Madam Chairwoman. Chairwoman Waters. Thank you very much. I would like to thank all of our witnesses for participating today. I guess one thing that I heard was that everybody--you are all happy with the President's proposal, and you are glad that standards are being set for loan modifications. Is that correct? And let me just close by asking this question: How many of you or your companies were involved with the HOPE NOW program that was originated, what, a year-and-a-half ago? How long ago was that voluntary program put together? Ms. Sheehan. That really started coming together in mid- 2007. We kicked off initially that fall. Chairwoman Waters. And the idea of that program was that instead of trying to impose upon you rules, regulations, laws, that you would voluntarily get together and deal with this foreclosure problem; is that right? Ms. Sheehan. Yes. Chairwoman Waters. That was the idea? I may be a little bit naive, but given your expertise and everything that you know about this industry, why has it taken so long and why has it taken the President's initiative to get you all happy about standards? Why didn't you come up with something? Why didn't you propose standards? Why didn't you all tell us how this should be done? That was the whole idea putting together HOPE NOW. Did HOPE NOW fail? Mr. Hemperly. The President's plan encompasses the GSEs, and up to this point, we hadn't had any kind of standardization where the GSEs were participating. And I think all of us probably served--the largest percentage of our servicing portfolios are Fannie and Freddie loans. Chairwoman Waters. I don't get the answer, because what I am asking is, you were at the table, and you were there to deal with this problem of foreclosures. What happened was you came up with a very, very weak program of using these HUD-approved counselors and nonprofits to counsel people and to help people, and that is about all you did. Why didn't you use your expertise and your talent to shape and form a response to the foreclosure meltdown that we were having? I am trying to figure out why the voluntary effort didn't work? Ms. Coffin. I would like to comment on that. I think one thing--and many of us have worked together outside of HOPE NOW and with HOPE NOW, and when this program began and when we launched it in 2007, the most prominent problem--the problem was subprime ARMs that you spoke about earlier today, and also getting borrowers to call us. And where HOPE NOW was very successful in its initial efforts was a streamlined ASF which allowed us to proactively go after and modify those ARM loans into fixed products before their ARMs reset. Chairwoman Waters. Let me say this, because our representative here representing Citi talked about having adopted Sheila Bair's program that she put together after she took over IndyMac, which really for the first time showed us what you can really get done. And so Sheila Bair basically took the IndyMac portfolio without your input, without your help, and came up with standards and ways by which--and one of the things that she did was she constructed letters that went out to the homeowners that said, this is what we can do for you, you know, under these conditions. Some other attempts, I am told, were letters that went out and said, come in and talk to us. And people said, I am not going in there; they are going to take my home. But she constructed letters that basically said, if you are in this kind of situation, here are the kind of things that we can do to help you. So I guess I point that out to you, because we have struggled with this problem far too long, given you were all at the table under a voluntary program called HOPE NOW. I want to abolish HOPE NOW. And I know, even though the President may be relating to it in his plan, I think that HOPE NOW did very little to deal with this crisis. And I would just like you to think about how you can get in front of these problems that is going to affect the entire industry and come up with resolutions if you are truly interested in helping the homeowners. I know that many of you can give me a lot of responses to that, but of course, we don't have any more time. And because I am chairing, I get a chance to do this. So I thank you for having been here today, and I am hopeful that as the President unveils his program, we are going to have the kind of cooperation and input to implement something that is truly going to deal with what is the problem facing our entire economy at this time. Thank you all very much. I am reminded that I should tell you again 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. Now, the panel is dismissed. 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