[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE RECENTLY ANNOUNCED REVISIONS
TO THE HOME AFFORDABLE
MODIFICATION PROGRAM (HAMP)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
APRIL 14, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-122
----------
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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
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Page
Hearing held on:
April 14, 2010............................................... 1
Appendix:
April 14, 2010............................................... 43
WITNESSES
Wednesday, April 14, 2010
Baker, Dean, Co-Director, Center for Economic and Policy Research 22
Caldwell, Phyllis, Chief Homeownership Preservation Officer, U.S.
Department of the Treasury..................................... 5
Cohen, Alys, Staff Attorney, National Consumer Law Center........ 24
Fiorillo, Vincent, Trading/Portfolio Manager, Doubleline Capital
LP, on behalf of the Association of Mortgage Investors (AMI)... 26
Jakabovics, Andrew, Associate Director, Housing and Economics,
Center for American Progress Action Fund....................... 28
Kling, Arnold, member, Mercatus Center Working group on Financial
Markets, George Mason University............................... 30
Stevens, Hon. David H., Assistant Secretary for Housing/FHA
Commissioner, U.S. Department of Housing and Urban Development. 4
Story, Robert E., Jr., CMB, Chairman, Mortgage Bankers
Association (MBA).............................................. 32
White, Alan M., Assistant Professor, Valparaiso University School
of Law......................................................... 33
APPENDIX
Prepared statements:
Baker, Dean.................................................. 44
Caldwell, Phyllis............................................ 51
Cohen, Alys.................................................. 61
Fiorillo, Vincent............................................ 90
Jakabovics, Andrew........................................... 97
Kling, Arnold................................................ 105
Stevens, Hon. David H........................................ 108
Story, Robert E., Jr......................................... 118
White, Alan M................................................ 128
THE RECENTLY ANNOUNCED REVISIONS
TO THE HOME AFFORDABLE
MODIFICATION PROGRAM (HAMP)
----------
Wednesday, April 14, 2010
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 2:08 p.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Representatives Waters, Cleaver, Green,
Donnelly, Driehaus, Himes; Capito and Jenkins.
Also present: Representatives Watt and Bean.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order. Good
afternoon, ladies and gentlemen. I would like to thank the
ranking member and other members of the Subcommittee on Housing
and Community Opportunity for joining me today for this hearing
on the recently announced revisions to the Home Affordable
Modification Program, commonly referred to as HAMP.
Today's hearing will again revisit the Administration's
program to prevent foreclosures. This is the third subcommittee
hearing on the topic since the Administration announced the
program just over a year ago. In that time, we have seen about
1.4 million trial loan modifications take place, but only
230,000 modifications have been made permanent.
At the same time, performance on home mortgages serviced by
the largest national banks and thrifts continued to decline
through the end of 2009. While foreclosure activity decreased
from January to February of this year, the February 2010
numbers are still 6 percent higher than the numbers from
February 2009.
So, I am pleased that the Administration addressed
something that had long been clear to me and many of us in
Congress: the original HAMP program was not doing enough to
address the foreclosure crisis as it exists today. While the
original program helped borrowers get lower interest rates, it
did nothing to address the concerns of unemployed homeowners or
underwater borrowers.
In my hearings, my conversations with agency and bank
officials, and my discussions with homeowners impacted by these
policies, I have advocated for stronger foreclosure
intervention programs. In December of last year, the Wall
Street Reform and Consumer Protection Act included a provision
I authored to provide $3 billion in assistance to unemployed
borrowers nearing foreclosure, a much more robust program than
what the Treasury Department has proposed.
I hope that a provision similar to what I authored will be
included in the Senate's Wall Street Reform bill. And I have
likewise been a strong proponent for principal reduction
programs, seeing the devastation in Los Angeles.
A recent study by First American CoreLogic estimated that
the average borrower in Southern California would not get out
from being underwater until 2016. So I'm curious today to hear
from the Administration and from advocates about how these new
initiatives will address these pressing issues.
Though I am concerned that these programs won't be
operational until the fall, I am also interested to hear the
Commissioner elaborate on how these policy changes will impact
FHA's capital reserve level, given the important legislation I
am crafting to address that issue. And I am also interested in
hearing from advocates about what we should expect from these
new initiatives. Will it be enough? Or do we need to mandate
that these banks take steps to more seriously assist
homeowners?
Increasingly, I am unconvinced that these voluntary
programs are going to provide the assistance that homeowners
desperately need. I find it curious that some major banking
institutions have said publicly that principal reductions for
struggling homeowners are unfair, and cause market distortions.
However, when these financial institutions find themselves
underwater on their own real estate investments, they
themselves often stop making payments.
For example, Morgan Stanley recently decided to stop paying
on five underwater office buildings in San Francisco. And when
the Mortgage Bankers Association found itself underwater on its
headquarters, they were able to rely on other lenders to get
out from under this unsustainable mortgage. Unfortunately, it
seems that many of their members oppose giving homeowners the
right to do the same.
And I also remain troubled by the behavior of servicers who
continue to construct barriers for some in search of loan
modifications. I will continue to demand more accountability
for servicers, and I will work with Chairman Frank to enact
mandatory loss mitigation legislation.
I would now like to recognize our subcommittee's ranking
member, Mrs. Capito, for 5 minutes to make an opening
statement.
Mrs. Capito. Thank you. I would like to thank the
chairwoman for holding this hearing today.
Last month, the Treasury and the Department of Housing and
Urban Development announced another round of revisions to the
Administration's Home Affordable Modification Program, commonly
referred to as HAMP. Rolled out with the fanfare of promising
to help nine million struggling homeowners, the HAMP program
has fallen woefully short. As of March 12, 2010, Treasury
disclosed that only 170,000 homeowners had received permanent
modifications.
From the beginning, I have had significant concerns about
the over-promising of assistance by these programs from this
Administration. For families who are struggling, all this
fanfare accomplishes is raised expectations about a program
that is providing assistance to a fraction of the population
that it is supposed to help.
I also have concerns about the precedents set by the
changes of this program. There is no doubt that some homeowners
were victims of mortgage fraud in the years running up to the
housing bubble. However, the problems we are now seeing in the
housing markets are less related to exotic mortgage products.
Are we creating a moral hazard here for future home buyers
that will give them less incentive to pay their mortgages on
time, and purchase a home that is well within their means? Is
it fair to the vast majority of Americans who rent, own their
home outright, or are current on their mortgage, that some
Americans who are not as responsible with their financial
decisions are now receiving these benefits?
The newest revisions allow borrowers to refinance into the
FHA program, which is already struggling with their capital
reserve fund below the mandated 2 percent level. We are in the
process of crafting legislation to address the issues facing
the FHA, but it concerns me that we are utilizing a program
with significant challenges as part of foreclosure mitigation.
It is tough to predict the effect these additional refinances
will have on FHA.
I look forward to hearing from our witnesses and, again, I
would like to thank the chairwoman for holding this important
hearing.
Chairwoman Waters. Thank you very much. Mr. Green, for 2
minutes.
Mr. Green. Thank you, Madam Chairwoman. I thank the
witnesses for appearing, and would like to assure you that I am
very much interested in hearing about principal reduction
programs that are being made available. My understanding is
that on March 26th, Treasury and FHA announced a program, and
on March 26th, the HAMP program was also reconstructed, or it
was modified such that it would emphasize principal reductions,
as well.
So, principal reductions are being implemented currently,
as I understand it, by Bank of America. And I will be
interested in knowing if you have some knowledge or empirical
evidence as to how Bank of America is doing this, and doing it
effectively. My belief is that at some point, we will have such
a large number of persons who are underwater that principal
reduction would become more appealing to private enterprise.
Initially, the servicers had concerns with no incentives.
We provided incentives. Then, one of the concerns was too much
liability. We passed some measures to help with liabilities. We
have gone through tranche warfare. Any number of reasons why we
can't do what they say can be done but does not get done on a
large scale.
So, I am interested very much in hearing what you have to
say about these things. And I thank you, Madam Chairwoman, for
hosting this hearing today. I yield back.
Chairwoman Waters. Thank you very much. Mr. Donnelly, for 2
minutes.
[No response.]
Chairwoman Waters. Mr. Donnelly does not wish to speak. We
will go right to our witnesses.
I am pleased to welcome our distinguished first panel. Our
first witness will be the Honorable David Stevens, Assistant
Secretary for Housing/FHA Commissioner, U.S. Department of
Housing and Urban Development.
Our second witness will be Ms. Phyllis Caldwell, Chief
Homeownership Preservation Officer, U.S. Department of the
Treasury.
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.
STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT
SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Stevens. Chairwoman Waters, Ranking Member Capito, and
members of the subcommittee, thank you for the opportunity to
testify today on the Administration's recently announced
adjustments to FHA and HAMP to prevent more avoidable
foreclosures, and to better assist homeowners who owe more than
their home is worth.
The Obama Administration's goal is to promote stability for
both the housing market and homeowners. To meet the objectives,
we have developed a comprehensive approach, using State and
local housing agency initiatives, tax credits for home buyers,
neighborhood stabilization and community development programs,
mortgage modifications and refinancings, support of Fannie Mae
and Freddie Mac to stabilize mortgage and securities markets,
and several reforms to restore confidence in FHA.
With this past year's record low mortgage rates, thanks in
large part to these initiatives, more than four million
homeowners have refinanced their mortgages to more affordable
levels. This helped save homeowners more than $7 billion last
year, and more than 1 million families are saving an average of
$500 per month through the Administration's mortgage
modification program.
Home equity increased, on average, by more than $13,000 for
homeowners in the last 3 quarters of 2009. These efforts have
begun to restore the confidence we need to get our economy
moving, creating 162,000 jobs last month, the best job report
in 3 years.
Even with the success, we continue to see challenges. Our
strategy to address the housing crisis must evolve, because our
challenges have also evolved. In addition to housing
affordability, the recently announced FHA and HAMP initiatives
are designed to tackle two of the biggest threats to our
housing recovery: unemployment; and underwater borrowers.
Our housing initiatives must balance the need to help
responsible homeowners struggling to stay in their homes, with
the recognition that we cannot stop every foreclosure. Some
people simply cannot afford to stay in their homes. The Home
Affordable Foreclosure Alternatives program includes a variety
of options to help homeowners transition to more affordable
housing, including incentives for expanded use of short sales
and deeds in lieu, as well as relocation assistance.
For those homeowners who can be helped, the Administration
has also expanded efforts to prevent avoidable foreclosures by
providing responsible borrowers with opportunities to
sustainably modify or refinance their loan. Last month, we
announced the FHA refinance option, which will provide more
opportunities for lenders to restructure loans for families who
owe more on their home than it is now worth, due to price
declines in their communities. This option is voluntary for the
lender and borrower. To qualify for a new FHA loan, a borrower
must meet FHA's fully documented underwriting requirements,
must be current on their mortgage, and the lender must reduce
the amount owed on the original loan by at least 10 percent.
We have also included incentives to encourage the private
sector to write down second liens. Total mortgage debt after
refinancing cannot be greater than 115 percent of the current
value of the home, giving homeowners a path to regain equity in
their homes, and an affordable monthly payment. These
adjustments support principal reduction efforts already under
way in the private market, and offer incentives to expand their
reach. The vast majority of the burden of writing down these
loans will fall where it belongs: on lenders and investors, not
the taxpayer.
I have appeared before this committee several times to
discuss the reforms we have made to strengthen FHA. It is
because we are in a strong position today that we are able to
facilitate these efforts to assist more struggling homeowners.
Furthermore, the Administration has designated $14 billion
of TARP funds allocated to supporting the housing recovery, to
provide incentives to write down second liens, and to mitigate
risk to the FHA fund. This FHA refinance option, in addition to
changes to the Home Affordable Modification Program which Chief
Homeownership Preservation Officer Phyllis Caldwell is here to
discuss, will help the Administration meet its goal of
assisting three to four million homeowners avoid foreclosure.
I have submitted more detailed testimony about these
efforts for the record. Madam Chairwoman, taken together, the
Administration's broad housing initiatives and these newly
announced flexibilities will offer a second chance for millions
of responsible American families to stay in their homes. These
expanded efforts build upon the substantial progress that has
already been made, and will further help stabilize our
neighborhoods and communities, and contribute to economic
recovery. Thank you.
[The prepared statement of Commissioner Stevens can be
found on page 108 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Caldwell?
STATEMENT OF PHYLLIS CALDWELL, CHIEF HOMEOWNERSHIP PRESERVATION
OFFICER, U.S. DEPARTMENT OF THE TREASURY
Ms. Caldwell. Chairwoman Waters, Ranking Member Capito, and
members of the subcommittee, thank you for the opportunity to
testify today on the recently announced enhancements to the
Home Affordable Modification Program, or HAMP, a key component
of the Administration's Making Home Affordable initiative.
These program enhancements will better assist responsible
homeowners who have been affected by the economic crisis. The
program modifications will provide greater protections for
borrowers at risk of foreclosure, expand the program's
flexibility to assist more unemployed homeowners, and help more
people who owe more on their mortgage than their home is worth.
Costs will be shared between the private sector and the Federal
Government. Funding from the Troubled Asset Relief Program,
TARP, will not exceed the $50 billion originally allocated for
housing programs.
At the time we launched HAMP in March 2009, President Obama
said that the program would enable as many as 3 million to 4
million homeowners to modify the terms of their mortgages.
Through March, over one million homeowners were in active trial
or permanent modifications, and nearly 230,000 homeowners are
in active permanent modifications.
An additional 108,000 permanent modifications have been
offered and are waiting only for the borrower's signature.
Borrowers and permanent modifications are saving a median of 36
percent or more than $500 each month. And HAMP has proven it is
helping borrowers who have faced real financial hardship.
Nearly 60 percent of borrowers in permanent modifications have
faced a reduction in income, including loss of wages, hours, or
unemployment of a spouse.
HAMP has demonstrated real progress in the first year of
the program, and we continue to improve it, based on lessons
learned and feedback from homeowners, investors, servicers, and
borrower advocates. Despite the progress, however, we have
encountered a number of policy and operational issues that have
been challenging to address. These include difficulties
converting trial modifications to permanent status, confusion
surrounding the concurrent foreclosure and modification
process, and significant economic challenges posed by
unemployment and severe negative equity.
After working with stakeholders at nearly every stage of
the housing finance process, we have moved aggressively to
implement program changes and expansions to help at-risk
homeowners. To ensure that borrowers will not be caught in a
long trial period, we have increased up-front document
requirements for a trial modification, and established concrete
time frames for servicer response.
We have made improvements around borrower solicitation and
communication that will take effect in June, ensuring that
homeowners are evaluated for HAMP prior to foreclosure
proceedings, and requiring servicers to consider borrowers and
bankruptcy upon request.
To further assist certain unemployed homeowners, servicers
will be required to reduce their mortgage payments temporarily
to an affordable level for a minimum of 3 months while they
look for a job. If a homeowner does not find a job before the
assistance period is over, the homeowner will be evaluated for
permanent HAMP or possibly may be eligible for a short sale
program.
To expand the use of principal write-downs, servicers will
soon be required to consider an alternative modification
approach that emphasizes principal relief. Under the
alternative approach, servicers will be asked to consider
principal write-down balances above 115 percent current loan-
to-value, and eligible homeowners will earn this forgiveness on
a pay-for-success basis, with principal forgiven in three equal
steps over time, as long as the borrower remains current.
And lastly, four servicers, representing over half of the
second lien mortgage market, have signed on to participate in
the second lien program, or 2MP, which provides for concurrent
modification or extinguishment of a second lien when the first
is modified in HAMP.
We believe these changes will better enable us to reach our
goal of preventing avoidable foreclosures. Thank you.
[The prepared statement of Ms. Caldwell can be found on
page 51 of the appendix.]
Chairwoman Waters. Thank you very much. I will now
recognize myself for questions to our first panelists.
First of all, let me thank you for being here. Mr. Stevens,
as you know, we are working on legislation to empower FHA to
increase its capital reserves. Please elaborate on how the
Administration's proposed refinance program will interact with
FHA's capital reserves. Should we be worried that this creates
more risk for FHA?
Mr. Stevens. So let me start by making one point very clear
about the FHA refinance option. The option that we announced
utilizes the existing FHA program as it stands today with no
changes to policy within the FHA program to utilize it. So all
we are doing is using existing resources currently available
within the FHA guidelines.
Furthermore, to protect any unknown risk--and I want to
emphasize that we do not expect--we have looked at a lot of
modeling on this particular option, and do not expect
necessarily to use these funds. However--these funds to be
needed--TARP funds will be made available, $14 billion of TARP
funds will be made available, to offset lender claims on
defaulted loans, and will reduce a portion of the FHA risk on
these loans.
That, combined with the fact that these are existing
policies, leads us to the conclusion, based on our analytics,
that this should not expose FHA to further risk and their own
MMI funding the portfolio.
Chairwoman Waters. That's good, and that helps me to
understand how you are going to do this. But when does the new
refinance program begin? In the fall, is it?
Mr. Stevens. The new--I'm sorry, Madam Chairwoman, when--
Chairwoman Waters. The program that you announced for
refinance--
Mr. Stevens. Yes.
Chairwoman Waters. --does not begin right away. It starts
some time in the fall?
Mr. Stevens. That's correct. We have to issue a mortgagee
letter, some guidance to the industry. We have to pull together
the industry participants so that the dialogue can begin to
occur.
One of the fundamental challenges we have had with many of
these modification efforts is that the industry is very
fragmented between servicers, originators, investors, and the
borrower, who all have to come together in order to form this
union that can result in the principal write-down. For this
program, this option under the refinance guideline, to be
effective, we need to pull those components together and give
clear guidance to the industry, not only how to make the
operations work, but, as well, to ensure that the fundamentals
associated with the TARP execution related to this for the
lenders when they submit claims down the road is also effective
and available at that time.
So, for that reason, we do not expect this to be
operational until the fall--late summer, at best.
Chairwoman Waters. I'm a little bit worried about many
homeowners who have paid their bills on time for the length of
the mortgage that they are holding. They have gotten into
trouble, they have missed payments, they are trying to get loan
modifications, they are trying to get refinanced, they are
trying to do whatever they can.
But under your program, for example, if you use the same
criteria that you use for your FHA mortgages, are they going to
be eligible?
Mr. Stevens. The FHA program, FHA refinance option, is
merely one of a variety of options that's provided by this
Administration, particularly with the recent announcements that
we just made a couple of weeks ago that helps provide a series
of alternatives to help affect responsible homeowners who we
are able to effectively reach.
We do need to be clear, and the President has said that not
everybody will avoid foreclosure. And to that extent, there
will be some borrowers who cannot qualify. However, given the
FHA guidelines, we believe that there will be a significant
opportunity for homeowners who are in distress, underwater in
their homes, who can afford a mortgage if it was written down
to an appropriate level, who will be able to make their
payments for the long term. And that is who this particular
portion of the Administration's programs are designed to reach.
Chairwoman Waters. Thank you very much. Mrs. Capito?
Mrs. Capito. Thank you. Let me make sure I get how this is
going to work. If you're in an underwater mortgage, and let's
say you have a second lien, like a lot of people do, you are
going to extinguish that. Who pays for that?
Mr. Stevens. Let me just walk--I will give you the full
scenario. What will happen is--let's assume there is a second
lien in the case you are using as an example. The first lien
investor will most likely have an underwater loan to begin
with. They have to do at least a 10 percent principal write-
down, and the borrower has to benefit from that transaction and
write down the principal to our maximum loan-to-value available
in FHA, which is roughly 97 percent.
Mrs. Capito. Okay. Let me stop you there. When they write
it down, is that what Ms. Caldwell--I think in her testimony--
said the cost is shared by the private sector and TARP?
Mr. Stevens. No, this--the entire cost for the first lien
write-down by the investor is borne by the investor. There are
no TARP funds associated whatsoever with the investor--
Mrs. Capito. What's the incentive--
Mr. Stevens. --portion of the write-down in the FHA
program.
Mrs. Capito. Is the $1,500 increased fee for the lender to
do this, is that what they're--
Mr. Stevens. No. The motivation for the investors--and we
have had a multitude of investors come visit a variety of the
agencies in Washington, and talk about their concern about some
of the at-risk borrowers in the population--is that by writing
down a portion of the loan, they are willing to take that loss
for the benefit of ultimately having a loan that gets
refinanced out of their portfolio, rather than risking it to
potentially go into default at a deeply underwater level,
simply because that borrower may be at risk for strategically
defaulting, or have had income reductions that no longer allow
them to support the loan as it stands today, and have no other
alternative but to refinance out.
So, again, the lender will take a portion of that write-
down for the security of knowing that the underlying loan that
ultimately gets restructured will perform. And that's in
their--that, in many cases--
Mrs. Capito. But then it goes off their books, because it
goes into the FHA--
Mr. Stevens. It goes into an FHA.
Mrs. Capito. Okay. So the hit to the lender, really, is the
write-down in the--say if it goes to the FHA for 100 and they
have it at 200, they take $100,000--
Mr. Stevens. That's correct. And that's one of the unique
attributes--
Mrs. Capito. But what's going to prevent the lender--excuse
me for interrupting--
Mr. Stevens. Go ahead.
Mrs. Capito. --but I only have a little bit of time--what's
going to prevent the lender from saying, ``Well, now, we
started out with this, and then we moved to that, and
refinancing, and remodifications, and now it's going to be
this. You know what? I might just wait another 6 months. There
might be another program coming down the road that's going to
be better for me.''
Mr. Stevens. Look, the key about this program is it's
entirely optional. It does require these participants in the
market to make this decision on their own. If investors want to
take the gamble and delay, thinking that some new option is
going to be available, that's a risk that they have the
opportunity to take. I think--
Mrs. Capito. Or--
Mr. Stevens. I think that's a very high-risk--
Mrs. Capito. Or they could force the borrower into
foreclosure, correct?
Mr. Stevens. Yes, the alternative--they have the
traditional alternatives they have today. One is the borrower
may go into foreclosure, at which point most of these loans
would ultimately be complete losses to their balance sheet.
They could delay, hoping--to your point--that something new
down the road is coming. I think that's a fairly high-risk
option, given the realities of the market together.
Mrs. Capito. Well, they have had several options, so I
don't think it's that high risk.
Mr. Stevens. Well, they have--except as we all know, they
all had effectiveness at relative levels. So they--there is no
single solution here that has been provided that gives mass
relief, particularly to these mortgage investors who are very
concerned about broad-based impacts to the capital levels and
their balance sheet.
So, there is no question that they will look through their
portfolio, they will look at borrowers who are most at risk for
default, based on negative equity, perhaps income reductions,
who are stressed. And they will recognize that a portion of
these borrowers, if they were re-underwritten to their actual
new income levels that have been adjusted during this
recession, and a new appraisal, based on the actual property
value, that this borrower would actually qualify for a new
loan.
So, they will take that proportional write-down for the
benefit of not incurring the complete loss in the event of that
loan going to foreclosure.
Mrs. Capito. Well, a complete loss would be--it wouldn't be
a complete loss, because they--wouldn't they become owners of
the property? It has some value.
Mr. Stevens. That's correct. It would be the net difference
of the post-foreclosure expense against the resale price of
that real estate--to your point, that's why we do not believe
these numbers will be of the magnitude to solve the housing
crisis.
We think this is another solution that can be combined with
the variety of solutions offered by this Administration--which,
again, have just been enhanced a little bit further--to help
provide more alternatives for investors, servicers, and
borrowers to deal with this particular climate. But it will not
be a fix-all solution, by any means.
Mrs. Capito. Okay. Let me just ask Ms. Caldwell, in the
part of your statement where you said the cost will be borne by
the private sector and by the TARP, what cost are you referring
to there?
Ms. Caldwell. Thank you. In the HAMP modification, to get
to affordability, a homeowner comes into HAMP because they are
having trouble paying their mortgage. And so, the HAMP modifies
the mortgage to 31 percent of the homeowner's debt to income.
To the extent--for the--
Mrs. Capito. So--but that could be through extending the
life of the loan, or--
Ms. Caldwell. Correct.
Mrs. Capito. --lowering the interest payment. It's not
necessarily a write-down, correct?
Ms. Caldwell. But the--not a write-down on the principal
balance.
Mrs. Capito. Right.
Ms. Caldwell. But a write-down on the monthly payment.
Mrs. Capito. Right.
Ms. Caldwell. And so, the difference between that write-
down from 38 to 31 percent debt-to-income is shared through
incentives from the Treasury and incentives--and reduced
payment from the investors. On the--
Mrs. Capito. And how does that split out, like half and
half or--
Ms. Caldwell. Half and half. On the short sale deed in lieu
program, for example, if a homeowner goes to short sale, there
are incentives for the servicer for doing that, yet the second
lien holder must release the lien. There is some compensation,
but not full. And the second lien holder has to discharge
future obligation from that borrower. So the--
Mrs. Capito. So the second lien holder is compensated by
the Treasury? Or is it split?
Ms. Caldwell. It's partially--it would depend on the amount
of the lien split.
There is incentive available to pay up to $6,000 for
release of the second lien, but that lien could be $20,000, it
could be $30,000, or it could be some other amount.
Mrs. Capito. Well, my time is up, but I will say this: all
of this is so darn confusing. I don't see how people could plan
into the future when the programs keep changing. And I
understand the motivation here is to try to stem the tide and
you find the bottom, I guess, for want of a better term.
But if we keep moving the boundaries around here,
increasing the program--I went around to my district in the
last 2 weeks and tried to explain this program that we're going
to have forbearance for people who have lost their jobs. This
is not selling in the American public, the ones who have been
sitting there paying their bills, doing what they want to do,
cutting back on all of their daily expenses to try to make sure
they meet that one big thing in their life, which is their
mortgage payment, I just have concerns about the changes, the
confusion, who is taking the hit. Is it just another hit to the
taxpayer? Thank you.
Chairwoman Waters. Mr. Green?
Mr. Green. Thank you, Madam Chairwoman. Is it fair to say
that homeowners who are playing by the rules, who made all of
their payments timely, and been blessed to keep their jobs,
that they have a stake in this, as well?
Is it fair to say that because property values decline when
we have foreclosures in a community, that those who have played
by the rules are impacted by the foreclosures that take place?
I have some evidence that property values decline on an
average of about $150,000-plus in some communities. So we all
have a stake in this. Whether it is a direct impact or
indirect, we still have an impact upon us. Is that a fair
statement, Mr. Stevens?
Mr. Stevens. Absolutely. And I think it relates a bit to
the previous statement, in that even homeowners who have been
able to pay responsibly get impacted when a home goes to
foreclosure in their neighborhood and drives down home values.
So, that is a key component to making sure this program is
managed responsibly.
The thing I would absolutely highlight, to your point, is
that the issue of negative equity, for example, is heavily
concentrated in a select number of States in this country. And
in those States--take Nevada as an example, where the average
loan-to-value is over 100 percent--any event that impacts a
family living in a home--loss of job, something that impacts a
family--would make it literally impossible for them to get out
from that home or afford that mortgage without some other
solution. And that is a result of no fault of their own,
necessarily, it's a fault of the depression of the entire
market.
Mr. Green. And my suspicion is that there is empirical
evidence to support the notion that the prices receding, being
devalued, will impact homes on the market, which will impact
housing starts, which will impact employment, which impacts
employment, by the way, in housing but also in people who lay
carpet, people who manufacture carpet, people who sell
appliances, people who make appliances. The domino impact is
one that is felt throughout the economy. So we have to do
something to stop this slide in housing prices and
foreclosures, because of the impact that it has on the economy,
as a whole. So, we all have a stake in it.
And I understand the moral hazard argument, but there is
also what I call an immoral hazard argument. It is immoral to
do nothing, and just watch as the economy slides into some sort
of abyss from which it may be difficult to extricate itself.
Now, let's talk for just a moment about empirical evidence
necessary to evaluate these programs. The servicers are key. Do
we have in place a requirement of some sort that servicers
provide evidence of rejections, number of rejections, why the
rejections took place? And are there sanctions available, in
the event the servicers don't provide the empirical evidence
necessary to evaluate the programs?
Ms. Caldwell. I will take that question. It's a very
important question, something that we spend a lot of time
thinking about.
And the short answer is yes. Servicers that are part of the
HAMP program have signed a servicer participation agreement
that specifically spells out their obligations under the
program, including fair lending, including reporting of
denials, and including modifying according to HAMP guidelines.
I think it's also important, though, to remember that this
is a voluntary program. And so, at the beginning, as we try to
get servicers, investors, and homeowners together at the table,
this is fundamentally shifting how the servicing business is
done. And so, some of the challenges that we have seen in the
first year, as servicers have ramped up, has been a result of a
rapid growth in the program and adjusting to the program.
But yes, absolutely, we do. We publish a monthly servicer
performance report, and we released our most recent one today,
that highlights, by servicer, their delinquencies, the number
of homeowners they have on trial modifications, and the numbers
they have converted to.
Mr. Green. Will the raw empirical evidence be made
available to the public for those organizations that take this
information and massage it in such a way as to come to
conclusions about how efficacious the program is?
Ms. Caldwell. At this point, part of the program is very
committed to transparency. We began collecting denial codes, as
well as race and gender information in December. At this point,
we are beginning to get those first collections in. But our
intention is to make that data available to the public as soon
as it is scrubbed and ready.
Mr. Green. [presiding] I yield back. Thank you. Ms. Jenkins
is now recognized for 5 minutes.
Ms. Jenkins. Thank you, Mr. Chairman. Some analysts are
predicting losses as great as $30 billion between the 4 banks
currently participating in the 2MP program associated with home
equity lines. Are these estimates within the projections
Treasury anticipates, and are banks prepared for this much
damage to their revenues?
Ms. Caldwell. I think the question of second liens and
valuation--I will let the respective institutions speak to the
estimates for on their balance sheet. But I do think it is
important, in the context of 2MP, to know that we worked very
closely with the second--with these second lien investors. It
was a voluntary program to sign up for, and we got the four
largest servicers to sign up in February. And that was after
each of them looked at their second lien portfolio, understood
what it meant, and made a commitment to modify those second
liens that were behind a first mortgage that had been modified
in HAMP.
And so, it is our expectation that they will do that in
accordance with the program guidelines. But I can't speak to
the accounting treatment on their own balance sheets, as a
result of their participation.
Ms. Jenkins. Okay. And the roll-out of the Treasury
Department's second lien modification program will not be
effective until September of this year, under the--
Ms. Caldwell. The--oh, sorry, go ahead.
Ms. Jenkins. Under the HAMP program, a servicer cannot
execute a foreclosure until all available modification options
have been tried. Does the September 2010 start date for the 2MP
initiative amount to a 6-month foreclosure moratorium?
Ms. Caldwell. Let me clarify two things. The September date
for 2MP is actually the date that the Treasury systems will be
up and running to report on the second lien program. As with
all things in HAMP, servicers may implement the program when
they are ready.
At this point, those servicers that have a second mortgage
behind a first mortgage that they service--meaning they know
when they have the first being modified and they hold a
second--they have indicated that they will begin modifying
those loans immediately.
One of the key components of the second lien program is a
matching system that notifies a second lien holder when the
first lien has been modified, even if that first mortgage is
done by another servicer. And so, that matching system should
be in place within the next month. And then, second lien
holders will know when they have a junior lien on a mortgage
that has been modified.
And again, our expectation is they will begin making those
modifications, even though they will not be able to report them
and receive incentives, they will just accrue them.
To your second point regarding the borrower notice and
outreach and solicitation, that takes effect in June. And that
is specifically about those trial modifications where a
homeowner has provided up-front documentation to get into a
trial. That guidance clarifies that if a homeowner is in a
trial modification and making payments, they may not be
referred to foreclosure. So I would not characterize the 2MP
timing as related to anything on the foreclosure process.
Ms. Jenkins. Okay, thank you. I yield back, Madam
Chairwoman.
Chairwoman Waters. Thank you very much. Mr. Driehaus?
Mr. Driehaus. Thank you, Madam Chairwoman. Just to follow
up, if Ms. Caldwell or Mr. Stevens could provide clarification,
because this remains a problem in Cincinnati for folks that we
are dealing with, in terms of folks who are seeking
modification--and it might be--it's usually the huge entities.
It's dealing with one of these--Deutsche Bank, or one of these
massive entities, where at the same time they're dealing with a
modification, someone else at the institution is proceeding
with a foreclosure.
And I apologize if I'm asking you to repeat yourself. But
if you could, help me better understand specifically what
you're doing to prevent that from happening, and what type of
clarification we are requiring of the financial institutions,
so that this isn't occurring.
Ms. Caldwell. Absolutely. And that's a very important issue
in the HAMP program.
When the program was originally announced, servicers were
allowed to have dual track foreclosure, meaning they could go
down the modification process, but could also continue along
the foreclosure. That has been a standard practice in the
industry. And very often, it was a practice used to get
homeowners' attention.
That was--HAMP guidelines have always prohibited a home
from going to foreclosure sale while a homeowner was in HAMP.
But there was confusion between what is a foreclosure process,
meaning actions leading up to sale, and actual sale. And so,
what the new guidance did is require servicers to clarify the
difference between process and sale in those cases where there
might be homeowners already in a simultaneous foreclosure.
But for new homeowners coming into the program, servicers
must provide outreach to the homeowner, and try to contact them
before initiating a foreclosure action. And to the extent that
homeowner has been evaluated for HAMP and is in HAMP, they
cannot refer the loan to a simultaneous foreclosure, as long as
that homeowner is making the three trial payments.
Mr. Driehaus. So, if they're being evaluated for HAMP, they
still are provided those protections. This isn't--because there
was a distinction being made between the evaluation process and
the actual, in the program, being modified, and having been
approved for modification and they're in the program, and
therefore we would stop the foreclosure proceedings.
But now, if they're being evaluated, we can no longer
proceed with the foreclosure proceedings?
Ms. Caldwell. That is correct. For those homeowners who are
being evaluated effective June 1st, in those evaluations where
the homeowner has provided up-front documentation, the loan may
not be referred to foreclosure until a decision has been made
that they are not in HAMP. And if they are in a HAMP trial and
they are making payments, they may not be referred.
There are some circumstances where there are homeowners
where the foreclosure process has already started, and they are
already in the trial process. In that, servicers will be
required to send notice to explain that they are already in a
simultaneous foreclosure process, but that their house will not
go to sale until they are declined from HAMP.
Mr. Driehaus. And we aren't able to put a freeze on that
process? Why are we doing this prospectively, beginning in
June, rather than saying, ``Hey, look, this is a problem right
now with folks who are experiencing this.'' We are sending a
lot of mixed messages, especially to people who are getting
confused about the information that is coming to them.
They are doing everything they can. They understand that
the government is on their side, trying to help them stay in
their home, yet they are getting a notice from the same bank,
telling them they're being foreclosed on, and they're
proceeding with the foreclosure action.
So, what we're saying is that, well, in June we are going
to change the process. But if you're already there, you're
already there. Is there any way for us to prohibit them from
proceeding with the foreclosure process for those who are
already in the system?
Ms. Caldwell. That's a good question. For those who are in
the process, it's sometimes very difficult and often more
expensive to stop and start a foreclosure action. And so, based
on feedback from multiple stakeholders, we made the decision,
from a process standpoint, with the number of changes coming
out we should do something prospectively, but just aggressively
communicate what has been happening to address the confusion
that had been in the program.
But in terms of going back and retroactively changing
process for one million homeowners in trial modifications, we
focused on going forward.
Mr. Driehaus. I guess my concern is that is one million
problems in terms of, if we aren't going back and trying to
address--because there are so many people who are experiencing
this right now, and if we are not addressing it right now--
that's great, that we're fixing the problem prospectively. But
there are a lot of people stuck in that situation right now.
And I hope that the communication is enough. But my fear is
that it's not. Thank you, Madam Chairwoman.
Chairwoman Waters. You're welcome. Representative Bean is
in attendance. Without objection, Representative Melissa Bean
will be considered a member of the subcommittee for the
duration of this hearing.
Ms. Bean. Thank you, Madam Chairwoman. My question is, why
is the FHA rolling out a new FHA refinance plan, instead of
working with the existing HOPE for Homeowners program that has
been ready to go?
And now that the new guidelines are finalized, how many
refinances do you expect would be done through HOPE for
Homeowners this year?
Mr. Stevens. Just to be clear, we look at the HOPE for
Homeowners as a complementary program to the FHA refinance
option. As--HOPE for Homeowners was, obviously, created
legislatively. That program still exists today. It has not had
the volume that was originally anticipated. That's clear. We
have just--we made some recent adjustments to it in the fall,
and have re-added those to the roll-out.
While we have seen some increase, it has still been
extremely moderate, in terms of take-up. And while I'm not
passing--come to the point where I can draw conclusions as to
why, it is a very different program in terms of documentation
standards, requirements for servicers, etc. And so, that
program exists and we are hoping that it does sort of pick up
steam, in terms of success.
The refinance option that FHA has announced is really
utilizing an existing FHA refinance option that already was
available. It just adds some additional advancements to it, in
combination with our partnership with Treasury to help
facilitate that relationship between the servicer, the
investor, and the originator, to make it utilized as well.
So, we're hoping, between the two, we can reach a broader
segment of the distressed homeownership population.
Ms. Bean. So you are expecting some increase in HOPE for
Homeowners participation?
Mr. Stevens. Yes, we have already seen some increase. It is
extremely moderate.
Ms. Bean. My other question is for Ms. Caldwell. On
average, how many hours are spent modifying a loan through the
HAMP program? And how does this compare to when it first
started?
And besides delays caused by the borrowers themselves,
what's the biggest internal delay mortgage servicers face in
completing a loan mod?
Ms. Caldwell. The--I think it's--as we think about the
delays and modifications, we have seen three things. The first
has been the servicer capacity to overhaul the business that
had been a payment collection and processing business to what
looks much more like an origination business, and an
origination business for homeowners facing real distress. So,
first would be servicer capacity.
The second one would be understanding the changes and the
requirements of the program. As homeowners, investors, and
servicers have had to come together and learn a program that
was started from scratch to address a problem at huge scale,
just the understanding and ramp-up and learning and
coordinating among all those parties has taken a lot of time.
And then third would be the documentation issue. Last year,
Treasury made a decision to open up trial modifications to
homeowners, based on stated income in an effort to get more
people into the program, and more immediate savings into
American homeowners.
What we underestimated was the challenge that would result
in getting the documentation in, getting it reconciled, and
getting those homeowners and trials converted. And that has
really been the bulk of the focus of the last few months, is
getting that backlog of trial modifications that came in, where
people are saving on their mortgage, decisioned and converted.
Ms. Bean. We know that also contributed, the fact that
people got into trial mods without documents, and then later it
turned out they didn't have enough unemployment to justify a
permanent mod, that we sort of set some people up to think they
were on track to get a permanent modification, only to find out
later that they were never going to be eligible. So we are glad
to see some changes in that regard.
What specific changes have been instituted as a result of
the auditing on servicers by HAMP compliance officers?
Ms. Caldwell. From the compliance we have done a number of
things. The first has been the institution of the temporary
review period that we announced at the end of December, where
we said servicers could not decline anyone from HAMP until they
did a thorough review--or decline anyone from HAMP unless the
property was ineligible.
That was done, in part, because our compliance showed that
the servicers had not yet put--were not yet understanding all
of the rules of the program. So we had servicers go back and do
a temporary review.
In addition, there have been some servicers that have been
instructed to re-run the net present value test, as we have
also learned that the net present value test coming in and
coming out has been confusing.
And so, we have really focused the compliance effort on
making sure the homeowners are not inappropriately denied a
HAMP modification. And that's why we have kept people in trial
modifications longer than many would have liked, but it's
really to make sure that when someone is declined a HAMP mod,
it is really for the right reason.
Ms. Bean. Thank you. I see my time has expired. I yield
back.
Chairwoman Waters. Thank you. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. I have one
question.
I am a little bewildered by the fact that I think it's a
generally accepted fact that minorities were targeted for
subprime loans and all the exotic products were made available
to minorities at a much, much higher level.
And so, I am concerned, if that is a fact--which I believe
it is--I can't understand why Treasury has not released the
data that they have been collecting, and pledging to make it
public. And we have no data on the applications for HAMP based
on race, sex, or national origin. Can you give me some
indication, either, as to when Treasury is going to release
that data?
Ms. Caldwell. Absolutely. At Treasury, we are very focused
on the impact on low and moderate income and ethnic minority
communities, in terms of mortgage modifications. And we partner
with NeighborWorks and housing counselors, and have targeted
outreach events to try and reach all populations in HAMP.
In terms of the data, we began collecting it in December of
2009. And we will begin reporting it, making it publicly
available in raw form as soon as it has been scrubbed and is
ready.
I will say a few things. One, it is--in terms of the
modification program, the servicers can only report what people
self-identify on their modification documents. And the early
results are coming in that many people are opting not to
identify. So we are a bit concerned. I don't want to set
expectations that the data will be complete.
Second, we are also finding that many of the low and
moderate income and ethnic minority communities are adversely
impacted by other conditions, such as unemployment, that are
also making it very difficult to qualify for a HAMP
modification. But we are very, very focused on the program.
And all servicers that are part of HAMP are required to
comply with fair lending guidelines.
Mr. Cleaver. Yes. But even if we get partial data, it will
still give us, I think, some indication as to who the
applicants are, and it can even provide much clearer
information about the people who were steered into these
subprime loans.
So, do you have any indication of when maybe the Chair can
receive that?
Ms. Caldwell. The target date for release has been by the
end of June. And that's assuming we have collected--we should
have it collected in, and it allows some time for scrubbing of
the data and removing of all personally-identifying information
and compliance with all privacy guidelines to make sure that
it's in a format that can be released. But we are certainly on
track, to get that made public.
Mr. Cleaver. Thank you, Madam Chairwoman.
Chairwoman Waters. You're welcome. Without objection, the
Chair is going to have a second round with this panel.
Mr. Himes just came in. Mr. Himes, for 5 minutes.
[No response.]
Chairwoman Waters. Not yet? The Chair is going to initiate
a second round with this panel. It is so important, because we
are all confused. The public gets confused. We are not getting
the modifications that are being represented. And let me just
quote you Elizabeth Warren, who released an Oversight Panel
report strongly criticizing HAMP today, saying in the end it
will only prevent 276,000 foreclosures. As you know, we have
listened to you, and you have told us that the Administration
claimed it would prevent three to four million foreclosures.
Now, the reason that I am going to go a second round with
you is this: I think it's very important for you to share
everything that you can with us, and for us to be very honest
with you about what we're feeling about the Administration's
foreclosure programs.
I know that, as you start your testimony with us, and as we
see your representations in the press, you talk about progress,
and you talk about things are better, etc. But the fact of the
matter is our constituents are unhappy, and they are constantly
bombarding us with the problems of your voluntary modification
programs.
For example, your document requirements are awesome. And
many of the folks who are in foreclosure--and some are
elderly--who are attempting to comply--I say ``your document;''
the document request of the various institutions--we don't know
how much you monitor the servicers. We know that the servicers
have been slow. We know that some of them appear not to be as
well-trained, or to understand the program as well as they
should. And now the program is changing, and so we're going to
have to go through another period of time where servicers are
not fully informed about what the Administration's program is.
And so, voluntary, not enough oversight with servicers, a
complete misunderstanding of the HAMP program, as it relates to
the--what is it, the 3-month period that you allow the
homeowner to be in a program based on their income, prior to
determining whether or not they get a loan modification? Is it
3 months? What is it?
Ms. Caldwell. Correct, a 3-month trial modification period.
Chairwoman Waters. Trial modification. We have complaints
that people are going into foreclosure while in trial
modification. We have many of those complaints. And it goes on
and on and on.
We are going to have to make some decisions about what we
must do. And it seems to me there must be a combination of
something mandatory and voluntary, and there must be a way by
which to speed up these modifications. And despite the fact--we
are working very closely with FHA to make sure that program is
solid--we get a little bit worried. Even when you talk about
using some of the TARP resources, we get a little bit worried
about a lot of refis being thrown into FHA.
And so, I want to make sure that I use my period of time to
say to you that on both sides of the aisle, we're not happy,
and that we're really concerned about the inability to really,
really move something substantially.
For example, let me ask you about unemployed individuals.
You just referred to maybe you're finding with some of the
minority populations that it's a little bit harder, because
maybe the unemployment is higher. It is higher. But as you
know, the Administration, I think the President, came up with
an Executive Order based on my bill about dealing with
unemployed homeowners, and making it possible for them to stay
in their homes that's patterned after the program in
Pennsylvania. Is that working yet in the--is that program
working yet for the unemployed?
Ms. Caldwell. There is a--the program I believe you're
referring to is the hardest-hit fund that President Obama
announced to target five States. And one of the options they
could use to address unemployment or negative equity are
programs similar to the Pennsylvania--
Chairwoman Waters. The program is in the Wall Street Reform
bill that we passed out of this committee and off the Floor.
That's the one. He targeted five States.
Ms. Caldwell. Five States?
Chairwoman Waters. Is that working yet?
Ms. Caldwell. The proposals for the program from the
various States are due Friday, for how they would like to use
those funds. And we expect funding to go out the door in June.
So it is operating.
Chairwoman Waters. Thank you very much. Mrs. Capito?
Mrs. Capito. I have no further questions for the panel,
Madam Chairwoman. Thank you.
Chairwoman Waters. Thank you. Mr. Cleaver.
Mr. Cleaver. Are there some adjustments that you would
recommend that we make, legislatively, to empower the Treasury
to respond more favorably and quickly?
As soon as I turned on the television this morning, the
first news story was the failure of this program. Diane
Sawyer--did you hear a report? Does anybody tell you about it?
Ms. Caldwell. I did not see Diane Sawyer's report this
morning, but I am familiar with the Congressional Oversight
Panel report that was released.
Mr. Cleaver. Right, that's what she used to start out by
saying--which some of us would like--would rather not hear--the
President's housing program is a failure.
What can we do? We have people who are angry with us
because they don't know that we don't go out and actually do
the modifications, although all of us will probably have to get
involved on the telephone with some of the lending
institutions, mortgage companies. Is there anything we can do
to help you do a lot more than is being done?
Ms. Caldwell. I think the most important thing is to make
sure that homeowners understand that there is help available,
and they should not be paying a cost or paying scammers for any
of that help.
Mr. Cleaver. Is that the number one problem we have?
Ms. Caldwell. It is a big problem. Mortgage fraud scams in
the modification business are a huge problem.
But we do have a number, a call center number, 888-995-
HOPE. And what we do is we--when we hear from homeowners, it
helps us understand where servicers are failing, it enables us
to go back and intervene on their behalf, and it enables
homeowners to be in touch with a homeownership counselor to
help guide them through the process.
So, I think the most important thing is to make sure that
we do outreach to the homeowners, that we do continue to follow
up on all those reports that we understand, and keep the
pressure on for modifications.
Mr. Cleaver. Yes. Do we need to try to meet with the FBI to
ask for more agents? If fraud is the number one inhibitor, then
we need to hire more FBI agents or Lassie, Rin Tin Tin,
whatever. I don't know.
Ms. Caldwell. I don't know that it's the number one
inhibitor, but it is an inhibitor. But this is a crisis at a
scale that we have not seen before. And as we try to pull
together multiple parties, including homeowners, servicers,
investors, and counselors, to come together and address this
program, I do think we have a lot of very complex issues and a
lot of different sides, and scams are one of them.
Understanding the program is another one. And the fact that it
is a program where we have a lot of people who are in distress,
but it's not a program that is designed to help everyone.
And so, we do have to make sure that we don't set the
expectation that everyone is going to be helped. This is for
people who live in their homes, own their homes, have an
ability to stay in their homes, but have a hardship. And so
there are many people with second homes or jumbo mortgages who
are also facing hardship.
Mr. Cleaver. Yes, okay. You're actually frustrating me, but
I will--that's what the program was designed to do, all the
people you just--I don't know of anybody who is trying to help
somebody who is not in their home. Everything you said, that's
what we're trying to--
And I admit, Madam Chairwoman, that this is a difficult
program to do, and I don't want to suggest, even lightly, that
it's not. Maybe this is self-defense because of the pressure
that's being applied to us. And then I'm sure that after this
latest report hits, and the pressure will increase. So out of
my frustration, I am raising these issues. I yield back.
Chairwoman Waters. Thank you. Mr. Green.
Mr. Green. Thank you. The number of persons who don't
qualify for the program, my assumption is that this is
something that is quantifiable perhaps after the fact, if not
before. You can get some notion of it.
And my assumption is that the program, having been designed
specifically for persons who do qualify--my question is, do we
over-emphasize that line of--remember now, we have a lot of
people who won't be able to qualify, and that's understandable,
but is that being overly emphasized, do you think?
Ms. Caldwell. I don't think it's being overly emphasized.
But one of the reasons that we made the changes that are moving
the program to up-front documentation is to make sure that the
program is focused on those homeowners who are qualified for
the program and can stay in the program. One of the things that
we did learn from opening the program up based on stated income
is that many times the stated income versus the verified income
didn't match. And so someone may have thought they were
eligible for the program, and they weren't.
So, as we go through this trial period, we are going to
have some people who thought they were eligible and they were
not. And the importance of this change is to make sure that
homeowners going into trial modifications have been screened
and determined to be eligible. And the only responsibility that
homeowner will have is to make the three trial payments on
time.
But, yes, you're correct. In the trial population we do
have to focus on making sure that people understand whether or
not they are eligible.
Mr. Green. You mentioned second homes, and that persons who
have second homes, maybe third, that they are not eligible,
correct?
Ms. Caldwell. Correct.
Mr. Stevens. Correct.
Mr. Green. They do have something that they are eligible
for, a bankruptcy. Not that anybody wants to go into
bankruptcy. It's a horrible thing. But they are eligible for
bankruptcy, as a means of preserving those second and third
homes, true? Or do you know? Maybe that's something you're not
familiar with.
Ms. Caldwell. Yes, I can't speak to the full range of
bankruptcy on primary and secondary residences.
Mr. Green. All right. Thank you, Madam Chairwoman.
Chairwoman Waters. You're welcome. Ms. Melissa Bean, you
have about 8 minutes left before we go to the Floor. We will
recess after your questions.
Ms. Bean. Thank you, Madam Chairwoman. I just have one very
specific question. How many HAMP compliance officers are there
in the field, and what's the ratio of those officers to
servicers? How does that compare to, say, bank examiners to
banks?
Ms. Caldwell. In terms of the HAMP compliance officers,
Freddie Mac has a separate organization, a Making Home
Affordable compliance that has been set up to do the compliance
on HAMP. I don't know the exact head count of how they staff
it, and how it would compare to bank examiners, but it is set
up to provide an audit-like function. So it is designed to do
random sampling across all of the servicers. They have been
out, they have done second looks at each of the servicers. They
have done test audits of declines, and they have also done
testing around outreach. So it is--and they do have the ability
to staff up and contract as needed to get the job done.
Ms. Bean. And can I ask you to just provide that in follow-
up?
Ms. Caldwell. Yes.
Ms. Bean. Thank you. I yield back.
Chairwoman Waters. This committee will stand in recess. We
have to go and take some votes. The Chair notes that some
members may have additional questions for this panel, which
they may wish to submit in writing. Without objection, the
hearing record will remain open for 30 days for members to
submit written questions to these witnesses, and to place their
responses in the record.
This panel is now dismissed. And thank you so very much. We
will call the second panel upon our return.
[recess]
Chairwoman Waters. The Subcommittee on Housing and
Community Opportunity will come to order. I thank all of the
witnesses for remaining. This is quite unfortunate, that we had
to spend the time on the Floor. It was unavoidable. But I do
appreciate your patience, and I am going to introduce the
second panel.
I am pleased to welcome my distinguished second panel. Our
first witness will be Dr. Dean Baker, co-director, Center for
Economic and Policy Research.
Our second witness will be Ms. Alys Cohen, staff attorney,
National Consumer Law Center.
Our third witness will be Mr. Vincent Fiorillo, trading/
portfolio manager, Doubleline Capital LP.
Our fourth witness will be Mr. Andrew Jakabovics, associate
director for housing and economics, Center for American
Progress Action Fund.
Our fifth witness will be Dr. Arnold Kling, member,
Mercatus Center Working Group on Financial Markets, George
Mason University.
Our sixth witness will be Mr. Robert E. Story, Jr.
chairman, Mortgage Bankers Association.
And our seventh witness will be Mr. Alan White, assistant
professor, Valparaiso University School of Law.
Thank you. We will start with our first witness, Dr. Dean
Baker.
STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND
POLICY RESEARCH
Mr. Baker. Thank you, Chairwoman Waters. I appreciate the
opportunity to address the committee today.
The main point I would like to raise is the fact that I
think, in considering the various mortgage modification
programs, and certainly the new ones being put forward by the
Administration last week, there has been a failure to consider
the underlying state of the housing market. And I think this
has been a real tragedy, not just in these modification
programs, but this is really the problem that got us here to
begin with.
Specifically, we had a hugely overvalued housing market. By
my calculations, we had an $8 trillion housing bubble which is
in the process of deflating. That is the underlying cause of
the problems facing homeowners today. And as much as these
programs might be well-intentioned, I have to say that even in
a best case scenario, it's very unlikely that you're going to
benefit more than 15 or 20 percent of homeowners with permanent
modifications.
And, perhaps even more seriously, I think because of the
state of the housing market, many of those homeowners will not
end up benefitting at the end of the day. And what I mean by
that is we should care at the end of the day whether we have
actually helped homeowners in terms of saving them money on
housing costs, and also providing equity for them in their
home.
And what I would argue is that because in many markets the
bubble has yet to deflate, we are going to still be in a
situation where homeowners are likely paying much more in
ownership costs than they would pay to rent a comparable unit.
And secondly, because house prices are going to fall further,
even if we are able to negotiate a permanent modification that
leaves them at least temporarily with a little equity in their
home, because prices are going to fall further they will end up
again underwater in 2 or 3 years, and likely end up in a
similar situation, when they're prepared to sell their home.
Very quickly, what I just would point to is if you look at
the long-term trend in house prices, we have a 100-year-long
trend, 1895 to 1995, where house prices had just kept even with
the overall rate of inflation. That's a nationwide average.
There are, of course, huge variations around the country. You
have markets like California, Manhattan, and other markets
where home prices rose more rapidly. But it's a nationwide
average. We have 100-year-long data, which should be pretty
compelling evidence as to what you should expect to see in
housing prices.
In the period from 1996 until the peak of the bubble in
2006, house prices rose by more than 70 percent in excess of
the rate of inflation. There was no explanation for this in the
fundamentals of the housing market, nothing on either the
supply side or the demand side. And also, for those who need
further confirmation, nothing in the rental market that was
remotely corresponding to that.
Now, since the housing bubble began to decline, began to
deflate in 2006, house prices have fallen back, but they still
are somewhere between 15 to 20 percent above their trend
levels. What happened was that Congress put in--or I should say
government put in several policies last year to slow the
decline in house prices, and it at least temporarily had that
effect.
The three obvious ones are, first off, the first-time
buyers tax credit, the $8,000 tax credit is about 5 percent--a
little less than 5 percent--of the median house price. Second,
the Fed's policy of quantitative easing that pushed mortgage
rates to 50-year lows. And the third part of the story was the
huge expansion of the Federal Housing Authority in the housing
market, guaranteeing 30 percent of purchased mortgages in 2009.
All three of these supports are gradually being retracted
from the housing market. The Fed ended its policy of
quantitative easing last month. First-time buyer's credit, the
extended credit, ends at the end of this month. And, of course,
the FHA is being forced to cut back its role in the market, as
a result of the fact that it's now below its minimum capital
requirements.
For these reasons, I expect house prices to resume their
fall, and there is some data that already suggests that. Other
factors that would suggest house prices are going to continue
to fall are record vacancy rates--these are the highest vacancy
rates we have seen since the Commerce Department kept data in
the early 1950's--and also, we know that rents are now falling
for the first time that--at least the Consumer Price Index
measure of rent is falling. Other measures of rent are falling
more rapidly.
This leads to a situation where, as I say, I think it's
virtually certain that in many, if not most markets, house
prices will fall further. And any program that's not designed
to take that into account will lead to serious problems.
What I would advocate, just very quickly, as an
alternative, is a proposal, the Right to Rent proposal that's
being introduced as a bill in Congress tomorrow by
Representatives Grijalva and Kaptur, which would give people
the right to stay in their home, as renters, paying the market
rent for--I believe it's a 5-year period of time. This
addresses the problem of giving homeowners who are underwater
housing security, which I think is the most important thing we
could do. It prevents the blight of vacancies that are
afflicting many neighborhoods. And, thirdly, it does give banks
incentive to act on their own to try to prevent foreclosure.
And this costs no taxpayer money, requires no bureaucracy, and
the day it goes into law, it immediately affects all underwater
homeowners.
So, I will cut off there and end my time.
[The prepared statement of Mr. Baker can be found on page
44 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Cohen?
STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL CONSUMER LAW
CENTER
Ms. Cohen. Thank you, Chairwoman Waters. Thank you for
inviting me to testify today regarding HAMP and its effect on
foreclosures. I am a staff attorney at the National Consumer
Law Center, and I am also testifying today on behalf of the
National Association of Consumer Advocates.
HAMP has sought to change the dynamic that leads servicers
to refuse even loan modifications that would be in the
investor's best interests by providing both servicers and
investors with payments to support successful loan
modifications.
Yet, an entire year into the program, only a little over
200,000 modifications have been provided, and homeowners and
their advocates still report a stunning degree of noncompliance
with the program rules. Both SIGTARP and GAO have been critical
of implementation and transparency issues. And to date,
Treasury has not levied any penalties on servicers for
noncompliance, and no loan level data have been released to the
public.
While the Administration's recently-announced changes to
HAMP acknowledge that no foreclosure prevention program can do
its job without principal reduction, assistance for the
unemployed, and stopping the foreclosure process during
consideration for a modification, even these enhanced measures
threaten to be an empty promise without meaningful
transparency, accountability, and enforcement.
Moreover, until the HAMP program or legislation addresses
servicers' incentives to foreclose rather than modify loans,
and mandates program compliance, new initiatives are unlikely
to dampen the country's economic distress.
I just want to pause here for a moment and respond to a
couple of points in the MBA's testimony. One is that the
foreclosure stops themselves are costly and should be
reconsidered. If a loan is not referred to foreclosure, there
are no costs on behalf of the servicer. And if the servicer
gets their job done quickly, and the person qualifies, and it's
NPV-positive, the investor is in a better situation. And if
it's done quickly, and it's not NPV-positive, then they can
move to foreclosure so the investor doesn't lose too much
money.
Second, there is a claim in the MBA testimony that
mandating principal reductions is a violation of the takings
clause of the Constitution. We have looked at that question and
we don't think there is any basis for that.
Back to the other measures that Treasury has passed, the
unemployed measure itself offers short-term payment relief
without any debt relief, and for a period far shorter than the
current average period of unemployment. A Federal bridge loan
program, or broadly available funding for State bridge loan
programs would provide the type of relief needed.
The principal reduction program is based on voluntary
principal write-downs, an approach that heretofore has not
produced significant results, and that adds complexity without
providing transparency or accountability. The proposal
introduces a second net present value test, when even the
simple one-step NPV analysis has been the subject of criticism
for lack of transparency and poor implementation.
Because the principal reduction will result in a hit to the
servicer's largest source of income, the monthly servicing fee,
servicers have a strong incentive to avoid principal
reductions. Modest incentives are unlikely to change this
picture. Even the most promising initiatives--the mandatory
stop of foreclosures and the access to HAMP for homeowners in
bankruptcy--will not succeed without transparency and
accountability.
Servicers' interests often do not align with those of
investors or homeowners. Servicers, unlike investors or
homeowners, do not necessarily lose money on a foreclosure. The
result is that servicers are often indifferent, at best, as to
whether a delinquency ends in a modification or in a
foreclosure. Until this situation is addressed more directly,
loss mitigation will favor the interests of servicers over
those of homeowners and investors.
In addition to improving the program's transparency,
accountability, and enforcement, several core program elements
must be reformed. Trial modifications are leaving many
homeowners in limbo, while increasing their principal balances
and damaging their credit ratings. The Administration must
mandate automatic conversions for homeowners who make the
required payments, and apply all payments as specified under
the permanent modification.
The program should also better meet the needs of homeowners
with negative amortization loans, folks who re-default for a
second time, including for unemployment, and those with debt
below 31 percent of income, but who have high fixed expenses.
In order to overcome the misalignment of incentives between
servicers and the other stakeholders, mortgage servicing needs
to be regulated by Congress. That's why we support your bill.
We also recommend that Congress take other additional steps to
ensure that the current crisis is not repeated. That includes
legislation to require loan modification offers to qualified
homeowners, funding quality, foreclosure mediation, allowing
bankruptcy judges to modify home loans, removing negative tax
consequences of principal reduction, and ensuring that
predatory lending is not legal in our country.
Finally, Congress should establish an independent consumer
financial protection agency that can pass strong rules to
govern the market.
Thank you for the opportunity to testify today.
[The prepared statement of Ms. Cohen can be found on page
61 of the appendix.]
Chairwoman Waters. Thank you. We will call on our next
witness. How do you pronounce your name?
Mr. Fiorillo. ``Fiorillo.''
Chairwoman Waters. ``Fiorillo?''
Mr. Fiorillo. Yes, ma'am.
Chairwoman Waters. Mr. Vincent Fiorillo. Thank you.
STATEMENT OF VINCENT FIORILLO, TRADING/PORTFOLIO MANAGER,
DOUBLELINE CAPITAL LP, ON BEHALF OF THE ASSOCIATION OF MORTGAGE
INVESTORS (AMI)
Mr. Fiorillo. Thank you, Madam Chairwoman, and thank you
for inviting me to testify today. My name is Vincent Fiorillo,
and I am testifying on behalf of the Association of Mortgage
Investors, or AMI, a trade group organized to develop investor
consensus on current public policy initiatives. I have spent
nearly 35 years working in the mortgage finance industry, and
have seen the mortgage market from the perspective of
investors, and from the perspective of brokers and issuers.
In general, mortgage investors include charitable
institutions, endowments, foundations, universities, mutual
funds, and sovereign wealth funds. My testimony today
represents the views of the AMI. AMI supports a mortgage
solution that will help homeowners stay in their homes, rebuild
equity, address affordability, and provide a new and fully
vetted and underwritten FHA mortgage.
The recent crisis demonstrates that the process of
originating mortgages and securitizing those mortgages into
marketable securities can and must be reformed to ensure
greater transparency and integrity. In fact, the fact remains
that, without a responsible and viable mortgage securities
market, homeownership will be an unfulfilled dream.
The delayed implementation of HAMP resulted in a lower-
than-projected number of permanent loan modifications.
Investors and first leads have experienced a degradation of
their position, while subordinate liens have been enriched in
recent months. This has happened without benefitting the
troubled homeowner who is still saddled with the excessive
debt, and a mortgage far in excess of the home's value.
Based on our expertise in the mortgage finance industry,
and our experiences with recent foreclosures avoidance
programs, I would like to make two important points today
regarding the current HAMP program.
First, there is a high risk of re-default, because
calculations used to evaluate a borrower's application do not
factor in the borrower's total debt obligation. Of the nearly
170,000 HAMP permanent modifications, half of them are saddled
with extraordinary amounts of total debt, which leaves very
little income to pay for necessities, such as food and
clothing.
Second, the current mortgage modification program permits
trial loan modifications on the HAMP without any income
verification. The AMI endorses the changes in June that will
require income verification prior to qualifying for a trial
modification.
In our view, the most important impediment to the success
of any program is the conflict that exists when bank-owned
servicers hold second-lien mortgages. The four biggest banks
service approximately 40 percent of our Nation's mortgages, and
hold roughly $419 billion of second liens on their balance
sheet as of December 31, 2009. Under temporary loan
modification programs, banks have been able to defer the
recognition of losses on the second lien portfolios. In fact,
the current program actually improves the cash flow available
to the second mortgage, at the expense of the first.
For over a year, mortgage investors have advocated that any
successful solution to our housing crisis must address two key
components: affordability; and negative equity. Everyone must
share the burden.
Madam Chairwoman, we mortgage investors are willing to
forgive principal at their expense, allowing borrowers to re-
establish themselves and stabilize their housing situation. But
solutions cannot be a windfall for certain stakeholders at the
expense of others. Relief must come from significant principal
forgiveness on both the first and the second lien, in
connection with the refinancing of the overextended homeowner
into a new low-interest mortgage.
AMI supports the framework of the FHA's new short
refinancing program for homeowners who owe more on their
mortgages than their home is currently worth. Taxpayers are
protected, because investors are using their money to reduce
principal, while homeowners must qualify for a fully
underwritten FHA refinanced mortgage.
In order for the program to work, Treasury and FHA must
specify its details and hold all parties accountable for its
implementation. Our fear is that these details could easily be
overlooked.
For example, it is unclear whether a servicer can approve a
reduction in the first lien, and then have the holder of the
second lien opt out, avoiding principal reduction. This is
problematic because it is completely counter to the needs and
the interest of the homeowner, ignores the priority of liens,
and results in an unjust enrichment of the bank's second liens
position.
This situation is not only bad for investors now, but
projecting forward, investors in the mortgage finance
marketplace will be reluctant to invest in mortgages because of
this additional risk. This risk will ultimately result in
increased borrowing costs for future home buyers.
In conclusion, mortgage investors believe that the
Administration's newly announced program for principal
reduction leading to an FHA refinance program is an important
step forward, and can be a permanent solution to the
homeowner's problem. The Nation's foreclosure crisis must be
solved by addressing both the problem of ability to pay and
willingness to pay. With the current lack of detail, investors
are extremely worried there are significant execution risks to
the program.
Madam Chairwoman, in order to ensure the program's success,
the participation of both first and second lien holders is
critical. Rebuilding the mortgage market of the future will
only be more difficult, as long as the priority of liens is not
respected. Investors will hesitate before investing the capital
necessary to jumpstart consumer lending.
Thank you for the opportunity to share our views.
[The prepared statement of Mr. Fiorillo can be found on
page 90 of the appendix.]
Chairwoman Waters. Thank you very much. Mr. Andrew--is it
``Jakabovics?''
Mr. Jakabovics. ``Jakabovics.''
Chairwoman Waters. ``Jakabovics?''
Mr. Jakabovics. Yes.
Chairwoman Waters. Okay, thank you.
STATEMENT OF ANDREW JAKABOVICS, ASSOCIATE DIRECTOR FOR HOUSING
AND ECONOMICS, CENTER FOR AMERICAN PROGRESS ACTION FUND
Mr. Jakabovics. Thank you very much, Madam Chairwoman, and
Ranking Member Capito. It's an honor to be here today to
discuss with you the recently-announced changes to the Home
Affordable Modification Program, as well as the program's
successes and failures to date. I will share my analysis of
those changes, as well as recommendations for further action.
Through the end of March, approximately 1.2 million
homeowners have been offered trial modifications under HAMP,
but only 230,000 have successfully negotiated the seemingly
Byzantine process for getting into a permanent modification.
While there remain significant operational barriers to HAMP's
full-fledged success, the Administration's new initiatives are
likely to bring relief to an additional subset of homeowners
struggling to pay their mortgages.
In moving to offer underwater but otherwise creditworthy
borrowers an FHA refinancing, and in bringing principal write-
downs into the HAMP modification process, the Administration is
attempting to tailor its response to address the current
problem of prime loans going bad. There are nearly a million
more prime loans that are seriously delinquent or in
foreclosure than subprime loans.
Writing down the amount of outstanding mortgages to bring
them in line with the current values of the properties provides
an opportunity to create the conditions for homeowners to keep
paying their mortgages over the long term, while minimizing the
walk-away risk that threatens their neighbors' financial
health. Since the housing crisis began, we have argued that the
best solution has been to restructure mortgages to reflect the
current property values. And, indeed, the new FHA program is
essentially a modern version of the New Deal's Home Owners Loan
Corporation, which helped homeowners in the 1930's weather the
Great Depression.
Commissioner Stevens, in his testimony, laid out the
details of the FHA program, so I just want to touch on a few
reasons why I believe it is an important step forward.
Given the much larger losses that lenders and investors
face if borrowers in these underwater properties defaulted,
cash in hand equal to 97.75 percent of value may be
sufficiently attractive to allow these short refinancings to
proceed. I would also note that this is actually a sweeter deal
than they got under the Home Owners Loan Corporation, when they
only got paid out $.80 on the dollar.
The new FHA refinance program will allow existing
mortgagees to retain almost a fifth of the property's current
value as a junior lien on the property, effectively giving them
some upside beyond the cash in hand. Realistically, this
program will likely help borrowers with a first lien only,
given the challenges that we have already heard about--around
extinguishing seconds.
In addition to the short refinances through FHA, principal
reductions will be promoted in the HAMP waterfall. While
current HAMP allows for principal reductions, the NPV test will
now be run a second time to calculate the value of a
modification that includes the principal write-down. The
results of two NPV tests will be compared so that servicers
will see the value of doing a write-down where appropriate.
Principal write-downs will remain optional, even when the NPV
results show it to be more valuable.
But servicers' existing legal obligations to lenders and
investors to get the best possible returns from modifications
should--and I emphasize should--make it difficult for servicers
to choose the standard HAMP modification, when the principal
write-down alternative yields better returns under the same NPV
run. Unfortunately, the lack of transparency around servicers'
activities makes it difficult, if not impossible, for investors
to know if servicers are leaving money on the table by not
doing the write-downs.
Principal write-downs will probably actually be more
valuable, compared to the current HAMP modifications, because
of the reduced re-default risk from a lower LTV, compared to
the standard waterfall. Moreover, the program incentivizes
borrowers to remain current in the modified loans, because the
forgiveness will be phased in over 3 years, as long as the
borrower does remain current.
As with the FHA short refinancing, this policy's success
will also likely be determined with the ability to modify
second liens or eliminate them. And if 2MP proves ineffective
at eliminating those liens, it is unlikely that the first liens
will be written down.
Crucially, neither Fannie Mae nor Freddie Mac has issued
guidance to their servicers indicating that they are going to
participate in the principal reductions when the NPV test shows
them to be more valuable. But nearly 60 percent of all
modifications to date have been made for GSE loans. Adopting a
preference for principal reduction by the GSEs would ultimately
benefit the enterprise's bottoms lines, and by the extension of
taxpayers. And Treasury and FHA must direct the GSEs to
participate, and certainly congressional pressure in that
direction would be welcomed.
Another facet of the changes to HAMP is assistance for
unemployed borrowers. But in the interest of time, I will refer
you to my written testimony for my comments on that element.
But looking at HAMP in total, the biggest barrier to the
program's success has been servicers' ability to quickly and
accurately modify loans. And while Alys's testimony was focused
on many of the outstanding issues, I want to use the remaining
time that I have to strongly urge Treasury, with congressional
support, to adopt or develop a Web portal as a single point of
contact for borrowers and their advocates, as well as
servicers. This will speed the rate of implementation of
changes to the program, which has been a frustration for
everyone, as well as implementing changes to the NPV model, and
would dramatically improve the overall throughput of the
program.
Compliance would also be much easier if Treasury developed
and maintained a single point of contact for borrowers and
participating servicers. Specifically, it would allow borrowers
and their advocates to submit applications for modifications
and allow people to know what their status is in the process.
Servicers would securely access the applications for loans they
control and would be able to quickly provide borrowers with a
response. There are relatively few variables that servicers can
change. So even the NPV tests could be run on this central
platform, once borrowers and servicers have submitted their
respective information. This also sidesteps the issue of
servicer capacity.
In the interest of time--I am actually out of time--I will
look forward to any questions that you might have.
[The prepared statement of Mr. Jakabovics can be found on
page 97 of the appendix.]
Chairwoman Waters. Thank you.
Dr. Arnold Kling?
STATEMENT OF ARNOLD KLING, MEMBER, MERCATUS CENTER WORKING
GROUP ON FINANCIAL MARKETS, GEORGE MASON UNIVERSITY
Mr. Kling. Thank you, Chairwoman Waters, for the
opportunity to testify. With your permission, I would like to
submit my written testimony for the record, and speak to some
questions that you and your colleagues raised this morning.
One of the--both you and Mr. Cleaver expressed some
frustrations with how this program is working. And my comment
on that is keep in mind that this program is taking two
business processes--loan servicing and loan origination--
combining them in a way that they have never been combined
before, and redesigning them on the fly. So these are two well-
developed business processes that you are attempting to
redesign on the fly from Washington, when they have
historically been done at a very local level. Particularly the
loan servicing; it's done on a case-by-case local level.
I just don't think it's possible to do that effectively,
and it doesn't surprise me that we are having frustrations and
complaints. I think what we are trying to do is just too
difficult to do from Washington. And that--it needs to be
rethought, if for no other reason than that.
Representative Capito, you mentioned the issue of finding a
housing market bottom, and I think that is an important issue.
Dean Baker referred to that. If we modify loans and we have not
yet reached a bottom, what we are doing is setting borrowers
and lenders up to fail, once again. And I would guess that
approximately half of them will. A very large percentage will
fail again.
And so that--and I think we would be better off if we would
put this housing crisis behind us. Trying to modify loans and
keep the same borrowers in their homes means that the crisis is
going to still be in front of us, and we may have another
hearing like this in 5 years. Putting it behind us may be
difficult and painful for some people. But I think, overall, we
would be better to have it behind us, and allow the market to
reach a natural balance of supply and demand, rather than have
to guess where the bottom is.
And that finally brings me to Mr. Green's question--isn't
there a benefit to this program for other homeowners, the
people who are not receiving modifications? And my answer to
that is that's very questionable.
Let's say I am in a neighborhood--and actually, my
neighborhood does have a number of foreclosures--suppose that
preventing foreclosures means that home values stay up for a
while. That doesn't benefit me unless I happen to sell my home
over the next couple of years. Because, presumably, in the long
run, the market will reach its natural level whether there are
modifications or not. So if I'm going to wait in my home for 8
to 10 years, then it doesn't matter to me whether house prices
are temporarily above their natural level or not.
But if they temporarily raise prices by putting off
foreclosures, at best what that means is that the people who
happen to sell over the next 2 years will be lucky. And the
people who happen to buy over the next couple of years will be
unlucky. So I am thinking also of the people who would like to
buy homes right now. And they deserve a chance to buy homes at
the appropriate price. They shouldn't have to face prices that
are artificially raised by these sorts of programs--or they
certainly don't benefit from those programs.
So, I think, overall, there--it's not clear that there are
benefits for other people from these mortgage modifications.
And keep in mind that people who have been paying their
mortgages every month, it's not just that they have been paying
their mortgages every month. They are taking the same capital
losses that the HAMP borrowers took. In fact, they are taking
more, because since they have paid their mortgages, they take
the full capital loss, whereas somebody somebody whose mortgage
is underwater can walk away from it, and the bank takes most of
the loss.
So, in dollar terms, the biggest losers are the people who
have held on to their homes and made their mortgage payments.
They have lost more in dollar terms than the people who have to
go through foreclosure. So I think it's a pretty hard sell to
say that they are the big beneficiaries of this program. And I
will stop there. Thank you very much.
[The prepared statement of Dr. Kling can be found on page
105 of the appendix.]
Chairwoman Waters. Thank you.
Mr. Robert Story?
STATEMENT OF ROBERT E. STORY, JR., CMB, CHAIRMAN, MORTGAGE
BANKERS ASSOCIATION (MBA)
Mr. Story. Chairwoman Waters, Ranking Member Capito, thank
you for the opportunity to testify this afternoon. MBA members
are committed to helping financially troubled borrowers retain
homeownership and avoid foreclosure. Many are participating in
the Administration's Home Affordable Modification Program, and
all servicers for Fannie Mae and Freddie Mac loans are
participating in HAMP.
As we speak, servicers are working hard to implement the
recent changes announced by the Administration. We are also
working with Treasury to suggest improvements to HAMP, in order
to increase efficiency and ensure better outcomes.
During these trying times, servicers continue to hire
staff, reach out to borrowers, and employ new strategies to
keep people in their homes. According to Treasury, more than
1.4 million borrowers have been offered trial modifications
under HAMP, 1 million borrowers are in active modifications, of
which almost 230,000 represent permanent modifications. An
additional 100,000 permanent modifications are pending borrower
acceptance. And servicers have substantially increased the pace
in which the permanent modifications are being done.
In addition to HAMP, servicers are providing their own home
retention solutions. Since July 2007, HOPE NOW data shows that
the industry completed an estimated 2.7 million propriety
modifications. During the month of February 2010, nearly 96,000
families received loan modification outside of HAMP. Combined
with HAMP, a total of 148 permanent modifications were granted
in February.
Servicers are also engaged in modification and loss
mitigation activities through FHA and VA. These are additional
and important efforts by the industry and the government to
help distressed borrowers.
I would now like to turn to HAMP changes announced by the
Administration. With the jobless rate near 10 percent,
assisting unemployed borrowers must take priority. MBA fully
supports the creation of a temporary forbearance program to
address the unique circumstances of unemployed borrowers.
Features outlined in the Administration's program are
consistent with MBA's own recommendations represented to
Treasury in February. That includes the recognition that
borrowers should continue to pay a portion of their income
toward their mortgage.
We also support allowing different periods of forbearance
to help ease financial institutions' concerns with the
accounting and regulatory treatment of assets that remain
delinquent for 6 months or longer.
MBA recommendations have other important features that we
hope are considered, as the Administration designs the details
of the program. For example, there should be a source of loans
to allow financial institutions to carry delinquent mortgages
during the forbearance program. Servicers advance principal and
interest payments to investors during this time, despite not
receiving such payments from borrowers. They also advance funds
to pay for the borrowers' taxes and insurance premiums.
While the servicer ultimately gets reimbursed for most of
these advances, the carry time and cost is substantial. This is
especially true for non-bank institutions that must borrow the
funds. Servicers should be given the tools to succeed, and a
loan program that is repaid with interest would not cost
taxpayers.
MBA also recommends applying a cost sharing feature to
offset the investor's risk of delaying foreclosure when a
forbearance plan fails.
Treasury announced an optional principal write-down
component to HAMP. While MBA is concerned that this may
increase delinquencies, we are not opposed to it, provided it
remains voluntary. We urge the Treasury to monitor the program
to gauge whether it is causing strategic defaults, and to make
adjustments if necessary.
One area of substantial concern is the announcement that
servicers must re-underwrite all borrowers with modifications
using the alternative net present value test. Given all the
concerns about server capacity, this is a burden that will not
yield the results anticipated. We suggest limiting such reviews
only to borrowers and loan products that lien holders deem
eligible for principal reduction.
With respect to FHA refinance and modification
enhancements, the new rules will make it more attractive for
underwater borrowers to refinance into affordable mortgages.
MBA also supports the incentive payments proposed by Treasury.
Finally, on the important subject of second liens, the
Administration's changes are likely to make modifications more
attractive. The fact that the largest servicers are
participating will have a positive impact on the number of
borrowers receiving help. The 4 largest banks hold or service
$427 billion in second liens, representing approximately 60
percent of outstanding second mortgages.
Chairwoman Waters, HAMP is a critically important effort
that is assisting hundreds of thousands of homeowners. We hope
to continue working with the Administration and this
subcommittee on successfully implementing the new programs so
that we can help the maximum number of financially distressed
homeowners. Thank you.
[The prepared statement of Mr. Story can be found on page
118 of the appendix.]
Chairwoman Waters. Thank you.
Mr. Alan White?
STATEMENT OF ALAN M. WHITE, ASSISTANT PROFESSOR, VALPARAISO
UNIVERSITY SCHOOL OF LAW
Mr. White. Thank you, Chairwoman Waters, Ranking Member
Capito, and members of the committee, for this opportunity to
share some thoughts with you about the HAMP program and the
foreclosure crisis more broadly.
I think at this point, the HAMP program overall can only be
judged a failure if we consider the two overarching goals that
this program obviously should be serving. The national
foreclosure crisis means that at this point we are looking at
foreclosures that are approximately quadruple their historical
level, in unprecedented historical levels. So the first goal of
this program, obviously, is to reduce the number of
foreclosures. And that has not been achieved.
And the second--I think equally important--goal that we
need to keep in mind is to bring down the overall level of
mortgage debt that is hanging over the American consumer.
Mortgage debt, in line with housing prices, experienced a huge
bubble in the past 10 years, and went from something like $5
trillion to almost $11 trillion, a level of debt that's just
simply not sustainable for the American homeowner, and that has
all sorts of consequences for the economic recovery that we're
all hoping for.
So, I think any intervention using taxpayer funds should be
designed to achieve these two goals of reducing foreclosures
and hopefully what I call the deleveraging of the American
homeowner.
If we look at the level of foreclosures and modification
activity over the last year, as far as I can determine, the
HAMP program thus far has been a negative. It's important to
keep in mind that, prior to the announcement of HAMP last
March, the mortgage industry, servicing industry, was
voluntarily modifying about 100,000 to 120,000 mortgages each
month. The largest number reported so far, the number reported
for the last month, for March, of HAMP modifications has been
about 60,000. Even if we combine HAMP modifications with the
other modifications servicers are doing completely outside of
HAMP--which raises some separate questions--I think we are just
now returning roughly to the level of modification activity we
saw a year ago that, as I say, was being done entirely without
taxpayer subsidy or incentive. And this is troubling.
Obviously, as other speakers have mentioned, setting up
this program is a daunting task. It has involved huge
administrative problems. But it still seems troubling that, at
the end of a year, the overall level of modification activity
has not risen. And I think it's also important to compare that
number to the number of new foreclosures that are being filed
every month. And that's about 200,000.
So, at this point, we are trying to bail water out of a
bathtub, when there is water pouring in at about twice the rate
that we're getting the water out.
And I think there are a number of reasons that HAMP has not
produced an increase in modification activity and a reduction
in foreclosures. I think, in hindsight, it may have been overly
prescriptive in the types of modifications and exactly what was
expected of servicers. It might make sense at this point to
think about simply providing incentives and rewards for
servicer performance, rather than specifying so prescriptively
what type of modifications need to be done.
And in that respect, I think it's interesting that we still
have about half of all modifications being done outside of HAMP
without HAMP subsidies, and, in many cases, better quality
modifications.
For example, when we look at principal reduction, so far I
think only about one percent of all HAMP modifications have
involved any actual write-down of principal. Meanwhile,
something like 10 to 20 percent of propriety modifications done
by lenders without HAMP subsidies have included principal
write-downs. A lot of those may be option ARMs, they may be
investor loans. There may be reasons for the differences. But I
think it would be important, going forward, to look at why it
is that servicers think that they can have greater success
outside the HAMP program guidelines.
I do also want to briefly mention what's mentioned at
greater length in my written testimony, that there is a serious
issue with servicer performance under the HAMP contracts. And
while participation in HAMP is voluntary, once servicers
participate, they have mandatory contractual obligations that I
think it's pretty clear at this point they are falling very
short of meeting.
I cite, among other things in the testimony, the HAMP call
center report that gives statistics on the number of borrower
complaints about servicer activity, including such things as
5,000 people reporting that their documents have been lost, and
so forth. And I think there is more than anecdotal evidence at
this point that servicers are not meeting their obligations,
and Treasury really ought to be doing something about that.
Thank you.
[The prepared statement of Mr. White can be found on page
128 of the appendix.]
Chairwoman Waters. Thank you very much. I will yield myself
5 minutes for a few questions.
First to you, Mr. Baker. You talked about a rental program
possibility allowing homeowners who are defaulting or who have
defaulted on their loans to work out some agreement with the
mortgage holder for rental possibility. Are you referring to
the banks coming up with rental programs where they now have to
set up a situation inside the bank or with a subsidiary or a
contractor to manage rental properties for them until they can
go back on the market? What are you referring to?
Mr. Baker. Well, the idea would be that you would
temporarily change the foreclosure process, so that homeowners
who are facing foreclosure--and you could put a cap on the
house price that applied to the bill put forward by
Representatives Grijalva and Kaptur puts the cap at the median
house price--that they would have the right to stay in the
house as a renter, paying the market rent. It would be up to
the bank, how they chose to do that.
So, you would have--as part of the foreclosure process, you
would have an appraisal where the appraiser would determine
what the market rent is for a house at that point in time. And
whether the bank opted to rent directly, whether they opted to
contract with the management agency, that would be up to the
bank. What would not be up to the bank is whether or not the
person got to stay there as a renter. That would be a right
given to them under the law for whatever period of time. Again,
I believe it's 5 years--
Chairwoman Waters. Who would be responsible for the upkeep
of the property, for capital improvements, etc., etc.?
Mr. Baker. That would be subject to the landlord-tenant
laws that are in--it's the bank's property, the bank owns--the
investor owns the property, so it is their property. But the
specifics, in terms of have they done adequate maintenance,
that would be dependent on the landlord-tenant laws in the
jurisdiction.
Chairwoman Waters. So your suggestion is that, with Mr.
Grijalva's legislation--I have not seen it--that we would
mandate a program that would cause the banks to have to allow
the person to stay in their property under some kind of market
rate rental agreement period.
Mr. Baker. That's right, and the idea is this would be a
temporary period, recognizing the extraordinary circumstances
that we're faced with in the housing market today. And the idea
is that, once that was in place, it immediately provides help
for everyone in the situation, without having to go through a
complex process.
Chairwoman Waters. Ms. Cohen, you pointed out several
weaknesses in the HAMP program, and talked about alternatives,
and talked about support to my bill dealing with servicers--a
number of issues involved with this mess that we're all in.
I agree with you, certainly, that we need to regulate the
servicers. There is a lot that we have all learned, as we have
had this meltdown, about the servicers, who they are and what
they do, etc.
But what would be your basic foremost recommendation for
dealing with this foreclosure problem? Mr. Baker just talked
about rental agreements that would be mandated on the lenders,
the mortgage holders. Do you agree with that? Or do you think
that perhaps principal write-down would be more effective? What
would be your one big recommendation that you would have to
deal with this issue?
Ms. Cohen. First of all, I read Mr. Baker's testimony, and
I think his proposal is very interesting. It is important to
consider it, and for Congress to take a close look at it. That
proposal may have an effect on people who are staying in their
homes. It is, to some extent, focused more on people who are
unable to stay in their homes.
One question is, what directly can we do to help people
stay in their homes? Principal reduction is an issue that is
focused on folks who can and cannot afford their mortgages. And
the foreclosure crisis is primarily being fueled by people who
cannot afford their mortgages. And so, I think it's interesting
to think about what Professor White said, which is in the end
what we care about is the result and not the details.
And so, the reason that requiring loan mod offers and
allowing cram-downs in bankruptcy matters, is because it's the
result. And we don't necessarily need to say it looks like this
or it looks like that. HAMP is well-intentioned in looking at
DTIs and at other things. But in the end, what we really want
is for people to be given a chance to stay in their house
before they're put in foreclosure. And right now, that isn't
happening.
Chairwoman Waters. Thank you. I think it was you, Mr.
Story, who gave recognition to our frustration and some of the
comments that were made by Mr. Green, myself, and others. Was
that you, Mr. Story?
Mr. Story. That wasn't me.
Chairwoman Waters. Was it Mr. Kling? Who was it?
Mr. Kling. That was me.
Chairwoman Waters. Oh, okay. Thank you very much. Mr.
Kling, you correctly identified the frustration that we have
obviously exhibited here today. If we were to come up with a
way of dealing with this that was simpler, that would help to
take care of more of the mortgage holders out--more of the
homeowners out there who were in trouble, etc., do you think we
should scrap all of this, the HAMP program and the changes that
are made to the HAMP program with the refinance possibilities
with FHA and the five cities that--five States that now have
available to them a program for unemployed people, and on and
on and on?
Do you think that somehow we need to get a handle on a
program that is clear, concise, and more helpful to more
people, and scrap all of what we have been attempting?
Mr. Kling. Thank you, Congresswoman Waters. I guess that
would be my instinct, because again, loan servicing and loan
origination are complex business processes that are very
difficult to redesign on the fly. And there--you are constantly
going to run into things that you didn't expect, issues that
you didn't have. And every time you change something to fix one
problem, some new problem will crop up.
So, searching for simplicity, I think, is a good idea. It
could be that Dean Baker's idea simplifies things for lots of
people. It could be that just writing a check to troubled
homeowners for a certain amount, which they could use for
moving expenses, if they have to move, for making up their
payments if they're only a little bit behind, that's a much
simpler task than trying to build a whole new servicing
origination process on the fly. That's just my opinion.
Chairwoman Waters. Thank you very much. Mrs. Capito?
Mrs. Capito. Thank you. Mr. Kling, I would like to follow
up with you. One of the issues that I think--when we had Mr.
Stevens in before, and Mr. Donovan--was trying to find the time
and when there is going to be less Federal involvement through
Fannie, Freddie, or FHA in the housing market.
And I am curious to know if you think that the next
iteration of this program obviously involves FHA more. And
between the three of them, they continue to dominate the
market, I don't know, 90 percent, or something of that nature.
How do we inject and get more private capital back into the
housing market?
Mr. Kling. So your question is, how do we get more private
capital back into the housing market?
Well, certainly, if you have Freddie Mac and Fannie Mae
using the government's borrowing rate to set rates, there is no
way that there will be private capital in the market. So
something has to be done to phase Fannie Mae and Freddie Mac
out of the market to give room for private capital to come in.
And this is one of those things that I am sure everyone wants
to do, but not now. And now is never the time when you're going
to want to do it.
But if you--one approach would be to take the loan limits
for Freddie Mac and Fannie Mae, and over, let's say, a period
of 3 years, bring them down by a couple hundred thousand a year
and get to the point where they're no longer originating loans.
You eventually bring the loan limits down to zero. And then
you--that would allow private capital to work its way into the
housing market.
Mrs. Capito. Thank you. Mr. Story, in your testimony you
mentioned that servicers are offering their own modification
and home retention solutions to borrowers who might not qualify
for Federal programs. What do you think some of the reasons are
why a borrower might not qualify for some of these Federal
programs, but still qualify for a servicer program?
Mr. Story. Some of the reasons are that the debt-to-income
ratios are more flexible in the non-HAMP programs. I think
that's probably one of the biggest reasons why they are going
outside that program.
Mrs. Capito. Do you have any--
Mr. Story. We have some more flexibility, in terms of what
the payments may be.
Mrs. Capito. Do you have any sense of how it's breaking
out, in terms of percentages, people going to the Federal--the
numbers that we heard are pretty--I think maybe that was--I
can't remember who it was--it's the end of the day here, but
somebody had said the numbers being serviced by HAMP, and then
the numbers being serviced by servicers outside of these
programs is exponentially larger. Was that you, Mr. White, who
had those figures?
Mr. White. Yes, I think it is actually about half and half.
Mrs. Capito. Half and half?
Mr. Story. We can probably get you better numbers. We will
check to see what we have, in terms of the numbers.
Also, FHA and VA aren't included in HAMP, either. So that
sometimes makes a difference there, as well.
Mrs. Capito. Until HAMP part two--
Mr. Story. Yes.
Mrs. Capito. --then FHA is in that, which brings me to
another--I will make a comment. If anybody wants to comment on
it--and I think both the chairwoman and I mentioned this in our
opening statements, that the capital reserve issue with FHA--
and here we are, creating another avenue for access to FHA when
we have a time when FHA is facing some problems financially,
even though there have been some reactions to that by the
Administration to try to help that, and we are trying to work
on our own solutions. But at the same time, to me, that's
another red flag of why we really need to scrutinize this
particular effort.
Does anybody have a comment on that, on the FHA involvement
with this? Yes? We will go with Mr.--if I can say his name--
Mr. Fiorillo. It's not that hard. We had a mayor in New
York--
Mrs. Capito. Okay. Both of them.
Mr. Jakabovics. Okay.
Mrs. Capito. So I will go with Mr. Jakabovics first.
Mr. Jakabovics. Close enough. So, I think that you have to
recognize that the piece that FHA would be responsible for
under the short refinancings that are being allowed under the
program are actually potentially less costly to FHA than their
standard activities, because the first loss position would be
held by TARP. So, my understanding--
Mrs. Capito. Wait a minute. That's the taxpayer.
Mr. Jakabovics. Right, but--
Mrs. Capito. TARP is the taxpayer.
Mr. Jakabovics. But it's a separate piece, and that money
has already been set aside, so you're not further risking the
capital. You asked about the capital ratios and capital--
Mrs. Capito. Right, on--
Mr. Jakabovics. No, I understand. But the other thing
that's important is you're bringing these loans back down below
100 percent loan to value. And all the evidence that's out
there is that the risk of walkaway exists when the loan is
worth a lot more than the home.
So, I think that under the program, if you qualify, so
you're creditworthy, you have to have been current on your
mortgage to get into the FHA refinancing, so it's not people
who have been delinquent. So if people can still qualify for
the refinancing, they are choosing to refinance into a more
affordable option.
So, if they are otherwise going to re-default, or default,
I think that by allowing them to refinance into FHA, it's
similar to the HARP program, in terms of allowing the Fannie/
Freddie, but without the write-down in loan-to-value. So I
think there is a lot of benefit for the FHA component.
Mrs. Capito. Okay. Mr. Fiorillo?
Mr. Fiorillo. Similar theme. What you're doing is basically
taking a homeowner who is above 115, taking him down to 115,
but only asking FHA to guarantee the 96.5 percent. So the loan
has been performing, the loan has been under-written, all of
the documentation has been filled out. They are actually
getting a better loan than what they have had.
And, to be perfectly honest, after--
Mrs. Capito. Who is getting a better loan?
Mr. Fiorillo. FHA.
Mrs. Capito. Well, they didn't have the loan before.
Mr. Fiorillo. Well--but they are getting a loan that's
probably better than one walking in off the street.
And, more importantly, in 35 years there have been enough
FHA loans to understand and to know what the rules are. So if
you can qualify--they're very stringent. So if you can qualify
at 96.5 percent, which is what the goal is, it's probably a
better loan than what, again, somebody who would be walking in.
And to answer your question about is there one simple way
to handle this problem, over a year ago several investors sat
around Treasury and said HAMP, help for homeowners can work,
and help for homeowners is one loss, one time. The problem with
the program was you had to extinguish seconds, and there was
nobody willing to do that. But that's a simple way to handle
it. But the losses could be pretty dramatic on the bank balance
sheets.
Mrs. Capito. Thank you.
Chairwoman Waters. Thank you. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. I just have one
question, actually. Home prices have been devalued in my
community in Missouri 30 percent in some areas and higher. I am
just wondering, Mr. Kling, if we let the market determine who
goes into foreclosure and eventually loses their home, do you
have any view of what would happen to neighborhoods that are
already devastated? And when you have a large number of
foreclosures, does that not reduce the value of everyone's
home, including the people who make their payments on time
every month?
So, while we may say, you were bad, you have a bad loan,
you're not a good person, and so you deserve to lose your home,
what about the next door neighbor, and the neighbor on the
other side, and on down the street? I live in a--our church is
in a neighborhood where there are probably five foreclosures.
Everybody is in trouble in the neighborhood, even the people
who go to work every day. What is the solution to that?
Mr. Kling. Well, I don't think the solution is to say that
people are bad because they go into foreclosure and they're not
because they don't. I think--I don't know if you're from St.
Louis, I'm from the St. Louis area, originally, myself.
Mr. Cleaver. No, I'm from the largest city.
[laughter]
Mr. Kling. But I now live in Silver Spring, and there are a
lot of foreclosures in our neighborhood.
I think it's possible that having loans in foreclosure--
that keeping people out of foreclosure would temporarily keep
home prices above what they would be. And, as I said before,
that would certainly benefit anyone who needs to sell a house
right now.
So, let's say I have made good on my mortgage, but I got a
new job somewhere and I want to sell right now. And there are a
bunch of foreclosures in my neighborhood. And, because of those
foreclosures, when I sell I'm not going to get such a good
price. And if you could prevent those foreclosures, I will get
a good price.
But that means that somebody who buys my house when I sell
it, because I have a new job in a new city, is actually
overpaying for it. And so, at some point they are going to pay
the price for that. And I have seen that. I saw it in my
neighborhood, some neighbors had sold at a peak that--probably
the house sold for $200,000 more than what it's worth now, and
I feel very sorry for those borrowers. So we are--
Mr. Cleaver. I do, too, because I have a 3 year old who
would not take that deal.
Mr. Kling. Yes.
Mr. Cleaver. That is not happening where we--
Mr. Kling. Well, but--
Mr. Cleaver. That's not happening in Kansas City.
Mr. Kling. Right. The--I guess my point is it's a
redistribution from people who have to sell now to people who
are anxious to buy now. Or from--sorry, the--
Mr. Cleaver. But you do understand that people are not
selling because they can't even get their investment out of it.
Mr. Kling. Yes, that's true. And they--in the short run,
those people would be helped by anything that artificially
raises house prices. But the people--but eventually the price
is going to hit a market level.
And if you--so, if I am somebody with more of a long-term
horizon, that I'm in this neighborhood for 6 or 8 years, then I
think what I would like is for my neighborhood to have people
who genuinely own the home, who are not at risk of defaulting,
I'm willing to have new immigrant families, other families,
other people trying to climb the ladder come in and buy these
foreclosed houses and live in them, and try to make their
living, rather than tell those people, ``No, we need to keep
these original home buyers in, and we need to artificially
boost prices and keep them out of reach for you, in order to
temporarily boost my house price.''
There is no way we can make this all good, and make house
prices go back up to what they were 2 years ago.
Mr. Cleaver. But are you suggesting that it's not--if we
just allow everybody who is on the precipice of foreclosure to
go into foreclosure, that is not as bad as somehow trying to go
through this very difficult, complicated process of trying to
save homes?
Mr. Kling. Again, there is no perfect solution. You can't
bring those home prices back up to where they were.
Mr. Cleaver. They will eventually get there, don't you--
Mr. Kling. Eventually, they will go back to where they
belong. And in the meantime, I do think the least bad option is
to get the foreclosures behind us, get the crisis behind us,
get people in those neighborhoods who can afford the payments
because they're buying them at lower prices, and to have
everybody in the neighborhood know that this isn't hanging over
us, that there aren't these people who are on the precipice--
because they will stay on the precipice, if you keep them in
there--but that everyone in our neighborhood is here for the
long term. I think, ultimately, that actually could be better
for the neighborhood.
Mr. Cleaver. Okay. Mr. Baker?
Mr. Baker. Yes. If I could just speak to that very quickly,
because I think there is an important point to distinguish
here, because I am sympathetic with this idea that prices have
to adjust. I don't think you can keep a bubble inflated, and I
don't think it's desirable.
But I think there is a second point here, that the fact
that you have a neighborhood that's subject to a lot of
foreclosures, that fact itself lowers the prices. You have
vacant homes that are havens for crime; they can be drug
houses. That lowers the price. That's an artificial lowering of
the price. I think we have every reason in the world to try to
prevent that.
So, I don't think we could maintain bubble prices
indefinitely. I don't see any social value in trying to do
that. There absolutely is a social value in trying to prevent a
neighborhood from being run down because you have a lot of
houses that are in this foreclosure process, where they are
abandoned, boarded up, not properly maintained. And that, I
think, is very much what Congress and this committee should be
focused on.
Mr. Cleaver. Yes. We are not doing it at the optimum level
of success. But that's what we are trying to do. Thank you,
Madam Chairwoman.
Chairwoman Waters. Thank you very much. If I may, what Mr.
Cleaver is referring to is what we are trying to do with the
NSP program, neighborhood stabilization, where we have now
funneled in about $6 billion. We're into a second round of
funding.
Unfortunately, most of the cities don't know how to use the
money. They have not been able to implement the program very
well. And we are going to hold some hearings on that, and we
are going to try and get some technical assistance. Because
you're right, we are too interested in maintaining some kind of
stability and not driving down the prices further because of
the foreclosures and the abandonment and all of the problems
that go with that.
Let me thank all of you for your patience today. It has
been a long day. And I am very appreciative for the time that
you have given to us. If I had my way, I would put all of you
on this panel in a room, because I think you could come out
with something that makes good sense. I have appreciated your
testimony very much here today, and you obviously have given a
lot of thought to this, and you understand very well what is
and what is not happening with the HAMP program.
I feel if we continue to go in the way that we are going,
that we are simply going to further complicate the process and
we are not going to be able to forestall foreclosures, or to
maintain people in their homes in the way that we are going.
So, I am hopeful that you will allow us to call on you. My
staff has been here, listening very carefully and taking a lot
of notes. And some of you traveled from afar, I know, and we
can't ask you to keep doing that. But we can conference call
with you and talk with you by telephone. And I think that we
will continue to do that.
The Chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses, and to place their responses in the record.
The panel is now dismissed. Do we have any written
submissions for the record?
[No response.]
Chairwoman Waters. If not, the hearing is adjourned, and I
thank you very much.
[Whereupon, at 5:49 p.m., the hearing was adjourned.]
A P P E N D I X
April 14, 2010
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