[Senate Hearing 111-142]
[From the U.S. Government Publishing Office]
S. Hrg. 111-142
FORECLOSURE MITIGATION UNDER THE TROUBLED ASSET RELIEF PROGRAM
=======================================================================
FIELD HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN PHILADELPHIA, PENNSYLVANIA ON SEPTEMBER 24, 2009
__________
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Rep. Jeb Hensarling
Paul S. Atkins
Richard H. Neiman
Damon Silvers
C O N T E N T S
PAGE
Opening Statement of Damon Silvers, Member, Congressional
Oversight Panel................................................ 1
Statement of Richard Neiman, Member, Congressional Oversight
Panel.......................................................... 1
Statement of Paul Atkins, Member, Congressional Oversight Panel.. 5
Statement of Damon Silvers, Member, Congressional Oversight Panel 7
Statement of Seth Wheeler, Senior Advisor, U.S. Department of the
Treasury....................................................... 11
Statement of Eric Schuppenhauer, Senior Vice President and CFO/
Program Executive, Homeowner Affordability and Stability Plan,
Fannie Mae..................................................... 22
Statement of Edward L. Golding, Senior Vice President, Economics
and Policy, Freddie Mac........................................ 29
Statement of Honorable Judge Annette M. Rizzo, Court of Common
Pleas, First Judicial District, Philadelphia County;
Philadelphia Mortgage Foreclosure Diversion Program............ 46
Statement of Irwin Trauss, Supervising Attorney, Consumer Housing
Unit, Philadelphia Legal Assistance............................ 59
Statement of Eileen Fitzgerald, Chief Operating Officer,
Neighborworks America.......................................... 78
Statement of Deborah Goldberg, Director, Hurricane Relief
Project, National Fair Housing Alliance........................ 85
Statement of Dr. Paul Willen, Senior Economist and Policy
Advisor, Research Department, Federal Reserve Bank of Boston... 112
Statement of Allen Jones, Senior Vice President for Default
Management, Bank of America Home Loans......................... 120
Statement of Larry Litton, President and CEO, Litton Loan
Servicing...................................................... 127
Statement of Joe Ohayon, Vice President for Community and Client
Relations, Wells Fargo Home Mortgage........................... 133
FIELD HEARING ON FORECLOSURE MITIGATION EFFORTS UNDER THE TROUBLED
ASSET RELIEF PROGRAM
THURSDAY, SEPTEMBER 24, 2009
U.S. Congress,
Congressional Oversight Panel,
Philadelphia, Pennsylvania.
The Panel met, pursuant to notice, at 10:03 a.m. in the
Kirby Auditorium, National Constitution Center, Damon Silvers,
presiding.
Present: Damon Silvers, Richard Neiman, and Paul Atkins.
Mr. Silvers. This hearing of the Congressional Oversight
Panel is called to order. I thank you all for joining us today.
My name is Damon Silvers and I serve as Deputy Chair of the
Congressional Oversight Panel. The Panel's Chair, Professor
Elizabeth Warren was called to testify before the Senate
Banking Committee this morning at a hearing on TARP oversight
in Washington, DC. She deeply regrets that she is unable to be
here, but we are after all the Congressional Oversight Panel.
I will now turn the gavel over to my colleague on the
panel, New York Banking Superintendent Richard Neiman. Richard
serves as the Chair of New York Governor Patterson's Halt
Abusive Lending Transactions Taskforce and is a member of the
Multi-State Foreclosure Prevention Working Group.
Superintendent Neiman has done extraordinary work in the area
of mortgage foreclosure prevention for this panel including,
but not limited to, his efforts to put this hearing together.
Consequently, it seemed appropriate to us for Richard to chair
this morning's hearing. Richard, the gavel.
STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman [presiding]. Thank you very much Damon for those
kind words and also for the opportunity to share today's
hearing. Good morning. First, I do want to thank and am very
grateful to the City of Philadelphia and the National
Constitution Center for hosting this hearing of the
Congressional Oversight Panel. This city has been hard hit by
the foreclosure crisis. Too many Philadelphians know firsthand
what it means to have a home taken away.
The Panel would also like to thank Senators Casey and
Specter and Congressmen Brady and Fattah and their staffs for
helping to plan today's hearing on this important issue. I also
want to give a special thanks to Judge Rizzo of the
Philadelphia Court of Common Pleas for working with the Panel's
staff on the hearing and inviting us to visit the court this
afternoon to learn more about its innovative mediation program.
The number of families at risk of foreclosures here in
Philadelphia and across the country is on the increase. What
started as a crisis driven by subprime borrowers with
inappropriate products has now spread to include families with
traditional mortgages. Even prime borrowers are now losing
their homes as a result of the downturn in the economy and the
downturn in housing prices and job losses resulting from a
recession that few predicted.
Today's three panels of witnesses will convey the view of
(1) the homeowners who are in jeopardy; (2) the lenders and
servicers who can modify mortgage terms to keep people in their
homes; and (3) the government that is implementing and
overseeing the programs to facilitate these modifications. Only
with these three groups of stakeholders working together can we
develop affordable and sustainable solutions to the housing
crisis and a greater level of engagement and cooperation that
is long overdue. I am concerned that the pace of modifications
is not keeping pace with the rise in foreclosures. We are also
hearing specific concerns from borrowers and housing counselors
regarding the responsiveness and the capacity of mortgage
servicers and we will hear much more from them today.
To my knowledge, this hearing is the first time that
Treasury, Fannie Mae, and Freddie Mac are together in a public
forum along with housing advocates and mortgage servicers to
discuss the progress of the Administration's foreclosure
prevention programs. We need to see this crisis from the
perspective of those who are facing foreclosure, as well as
those who are helping these families through counseling,
modifications, and the judicial process.
The broad representation that we have here today from the
servicing industry is especially critical. Housing counselors
and government agencies may design initiatives to help
borrowers at risk, but ultimately it is the servicers and
lenders who will determine whether these programs succeed. They
have the power to decide whether to modify a loan or to pursue
a foreclosure.
As New York's Superintendent of Banks since 2007 when the
crisis began, I have seen firsthand the positive results for
homeowners can be achieved when the public, private and
nonprofit sectors come together with a common purpose.
Foreclosure, as we all know, is in no one's best interest.
Now, some procedural issues. Because of the number of
witnesses appearing today and the extensive scope of the
testimony, we invite each witness to make an opening statement
limited to five minutes. All of us have already read your
written testimony, so in the five minute time period I strongly
encourage you to highlight those points that best capture your
main positions and constructive suggestions for foreclosure
prevention. We need to be strict on our time constraints in
order to hear from everyone, so I ask that you be conscious of
the time. We'd like to finish our work before 1 p.m. and allow
time for members of the public to share their comments with us,
as well.
So, with those opening remarks I'd now like to turn it over
to Commissioner Paul Atkins for remarks.
[The prepared statement of Mr. Neiman follows:]
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STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL
Mr. Atkins. Thank you very much and I'd also like to thank
Philadelphia for hosting this in the Constitution Center and
most importantly to all of the witnesses who are appearing
today at this hearing, some upon rather short notice. So, thank
you very much for your efforts in coming here.
The issue of foreclosure mitigation and its effectiveness
is one of the areas that Congress specifically tasked this
particular Panel to report on under the Emergency Economic
Stabilization Act of 2008. I think it's appropriate for us to
review what's being done in this area to help address the large
number of foreclosures that the U.S. is experiencing these
days. I welcome the opportunity to learn from our panel of
witnesses today. This is an area that like much of what is
being done by the U.S. government in the past year is fraught
with moral hazard if poorly implemented. The interest, of
course, is in helping those who may be in trouble through an
interaction of bad luck, a bad economy, and perhaps bad
personal circumstances. If you're out of a job, it is really
difficult to make payments unless you've saved over time. But,
just like that proverbial dichotomy between the ant and the
grasshopper, we want to be sure that we're helping the ant and
not necessarily the grasshopper.
So, I'll be interested today to hear how these programs are
operating, what steps are being taken to help those who
actually deserve it, what measures are built in to root out
fraud and who is actually bearing the cost of these
extraordinary measures in particular, the taxpayers and the
investors. Because I think they deserve to have accountability
in this area. Thank you very much.
[The prepared statement of Mr. Atkins follows:]
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Mr. Neiman. Mr. Silvers.
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Mr. Silvers. Thank you, Richard and good morning. It's a
pleasure to be here in Philadelphia, which is the city where I
lived as a child. I mention this not as an exercise in mere
nostalgia, but because we are here to talk about home
foreclosures. An event in which banks, servicers, investors,
courts, and ultimately officers of the law come together to
remove a family from their home and their community and their
children from their rooms and from their schools and their
friends.
I said this at our hearing in February on this subject and
I will say it again. The fact that a lender can throw a family
out of their home is a necessary part of a system of lending,
but it is also an act of emotional violence and economic
destruction. Foreclosed homes typically yield less than forty
cents on the dollar to lenders while destabilizing
neighborhoods. Foreclosure should be the last option after
everything else fails.
Before I turn to those economic consequences, I just want
to say that I still see this issue through the eyes of the
eight-year old I was here on Hamilton Street in Philadelphia
and how I would have felt if we had suddenly been forced out of
our house. Public policy should be about minimizing
foreclosures for the same reasons it should be about minimizing
child abuse or protecting the public health or educating our
children. Others may disagree. Some may see no particular
reason to view a home foreclosure any differently than any
other failed financial transaction. Some may feel that the
children should suffer from the sins of the parents. Some may
feel that before the government can act to help a family, it
should undertake an exhaustive inquiry into that family's
morality, business judgment, and general character, for fear
that some of the money that would otherwise go indiscriminately
to the stock and bond holders of our large banks might be
tragically and improperly diverted to a less than upstanding
homeowner.
The remainder of my statement is addressed to those who
share one or more of those views. For the reality today is that
the continuously escalating mortgage foreclosure crisis
threatens to overwhelm the entire effort to stabilize our
financial system in the interest of broader economic recovery.
This is the intersection of morality and economics.
Current estimates from the Mortgage Bankers Association are
that so far we've had between five and six million
foreclosures, which sounds big until you recognize that this is
less than half of what is projected to occur between now and
the end of 2010. This tidal wave appears to be the result of a
combination of predatory lending, a collapse of underwriting in
the bubble, rising unemployment, and the inability of
homeowners with negative equity to refinance. This tidal wave
threatens a vicious cycle in which foreclosures exert downward
pressure on housing prices, falling real estate values and
defaulted mortgages push down on bank capital, weakened banks
pull back on lending, causing business activity to decline and
unemployment to rise, feeding more defaults.
This panel takes up the issue of foreclosure prevention--as
my colleague Paul Atkins said--a statutorily mandated purpose
of both the TARP and this panel against the continuing mystery
of why lenders and processors are unable to renegotiate
troubled mortgages at scale, when it has long been clear that
such restructuring is generally in both parties' interest.
Despite the enduring nature of that mystery, two things have
changed since our panel held its last focused hearing on
foreclosures. The first is that the Obama Administration's plan
for prevention has been in operation. The second is that the
driving force appears to have shifted from predatory loans to
unemployment and negative equity. The Administration's
commitment to help families is admirable. However, it appears
that without addressing these issues of unemployment and
negative equity, it may not be effective. I continue to believe
there is no way to do this on a national scale without allowing
judges to do so in bankruptcy.
Finally, the problem of mass foreclosures is the other side
of the coin of weak bank balanced sheets. So long as we make
our policy centered on pretending we have strong banks, we may
not be able to admit that these loans have to be written down
if we are to end up with viable housing markets and stop the
downward spiral.
As Superintendent Neiman has said, we have outstanding
examples of innovative approaches here in Philadelphia and
Pennsylvania. The program Judge Rizzo has been leading, the MHA
Program at the state level, I think is a large part of why we
are here today. We have an outstanding set of panels and
hopefully it will shed light on some of these questions and how
we can make this epidemic of foreclosures a thing of the past.
Thank you.
[The prepared statement of Mr. Silvers follows:]
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Mr. Neiman. Now, for our first panel of the morning. We are
happy to have three distinguished gentlemen who share
responsibility for running the Making Homes Affordable Program
of this Administration. I'm pleased to welcome Seth Wheeler,
Senior Advisor in the U.S. Treasury Department, Eric
Schuppenhauer, Senior Vice President and Program Executive for
the Homeowners' Affordability and Stability Plan at Fannie Mae
and Edward Golding, Senior Vice President, Economics and Policy
at Freddie Mac.
Mr. Wheeler would you like to start with your opening
statements?
STATEMENT OF SETH WHEELER, SENIOR ADVISOR, U.S. DEPARTMENT OF
THE TREASURY
Mr. Wheeler. I would, thank you. Members Neiman, Silvers
and Atkins, thank you for the opportunity to testify today
about the Treasury Department's Making Homes Affordable Program
and our efforts to stabilize the U.S. housing market and
support homeowners. I'd also like to thank Chair Warren and
Representative Hensarling for this invitation, though they're
not able to be here today. I'd also like to recognize some of
the housing counselors and advocates that will be on the next
panel, who have been important partners in helping us
understand how we can improve our efforts, as well as the
servicers who are key in implementing it.
We announced Making Homes Affordable or MHA in February. A
plan to stabilize the U.S. housing market, support loan
mortgage rates and offer assistance to millions of homeowners
by reducing mortgage payments and preventing avoidable
foreclosures. There are clear signs that MHA is already having
a meaningful impact. However, as with any new program of this
size and complexity MHA faces a number of challenges. The
Administration is working to address these challenges and to
expand and improve the program going forward.
The Making Homes Affordable Program includes three key
elements. First, broad support for the GSEs--Fannie and
Freddie--to support mortgage refinancing and affordability
across the market. We have supported loan mortgage rates by
strengthening confidence in Fannie Mae and Freddie Mac,
including through a $200 billion increase in the Stock Purchase
Agreements and continued support for market liquidity.
Second, we increased refinancing flexibilities for the
GSEs, providing more homeowners with an opportunity to
refinance to lower monthly payments. Lower rates have enabled
nearly 300 million borrowers with GSE loans to refinance since
the announcement of the Administration's comprehensive housing
plan.
Third, a key part of the Administration's broad housing
plan is a comprehensive $75 billion program to lower monthly
mortgage payments for borrowers and providing modifications on
a scale never before previously attempted. On launching the
modification program, we estimated the program could help as
many as 3 to 4 million borrowers through 2012 targeting a run
rate of 20,000 to 25,000 trial modifications starts per week.
Six months into the program, there are clear signs that the
program is working. Over 57 servicers have signed up for the
program. More than 85 percent of loans in the country are now
covered by the program. As of the end of August, servicers had
approved and extended over 570,000 trial modifications offers.
Also, as of the end of August, over 360,000 trial modifications
were already underway.
At the beginning of October, we will report on substantial
progress that has been made in September. We are above our
target pace of 20,000 to 25,000 trial modifications started per
week and are on track to reach our goal of 500,000 trial
modification starts by November 1st, but we can do better.
On July 28th we held a meeting with servicers at Treasury
where we told them that they need to ramp up modifications and
treat borrowers better. We asked servicers to commit to doing
better. Servicers must add more staff than previously planned,
expand call center capabilities, provide a process for
borrowers to escalate servicer performance and decisions,
bolster training, enhance on-line offerings and send additional
mailings to potentially eligible borrowers.
I think we are making key progress here. We were hitting
20,000 modification starts prior to that meeting and we've
bumped up that number by 50 percent to over 30,000 since that
meeting, but there is more to do.
We are working with servicers and Fannie Mae to streamline
application documents and develop web tools for borrowers. We
are committed to transparency and accountability.
First, on August 4th we began publicly reporting servicer
specific results on a monthly basis. The second public report
was published earlier this month. These reports provide a
transparent and public accounting of individual servicer
performance. In the future, we'll expand the content of these
reports to cover additional areas.
Second, we are working to establish specific operational
metrics to measure the performance of each servicer and will
include these metrics in our public reports.
Third, servicers must report the reason for modification
denials, both to Treasury and to borrowers.
Fourth, we asked Freddie Mac, as a compliance agent, to
develop a ``second look'' process pursuant to which Freddie Mac
will audit a sample of MHA modification applications that have
been denied. The ``second look'' process began on August 3rd
and is designed to minimize the likelihood that borrower
applications are overlooked or inadvertently denied.
In addition, we are improving borrower outreach, which is
essential to the success of the program. We have launched a
consumer focused website, established a call center for
borrowers and launched a series of borrower outreach events in
cities facing high foreclosure rates across the country.
President Obama's Housing Stabilization Plan has made
significant progress in assuring the flow of mortgage credit,
bringing down mortgage rates and providing many families with
the second chance to stay in their homes. We are on track to
meet the goals we set for the program. To reach 500,000 trial
starts by November 1st and offer help to 3 to 4 million
borrowers by the end of 2010. But, we can and we must redouble
our efforts to broaden the reach of these programs.
We look forward to working with you and your staff to
achieve these goals. Thank you.
[The prepared statement of Mr. Wheeler follows:]
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Mr. Neiman. Thank you very much for keeping right on time.
Mr. Schuppenhauer.
STATEMENT OF ERIC SCHUPPENHAUER, SENIOR VICE PRESIDENT AND CFO/
PROGRAM EXECUTIVE, HOMEOWNER AFFORDABILITY AND STABILITY PLAN,
FANNIE MAE
Mr. Schuppenhauer. I appreciate the opportunity to
participate in today's hearing on behalf of Fannie Mae. In my
opening statement I'll briefly touch on the main points of the
testimony we've submitted today.
First, as the Department of Treasury's Administrator for
the Home Affordable Modification Program, our principal
activities include, implementing the program guidelines and
policies, preparing the requisite forms, tools and training, to
instruct mortgage servicers on how to modify mortgages under
the program; serving as paying agent to calculate subsidies and
compensation under the program; serving as record keeper for
executed loan modifications and program administration;
coordinating with Treasury and other parties to achieve the
program's goals.
As Mr. Wheeler has testified, the program is making
progress and several extensions of the program are in the works
or underway.
To make further progress, we're focused on two main
challenges. First, we're helping servicers to ramp up their
operations to modify loans under the HAMP program. We are
providing information and resources that servicers need to
implement the program through a special website for servicers
as well as through our own business-to-business website for
Fannie Mae servicers. We are also communicating all aspects of
the program to servicers during both the initial rollout and as
program parameters evolve. And, we are helping servicers
implement the program and integrate with new systems and
processes deployed for it. We work closely with the servicers
every single day. We setup a servicer support call center. We
have conference calls every week with the leadership of
participating servicers. And, we provide servicers with ongoing
training, both web-based and in person.
Our second main focus is on expanding borrower awareness of
the program. For example, we helped Treasury develop a website
and a call center where borrowers can find out whether they're
eligible for the program and find out more details. This
website has received more than 36 million page views since its
launch in March 2009. The call center offers free HUD certified
counseling if borrowers need in-depth help with their case. The
call center has received hundreds of thousands of calls since
it launched in June 2009. We've also produced consumer oriented
direct mail, flyers and brochures describing the program. Also,
we're expanding our program tracking system to collect data on
borrowers who did not obtain a modification to find out how to
further assist them. And, we're supporting Treasury's efforts
to train counselors so they can work more effectively with
borrowers about the program.
In addition, we're continuing to work with Treasury on a
multi-city borrower outreach campaign that Mr. Wheeler
mentioned. The goal is to draw struggling homeowners to events
where they can meet with counselors and servicers and get the
help they need. The events we've held so far drew nearly 10,000
borrowers that were in need of help. In two weeks, we'll be
right here in Philadelphia as we continue to target the hardest
hit markets from a foreclosure standpoint.
On top of our support of Treasury's efforts, Fannie Mae
also has participated in over 140 foreclosure prevention events
in roughly 70 markets in the United States with a range of
public, private, nonprofit and industry partners. As we carry
out the loan modification program, I also wish to note that
through August we've entered into 133,000 HAMP trial
modifications, just on Fannie Mae loans. We've also completed
nearly 88,000 loan workouts outside the HAMP program to help
our borrowers avoid foreclosure.
Finally, I'd like to touch on what we are doing to help
borrowers refinance their homes. Last month, FHFA, our
regulator reported that Fannie Mae and Freddie Mac have
refinanced more than 2.9 million loans this year through July.
Of those, Fannie Mae has refinanced about 1.7 million loans.
We've also made progress carrying out the Home Affordable
Refinance Program to help our borrowers who saw their equity
disappear as home prices fell. Previously, many of these
homeowners were unable to refinance. Thanks to this program,
borrowers with loan-to-value ratios above 80 percent and up to
125 percent can refinance for a better loan and a better chance
to keep their homes. To support this program, we built a loan
lookup tool on Fannie Mae's website where borrowers can
determine whether we own their loan and whether they can get
refinancing assistance. We also streamlined the loan process
and we offered new refinance flexibilities on credit scores,
mortgage insurance and appraisals to support the Home
Affordable Refinance Program.
In closing, the Making Home Affordable Program has provided
powerful tools to help borrowers modify or refinance their
mortgages. The main program elements are now in place and we
are steadily helping more borrowers. Clearly however, we have
much work to do and progress to make. Fannie Mae sees this as a
critical responsibility and we'll get the job done.
[The prepared statement of Mr. Schuppenhauer follows:]
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Mr. Neiman. Thank you very much. Mr. Golding.
STATEMENT OF EDWARD L. GOLDING, SENIOR VICE PRESIDENT,
ECONOMICS AND POLICY, FREDDIE MAC
Mr. Golding. To the members of the Congressional Oversight
Panel, thank you for inviting me to speak today. I am Ed
Golding, Senior Vice President of Economics and Policy at
Freddie Mac and I head Freddie Mac's team that supports the
President's Making Home Affordable Program. Freddie Mac is
proud to play a vital role in Making Home Affordable and in
fact MHA is our number one priority. To help meet the
President's goal of helping millions of families lower monthly
costs and avoid foreclosure, Freddie Mac has introduced two new
initiatives. The first is our Relief Refinance Mortgage
Program. It assists families who are current on their
mortgages, but cannot refinance because of declining home
values. The program enables borrowers to lock in today's low
rates and refinance loans up to 125 percent of the value of
their homes. We also continue to support the broader mortgage
market's refinancing needs. Freddie Mac, so far this year has
refinanced more than 1.3 million mortgages and on average,
these refinances reduce the mortgage rates by approximately
1.25 percent, one and a quarter points. This saves families $4
billion per year.
The second initiative is our implementation of Home
Affordable Modification Program or HAMP. HAMP helps at risk
borrowers keep their homes by lowering monthly payments to
affordable levels. HAMP requires borrowers to go through a
trial period after which the loan will be permanently modified.
Through mid September, approximately 80,000 of our borrowers
have entered trial periods. We are working diligently to turn
these trials into final modifications through direct outreach
to borrowers. We are also pushing hard to get financially
stressed families into the trial plans even before they become
delinquent.
Freddie Mac also plays a major role in MHA as the
compliance agent for Treasury. In this role we conduct
examinations and review servicer compliance with program rules
and guidelines and report these findings to Treasury.
Because of confidentiality issues, Freddie Mac has created
a separate business unit within the company known as MHA-C to
carry out these duties. MHA-C has over 100 employees and is
continuing to staff up. MHA-C has developed an extensive and
robust internal control and compliance system and it has the
authority to conduct both announced and unannounced audits of
the servicers. Based on these reviews, we are identifying
corrective actions and follow-ups with the servicers. We will
be using a number of fraud detection and compliance techniques
to identify borrower, servicer, and systematic fraud and to
improve the quality controls in the servicers.
Additionally, we are reviewing servicers' implementation of
the NPV model, which is a key component for determining
borrower eligibility. We are testing whether they are using the
model appropriately as the program requires.
Treasury has also asked MHA-C to develop what is termed the
``second look'' process to minimize the likelihood that
borrowers are incorrectly deemed ineligible. We are ramping up
``second look'' efforts significantly to increase the number of
files reviewed and to help increase the number of HAMP
modifications. In our reviews we have found variations in how
servicers communicate with borrowers who are deemed ineligible.
As a result, Treasury has issued guidelines earlier this month
to standardize and improve communication between the servicer
and the borrower. As more borrowers transition to permanent
modifications and incentive payments are disbursed, we will be
conducting audits to help ensure that the correct payments are
made. As we move forward with MHA, we will continue to improve
features of the compliance program to assist the greatest
number of borrowers in need at the least cost to taxpayers.
In conclusion, the employees of Freddie Mac come to work
everyday highly motivated to make a positive difference for
millions of families by lowering mortgage costs and helping
more families keep their homes. We are focused on meeting the
challenges involved in fulfilling our duties under the Making
Home Affordable program and helping to ensure its success.
Thank you for this opportunity to testify. I'm happy to
answer questions.
[The prepared statement of Mr. Golding follows:]
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Mr. Neiman. Thank you very much for all keeping it within
those timeframes and we'll try to keep that as a habit. My
first round of questions, I'd like to start with the metrics of
success because that is what is published every month and I
think by which the program will be judged. As Mr. Wheeler
indicated, through August there was a reported 360,000 trial
modifications started. But, I think we would all agree that the
success of the program really will be the degree of permanent
sustainable modifications that are eventually implemented.
Though the data may not all be in yet--particularly with regard
to borrowers who have three months of payments--are there any
estimates or target projections that the Treasury is using to
assess what percentage of those trial modifications we can
expect to convert to permanency?
Mr. Wheeler. Thank you for that question because I think
that highlights one of the biggest challenges and most
important priorities for Treasury. As you noted as of the end
of August and as we discussed 360,000 trial modifications were
underway. When we update again with this month's report there's
certainly many more. It's absolutely critical if the borrowers
are to remain in their home that they complete these trial
modifications and then ultimately are successful on their
official modification. In terms of reporting, as you've noted
right now we don't have any robust reports or any reports that
we've put out to date on official modifications. The number of
official modifications is still very low. As you probably know
we put out a grace period of 60 days. In ramping up the program
we laid out the program, set forth all the documentation
standards that borrowers are required to complete and to ensure
that we have as high a conversion rate to fulltime official
modifications as possible. We also instituted a 60 day grace
period while we review all those documentation standards to
ensure that as many as those as possible are able to convert.
Mr. Neiman. Any best guesses? Are you operating under any
operating assumptions as a particular percentage of those trial
modifications?
Mr. Wheeler. At this point most of the information is
anecdotal as we talk to servicers, which I'm sure you have.
Right now there's certainly risk. If we're not able to close
out those modifications there's certainly a risk that a high
portion are not able to complete their trial modifications.
There will be some who don't make payments and I don't know
exactly what that number is, but certainly not a trivial
number. And another segment even if they're making payments,
they will not complete their documentation for completing the
modifications.
Mr. Neiman. And we will hear information and issues around
the documentation and outreach necessary to complete a
permanent modification. The monthly reports also show great
disparities between servicers in trial modification starts.
Partly, it could be the result of the fact that some trial
modifications may start with verbal information as opposed to
those that utilize full documentation. Those requiring full
documentation will of course have a higher conversion to
permanent as opposed to those with verbal. Is this a concern
and is that an issue that you are rethinking to address that
issue or taking any actions to address that concern?
Mr. Wheeler. On that topic, I think you've correctly laid
out the range of possibilities. Certainly, that may not explain
all of the disparity, but a good portion may be explained on
how far along they're able to document before borrowers start
the trial modification. I think our number one priority now is
that since we've ramped up capacity that it's essential that we
have a program with both documentation standards, if we learn
that documenting upfront is much more successful, and then
allowing flexibility to start a trial modification. Then, I
think we will rethink our standards and what we encourage
servicers to do. At this point we have given them that
flexibility. And just again to be responsive to this question,
as soon as we have more robust data, we absolutely plan on
reporting as soon as we're confident in the data. So, we
understand the critical importance of being flexible on policy
as we learn, as well as being accountable in reporting.
Mr. Neiman. We're going to hear from servicers and
borrowers later this morning. And we expect to hear that
modifications are being hampered by response time and concerns
about eligibility issues and servicer capacity. What is the one
area that you would say that borrowers should stop doing--that
servicers should stop doing or should be doing better to
address those issues?
Mr. Wheeler. I certainly have thoughts. I don't want to use
up all the opportunity to share perspectives. So, Eric do you
want to?
Mr. Schuppenhauer. Yes, thanks Seth. I think from a
servicer's perspective it's recognized that more needs to be
done. We're in the ramp up phase. Servicers have been adding
staff, have been adding personnel, have been adding
capabilities to handle the shear level of documentation
required under this program. It has taken time. Part of the
reason why we instituted the 60 day grace period was to allow
that further ramp up without dropping people out of trial
periods. We'll continue to evaluate and that's why we are
spending every single moment we can to understand the issues
and continue----
Mr. Neiman. Well, I'm over my time. Unless either of you
have a quick response to what a servicer should stop doing.
Mr. Golding [continuing]. Standardizing the documents and
reviewing which documents are necessary. Sometimes there are
variations in how much documentation is taking place from
servicer to servicer.
Mr. Atkins. Thank you very much again. I wanted to move
from maybe the macro-level down to the micro-level a bit. We
talked about successful modifications. We've talked a little
bit about that as you're looking at the program. Overall, what
about on the micro-level, what makes a successful modification
of an individual loan?
Mr. Wheeler. I'll take the first crack. For a successful
modification, I think the only metric that can be used is
whether the borrower is able to complete the trial modification
and is able to remain in their home. We designed the program,
the incentives to servicers and borrowers will continue. The
borrower incentives reach out for five years. The servicer
incentives reach out for three years. We think that clearly
tying those incentives out to that long a period is critical in
these challenging times that borrowers whose loans are modified
don't just make it six months or a year, but they're able to
stay in those homes and help stabilize those communities. So, I
think that's ultimately the measure of success. In early
measures it was how quickly we've ramped up. Our next view will
be how successful we are at converting trial modifications into
official modifications. But, ultimately when looking back five
years from now the measure is how successful are we at helping
these borrowers stay in homes, helping economic stability and
stabilizing neighborhoods.
Mr. Atkins. So, staying in their homes and meeting their
obligations, I take it?
Mr. Wheeler. And meeting their obligations, correct.
Mr. Atkins. And then do you have any tracking? I know it's
still at the early stages, but are there some studies--and I
guess we'll hear more about that a little bit later--tracking
the ongoing nature of these modifications whether we will fall
into a re-default situation and what sort of percentage that
looks like?
Mr. Wheeler. Perhaps, briefly Eric could comment as Fannie
is running the data reporting efforts and then Ed could
comment, Mr. Golding could comment on the compliance efforts to
ensure that we have accurate tracking.
Mr. Schuppenhauer. Mr. Atkins, we are tracking a number of
data elements as we go through the program. It is too early to
tell at this point in the program. The first modifications were
done in May, but we haven't had enough time to assess. However,
we do plan to provide a tremendous amount of transparency about
the types of modifications that have been done. Once the
modifications become permanent, it would be the appropriate
time to show how deep the modifications are, the payment
reduction, as well as their sustainability. We are committed to
providing that information as we go forward.
Mr. Golding. And we, of course will be reviewing loan
files. And it's important to point out we're reviewing both
loan files that have been completed along with those that were
not completed, that the person was determined ineligible. So,
we'll have data of Type 1 and Type 2. Both the ones that were
given the modifications, we'll also be able to look at those
that were not given modifications.
Mr. Atkins. As far as geographic distribution of this
effort, is it more concentrated on the coast versus the
interior of the country or how does that pan out?
Mr. Wheeler. At this point, we're starting to get the data
and trying to verify it. Certainly, expectations are that the
hardest hit neighborhood; areas will see the most number of
modifications. Certainly, California, Florida, Nevada, Arizona
and Ohio, Michigan are especially hard hit areas along with a
number of others, Pennsylvania included. So, I think we expect
that we'll see modifications where there is the most need. But
we are collecting that data and starting to verify that data
and we will report it in the coming months on a detailed basis,
determining how successful we are in each area.
Mr. Atkins. Okay. Well, my time is up so I'll yield the
floor.
Mr. Silvers. Let me pickup on some of this a little bit in
the same vein. Mr. Wheeler, what is Treasury's estimate of the
current rate at which foreclosures are being initiated on a
monthly basis?
Mr. Wheeler. On a monthly basis we read analysis reports,
we don't have an independent estimate.
Mr. Silvers. But what's your collective sense of the data
you received?
Mr. Wheeler. I think several hundred thousand. Certainly,
several hundred thousand modifications are being started each
month.
Mr. Silvers. No, I don't mean modifications.
Mr. Wheeler. I'm sorry, foreclosures.
Mr. Silvers. And you said that the Treasury's target is
20,000 a week?
Mr. Wheeler. 20,000 to 25,000 trial modifications.
Mr. Silvers. So, 100,000 a month roughly?
Mr. Wheeler. Roughly, 100,000.
Mr. Silvers. In light of that, don't you think you ought to
be adjusting the goal? I mean, is the goal adequate? Is the
goal of roughly a million intakes a year against a run rate of
3 to 4 million, is that an adequate goal?
Mr. Wheeler. I think again, this an excellent question. I
think a response can be made in several parts. First, it is the
design and who our target population is in terms of borrowers
and then second, how well we're going against helping those
borrowers. So, each of those can be evaluated. I think on the
first point we are trying to help all borrowers and we will see
millions, as you noted, millions of foreclosure starts over the
next several years. We are targeting a subset of those
foreclosure starts or those borrowers that are facing the risk
of foreclosure. We've targeted borrowers who occupy their own
home or residence. Borrowers whose loan balance is below
729,000 in principal balance and then which we've deemed that
the eligible population.
Mr. Silvers. Can I stop you there? What I'm really
interested in is not the question of meeting your targets and I
think my opening remarks indicated that. I'm not really
interested in the question of who's been a good boy or girl and
who is not. I'm interested in whether or not we're going to be
able with the targets you've got--and I understand that they
seemed appropriate at the time they were sent--will that be
sufficient to counteract the downward pressure of the
foreclosure epidemic on housing markets in our economy?
Mr. Wheeler. I think not only are we trying to help
individual families, but we are trying to stabilize
neighborhoods. The question is, who is our targeted population
and who are we able to help in that targeted population enough
to help stabilize neighborhoods? I think a second distinction
I'd make is between foreclosure starts, which could certainly
be traumatic for families and borrowers and foreclosure sales,
where borrowers actually lose their homes. The foreclosure
sales rate is much lower, but still very, very high. I think we
are, right now, focused on as quickly as possible getting the
program up and running, implemented as you know. For our entire
target population we have a rule that servicers are not allowed
to start foreclosure proceedings. They cannot go through a
foreclosure sale until a borrower has been fully evaluated and
we strongly encourage them not to even initiate foreclosure
proceedings until a borrower has fully been evaluated. I think
we are trying to move as quickly as possible to help as many
borrowers as possible. But I think in terms of neighborhood
stabilization and as we watch foreclosure sales rates and
borrowers losing their homes, I think we will need to continue
to evaluate.
Mr. Silvers. Mr. Wheeler and other members of the panel, I
think we had hoped that you might be the last panel rather than
the first. We understand that you could benefit from the other
witnesses. We understand that was not possible for scheduling
reasons. I think that's regrettable. However, I'm going to do
my best to make up for it by giving you a glimpse of the
testimony that's going to be heard later on in the day. This is
from Irwin Trauss, who is the Supervising Attorney for
Philadelphia Legal Assistance and I'd like you to react to
these statements. He says, ``The noncompliance with the HAMP
guidelines is pervasive.'' He's talking about servicers. ``The
absence of a meaningful method to challenge this noncompliance
is frustrating to advocates particularly, to housing counselors
who were led to believe that HAMP would be streamlined and self
effectuating without the need for an attorney or for
litigation.'' It's an odd thing for an attorney to say, in a
way. ``To address this situation, we need a multi-pronged
approach that is not dependant on the willingness of the
mortgage servicers to agree to the solution and is not
dependant on the lenders themselves determining for themselves
whether they have complied with the requirements of the
program.'' Can you comment on that assessment?
Mr. Wheeler. I'll take just twenty seconds and then let Mr.
Schuppenhauer and Golding cover the balance. We've certainly
heard those concerns. So, it has been a primary part of our
focus in recent months. The comments I'd like to make concern
empowering borrowers and in terms of providing transparency
around the process. These have been the key areas of feedback
we've heard from housing counselors and advocates. So, we are
undertaking a number of initiatives, many of which I outlined
in my opening comments. I'll let Mr. Schuppenhauer comment in
detail on that effort. But, equally important is the compliance
role of Freddie Mac. Specifically, if services are not getting
the job done, then recommendations can be made by Freddie Mac
to close that gap or penalties assessed as appropriate. So, Mr.
Schuppenhauer.
Mr. Schuppenhauer. Thank you, Mr. Wheeler. There are two
important points here. First, there is an escalation process
that we've put in place that serves the borrowers very well.
First, they can contact the Help Hotline that's been
established, 888-995-HELP, which is a trusted source for
information. Second, counselors can also contact our HMP
Support Center if there are pervasive issues. Finding out about
these issues and dealing with them is of paramount importance
from our standpoint so we can get the right training and the
right tools out there in the servicers' hands. I'll turn it
over to Mr. Golding to talk more about the compliance.
Mr. Golding. As I mentioned, we launched ``second look''
this month. We soon think we'll be able to have a large enough
sample so that we would be able to detect whether any servicer
was systematically denying modifications that should have been
approved.
Mr. Neiman. I'm going to use my time to follow-up on the
compliance issues because that really is the bulk of what we
will be hearing from housing counselors on the next panel.
Evidence that servicers may not understand the various terms,
specific noncompliance, or violations of the HAMP guidelines.
I'd like to understand a little further about, what are the
compliance process schedules that Freddie Mac really intends to
employ and also what kind of reporting will there be? And also,
how transparent will it be both in terms of overall compliance,
but also servicer by servicer reporting? Also, to the extent
that you can address, what's the response, are there any
remedies built in as a result of that noncompliance for
borrowers or sanctions against those servicers? I threw a lot
at you, but please do your best.
Mr. Golding. Yes. Please come back to me if I miss any of
them. Basically, in terms of the review of servicers I divide
it into two. One is the on-site visits looking to see what
their procedures are, lining them up with HAMP. Are they
basically implementing HAMP as directed by the guidelines?
Mr. Neiman. What's the staffing for this?
Mr. Golding. We currently have a hundred employees. We're
ramping up. Our expectations are to be around 200 and we will
use contractors as necessary to make sure that we're adequately
staffed to reach the servicers that we need to reach. It's
basically first lining up--I think of this as two steps--first
lining up their procedures with the HAMP requirements and then
the second test is going back and seeing whether or not they
improperly implemented the procedure. So, testing against their
stated procedures, including looking at individual loan files.
I should also point out; Eric talked about the escalation
process. We are also in constant contact with Fannie Mae as the
program administrator listening to what complaints they're
getting following their data also.
Mr. Neiman. Once those violations are identified they will
be recorded, too?
Mr. Golding. Well, first this goes a little bit into the
remedies. Clearly, if there's a violation where there should
have been a modification, the first thing is to stop the
foreclosure and make sure that the homeowner gets the
modification. Then there are two areas. Let me go to the
reports and then I'll get to the remedies and I think I will
have covered the three prongs. The reports; we are an agent of
Treasury; the reports will be written up servicer-by-servicer
and given to Treasury. We are in discussions with Treasury as
to how much of that information and what the content will be
made public. That's still to be determined.
As for the remedies, clearly there's a range of remedies
that we've talked about. One of them would be to withhold the
servicer incentive payments that were discussed. Clearly,
remedies could go as far as terminating someone from the
program. That's not a remedy you would want to use right away
because all you're doing is hurting someone on that. So, what
we really are focused on are correcting and making sure the
homeowner gets that modification. I think correcting the
procedures are the most important. If they are not implemented
properly, getting to the servicer, having them correct it, and
making sure that they try to maximize the number of eligible
borrowers that are offered modifications.
Mr. Neiman. So, if I heard you correctly decisions with
respect to making these reports public and in which format, as
well as sanctions are still open issues that have not yet been
decided?
Mr. Wheeler. They have not been decided and certainly we
have a strong commitment to supporting Freddie Mac in their
role as compliance agent and ensuring that these problems are
identified and disclosed. Exactly what the content will be has
not been determined, but appropriate remedial measures will be
taken.
Mr. Neiman. In my last 30 seconds, I'm going to ask for a
one letter response. What I'd like to do is, I think we should
all be evaluating each other's performance. So, what I'd like
you to do is give a grade to the servicers in assessing their
performance, recognizing this maybe the first semester in terms
of A to F.
Mr. Wheeler. If ``C'' means average then I think I give
them a ``C''. They're doing very well, again against program
goals, but we have a lot more work to do on helping borrowers
and implementation.
Mr. Neiman. Any other differences in grading?
Mr. Schuppenhauer. That is a fair assessment, it's the
first semester.
Mr. Golding. Obviously, I've had college aged kids. Seth,
there's been grade inflations since you've been in college. I
gave one of my students a B+ and he complained it was the
lowest grade he had ever gotten and I ruined his life. So, I'm
with the old scale, I think C is appropriate, but maybe on the
new scale they don't give C's anymore.
Mr. Atkins. I want to turn to cost, the flip side of all of
this because when you were talking about $4 billion of savings
on the Freddie Mac side for borrowers, obviously the money is
coming from somewhere. So, I was wondering if you all could
address what the estimated cost of all this activity is so far
to taxpayers, in general? Obviously, we're talking to both
Fannie Mae and Freddie Mac which now are explicitly government
entities.
Mr. Wheeler. So, there are at least three different types
of cost. There's the cost of TARP direct outlays in terms of
the financial instruments, SPA's that enable the non-agency
programs to operate. There's the cost associated with lost
mitigation in order to avoid future losses on Fannie and
Freddie. And then the program administration cost--what we pay
Fannie and Freddie. Right now, as you can see on the third one
we don't have a detailed cost estimate. We are trying
aggressively to manage cost and Fannie and Freddie certainly
they are doing their best to keep cost down. But, we also want
to do the program right. It's a balancing act.
The first two we've allocated up to 50 billion in cost for
the program and the process by which that's obligated. Each
time a servicer signs up, we establish a servicer cap for the
agreement that we purchase via Fannie Mae on Treasury's behalf.
So, right now we have a certain amount that's been obligated.
That doesn't mean all of that will go out the door and then
ultimately we are able to increase those obligations as needed
through the end of the year. Very few dollars have gone out the
door and the program is structured so that we only pay for
success. No trial modifications, unless they're successful,
cost the taxpayer a dime. When they are successful, even then
the incentives are back loaded so servicers can earn much more
all the way through an official modification. So, we've tried
to be very thoughtful of shepherding and stewarding taxpayer
resources. But again, this is a strong, strong priority of the
Administration to achieve economic stability and stability in
the housing market. So, certainly we are thoughtful on both
sides.
Mr. Atkins. Any further on your individual sides?
Mr. Golding. I might just add that part of what we're doing
in general in lowering the frictions in the mortgage market and
trying to get it easier to get the modification, easier to get
the refinancing. I think to the extent that if you lower
frictions, the transaction costs that benefit the system.
Mr. Schuppenhauer. And, as we stated in our written
testimony and in the earlier questioning, transparency around
this is something we hold very dear. It is in the early innings
or the early semester, however you want to phrase it. Very few
dollars have gone out the door, but we will be giving a full
accounting as time progresses. A very full public accounting in
terms of the cost of running the program, as well as the cost
involved in the incentives to make these modifications happen
and be sustainable.
Mr. Atkins. I have a little bit of time here remaining. I
want to focus on quality control a little bit and just how you
all are focusing on that internally, as far as internal audit.
Do you have a special program that is supervising these
internally?
Mr. Wheeler. Are we talking compliance?
Mr. Atkins. Yes.
Mr. Wheeler. Mr. Golding, you want to take a first answer
to that?
Mr. Golding. Yes. I guess the simple answer is yes, we have
internal audit. They obviously report independently to the
Chair of the audit committee. They have reviewed our processes.
We have two functions. One is we're implementing the
President's program on our own book and then we have the
separate unit, MHA compliance. And audit has been involved in
both of those.
Mr. Wheeler. Mr. Atkins, I'd point out that the Office of
Financial Stability within Treasury obviously has its own
compliance function and dedicated teams that work with Freddie
Mac. They design plans, establish protocols and ensure that
these programs are following the directives.
Mr. Golding. And I'd be remiss not to mention that we also
have a federal regulator who has also reviewed our
implementation.
Mr. Atkins. The Special Inspector General for the TARP, has
he been involved yet with this, with you all?
Mr. Wheeler. Certainly, at various points TARP, both Mr.
Barsharfsky, as well as his team have been consulted. They've
been very constructive and thoughtful. They've challenged us, I
think more deeply about how we can do a better job and given us
very good feedback. As well, I should point out the GAO has
also given us constructive feedback and we have tried to be
very open. Many of those are very, very good recommendations
and we've tried to act on nearly all of those to improve the
program.
Mr. Silvers. I want to continue on the vein of testimony we
haven't heard yet. First, I read you a quote before from Mr.
Trauss that would appear to allege a fair amount of improper
conduct by servicers trying to avoid restructuring people's
loans. One of your testimonies, I believe in Mr. Wheeler's
testimony, you talked about an interagency group that's met to
discuss fraud and other misconduct involving law enforcement
and so forth. I would like Mr. Trauss' testimony reviewed as to
whether or not it constitutes a legal problem in any respect
for any servicers. In particular, whether or not any servicers
are accessing TARP money upon assurances that they're doing
things, which they are not doing, which strikes me as raising a
whole series of rather serious legal issues, if that's the
case.
Now, I'd like to come to some other testimony, briefly. Two
important financial issues are covered in later testimony. One
is what the likely re-default rate is going to be on mortgage
restructurings and the second is the issue of self-cure. How
many people, having been served a foreclosure notice for
getting 60 days behind, how many people have actually been able
to get out? There are some historical data, I gather, that
suggest that self-cure rates of 30 percent have been common in
the past. On the other hand, we're not really in the past and
there's data that says that self-cure rates now are 6 percent.
Do any of you have an opinion as to which number is the right
number to be thinking about here as we look at the economics of
restructuring?
Mr. Golding. First of all, it's been a while since I've
looked at--and I'd be glad to get you a further answer later.
As I read the study, it is sort of a little bit of apples and
orange versus the long term rate because the 30 percent cure
rate--and sometimes you'll hear as high as 50 depending on how
serious the delinquency is--tends to be the long term. As I
read the study, they were looking at a shorter time period. So,
I will have to go back and make sure to see whether they've
lined up the time periods. But as I read that there was a
difference. I think your basic point is absolutely right we
have to wait and see. This is a very different environment than
historical studies where you saw just a few local regions with
a downturn.
Mr. Silvers. You don't disagree that the 6 percent numbers,
the data we have on the current environment although its short
term dropped.
Mr. Golding. I agree that the cure is likely to be lower.
Mr. Silvers. Lower than historical?
Mr. Golding. Lower than historical, yes.
Mr. Silvers. Mr. Wheeler.
Mr. Wheeler. I'll weigh in with a few thoughts here. You
started with re-defaults and clearly re-default is essential
for how we establish metrics for success and how to measure how
well we're doing, as well as in the NPV model. We've had a
number of teams in our agency across both federal regulators,
as well as the enterprises in developing an NPV model. They
looked at the experience of OCCOTS. They looked at the FDIC
experience. They looked at other reports on re-defaults to try
to start a benchmark of what a set of re-default assumptions
might look given certain borrower characteristics. I think
importantly though, some of those reports have indicated a very
high re-default rate and we do expect re-defaults. But, in
program design we try to minimize those.
Mr. Silvers. Mr. Wheeler, is it not the case that if you
design a poor mortgage relief program, one that doesn't grant
real relief, that re-default rates will be very high. And, if
you design one that actually is sustainable, re-default rates
will be lower?
Mr. Wheeler. Clearly, the better job we do, the lower the
re-default rates will be.
Mr. Silvers. And, your program--I believe and I would hope
you would agree--your program is significantly more helpful to
borrowers than the voluntary modifications that were going on
prior to the adoption of your program?
Mr. Wheeler. There are a number of safe guards that are
intended to achieve that.
Mr. Silvers. But, you've got a 31 percent income-to-payment
number, right?
Mr. Wheeler. Correct.
Mr. Silvers. That wasn't common prior to your program, was
it?
Mr. Wheeler. Several of what we believe to be improvements
and it's required that every modification, HAMP modification
target a 31 percent debt-to-income ratio, payment relative to
their income, but also a fairly robust documentation to ensure
that we get that modification at the right level. Again,
aligning success payments so that servicers and borrowers are
both incentivized to keep borrowers current. So, we certainly
expect that our performance will be much better than it
would've otherwise been. It's still hard to say how much
better.
Mr. Silvers. Well, my time has expired. I would like you
all in writing to respond to the suggestions by a number of our
witnesses that will succeed you. That is that as part of the
Federal program we adopt a HEMAP-like program for unemployment,
that we have compulsory mediation that goes on in Philadelphia
as a result of the court system and that you look at outreach
canvassing of the kind that goes on here in Philadelphia to
actually find people. I would appreciate it in writing. Thank
you.
Mr. Neiman. I'd like to thank the panel and before
dismissing you, I do want to highlight particularly for members
of the public that though this is our first public setting with
the three of you, we have been in regular contact certainly
with the Treasury both at the senior and staff levels. Both of
you have also offered ongoing commitments to dialogue, both in
formal and in informal sessions and we certainly will take you
up on that and look forward to that.
Again, I thank you for making the trip here and we look
forward to your continued involvement and response to the
requests that we made during the panel. Thank you very much.
Now, we'll do a transit to the next panel of witnesses.
Thank you very much.
Our second panel is here to give us the homeowner's, the
borrower's perspective on foreclosure mitigation and we really
are privileged for the panel that we have here this morning.
From your left you have Judge Annette Rizzo, of the
Philadelphia Court of Common Pleas and the Director of the
Philadelphia Mortgage Foreclosure Diversion Program; Irwin
Trauss, Supervising Attorney for the Consumer Housing Unit,
Philadelphia Legal Assistance; Eileen Fitzgerald, Chief
Operating Officer for NeighborWorks and Deborah Goldberg,
Director of the Hurricane Relief Project for the National Fair
Housing Alliance. And, again I'm going to ask each of you for
your opening statements. Please, do try to keep them to five
minutes to leave time for questions and answers. Judge Rizzo.
STATEMENT OF HONORABLE JUDGE ANNETTE M. RIZZO, COURT OF COMMON
PLEAS, FIRST JUDICIAL DISTRICT, PHILADELPHIA COUNTY;
PHILADELPHIA MORTGAGE FORECLOSURE DIVERSION PROGRAM
Judge Rizzo. Thank you. Of course, Mr. Neiman, Mr. Silvers
and Superintendent Atkins great to have you here. ``Build it
and They Will Come'', such were the words that started my
testimony approximately one year ago when Senators Casey and
Specter came to Philadelphia to have a Senate Judictiary
Hearing on our program. In June, when we pasted the one year
mark on our program, our motto or logon was, ``We Built It and
They Came''!
We welcome you, the Oversight Panel to Philadelphia to
focus on our a very homegrown local effort to stem the flood of
foreclosures happening throughout this country and particularly
in our city. I want to just share with you some obviously
overarching aspects of our program that we have in place, as
well as some lessons learned in the year and a half we've been
in progress, as well as some of the challenges we've faced,
which have really been introduced by the first panel in terms
of us implementing the provisions that we now have out of
Washington regarding HAMP.
Since our inception, we've been the subject of a multitude
of media events, locally, nationally and even internationally.
We've been the subject of conferences both in the legal and
business communities and the blueprint for the implementation
of programs across this country, either locally or on the state
level. We've gotten inquires, from as far as Alaska to Maine
and even to the paradise island of Hawaii.
In a judicially driven foreclosure state such as
Pennsylvania, we really view this program as one of effective
case management--and this is of course from the judiciary
perspective--to stem the tide of an increased caseload over the
last few years where equitable remedies are available. It is
not perfect. It is ever-evolving in circumstances, which change
as new relief plans avail themselves. However, programs such as
ours which are locally based, serve as the staging, really and
the theater in which direct and timely relief can be crafted
for homeowners on a micro basis.
We are in extraordinary times. I don't refer to this as the
crisis--that's the ``C'' word and we don't use that here--but
we see this really as an era of new financial challenges the
likes of which we've never faced in our lifetime and it is in
need of an extraordinary response.
I really often talk about this in more lofty terms, but in
problem-solving, we often look to new ways to deal with
existing problems and I say let's flip that. Let's really look
at a new situation in an old way. What I kindly refer to as the
George Bailey Building and Loan Model. That was a system where
local bankers really knew those customers who came into the
bank. The highs and their lows of their finances, and based on
that strong financial relationship and personal relationship,
banking was conducted. We are returning to community banking.
We are really infusing in this system a way to try to cut
through of all of the complexities of all these new programs.
To really be that human touch, that connection as you'll see in
our courtroom as you visit us, hopefully this afternoon.
Our program is really all about the fact-to-face between
the lender and the borrower. We have created a forum in which
lenders and borrowers can dialogue in good faith to bring about
attainable, and, more importantly, sustainable solutions to
keep borrowers in their homes. The provisions under the HAMP
program have provided a useful roadmap for participants in our
program to achieve such results. This is not to say that we
have not encountered some bumps in the road; bumps which I
believe are not insurmountable.
Just briefly, the Program did begin in June of last year
and we have passed the one and a half year marker. It is really
based on a prototype I developed in 2004 when a moratorium was
declared or at least requested by our Sheriff John Green. The
moratorium was not given--I really call that the ``M'' word--
but instead we did a prototype of actually stopping the sales,
looking at these cases on a real micro basis to see if really
we could do some workouts and we did achieve success in doing
that.
In addition, we also convened a group of stakeholders from
all sides of the issue to come together and meet on a regular
basis for four years to deal with some of the issues dealing
with foreclosures in general in our procedures, and that really
is the genesis of the current program. Because of this Steering
Committee, we now have lender bar, consumer bar, the City, the
Sheriff, and also all nonprofit groups involved with the issue
at the table to try to develop the program. So the Committee is
the beginning of it all. We dealt with day backward cases where
we literally did pull cases off of the Sheriff's sale block to
see if we could actually do workouts and that was the beginning
of our program. But, now our focus is more on the day forward
program where all cases filed in Philadelphia after September
8th of last year are subject to conference, which we schedule
45 days out. Lenders are required, as they are in any civil
action to file a civil complaint of foreclosure along with a
notice to the homeowners that they must immediately call the
Philly Hotline, the Save Your Home Hotline--which Mr. Trauss of
course will talk to you in detail about--and as well as to
attend a conference which we schedule automatically at the
filing of the complaint. In that window, it's very important
that then we see a marriage between the courts and non-judicial
entities, such as community outreach groups, which literally--
with their staff who are experts in this--go out to canvas
neighborhoods and actually reach people at their doorstep, ring
the bell and go, ``You're in foreclosure. Did you call the
hotline? Did you call the hotline!? You didn't? Here is my cell
phone, call the hotline.''
Mr. Neiman. If you could start wrapping up. Thank you.
Judge Rizzo. With that said, we have had success with about
6,300 conferences coming through our program to date. We have
about 1,500 in terms of actual homes we've saved from
foreclosure. Approximately 3000 according to OHCD are actually
in queue to be resolved, postponement with purpose and we are
looking forward to more iterations of this as we move forward
out of the pilot phase into an established program coming 2010.
I'm sure I have more to come in terms of reaction to some
of your questions. Thank you for your time.
[The prepared statement of Judge Rizzo follows:]
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Mr. Neiman. Thank you. Mr. Trauss.
STATEMENT OF IRWIN TRAUSS, SUPERVISING ATTORNEY, CONSUMER
HOUSING UNIT, PHILADELPHIA LEGAL ASSISTANCE
Mr. Trauss. To the members of the Panel, I'd like to thank
you for your invitation to share my perspective on the MHA
Program and the HAMP Program as they relate to the availability
of mortgage modifications and folks facing foreclosures in
Philadelphia.
I want to start by saying how privileged I am to be on this
panel with Judge Rizzo. Judge Rizzo really has been the driving
force behind this Diversion Program and it would not work to
the extent that it does without her dedication to try to save
people's homes. This is one of the reasons why I'm worried
about the replicability of this program because not every
location is going to have a Judge Rizzo.
I also want to applaud the efforts of the Treasury in
creating the Making Home Affordable Program. I think the
Program, if mandatory, if implemented as designed, could help a
broad spectrum of people facing foreclosures in a way that
would have little impact on the Treasury and would have a
tremendous impact on avoiding foreclosures. However, there are
areas in which Making Home Affordable as designed could not
help even if it worked 100 percent and one of those is
addressing the needs of the unemployed, as Mr. Silvers has
already indicated. Making Home Affordable was not designed to
and cannot address the needs of people who can't pay their
mortgages, fair mortgages, decent mortgages, simply because of
the--of unemployment crisis. I'm sorry, to use that word, but
the unprecedented levels of unemployment that we're
experiencing. To address that, I think some of TARP money,
which has been recovered from the bank, should be re-purposed
by this MHA Program. I think an additional program could be
created along the lines of the HEMAP Program in Pennsylvania,
which, by the way, over its life has recovered more money than
it's paid out to homeowners for grants and loans, which could
be used to enable people to pay arrears and for continued
assistance to pay mortgage payments or part of mortgage
payments while people are unemployed.
I'd also like to comment on a couple of things that were
said by the previous witnesses. One, about the Hope Now
Escalation Team, which we just found out about two days ago and
we called yesterday and they don't know, Hope Now does not know
that there's a Hope Now Escalation Team, as far as we can tell;
at least the person we spoke to on the phone. If we run a
hotline, we need to know these things. We're always trying to
find out where can you go. We called Hope Now and we said, ``We
want to talk to somebody in your Escalation Team.'' They had no
idea what we were talking about and they said that they do not
do any sort of enforcement and that what they do is help
consumers and make referrals. So, I don't know if the Treasury
people are still here or if Fannie Mae is still or Freddie Mac,
but they need to get the word out to Hope Now that there is an
Escalation Team.
Mr. Neiman. We will make sure to convey that to the
Treasury.
Mr. Trauss. Also, with respect to the remedies from our
experience, the servicers would like nothing better than to be
kicked out of the program, at least some of them. With respect
to what can you do to a servicer who is not complying, many of
these servicers seem to be very reluctantly involved in this
program and really would love for business to go back to normal
where they hound homeowners and foreclose and take sales to
Sheriff's sale because that's what they know how to do, they
can do it, they can do it quickly, they can do it efficiently,
they can do it cheaply, they make lots of money doing it. So,
the threat of being bounced from the program, I don't think is
a significant threat for compliance.
From my perspective, despite the promise of the program,
HAMP and MHA have not been particularly helpful in the
Diversion Program with respect to achieving permanent
modifications and I think that's reflected in the numbers. It
has been helpful in the Diversion Program because it's served
to slowdown the foreclosure process while lenders have been
acting on HAMP applications. And, it's provided some leverage
to advocates to press for meaningful resolutions. But, simply
put, lenders are avoiding making permanent loan modifications
and as long as homeowners have no leverage to force such
modifications, they will not happen in great numbers.
Overwhelmingly, as has been pointed out in my written
testimony, servicers are not complying with the guidelines and
they're doing it with impunity. Servicers generally--in my
limited experience--seek ways to find homeowners ineligible.
Even when servicers provide trial agreements, they do not
provide permanent HAMP modifications at the end of them.
Instead, we have seen them offer arrangements that are less
favorable than what HAMP requires.
As I pointed out in my written testimony, there's a slew of
inadequacies with respect to the enforceability of the program.
I'd like to make two points which are related to enforceability
and taking the problems out from the discretion of the
servicers. One is that in the Housing Economic Recovery Act of
2008, $30 million was provided for attorneys to help homeowners
prevent foreclosure. Because of the way the Neighborhood
Reinvestment Corporation is interpreting that statute, the
regulations prevent that money from being used by lawyers
representing people to defend foreclosures, including
participating in the Diversion Program. That needs to be
changed.
Mr. Neiman. I'll give you an opportunity during the
question and answer. That was my first question, on change. So,
if you could just wrap up.
Mr. Trauss. To wrap up, if you want the MHA to work, if you
want HAMP to work, I think the most important thing is to
convince the Senate to pass the amendments of the bankruptcy
code. It would give the bankruptcy court the authority to
modify mortgages and make them affordable without incentives to
the homeowners. And if there is a threat, then you're going to
get lenders doing what we need them to do. Thank you again for
the invitation.
[The prepared statement of Mr. Trauss follows:]
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Mr. Neiman. Thank you. Ms. Fitzgerald.
STATEMENT OF EILEEN FITZGERALD, CHIEF OPERATING OFFICER,
NEIGHBORWORKS AMERICA
Ms. Fitzgerald. Thank you, Superintendent Neiman, Mr.
Atkins, Mr. Silvers. Thanks for the opportunity to talk with
you today about NeighborWorks' Foreclosure Mitigation work and
feedback we have received on negotiating modifications under
the Making Home Affordable Program.
By way of background, NeighborWorks is a congressionally
chartered nonprofit. We were established in 1978 with a
statutory board, which includes the Directors of the Federal
Financial Regulatory Agencies and the Secretary of HUD, or
their designees. Our mission is to expand affordable housing
opportunities, working through a network of more than 235
community based organizations. NeighborWorks was at the
forefront of identifying the foreclosure crisis, creating the
NeighborWorks Center for Foreclosure Solutions five years ago.
In December 2007, NeighborWorks was named the Administrator of
the $180 million National Foreclosure Mitigation Counseling
Program, which was created under the 2008 Appropriations Act.
Two additional Appropriations have been made since then, $180
million in July 2008 and then an additional $50 million in
2009.
To date, 674,000 homeowners have received counseling
through NFMC is 1,700 grantees and sub-grantees. During this
foreclosure crisis, working with servicers has posed challenges
for counselors across the nation. While many issues are being
addressed, working with servicers has continued to be a
challenge since the launch of MHA. Before I discuss the
challenges, I do want to point out that MHA includes a number
of really successful components, the trial modifications having
been extended and initiated. The 31 percent front end DTI
requirement really improves a borrower's chance of success and
was a critical element. As was the willingness of both
servicers and Treasury to get input on the modification
process, and their commitment to addressing issues identified
and the addition of the MHA, FHA program.
Back to challenges, NeighborWorks recently held a series of
seven feedback sessions with NFMC counselors on MHA
implementation uncovering three major themes: difficulty
communicating with servicers; servicers not following MHA
program guidelines; and frustrations with the system as a
whole. Given the time constraints I'll just address a few of
these. So, difficulty trying to communicate with servicers.
Counselors noted that many servicers will not work with them.
Some servicers still ask for their social security numbers,
even though servicers have directed staff not to continue this
practice. Counselors also told us they spend as much as two
hours on hold trying to reach a servicer and then frequently
are transferred to numerous phone lines before getting answers
for their questions. Some servicers have contracted with third
party collection agencies who call borrowers demanding payments
and do not address refinance or modification options.
Challenge two: Servicers are not following MHA program
guidelines. Counselors gave many examples of servicers not
helping homeowners who were current on their payments, but who
knew they would have trouble making payments in the near
future. Instead, the servicers advised the borrowers to stop
making payments and call back when they were 30, 60 or even 90
days delinquent. Counselors also reported that some servicers
would not disclose terms of a modification or a payment
breakdown or put their offers in writing. In one case, a
servicer made three separate offers to a borrower on the
telephone and then sent the borrower a letter stating she was
ineligible for a modification.
Servicers are giving misinformation about the program,
stating that only Fannie and Freddie loans are eligible or
misstating the required front and backend ratios. Other
servicers are offering other workouts before MHA workouts,
which clearly is not supposed to happen. MHA modifications are
supposed to be offered first.
Counselors also gave examples of a number of servicers not
halting foreclosures while reviewing files for MHA eligibility.
In one case a servicer moved forward with foreclosure sales
when clients were being reviewed for MHA. In California there
is a 90 day moratorium on foreclosure sales. When asked about
this practice, that particular servicer said they were exempt
from State and MHA requirements.
Challenge number 3: Frustrations with the system as a
whole. Counselors gave many examples of servicers not giving
explanation of a denial for HAMP. They also noted it takes too
long to get a response to the modification request, two to
three months for a trial modification. In some cases counselors
are required to resubmit the same packages when servicers lose
documents or take so long to review them that the data and the
document is outdated.
Finally, a few thoughts on program improvements. NFMC
counselors support the creation of a central portal for
submitting modification requests, such as Hope Now and Treasury
portals which are currently under development, we hope. They
also would like uniform procedures and forms. The efforts
currently underway to establish uniform servicer guidelines
would assist counselors immensely if that happens. And finally,
counselors say they could be more effective if they had access
to servicers' NPV (not present value) models to understand how
servicers determine MHA eligibility.
In sum, government entities, counselors, lender servicers
and investors have to continue to work together to address this
crisis and improve the effectiveness of the programs.
[The prepared statement of Ms. Fitzgerald follows:]
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Mr. Neiman. Thank you. Ms. Goldberg.
STATEMENT OF DEBORAH GOLDBERG, DIRECTOR, HURRICANE RELIEF
PROJECT, NATIONAL FAIR HOUSING ALLIANCE
Ms. Goldberg. Thank you. I want to add my thanks to that of
my co-panelists here for you all hold this hearing and for
inviting me here to testify. I'm here on behalf of the National
Fair Housing Alliance, which is the nation's only national
organization that's exclusively devoted to eradicating
discrimination in the housing market. As noted, I run the
Hurricane Relief Project at NFHA and since 2005 our project has
been working with homeowners in the Gulf to help them recover
from the storms of that season. What we have found is that many
of the homeowners that we have helped would be facing
foreclosure even if Hurricanes Katrina, Rita, etc, had not
occurred. The reason for that is that they have the same kinds
of unaffordable and unsustainable mortgages that so many other
homeowners around the country have and whose failure has really
launched this current crisis. We do view it as a crisis at the
National Fair Housing Alliance and we are very mindful of the
fact that to a large extent the cause of this crisis have been
born by people of color and the communities in which they live.
We have decade worth of research that tells us that these
borrowers in these communities have been targeted for the kinds
of loans that are not sustainable, that are high cost, that are
high risk and they have been on the front lines of this crisis.
It's been estimated that people of color, over the last couple
of years have lost hundreds of billions of dollars worth of
equity as a result of foreclosures. That's going to have a
profound effect on their families' financial security now and
into the future and it may take us generations to be able to
recover from that.
The foreclosure crisis is unraveling several decades worth
of concerted efforts by a lot of people to promote community
revitalization and wealth building in our nation's cities. And
I want to say, I think it's been pointed out that the misery
now is being shared by a lot of other people. That loans that
might not be considered unsustainable and unaffordable are
still going into foreclosure. That's not the kind of sharing I
think any of us want to see.
With a crisis of this proportion we think it's been
imperative for the government to intervene and we applaud the
Obama Administration for launching the Making Home Affordable
Program and HAMP. Several people already talked about some of
the key elements of that program that have had a really
positive impact on the market within limits and we want to
support those things, such as the affordable payments and some
other things that have been mentioned. And I want to say that
we've been trying to work since the beginning with Treasury and
other government officials to try and improve the program's
operations. I think the early numbers indicate that HAMP is on
target to meet its goal. But as has already been discussed
extensively, and as we certainly believe, those goals are too
modest and the number of foreclosure starts that are projected
far outweigh the number of people that we expect that the
program will be helping. Our goal needs to be to stop
foreclosures, not to meet the goals that have been established
for HAMP.
My written testimony describes a number of operational
problems with HAMP and suggests a bunch of changes that we
think would strengthen the program, would increase its
transparency and accountability and extend its reach. My
testimony also makes a number of proposals for steps outside of
the context of HAMP that we believe would help us deal with
this crisis more effectively. Clearly, I don't have time to go
through those all, so I'm just going to focus on a few. I want
to point out two that I think have particular fair housing
implications. One is the data that are collected and made
public about how servicers are performing under the program. We
think it's very critical that loan level data, including
information on the race, gender, and national origin of the
borrower who is applying for a HAMP modification, be made
available to the public and that this be done at a geographic
level that makes it possible for public officials, community
organizations, individual borrowers, and the public at large to
understand how the program is working in their communities, to
be able to identify places where it may not be working
equitably or effectively and to intervene to change that.
A second thing is that we think that there needs to be
better support for borrowers, and particularly for outreach
into communities where English is not the primary language.
Third, we think that the NPV model must be made available
to the public. Borrowers should know what information about
them and their home (and a particular concern to us is how the
value of that property is assessed) is put into the model and
what the model tells them or what comes out of the model about
whether they succeed or not and by how much they failed. It's
particularly important to catch folks who just barely failed
the model's analysis. We also make some suggestions for ways to
make the model more accurate.
We believe that it's critical to establish a strong
effective and neutral appeals process that is borrower
initiated, where someone outside the system, not in the
servicer's shop, can review an application to make sure that it
was handled appropriately. And finally, I would say we think
it's really important to stop all foreclosure actions. We are
hearing of far too many borrowers who are either having
foreclosure initiated or moving along the path towards
foreclosure even though the final sale may not take place. That
racks up a lot of costs that undermine the borrower's ability
to obtain a successful modification.
And, I will stop there and welcome your questions.
[The prepared statement of Ms. Goldberg follows:]
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Mr. Neiman. Thank you. Our intent for this panel was to get
the borrowers perspective through the views and the eyes of
advocates and judges like yourselves. You have represented them
well. The testimony that you all have provided us, in my
opinion is really the most comprehensive summary of the
significant issues facing this program and will really serve as
a terrific basis for us in our work, as well as in our reports
to the public and interactions with Treasury. My first question
is designed to expand on your reports as a follow-up to the
issues that you've identified and give you an opportunity to
address what is the most important change either in the program
design of the Making Affordable Home Program or in its
implementation. If we had to leave here with one critical--and
I was going to start with three but I know we're pressed for
time and some of you may overlap--think of the one most
important change that we really should be looking at
recommending with respect to the design of the program or the
way it's being implemented. I'll start with anybody.
Judge Rizzo. I'm going to start. Again, I hope I can get
you more when I come a calling and you visit with us because we
have more to talk about. I obviously have the view from the
judiciary so I'm sort of level on all sides. Parties come to
the court by due process equally. I have to say in terms of
actually on the ground running, I go to my colleagues on this
panel to discuss it. The bottom line is, I don't know about
tweaking it anymore other than just reducing it down to fine
points and getting the word out where it's easy to read
language and that we have direct, what I would call batphone
hotlines to really get clarity on points. Through association
I've had being on panels in Washington, etc. I've had outreach
to individuals who I personally called to get clarity on.
That's all well and good, but what we need is something where
there is actually somewhere to go where we can get a clear,
quick answer. And that's why programs such as ours, I believe,
really work because we can react to that change very rapidly on
this micro basis in a case. But, any delay brings more
arrearage, more issues with the property, more hopelessness, as
I refer to it. So, when we wait and wait to get clarity the
numbers are rising and that's going to factor into the
numerical formula to actually see if this person can really
get----
Mr. Neiman. And getting clarity, you mean from the
servicer?
Judge Rizzo. Well, the point is the clarity, I would think
from the program itself to those who are the stakeholders in
it. So, if our servicers don't understand what's going on, how
can they in good faith negotiate to know all the terms when in
fact from the consumer side there's a conflict--and I speak
about this in my comments--there's a disconnect of how it's
interpreted. Well, that takes time to unravel all of that. That
is time wasted on getting this deal done and now we have more
arrears to deal with in terms of the formula we apply.
Mr. Neiman. Thank you. Counselors or Ms. Fitzgerald?
Ms. Fitzgerald. I'm going to hope Debbie says transparency
of NPV so then I'll say the other thing I want to say. There is
a huge process problem here. At the end, there's a lot of good
core guts to MHA, but if you dropped from the sky and said how
could you design a more dysfunctional system, you probably
couldn't get there. The hours and hours and hours of wasted
time, whether that's a homeowner, a counselor, or a legal
structure in trying to get resolutions--every servicer using
different forms for this, everyone having different
requirements. While MHA is the same, the paper requirement
documentation is not the same across all of the servicers.
Mr. Neiman. How important is the web portal? Is Fannie
talking or are administrators talking about this?
Ms. Fitzgerald. The web portal is a really good first step
because at least we can say some servicers require fax, some
require email, some require mail. So, that solves that problem.
What it doesn't solve is what gets pushed up into the web
portal and that requires some kind of standardization of
documents. In the loan origination process lots of folks use
Fannie documents. That's become a consistent process. We're
saying come up with one set of documents for every counselor,
every borrower. It makes outreach events go a lot better. So,
that seems very doable. It's not rocket science. Let's just all
agree to that and make that happen.
And then, I think the other piece of the process is really
trained staff and servicers. We are very appreciative that
servicers have obviously added a lot of staff, which has been
required and that's a huge effort to get everybody on the same
page. But, particularly on the collection side, I think a
homeowner or a counselor might wind up talking to anyone. And
while the loan modification groups seem to be maybe a little
bit more informed it's not clear that that has permeated the
organizations. So, I think really making sure that everyone
there knows this is the requirements.
Mr. Neiman. I give you ten seconds.
Ms. Goldberg. There isn't just one and I think that reduces
it too far. I want to completely underscore and echo all the
comments that Eileen made. I would say two things. One is we
need transparency across the board. Because there are so many
issues about the program, because it is a complex program, then
we need to know. We need to know what's going on within the NPV
model, with the denials for borrowers and the reasons for
denial that they're given, with the performance data for the
servicers. The only way that we can really get a handle on
where the bottlenecks are, where things are falling out is when
that kind of transparency is provided.
The other thing I would say is, I think we need to be
looking ahead more at how the program guidelines must be
changed to deal with what we can see coming down the road. We
are in many ways--for all the good things about HAMP--we are
kicking the can down the road to the end of the program. We
don't have really permanent modifications. We have five-year
modifications and who knows what's going to happen at the end
of that. We have an economic climate where unemployment is at
an all time high or a record high and expected to stay there
for quite some time, but yet we're not allowing for people who
re-default to get a new modification or to get a forbearance or
whatever might be appropriate. We're kicking them out of the
program. So, program changes to deal with circumstances like
these are needed if we really want to get our arms around the
foreclosure problem and keep it from overwhelming our economy.
Mr. Neiman. Thank you. My time has expired.
Mr. Atkins. I wanted to address first a question to Judge
Rizzo because it sounds like your program is pretty interesting
and I look forward to seeing it in action this afternoon. How
are you staffing and supervising this? Have you taken on more
folks who are able to delegate this? How does this work,
actually?
Judge Rizzo. Well, I always feel like it's the Wizard of
Oz. If you move the curtain you'll see it's one person working
all of the gadgets. We really are short staffed in terms of the
court system. We are really in an all stretch assignment,
myself and all my staff and wonderful court administrators. So,
from that perspective the court is working within its budgetary
bounds. That's not to say it's optimistic and that of course an
infusion of some funding in that regard to expand it wouldn't
be welcomed. But, more importantly, we are in true partnership
with these non-judicial entities, these community outreach
groups who actually go into the neighborhoods, our wonderful
housing counselors under the office of Housing and Community
Development and others, our Philadelphia VIP with our volunteer
lawyers, Judge Pro Tems--who I appoint and they work without
fee after being trained. We also try to support our wonderful
CLS and PLA attorneys who actually are staffed up to handle the
more complex cases. So, from an infrastructure perspective, the
money side really goes to the City and Mayor Nutter is in
complete support in terms of his message to call the hotline.
We're all in sync. It's really a marriage of judiciary with
non-judicial entities to get this thing going. So, it's always
in need of more legal services, more community outreach and
increasing our ready, wonderful staffed up and well trained
Housing Counselor Network in partnership with the courts. So,
we work on a shoestring from the court's internal perspective,
yet we'll of course welcome funding to be with our other
partners. So, it's a network and I think maybe Mr. Trauss can
speak to some of that in terms of the funding demands that are
placed on it. But, we do thank our mayor for trying to really
support this initiative.
Mr. Trauss. The court has managed to--without any increase
in funding--to create a program in which all this happens. Most
of the funding--as Judge Rizzo said--comes from the City of
Philadelphia. A lot of it comes from the Office of Housing and
Community Development and the cost associated with the program,
which are somewhat invisible. One of the problems with this is
that this model has been advocated as a cost free model. It's
all volunteer and in the court side that's true, the Judge Pro
Tems (JPTs) are volunteers, there are a lot of volunteer
lawyers. But, in fact there's probably a million dollars,
actually several million dollars that goes in--probably a total
of about three million dollars--that goes into the cost of
funding the hotline, funding about 32 housing counseling
agencies, funding outreach--although the amount of funding for
outreach is actually very small for the bang for the buck. So,
there is a significant cost and that cost is born by the City
in creating the structure, the infrastructure, which needs to
be there to have a meaningful program such as the Diversion
Program. You have to have housing counselors. You have to have
some way for them to get to the housing counselors where the
hotline comes in. The hotline, as I indicated in my testimony,
serves as something of a coordinating function. There's a
feedback loop that's created with the hotline. So, you need all
these things. And also, in a lot of cases, you need the one
thing that's missing which is beyond the volunteer attorneys
who get involved on a limited basis as lawyers that actually
step in and represent people when the lenders--and it is not
unusual--when the lenders overstep their bounds and ask for
things that they are simply not entitled to.
Mr. Atkins. What kind of backlog do you have, caseload
right now?
Judge Rizzo. Just very quickly. When we're in session we
hear approximately 150 cases in the morning and 150 in the
afternoon, that are called in. We have no backlog in a sense in
that regard. Philadelphia has seen a bump and increase, of
course, in foreclosure filings. It's leveled off and we
anticipate another bump. So, we're at about 10,000 filings per
year just in foreclosures. That has been a 2,000 jump up from
the years past. But, in terms of backlog, we're in flow and I
think we estimate about 140 or 150 filings per--well actually
that's by one firm so I don't know about how many filings per
month. We're steady in that regard and there is no backlog
because on initiation they immediately go into the chute and
they're scheduled for the 45 day conference. I will also add,
just to the other point almost a million dollars in pro bono
services have been generated and given to support this program.
So, that's daunting, but it is actually dedicated volunteers
serving.
Mr. Trauss. One of the unadvertised benefits of this
program is that to the extent that there are resolutions that
are reached, it takes cases out of the inventory of foreclosure
cased needed to be tried by the courts.
Judge Rizzo. I agree.
Mr. Trauss. So, that is a benefit the court experiences.
For these to be taken out of the system early, that's a benefit
to the court and that saves time and money.
Mr. Neiman. Mr. Silvers.
Mr. Silvers. Like my fellow panelists, I'm pleased to have
you all here. Particularly pleased to have Judge Rizzo here and
it's an honor to be with you and we're certainly coming to
visit. Let me just make sure I heard the testimony right. Judge
Rizzo, you said that you've had 6,300 conferences and 1,500
homes saved roughly from foreclosure?
Judge Rizzo. Yes, that's right. We can go on and on and
debate how you describe success because from the Court's
perspective when it's out of the system, those are the 1,500
because the case has been closed, we're judicial.
Mr. Silvers. How many of those 1,500 have come back?
Judge Rizzo. Well, that's the point and that's where the
data has been. How do you measure success? So, time has to pass
in effect for us to go back and revisit that. We're very
grateful that a national foundation has come calling to really
breakdown our data and give us that kind of critical
information.
Mr. Silvers. So, at this time you don't know?
Judge Rizzo. No, we do not. We're dinosaurs, we aren't very
good at collecting our data.
Mr. Silvers. I would note that the kind of cost figures
that you're talking about in the prior exchange, $3 million,
1,500 homes saved is comparable to the servicer fee that is
being paid under the MHA program per mortgage, which is only a
small portion of the total cost in the MHA program.
Moving forward from that, Mr. Trauss, when you say that MHA
should be mandatory, what do you mean? MHA is mandatory in a
sense of participating in the program is mandatory for TARP
recipients, more or less. Tell me what you mean by mandatory.
Mr. Trauss. Before I answer that question. Can I answer Mr.
Neiman's questions about the one thing that should be done?
Mr. Silvers. Please.
Mr. Trauss. And that is, the Administration needs to get
behind passing the amendments to the bankruptcy code to allow
for mandatory modifications. If that happened, if that was
real, then bankruptcy could modify these loans and make them
affordable, everything else would fall into line because the
creditors would want to avoid that and they would be looking to
what program would have incentives for them to make the changes
that benefited everybody.
With respect to mandatory, yes participation if you sign
the participation agreement then you're supposed to follow the
rules, but there're no teeth. So, I guess by mandatory I mean
some system where there are immediate consequences for failing
to do what you're supposed to do.
Mr. Silvers. Maybe I'm not following. Laws being
complicated, maybe I'm not following this, but it seems to me
that a firm that signs that agreement, receives TARP funds, has
entered into an arrangement with the Federal Government where
they're receiving money for making commitments and adhering to
them and in our law there are real penalties, including
criminal penalties for intentionally not following such an
agreement, isn't that right?
Mr. Trauss. Well, I haven't looked into it. I assume that
you're correct about that. What I know is that on the ground
day-to-day--and you maybe right that five years from now they
will----
Mr. Silvers. My point is just that maybe we have an
enforcement problem here and not a lack of penalties problem.
Mr. Trauss. Well, we have an enforcement problem, but
that's exactly my point. I mean, it's not a question of
penalties because penalties down the line do not help the
hundreds, thousands and millions of people who lose their
homes. For example, Bank of America--I don't know if they're
here yet--Bank of America until, I think August in Philadelphia
at least, were telling our hotline people that they signed the
SPA, but they were only doing GSE loans. They were not offering
MHA or HAMP on any non-GSE loans. There were thousands,
millions possibly, but thousands, tens of thousands perhaps
hundreds of thousands of people were not being put into the
system, their houses were going to foreclosure, they were
losing their homes because Bank of America was blatantly, as
far as we could tell, violating their obligations. We contacted
Fannie Mae, we contacted Freddie Mac and the response we got
from Freddie Mac was, ``Yes, we know.''
Mr. Silvers. You may have noticed Mr. Trauss, I don't know
if you were here earlier, but I asked the Treasury Department
to review your testimony in relation to allegations, plausible
allegations of misconduct and to report back to our committee
as to what they found. Can I ask Judge Rizzo--and Mr. Trauss
you may know the answer--when your outreach people go knock on
a door, they knock on the door and the person says ``Who is
it?'' what do they answer?
Mr. Trauss. Well, I am not directly involved in the
outreach. I don't know if anybody from the agencies is here.
So, I can't answer exactly what they say. We do get the calls
when the outreach workers--we try to coordinate with the
outreach workers so that we are there even when we're not.
Mr. Silvers. I assume they don't answer, ``It's your bank
calling''.
Mr. Trauss. No.
Mr. Saber. They identify themselves from the organization
they're with.
Mr. Silvers. I hope that the record taker here could hear
that response from the audience.
Judge Rizzo. That's Lance Saber from the City.
Mr. Saber. They identify themselves from the organization
that they are with. There are different organizations that are
out there.
Mr. Silvers. Thank you. My time has expired.
Mr. Neiman. We're going to try to do one more round. We're
running a little behind so we'll really try to keep these
within our time limits. I'd like to go back to my first line of
questions to the Treasury panel regarding their metrics of
success because it is currently focused on trial modifications.
As you all know, some trial modifications are offered and
started before verification of income based on verbal
information while other servicers do wait to verify that
documentation before offering a trial modification. Do you all
have any views as to whether either of those approaches is
preferable?
Mr. Trauss. I have no problem with the oral implementation
and what I find happening is that anything that reduces the
excuse that a servicer can give for not immediately saying, yes
we will consider you, we are stopping foreclosure, start
sending us money.
Mr. Neiman. So, the earliest you can to get people into it?
Mr. Trauss. Right, that is the best thing because it
doesn't take long. The paperwork that is required by HAMP is
very minimal. Now, the servicers add to that paperwork, but the
HAMP paperwork is pretty minimal and that's pretty easy to get
through. What we find is that the paperwork requirement is used
as an excuse to frustrate the ability of people to participate.
Mr. Neiman. How about from the counselor's standpoint.
Ms. Fitzgerald. I think it would be important to track
those two numbers differently. So, we don't disagree that you
should give the borrower the modification as soon as possible,
but when someone is going back to look at success, I guess I'd
want to know, was there a difference in those, because I
wouldn't want folks to say this program didn't work because of
stated income. So, I think it's really important if we're going
to do that to track separately.
Ms. Goldberg. I would also add a second and related but
important question is the servicers' ability to handle the
paperwork and review it in the timeframe that's provided by the
program. In my testimony I cited an example of a client we had
recently in Mississippi who got one of the early trial
modifications. She got it based on verbal information provided
to the servicer. She made her first payment under the trial
modification in April, the beginning of April, and at that time
she sent in all of her documentation. Unfortunately, she did it
without consulting with our counselors so she got some of it
wrong, like she didn't sign the tax return that she had
submitted electronically originally to the IRS. Five months
later, she's made five payments now. That's two payments beyond
the trial period and the servicer--who was Chase--contacted her
and said, the paperwork that we have for you is either missing
or it's invalid and if you can't get it to us within 60 days
you'll lose your shot at a modification. The servicer had this
paperwork for nearly five months and couldn't get through it in
a timely fashion to give the borrower the opportunity to
correct the errors before the trial period ends.
Mr. Neiman. So, how big is it? We keep hearing
documentation, we hear it from the servicers because they're
saying the individuals are not providing back signed documents.
We hear it from the counseling agencies that the documents are
either lost or not being presented in a timely fashion. How big
on a one to ten scale is documentation?
Ms. Fitzgerald. Big, but again it's the system: They
haven't sent any efficient system for collecting and making
standardized documentation. That is, to me the bigger problem.
Ms. Goldberg. I think earlier testimony alluded to one of
the things counselors struggle with, which is that the
servicers are consistently changing the system that does exist.
So, you're getting a new phone number, a new fax number, a new
email address to send stuff to all the time. So, you thought
you knew how to do it efficiently until you get the new policy
tomorrow.
Mr. Neiman. You may have been here when I asked the
Government Panel to assess the performance of the servicers
using a score grade of A to F, recognizing that this is a first
semester as opposed to a year end review. I'd be very
interested in your assessment of how you would grade servicers
as a whole.
Ms. Fitzgerald. My solution, when I heard that question was
incomplete.
Mr. Neiman. Incomplete, well that's fair.
Ms. Goldberg. Well, with some qualifications, I think I
would have to say a ``D'' and that's for two reasons. One is
that I don't think we're in the first semester. This problem
has been going on since long before HAMP, and servicers for
quite some time have been saying that they've been ramping up
and they're not there yet. So, I don't think we're in the first
semester.
The second thing is, my kid's teacher sends home a little
rubric to grade them by. It says these are the things we're
going to judge and effort doesn't count towards your grade.
It's what you actually have mastered and can demonstrate that
you mastered and the servicers just are not there yet. They
maybe making a great effort, but they don't have it mastered.
Mr. Neiman. Judge Rizzo or Mr. Trauss, care to weigh in?
Mr. Trauss. I concur.
Judge Rizzo. I'm going to refrain from any grading, but I
just want to say with all parties at the table, we really need
simplification and a way to make it an easy read for everyone.
That's also going to benefit our borrowers. Sometimes part of
the delay is caused by them even coming up to get it all
together. So, I have to, as a Court, balance that. The
simplification as easy read will help those wonderful housing
counselors and those who assist in the process, get it in the
chute so that it can be evaluated for the servicers. Hopefully,
we're all on the same page.
Mr. Neiman. Thank you. I'm out of time.
Mr. Atkins. I want to ask the Panel, especially here in
Philadelphia, what you all estimate the percentage of
nonstandard loans might be as part of this problem--and
subprime and no doc loans--such things as that. What's really
driving this or do you see this throughout all parts of the
population?
Judge Rizzo. I'll just start. What I've seen coming into
the program consistently is not necessarily the subprime.
Obviously, it exists to some degree, but that's not where we
are. We're an old historic city, made up of Philadelphia row
homes, individuals who've been in their homes for many, many
years. Our demographics show that our program really assisted
the elderly and single parents, moms that were looking into
that and we actually have special protocols to deal with their
very special needs. It's the situation you read about in law
school where someone wants to put aluminum siding on your
house, they get into some loan situation, nonpayment or they
run, it gets converted into some mortgage document, here we
have a lien and now here is someone who was in a home 35 years
and are about to lose it. So, I see some of these anecdotal
stories, not necessarily of the mass of subprime. We're not the
city with these people buying these mansions and being
underwater immediately. That's not what we're seeing. So, this
consistency of need that I'm seeing coming into the room is not
that.
Mr. Trauss. I would just have to disagree with Judge Rizzo
to some extent.
Judge Rizzo. And he always does.
Mr. Trauss. There's a combination and it's been a moving
target. To some extent in Philadelphia, I think the subprime
crisis, which was directed much more to low income homeowners,
kind of peaked in 2004. Subprimes did increase their
foreclosures to a level of 6,000 a year to close to 9,000 or
10,000 a year, perhaps last year. At this point we are seeing
unemployment as a huge component. Unemployment, under
employment, people lose their jobs, get their jobs back, lose
their jobs again, get another job. So, there's a shifting face
in what we're seeing. Now, remember this is a case, this is a
program which looks at cases in which complaints of
foreclosures have been filed. And, also in Pennsylvania the
time to get to foreclosure is somewhat long, relatively on a
case. So, the foreclosure rush that's resulting from the
unemployment increase, I don't think has yet hit the Diversion
Program to the extent that it might have hit other places
because there's a lag of probably about five months before a
case actually gets to a complaint of foreclosure. So, we're
seeing a change in the composition of the majority of what's
causing the foreclosures and it's moving more towards
unemployment.
Ms. Fitzgerald. In general across the country I can't find
the percentage, but our counselors serve a higher percentage of
folks with ARM than are in the general population. So, I think
it's probably 35 to 40 percent. With that said, there are a lot
of prime loans in this mix and a lot of families in particular.
We see each time that the percentage increases and problems
with income increase. I do think that we have a really big
challenge with the Option ARMS coming, particularly in
California. They are very concentrated, but they only peak in
2010 and 2011 and they're going to present a totally different
problem. I do know that Treasury seems to be aware of that and
is thinking of different strategies.
Ms. Goldberg. I can't speak at all to the numbers in
Philadelphia. I can tell you that in Louisiana it's a different
situation. We still see a mix of different loan types. And,
thinking of what I've heard from NFHA's members around the
country, I think it varies a lot depending on the particular
local market. In the Midwest it's a little bit different than
in some of the sand states. I think everybody is seeing
unemployment as an increasing factor regardless of the loan
type. But, we're also still seeing the troubling loan types.
Mr. Trauss. I was going to talk about the troubling loan
types. Philadelphia has historically had a high percentage of
its low-income population owning homes and that is what was
going up for a while. One of the problems is it's not always
obvious what the loans are. In some of these loans, you look at
them look like first mortgages, traditional first mortgages.
But, if you look closely at them, you find out that they are
predatory or unfair, they have high interest rates, they might
be part of a 80/20 loan where a person bought a house with a
first mortgage and there's a second mortgage they don't really
understand for 20 percent that's a high interest rate mortgage,
which makes the total package unaffordable. Unlike normal
loans, escrow is not included so that when they start getting
the payments there's a shock that happens as rates go up and
they didn't realize that it wasn't a traditional loan. So, from
the Court's point of view it would not necessarily be obvious
that the particular loan involved is the kind that they're
trying to breakout. There's a lot, of I guess I would call them
unfair loans that are in there along with traditional, prime,
credit and also these exotic loans with adjustable rates.
Mr. Atkins. My time is up. Thank you.
Mr. Neiman. Mr. Silvers.
Mr. Silvers. Thank you. When my last time expired I was
asking about how the outreach is conducted. Is it your view
that having outreach conducted by parties other than the banks
has contributed to the success of the program, either Judge
Rizzo or Mr. Trauss?
Judge Rizzo. I can tell you, I believe it's been a
significant benefit to have this type of canvassing done by
neighborhood groups who are known in the community, who have
the way to engage and actually have a level of trust infused in
the dialogue. When they knock and it's not someone serving
papers, it's someone saying, ``Listen, I know who you are.
You're in foreclosure. Did you get your papers? Did you look?
Did you see your date? Did you make the call?'' If there were
issues with language, we even have abilities through our
hotline to deal with those types of issues. So, that outreach,
that one-to-one human touch by people in the community, I think
that really started it. Actually, some studies were done where
we took some batches of our cases coming in subject to canvas
or not and we saw that the failure to appear rate was higher in
those which were not contacted through canvas. So, we really
have some experience with this to know that it really does make
a difference and I think it really is a key in terms of our
local program.
Mr. Silvers. Thank you. I want to shift to a much broader
question. There is a certain amount of dissatisfaction on this
panel and I think on the last one, to somewhat of a more
moderate degree, with the servicers. Any of you, what is
happening here, is this disorganization? Is this
intentionality? Do the servicers wish not to participate and if
so, why?
Ms. Fitzgerald. I think its really hard to aggregate a
group of organizations so, we have to be careful at that.
Mr. Silvers. Well, then let me help you. I mean, I'm just
interested in volume. If you look at the Treasury reports,
monthly reports, there's a half dozen, I think that constitutes
almost all of the volume. I mean, not just the volume of the
modifications, but the volume of the underlying loans. Lets
talk about them.
Ms. Fitzgerald. I do think that the mergers have created
maybe even unanticipated consequences because they have many
servicing systems. They have different procedures so I think
we've certainly seen probably a decline in responsiveness and
just our ability to solve escalated problems due to the
consolidation, than maybe we did three years ago about
awareness of the problem across senior leadership. Obviously,
there's a challenge in execution.
Ms. Goldberg. One thing I would just add to that, I can't
speak to intent but I think we should be mindful of the
incentives that are built in for servicers to move towards
foreclosure and how those compare to loss mitigation. Attorneys
on the Panel can probably speak to this better than I, but the
feedback that I get from the lawyers that I work with is that
servicers get paid more, they get paid faster, and they get
paid more reliably for all the steps that they take to move
somebody towards foreclosure than they do for loss mitigation.
Mr. Silvers. Ms. Goldberg, stop right there. Is that still
true today with the MHA Program being in place?
Ms. Goldberg. I believe it is.
Mr. Silvers. What could be done to the MHA Program--and I
invite any of you to comment--that would alter that fundamental
calculus? And, not giving in to the deeper questions of the
fundamental economics of the loan, but this questioning of
servicing and where those incentives are.
Mr. Trauss. There's a big problem with the incentives.
There's four problems mainly, which relate to your question. I
think there's a problem with culture, which is very hard to
overcome. There's been a way of doing things since the
servicers were created, which is now about 10 or 15 years ago
when it became big. They have a way of doing things, they have
a mindset that it's our way or the highway and they're not used
to changing that mindset and that's a big problem and that
relates to habit. And then there's the incentive problem. To
answer your question, we can't answer your question, at least I
can't without further study about the nature of the incentives.
My suspicion is, my gut is that the amounts of money involved,
even at this level are not big enough to overcome the cultural
problems, the habit problems, the disorganization problems, and
the existing incentives to foreclose.
Mr. Silvers. Can I stop you there for a second? You and I
have both stated that we think that restructurings and
bankruptcy would help here. From what you just said, might
another different approach be to--and this is more like a
business approach as opposed to a legal approach--to
essentially to get subcontractors who do nothing but this that
specialize in reformatting loans, if we've got profound
cultural problems with businesses that have been built to do
something different?
Mr. Trauss. The problem with using subcontractors, as
evidenced by the last opinion of Judge Sigmund, the bankruptcy
judge. One of her last opinions, talks about how theoretically
it could work depending on how you select the subcontractor.
Sometimes if you select somebody to do a narrow thing, they
don't do it with the right understanding.
Mr. Silvers. Well, they might not have the broader capacity
that the large banks and their servicing facilities have. Is
that what you're suggesting?
Mr. Trauss. Well, what I'm suggesting is the incentive that
loss mitigation has been farmed out, which it has by these
servicers already, even before Making Homes Affordable. It has
not enhanced the process and I don't know why that is. But,
doing exactly what you do hiring a subcontractor to do
something repeatedly and efficiently has not made it better,
it's made things worse.
Mr. Silvers. Thank you. My time has expired.
Mr. Neiman. Thank you. I want to thank you all for being
here this morning, but even more importantly I want to thank
you for what you do everyday and I look forward to the
afternoon with Judge Rizzo. I will look forward to staying in
communication with you. Please keep us advised as you update
your data and look at us as a resource, as well. Thank you very
much.
Let's try to change panels as quickly as possible because
we are running a little behind.
The witnesses--and this is our largest panel so we really
do have to be conscious of the time--the witnesses in our third
and final panel include three servicers and an economist from
the Boston Fed. From the left we have Dr. Paul Willen, Senior
Economist and Policy Advisor, Research Department at the
Federal Reserve Bank of Boston who has been writing and
researching this for many years and well known to many of us;
Allen Jones, Senior Vice President of Default Management with
Bank of America Home Loans; Larry Litton, President and CEO of
Litton Loan Servicing and Joe Ohayon, Vice President in
Community and Client Relations for Wells Fargo. I very much
appreciate you all being here. I know these are tough
environments for you all. I know you all travel and have come a
great distance, but I think this is very important. I am glad
that if we couldn't get Treasury to sit to the end and listen,
I think it's even all the more important that we have the
servicers sitting and hearing those prior panels. So, I look
forward to your opening statements and to the questions and
answers. And please do try to limit those to within five
minutes. Thank you. Dr. Willen.
STATEMENT OF DR. PAUL WILLEN, SENIOR ECONOMIST AND POLICY
ADVISOR, RESEARCH DEPARTMENT, FEDERAL RESERVE BANK OF BOSTON
Dr. Willen. Thank you. Mr. Atkins, Mr. Neiman, Mr. Silvers,
thank you for your invitation to testify. My name is Paul
Willen and I am a Senior Economist and Policy Advisor at the
Federal Reserve Bank of Boston. I come to you today, however,
as a researcher and as a concerned citizen and not as a
representative of the Boston Fed, the other reserve banks, or
of the Board of Governors. Over the last two years we have
searched for policies to help troubled borrowers avoid
foreclosure. In New England, we at the Boston Fed have worked
with banks to setup a lending facility to help subprime
borrowers refinance into prime mortgages. We brought borrowers
and servicers together in large scale foreclosure prevention
events that have served as a national model. In the research
department we have gathered and analyzed detailed loan level
data to help us evaluate policies to ameliorate the effects of
this crisis on our communities and on the country.
In my remarks today, I would like to focus on three aspects
of the foreclosure crisis relevant to foreclosure prevention
plans. The first is that an effective plan must address the
problems of unemployed borrowers. Long term loan modifications
that yield affordable payments for borrowers, but also provide
attractive payment streams to lenders will help some, but they
cannot help unemployed borrowers. 31 percent of an unemployed
person's income is often 31 percent of nothing and a payment of
zero will never be attractive to a lender. This is important
because our research shows that, contrary to poplar belief,
unemployment and other life events like illness and divorce,
much more than problematic mortgages, have been at the heart of
this crisis all along, even before the collapse of the labor
market in the fall of 2008. This may seem counter-intuitive.
Life events could not explain the surge in defaults in 2007
because there was no underlying surge in unemployment or
illness that year. But that view reflects a misunderstanding of
the interaction of house price depreciation and life events in
causing default. When prices are rising and borrowers have
positive equity, detrimental life events lead to profitable
sales. But when prices are falling and borrowers cannot pay off
their mortgages with the proceeds of a sale those life events
lead to foreclosure. Thus, we did not need to see a surge in
life events to get a surge in foreclosures, but rather a fall
in house prices, which is exactly and unfortunately what we
saw.
The second policy-related finding from our research is that
it is unlikely that a modest financial nudge to servicers will
lead to millions of modification that will help millions of
worthy borrowers. In a recent paper we show that in the period
of 2005 to 2008 lenders gave payment reducing modifications to
only 3 percent of seriously delinquent borrowers. In addition,
we show that this did not result from contractual issues
related to securitization. Lenders were just as reluctant to
modify loans when they owned them as when they serviced them
for a securitization trust. We argue that the main reason we
see so few modifications is that it simply isn't profitable for
lenders. Modifications benefit lenders because it helps to
avoid the high cost associated with foreclosure, but re-default
risk, the possibility the borrower who receives the
modification will default again, and self-cure risk, the
possibility that the borrower would have repaid the loan
without any assistance from the lender can wipe out these
benefits. The role of self-cure here is key. About a third of
the borrowers in our large sample are current on their
mortgages or prepay a year after they become 60 day delinquent.
An investor would view assistance given to such borrowers as
wasted money.
The third result from our research is that policy makers
need to exercise care in designing foreclosure prevention
policies to provide the right incentive to borrowers and
servicers. A program that offers monetary incentives to do as
many modifications as possible and to minimize the probability
that modified loans re-default, may not in fact prevent many
foreclosures. To see why, one must realize that the easiest way
to ensure that a borrower doesn't re-default is to choose a
borrower who is unlikely to default in the first place. Thus, a
servicer could make minor modifications to millions of loans to
perfectly creditworthy borrowers, collect large sums from the
government and then collect even more as a borrower continues
to repay the loan. Taking these research results into account,
we believe the most effective use of government money for
foreclosure prevention would involve direct assistance to
borrowers rather than to servicers. Two recent proposals, one
offered by a group of Federal Reserve Economists--including
me--and the other by researchers at the University of Wisconsin
target the unemployed to help them cover their housing expenses
until they get their feet back on the ground. Either plan would
prevent large numbers of foreclosures and would be a good
starting point for an effective foreclosure relief plan. We
hope these findings add perhaps unexpected insights to your
work as policy makers and thank you again for the opportunity
to appear before you today and of course I'm happy to answer
any questions.
[The prepared statement of Dr. Willen follows:]
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Mr. Neiman. Thank you. Mr. Jones.
STATEMENT OF ALLEN JONES, SENIOR VICE PRESIDENT FOR DEFAULT
MANAGEMENT, BANK OF AMERICA HOME LOANS
Mr. Jones. Superintendent Neiman, Mr. Silvers, Commissioner
Atkins, my name is Allen Jones, Bank of America's Default
Management Executive. I appreciate the opportunity to appear
before you today and provide you an update on Bank of America's
efforts to keep our borrowers in their homes. As the country's
largest mortgage servicer, we are a major partner in the
Administration's Making Home Affordable Program and we
understand the responsibilities that are associated with that
leadership role. We are committed to helping the Administration
achieve its goal of 500,000 trial modifications by November
1st. Bank of America is working to transition 125,000 at risk
loans into trial modifications as part of its goal. As a
demonstration of our growing momentum, in August we doubled the
number of trial modifications we started. And based on the most
recent reporting I can tell you that we now have 81,000
borrowers in trial modification. Throughout this historic
downturn Bank of America has extended credit to drive economic
growth and worked to develop financial solutions for our
customers. For example, we were one of the first lenders to
leverage the Administration's MHA refinance program and to date
have completed refinancing under the program for more than
74,000 borrowers. Earlier this year, Bank of America began
reporting on how it continues to lend and invest in the
communities we serve. In our second quarter report we stated
that the first half of this year, we've extended more than $394
billion in total credit, more than $196 billion in first
mortgages $40 billion in loan moderate income mortgages,
provided more than $8 billion in small businesses and $149
billion in commercial non-real estate loans. We will continue
to provide transparency into our lending and investing efforts
and we anticipate our next report on third quarter activity
will show continued leadership.
We understand the decisions we make have broad implications
even beyond our customer base. Recently Bank of America
announced we have created a new position, Consumer Policy
Executive, a role which will work directly with our core
consumer lines of business to ensure that view points from key
external stake holders, including community groups and consumer
advocates are taken into account as we address policy issues
critical to our customers. We're leveraging lessons learned
from this economic crisis as well as input from customers to
improve and strengthen our products to better meet consumer
needs. At the center of that work is our commitment to
simplicity and clarity, developing straight forward products
that are easy to use and have clear terms. As described in my
written testimony, my teammates on the credit card and deposit
teams have also recently announced exciting new innovations.
The focus of today's hearing is on what we are doing in the
market to keep Americans in their homes. Before MHA we were one
of the first lenders to implement a national home retention
program. Through that program and other efforts Bank of America
completed loan modifications for approximately 190,000
customers from January through mid-September of this year.
That's in addition to more than 230,000 for all of 2008. We are
now working hard to help ensure MHA's success and have
established a sizeable infrastructure to handle customer demand
and program details. Significant resources have been devoted to
this effort, including expanding our default management
staffing to more than 11,000, a 55 percent increase since the
beginning of the year. Our recent results reflect our
conversion to MHA as the centerpiece of our home retention
efforts. As a result, we have significantly increased our trial
modifications from approximately 28,000 in July to more than
81,000 through mid-September. In that same period, we have also
increased the number of offers extended under MHA to more than
141,000. Importantly, as we have ramped up, we've placed on
hold any foreclosure sale. With that said, we continue to look
critically at our loan modification process. Three areas of
particular focus right now are how we can make the process more
customer friendly and responsive, how we can more efficiently
handle customer documentation, and how we can keep customers
better informed throughout the process.
In addition, there are other challenges we continue to
confront in our efforts to help as many borrowers as possible
realize the benefits of MHA. In an effort to improve our
outreach and close these gaps, we've ramped up activity through
traditional avenues, such as mail, telephone and we've
escalated our participation in community and outreach events.
Since January we've participated in more than 167 community
outreach events and we'll be here in two weeks in Philadelphia.
We also have partnered with three national nonprofits. I've
heard earlier in the panel the importance of a trusted advisor.
So, we partnered with three national nonprofits in the creation
of the alliance for stabilizing communities. There are limits
to what the current programs can achieve. Unemployment and lack
of interest in maintaining a property, those are issues that we
have to consider. And as I wrap up my written oral statement,
I'd like to focus on the fact that we really understand the
urgency here. The strong focus from the Administration has
added substantially to our collective efforts to assist
homeowners. Yet, we understand we have a long way to go in very
challenging circumstances. We look forward to working with the
Administration and the Congress and I appreciate the chance to
be here. Thank you.
[The prepared statement of Mr. Jones follows:]
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Mr. Neiman. Mr. Litton.
STATEMENT OF LARRY LITTON, PRESIDENT AND CEO, LITTON LOAN
SERVICING
Mr. Litton. First of all, I would just like to thank you
for the opportunity to be here and if many of you can't tell,
I'm from Texas. I'm the funny sounding guy up here. So, I am
very excited to have this opportunity to kind of share some
insights with you. I am responsible for running a mortgage
portfolio for about 365,000 loans and about $58 billion worth
of mortgage products. We're in all 50 states. It's
predominately subprime as well as ALT-A products. At Litton
we've been a leader in providing workout solutions to
homeowners for more than 20 years. We have been and we continue
to be a proponent of thoughtful as well as practical loan
modifications that provide affordable opportunities to
struggling homeowners and that is very consistent with our
obligations to the owners of those loans. We are very proud
that many of our early strategies served as a basis for many of
the loss mitigation methods that the industry deploys up to
this day.
Over the past twelve months or in the twelve months prior
to the announcement of the HAMP Program in February, we had
modified more than 44,000 loans over that twelve month period
of time. That represented about 30 percent of our service to
first lien mortgage portfolio that were 60 day or more past
due. On average, these modifications lowered the homeowner's
monthly principle and interest payment by about 20 percent
based off of how those loan modifications had been structured.
Since March 2009, when the initial HAMP guidelines were
published up through August 2009 when Litton had signed up for
HAMP, we had extended trial modifications to approximately
40,000 additional homeowners. These trial modifications were
offered in accordance with the broad principles of the HAMP
guidelines. Since signing onto the program in early August we
have offered another 10,000 HAMP loan modifications. So, when
you add all that up you get 44,000 loan modifications that we
had done in the twelve months leading up to February, 40,000
trial modifications over that timeframe from February up until
we signed on the HAMP and then 10,000 additional loans that we
modified under HAMP, makes up a total of about 25 percent of
our total portfolio that we service has been modified over the
past 18 months.
So having said that, I'm here today to kind of offer a
couple of suggestions as it relates to the HAMP guidelines.
HAMP has very successfully created substantial momentum in the
mortgage servicing industry by providing more loan modification
opportunities to struggling homeowners. But as with any
government program, there are some lessons that I think that
we've learned and there are four suggestions I'd like to make
here today.
The first suggestion has to do with debt-to-income ratio.
So, the 31 percent debt-to-income standard is a very reasonable
basis to calculate a modified mortgage payment. However, I'm
going to give you an example. There are homeowners who have
substantial arrearage that has built up and that arrearage was
built up because a borrower may have had a prior unemployment
situation or other life event that may have created an instance
where the borrower got past due. Today they may have a front
end debt-to-income ratio that's less than 31 percent and then
after capitalizing arrearage or forbearing the arrearage, you
may create a situation where the DTI payment may be greater
than 31 percent, but those borrowers would be excluded from
HAMP. So, expanding HAMP to include situations where borrowers
have less than 31 percent debt-to-income ratios in those
instances where arrearage have been created, might be a
worthwhile way for policy makers to consider expanding the
program to be more effective. From an income documentation
prospective, it's completely understandable for a program that
relies on taxpayer funds to require lots of income
documentation. However, I would say that there are delays that
are created by requiring some of the documentation that HAMP
requires. The earlier panel made reference that in many
instances there is not a lot of documentation. I would agree
with that. However, I would state that it is a problem in many
instances getting that information from some of these
consumers. So, I think a way to streamline that might make the
program more effective, as well.
As it relates to the NPV model that the GSEs rolled out,
the NPV model was based on state averages of home price
depreciation and is not often granular enough to take into
account home price appreciation or declines within specific
communities and neighborhoods. This will cause some loans to
fail or some loans to pass the NPV test when they potentially
should not. Our experience has found that more loans fail than
what should actually fail in this situation because it's not
granular enough. So, being a little bit more specific as it
relates to the NPV models might also be something for
policymakers to consider, as well.
The last point I'll make has to do with option ARMS. Your
prior panelists made reference to a point--I think they are
exactly on point--that there's a coming wave as it relates to
option ARMS loans and many of those loans will not fit within
this program. So, policymakers considering ways to expand the
program to make it more focused on option ARMS product might be
something very worthwhile, as well. Thank you very much, I'm
happy to answer any questions that you might have.
[The prepared statement of Mr. Litton follows:]
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Mr. Neiman. Mr. Ohayon.
STATEMENT OF JOE OHAYON, VICE PRESIDENT FOR COMMUNITY AND
CLIENT RELATIONS, WELLS FARGO HOME MORTGAGE
Mr. Ohayon. Thank you. Members of the Congressional
Oversight Panel, I'm Joe Ohayon, Senior Vice President of
Community and Client Relations of Wells Fargo Home Mortgage
Servicing. Thank you for the opportunity to speak before the
Oversight Panel today. We take seriously the responsibility
that comes with Treasury's investment in Wells Fargo through
the Capital Purchase Program and we are committed to do
everything we can to assist struggling homeowners as part of
that responsibility. Wells Fargo may be a big corporation, but
we operate within the conscience of a company determined to do
what is right for our customers, our investors and all American
taxpayers.
Of course, this year much has changed and evolved in our
economy and in our efforts to assist struggling borrowers.
First, we worked hard to implement the very detailed and
evolving Home Affordable Modification Programs, which include
different guidelines and requirements for Fannie, Freddie, non-
GSE, and most recently FHA borrowers.
To handle the greater than 200 percent increase in
borrowers requesting assistance--including the 35 to 40 percent
who are current on their mortgages--we have hired and trained
an additional 4,600 U.S.-based home retention staff for a total
of more than 12,000. As of September 3rd, we have qualified
more than 304,000 customers for trial and completed
modifications this year alone. As it pertains specifically to
HAMP, we have offered 78,000 customers a trial modification and
we have received at least the first payment for about 44,000 of
those trial modifications.
We have further enhanced our support systems, our training
and our retraining to aide our service representatives in
appropriately communicating modification programs and
guidelines as they continue to change and expand to help more
borrowers.
In addition, we have improved the ways to obtain from
borrowers the extensive documentation the government requires
for its programs and we continue to work to ensure all
documents are processed in a timely manner. And most
importantly, in this dynamic environment we continue to conduct
final review to ensure every option is exhausted before a
property moves to foreclosure sale because when a foreclosure
occurs everyone loses.
Despite widespread decreases in home values, more than 92
percent of our customers in our entire servicing portfolio
remain current on their mortgage payments. This is the direct
result of our customers' efforts and our commitment to
responsibly servicing all of the loans in our portfolio,
including those formerly owned by Wachovia and loans we
service, but did not originate.
In addition, our delinquency and foreclosure rates continue
to be significantly lower than the industry average and the
lowest of the nation's largest mortgage lenders. And for all of
2008 and 2009 year-to-date, less than 2 percent of the owner-
occupied properties in our servicing portfolio have actually
proceeded to foreclosure sales. These results would not have
been achievable without the continued collaborative public and
private sector efforts to inform customers of their options and
the introduction of the new Home Affordable Modification
Programs.
While we're proud to be part of the HAMP development, it's
important to acknowledge that HAMP will not help all borrowers
in need of payment relief. For the customers who are ineligible
for HAMP and where we can reach affordability, we offer
customized solutions.
You've also asked for our feedback on Philadelphia's
Residential Mortgage Foreclosure Diversion Pilot Program and
I'm happy to provide you with a few comments based on our
experience. In general, we found that intervention programs
like Philadelphia's can be helpful when they allow a servicer
to engage in the discussion of alternatives to foreclosure with
borrowers that have not yet had such discussions with us.
Anytime we have the opportunity to work with a borrower that we
have been unable to reach or to have a deeper discussion with a
borrower, we open up the possibility that we can find a way to
avoid a foreclosure that otherwise would have occurred.
From our perspective, Philadelphia's Diversion Program is
one of the most streamlined and cost effective programs of this
kind and provides intervention in a way that can be helpful to
the borrower without being overly burdensome on the servicer.
Conferences are scheduled in a relatively short time, servicers
can participate by telephone, key steps in the foreclosure
process can proceed in parallel with the conciliation process
and the standards for evaluating whether or not the foreclosure
can be avoided are relatively clear. The city also has done a
good job of adapting its program and making adjustments as
lessons are learned.
In terms of ways to improve the program, we find that some
homeowners for whom a conference is scheduled fail to attend
the conference and a limited number of borrowers come out of a
conciliation conference with the potential for a workout
solution. If the city could provide some means of limiting the
conference to only those borrowers who have not been fully
evaluated for a possible alternative to foreclosure and those
who are actively engaged in the process, the resources required
on behalf of the city and servicers could be significantly
reduced and the customers who can truly benefit could still be
served. As servicers, we sit between the customer and investors
and we are responsible for doing modifications the right way.
We also have the responsibility to execute these programs well
for all American taxpayers by ensuring that customers given
modifications are truly facing hardships and that they can
afford and sustain their home payments after a modification is
completed.
Thank you and I look forward to your questions.
[The prepared statement of Mr. Ohayon follows:]
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Mr. Neiman. I started off my questioning of the Treasury
and GSEs by pointing to the success metrics that the Treasury
has been using to evaluate the success of the program and also
to establish performance among the various servicers. As you
all know, there is great disparity between performance, with
some down at zero percent with others up in the high double
digits. Recognizing that some of these disparities maybe due to
the timing when some servicers entered the program or based on
the type of trial modification. Is it based on verbal
information or have they waited for full documentation? I'd
like your views on what is the best way to analyze this
information and should there be changes in how we implement or
look at trial modifications? I'm open up to whomever. Larry,
you seem to be nodding.
Mr. Litton. As it relates to whether we start with the
verbal or a written, I 100 percent concur with the statement
that was made earlier that the most important thing is to get
moving whenever we have a customer on the telephone. So, we're
of the view that proceeding with verbal information is critical
so that we can stop the foreclosure and so that we can begin
the process of the loan modification. So, we're very supportive
of that. However, that does bring up challenges later in terms
of making sure that you follow-up with getting the income
documentation that we have to have. But I do think that that's
one area that could be driving substantial disparity, the fact
that some may be waiting for the written information to come in
before they start the trial.
Mr. Ohayon. I would agree with Larry. We've done it both
ways at Wells Fargo. A program has evolved over time now since
February and certainly has gotten better and more refined as
the months have gone on. Things like the roll out of FHA in
late July--which went live in the middle of August--certainly
help a servicer like Wells Fargo because we have a strong
concentration of FHA loans. But we started with fully
underwriting, requiring proof of income and documentation
upfront. It has since moved to a verbal approach. It provides
immediate relief to the customer because we can grant a trial
payment and reduce payments immediately. But, as Larry points
out, certainly it provides the opportunity that once we get
supporting documentation it may exceed that level or beyond the
level of income that we actually got from the customer.
Mr. Neiman. Thank you. You know, I'm also interested to the
extent that the program has restricted your ability to offer
loan modifications outside of the program. And, I would
particularly like to start off with Mr. Litton because he, to
my understanding, was one of the few servicers that had been
utilizing principle reduction as a favored loan modification
and the fact that HAMP does not prohibit it, but it doesn't
require it--permits it, but doesn't require it. Do you have a
view on whether this is making it more difficult for principle
reduction and is that something that the program should be
reconsidering?
Mr. Litton. You know, I testified back in November in front
of Congress on this issue. We adopted a policy in November
2008, ran that policy up through March 2009 that did support a
principal reduction strategy. That was based off the fact that
our analysis at that time concluded that using principal
reductions is a way to reduce payments, create lower loan-to-
value ratios, provide more exit opportunities for consumers
later on down the road and might provide more motivation.
Obviously, under the HAMP program, constructed as the way it
is, it is an option. However, the industry standard now--most
servicers are not using the principal reduction component of
that, they're using the principal forbearance part of that. The
ASF as well as several other entities have, I think been
comfortable with that and you'll see most servicers executing
it within those broad parameters.
Mr. Neiman. Any of the bank servicers care to?
Mr. Jones. Sure, I'd be happy to address that. Bank of
America's perspective is that in certain circumstances
principal reduction makes sense. I mentioned earlier that we've
done 190,000 modifications outside of MHA this year. Under MHA
the centerpiece of our activity today--81,000 loans in trial--
what we have found, it's not really the exit strategy as much
as keeping our borrowers in their homes. And we've found that
rate reductions, we've found that forbearance, we've found that
extension of term, those are the ways that we can keep
borrowers in their homes and that's what is important in
communities.
Mr. Neiman. So, even though the affordability may be the
same, I think it's your rationale that the motivation to
sustain that and when we look at re-default rates down the road
that may have a difference?
Mr. Litton. Absolutely. That's what led us down that road.
When I said exit, what I meant there is that the borrower then
has an opportunity if he needs to sell the house in two years
or three years or if he gets transferred, you're not carrying a
balance that is unsustainable at that point in time. That's
what led to that conclusion back at that point in time.
Mr. Neiman. Appreciate that. Mr. Atkins.
Mr. Atkins. I wanted to refocus on the re-default aspect
here, especially with unemployment statistics as they are. OCC
and OTS had a study that they also released earlier this year,
which pretty much--which we were talking about, Dr. Willen. So,
I was wondering is this principal reduction really the only
type of ultimate tool or what are the other types of things
that make sense in this context?
Dr. Willen. On the issue of principle reduction it's
exactly right. What I said before is the problem with negative
equity is basically the borrowers can't respond to life events
and I think--I don't know if it's quite the right way to put
it--it's sort of like they don't have an immune system. So,
there are shocks that happen to people with positive equity
that never show up in the data as foreclosures. They just show
up as sales. So, for example in Massachusetts in 2001 we had a
big increase in unemployment. We had a recession. The number of
delinquent borrowers went up, doubled. But, then you actually
saw a reduction in the number of foreclosures. It was a record
low for foreclosures. So, when people have positive equity
there are lots of different ways they can refinance, they can
sell, they can get out of the transaction. So, in the long run
I think one of the things we've been emphasizing is that it's
not just the re-defaults, it's the fact that there are a lot of
borrowers out there who are okay right now, who are fine right
now, and who may be fine a year from now. But, until they build
up some equity in their house, those are at-risk homeowners.
So, in that sense dealing with the principle reduction has its
virtues and the problem is most homeowners with negative equity
continue making their mortgage payments. So, you run this risk
when you start reducing principal that you're inviting all
kinds of people who can make their mortgage payments, and who
do make their mortgage payments, to look for relief.
Mr. Atkins. Right and I guess basically, that's for the
rest of you. I think that once we go down that road, rather it
be cram down or whatever, we're basically changing the whole
risk or ratio of this entire industry and I was wondering what
you might--how you would expect that to affect interest rates
for everybody in the whole way that industrialists look at this
industry?
Mr. Jones. I certainly will agree with much of what Dr.
Willen said and would cite as an example, negative equity
around payment option ARMS. That certainly is an area product
based whereon principal reduction makes a lot of sense. A
program like that existed a couple of years ago, but we
eliminated that program. So, payment option ARMS prospectively,
we will not offer. As it relates to improvements to MHA around
these same types of issues--keeping borrowers in their homes--
we've made suggestions and have had a good dialogue around what
can we do for those who are temporarily unemployed and how can
we help borrowers--our borrowers--stay in their homes as they
go through a gap in unemployment. But, we predict that they
will gain reemployment. So, there are opportunities there for
us to keep working with our borrowers and keep them in homes.
Mr. Ohayon. Regarding the principal curtailments we do at
Wells Fargo, depending on a product type that pay option ARMS,
certainly it may make sense to actually utilize curtailment,
just to get the dynamics of the product itself. But, when
you're looking at a background of what we're trying to
accomplish and one is addressing a hardship a customer is
facing and trying to create affordability. To get to
affordability, you can get there quicker and deeper through
rate reduction, term extension, and really the top of the
waterfall for HAMP and that's really the approach we've been
taking given the government's plan.
Mr. Atkins. Quickly, part of the bubble produced a lot of
questions regarding documentation and now we see that come up
in some courts as ownership issues, who owns the mortgage. Have
you all experienced that as a problem?
Mr. Litton. No. From a practical prospective, day-to-day,
I'm not saying that there's never documentation issues, but in
terms of being able to demonstrate who the owner of the
mortgage is, that has not been an issue.
Mr. Ohayon. Yes, I would agree.
Mr. Silvers. I would agree, as well. Like my fellow
panelists, I want to express my appreciation to all of you for
coming and being with us today. A person might wonder whether
this would be a pleasant experience and I want to commend you
for being here. Dr. Willen, his testimony stated that we really
needed to do something directly to deal with the consequences
of unemployment and I think it's been the theme today that
that's not in the design of the original MHA Program. Do the
rest of you agree that that would be a good idea for the
Administration to address that problem directly in the MHA?
Mr. Ohayon. We do at Wells Fargo. We've had a number of
conversations with the Administration around a short-term
solution to specifically address unemployment and even under
employment when you can't create affordability based on that
underemployment status, so we do.
Mr. Silvers. Is Pennsylvania a good model for how to do
this? The long-standing Pennsylvania program has been in effect
for about 20 years.
Mr. Litton. With regards to the ACT 6 and the ACT 91?
Mr. Silvers. I forgot the acronym. Is that program a good
model for the Treasury to consider in your view?
Dr. Jones. I think we will continue to look for innovations
and that is one that ought to be considered. I go back to the
earlier comments, Mr. Silvers, that we need to continue to
refine the program and work very strongly with the
Administration to keep our borrowers in their homes.
Mr. Silvers. Dr. Willen, you said a moment ago that in
relation to principal reductions that there was a problem of--
everyone would like a principal reduction, not everyone needs
one. Why is that not kind of a slam dunk argument given the
fact that principal reductions--and I think everyone has said
that there are circumstances in which principal reductions are
the only solution? Principal reductions in commerce are
typical. Meaning, in other lending relations principal
reductions happen all the time when people get in trouble in
various ways. Dr. Willen, is it the point that there needs to
be some sort of activity here, not just a slam dunk argument
for putting this in the bankruptcy courts?
Dr. Willen. You know, the bankruptcy claims I don't know.
That may well be. Let me say, I'm no expert on this, but I do
question how appealing it will be for the borrower.
Mr. Silvers. It's not an appealing place, is it?
Dr. Willen. No, it doesn't seem at this point that telling
a borrower, I got good news for you, you can file for
bankruptcy, that that's the kind of solution that we're looking
for right now.
Mr. Silvers. But isn't that a good thing in a way if we
want people who really want to stay in their homes to pay a
price?
Dr. Willen. Let me say, I think another alternative to this
is an enhanced short sale program because in a sense a short
sale is a principal reduction. So, I would guess in this sense
I would direct questions to Larry in a way about what's
happening.
Mr. Silvers. But that doesn't keep anybody in their homes,
a short sale program.
Dr. Willen. It doesn't keep anyone in their homes, but it's
an exit strategy for borrowers. And I think in some cases what
borrowers are looking for is closure. And I think one thing to
keep in mind, one of the problems borrowers face is that
they're unemployed and they have a job opportunity and they
need to move.
Mr. Silvers. That's a different issue.
Mr. Litton. But these are the kinds of problems. When you
talk to people these are the kinds of problems they're facing.
Mr. Silvers. I think that this seems to me to be the
argument for having this option available. It's that you have--
as I think your testimony quite compellingly states--certain
types of life problems, such as needing to move for a job.
Being underwater is very problematic and this helps. If you
don't want to move, short sales aren't a big help and short
sales put a lot of inventory on the market and that may not be
what we want to do right now. But in any case, I just wanted to
get that clear on the bankruptcy court issue. Mr. Litton, we
heard from Dr. Willen that his financial model is driven, I
think, by two numbers, re-default rates and self-cure rates
suggest that it may not be profitable for people in your
position to restructure loans. You've just finished telling us
that even before MHA you had restructured something, I think
something like 80,000 loans in total when you add all the
numbers up?
Mr. Litton. Yes, sir.
Mr. Silvers. You seem like a bottom line focused type of
person. Explain to me why Dr. Willen is wrong?
Mr. Litton. Well, I wouldn't say it that way, that he's
wrong. The way I would phrase it is this, at Litton Loan
Servicing, and taking into account our prior ownership, we were
aligned with the holder of the credit risk. So, as loans
defaulted and as losses mounted it was in our best interest for
those guys, in order to modify the loans and keep in their
homes because the losses would be lower, that's number one.
The number two, what I would argue is that it's clearly
stated in the pooling and servicing agreements that we are all
kind of responsible for servicing loans in that that we have a
contractual responsibility to represent investors and make
losses as low as we can make them. And, loan modification, in
our judgment, has been one of the ways to fulfill those
contractual responsibilities. And then there are economic
incentives way above and beyond what the HAMP program calls
for. So, for example, advances. Anytime a borrower doesn't pay
me, our company has to write the check and fund those advances
to the investors. And in this kind of climate those advances
add up to a lot of money at the end of the day. So, all of
those things combined is what I would argue is what led us down
this road.
Mr. Neiman. During the prior panel a statement was made
that the incentives under the HAMP program were not enough to
overcome the culture, systems, and other incentives that are
provided to servicers. Do you agree with that statement and
would you like to comment on it?
Mr. Ohayon. As Larry mentioned we've been doing loan
modifications for a long time, even pre-HAMP, because of
judiciary responsibilities to our investors. We also do it
because we think it's the right thing to do for our customers.
So, regardless of the incentives structure, we think it's the
right thing to do. Certainly, I want to get back to Larry's
point around the cost of foreclosure. The advances made are
significant. The reimbursement from investors doesn't happen
until a foreclosure action is taken or the loan reinstates
through modifications. So, actually we were recovering monies
sooner by doing a modification. So, you would think the
incentive structure is probably a reverse of that.
Mr. Ohayon. We don't have incentive to foreclose.
Mr. Neiman. Mr. Jones.
Mr. Jones. I agree with much of the remarks.
Mr. Neiman. Okay. Mr. Litton, do you?
Mr. Litton. Yes, sir.
Mr. Neiman. Do you think that was overstated?
Mr. Litton. Well, what I would say is the following. Most
servicers, well some servicers--and the reason that that
argument comes up is that some servicers have historically
owned REO outsourcing firms or foreclosure trustee firms,
things like that. And most of us don't. so, it is not a profit
center I can tell you in any way, shape or form in our company
and for most of the guys in the industry today.
Mr. Neiman. I'd also like to understand--and I've asked the
other panelists--about recommendations for changes in the
program design or in the implementation that would improve the
process under which you comply with this program. Are there any
that you would like to highlight for our panel in our work?
Mr. Jones. What I'd like to offer is number one, a thought
around the value of uniformity for all of us here. MHA offers
that uniformity. As far as, improvements we certainly have----
Mr. Neiman. Meaning web portal documentation?
Mr. Jones. We're a strong supporter of that and have been
engaged in dialogues around that. That is very helpful.
Documentation is one thing, but again there is a segment of
borrowers that MHA is not able to help today and so our efforts
in discussing the unemployment issue is something that we'll
see definite value in and update. But, I'd like to look at MHA
as one part of Bank of America's overall approach to keeping
borrowers in their homes. We support the Administration going
forward and want to continue the dialogue that has been very,
very positive. We'll see things coming around second liens,
around short sales, around deeds and--as much as we can make
those uniform, the better for the industry, the better for the
borrower.
Mr. Neiman. Thank you. Mr. Litton.
Mr. Litton. Yes, sir. I had one other thing that wasn't in
my written testimony, which is I think more clarity around
imminent default would be a great, great thing. We have lots of
customers that are current that call us that need a loan
modification and you're right it is absolutely silly to wait
for the loan to go delinquent. I think HAMP does allow you to
modify, but you have to have an imminent default standard.
Having a little bit more clarity around that, I think would
make servicers more comfortable doing more loan modifications.
Mr. Neiman. Good practical suggestion. With my last sixty
seconds I also asked the other panelists to grade the
servicers' performance recognizing where we may be in this
school year using a grade of A to F. Since I am used to self-
grading and I often feel that we are probably toughest on
ourselves in grading performance, I'd be interested if you
would grade--you don't have to necessarily grade your own firm,
grade each other or grade the man next to you. No, grade all
the servicers as to an A to F, I'd be curious.
Mr. Jones. Certainly. Thank you for the question. I think
this has been an evolutionary process to get to where we are
today. In the beginning of the year to summer, I think we were
really challenged. I think all of the servicers would say, ``We
could do better. We could do more.'' Today where we are, I
would give Bank of America a B.
Mr. Neiman. Mr. Litton.
Mr. Litton. I would comment on more from an industry
prospective. I deal with a lot of people whether it be up from
the regulatory side, the advocacy side, or customers, etc., I
would say our industry given an honest self-grade right now, is
at a C versus where we need to be.
Mr. Neiman. Mr. Ohayon.
Mr. Ohayon. I'll look at it from an industry prospective as
well and including the Administration and everyone else putting
this together. It's come a long way in six months.
Mr. Neiman. And the grade is?
Mr. Ohayon. I think the ability to get where we are is
pretty good. So, I would say a B.
Mr. Neiman. Dr. Willen, you want to weigh in?
Dr. Willen. Just to weigh in, I think that if we're giving
them a grade we should take into account that I think what we
were trying to say, just to clarify a little is, I think this
is an extremely hard problem. So, this is like a grade in a CAL
Tech astrophysics lab. So, I think they're doing well given
what an exceedingly difficult challenge they have.
Mr. Neiman. Thank you very much.
Mr. Atkins. Some of the stories we've heard today and
elsewhere sounded like a lot of it has to do with training and
internal processes and it sounds like you all have increased
the number of people. It sounded like they had 11,0000 people
and Wells Fargo 12,000 and so I was just wondering what your
efforts are to recruit, train and--internal quality control is
my question.
Mr. Ohayon. We had to adjust quickly given the volume that
came in pre-HAMP and post-HAMP. So, as I mentioned earlier, we
increased to about 46,000 team members in home retention just
this year. The training program is really comprehensive. Its
traditional training types, which is more classroom based, but
also a very practical experience in working with our most
seasoned representatives. We'll actually rotate our
representatives so that they're working with the skills that
they have. So, less complex tasks are given to new staff. And
then as they become more seasoned we kind of rotate them into a
more seasoned position. So, I think between traditional and
practical experience is what we've been doing with our staff.
We have an internal QC operation, which listens to phone calls.
So, everyone of our calls are actually voice recorded and we
sample that to make sure that what the customer is hearing is
consistent with what we're actually putting forth. It's been a
difficult environment, I can tell you that. Just look at the
HAMP program over the past six months. Things have evolved
significantly and it's been really important for us to make
sure that are baseline employees understand what those changes
are. So, that's sort of how we've been doing it.
Mr. Jones. Mr. Atkins, I agree with a lot of what has been
said around training. I would add that from Bank of America's
prospective the way we look at it really is top down. So, we
have our executives all focused on home retention. They are all
focused on how we train. The mention of call listening, we do
that as a practice. We listen to calls, we connect them and
then we give them to the line and we grade. Here it is, here is
where we need to make improvements. It has been a process of
bringing that 11,000 folks onboard. It's not easy as in
astrophysics as Dr. Willen said, but it is something that we
have gotten better at each month. And with the commitment of
our leadership across the board, I think the focus and the
urgency around making these programs successful ultimately will
win.
Mr. Atkins. And then as far as incentives for
representatives for themselves to show personal success, what
sort of motivation is there internally as far as benchmarks?
How are they themselves graded?
Mr. Jones. We have a standard package for our staff that
are working and we do not compensate on an incentive basis by x
number of calls, this number of outcomes. So, we have a base
salary that we offer to our staff and we have across the board
for all employees at Bank of America a paid performance
rewarded depending on how the company does.
Mr. Ohayon. I would agree. There is team member kind of
report cards. There are group goals that we meet and there's
investors score cards that we have that are directly tied to
their status. So, I think a combination of those report cards
is telling how really great we're doing.
Mr. Litton. And then, what I would add is, Mr. Atkins, is
that since HAMP has come out we've really enhanced our quality
control focus as it relates to that. I listen to phone calls. I
talk to customers. I deal with the advocacy groups. I do
understand that there's frustration around customers as it
relates to making sure that we have a consistent theme and
message coming out from our employee base. That is
fundamentally critical so we want to make sure incentives are
aligned to accomplish that objective.
Mr. Atkins. Mr. Silvers this will be our last around of
questions.
Mr. Silvers. Just, I want to get a couple of things about
data straight. Mr. Jones and Mr. Ohayon, you both gave totals
for temporary modifications offered, temporary modifications
entered into. Are these totals at the holding company level or
are these for your primary banking subsidiary?
Mr. Jones. The trial modification number that I gave you of
81,000 is for Bank of America.
Mr. Silvers. Bank of America the national bank, not for all
subsidiaries of the holding company?
Mr. Jones. This is for all of the operations of Bank of
America, which for all intensive purposes is the legacy
Countrywide company and Bank of America that rolls up to Bank
of America National Association.
Mr. Silvers. I was told that Bank of America, the parent
owns a firm called Home Loan Services. Is that correct?
Mr. Jones. That is correct.
Mr. Silvers. Can you explain to me why it is that Home Loan
Services has zeros on the Treasury Department charts?
Mr. Jones. Sure, I'd be happy to do that.
Mr. Silvers. Let me also say that there have been some
other statements made about Bank of America by prior witnesses.
I would invite you to respond to those, as well if you wish
either now or in writing.
Mr. Jones. Sure. I'd rather go to----
Mr. Silvers. Answer this.
Mr. Jones. Okay. As we have acquired entities, as Bank of
America has had the opportunity to acquire firms, Wilshire Home
Loan Services, the transition and the technology and the
platforms associated with those companies have come into our
system. So, the number that I gave you is 81,000. I saw the
zero for HLS. Certainly understand and would expect that you
would ask that question. We are working with our most at-risk
borrowers and doing everything that we can to get trial
modifications started. So, I think when you look at going from
28,000 to 81,000 today, the trajectory is very good and that
will continue for all of Bank of America.
Mr. Silvers. I would invite you Mr. Jones--I don't want to
spend all of the time we have on these matters--I would invite
you in writing to comment to the panel on prior testimony
relating to Bank of America. Frankly, I don't understand zeros.
I understand differentials, I don't understand zeros. If you
want to expand more in writing on that, I'd appreciate it.
Mr. Jones. Sure.
Mr. Silvers. Mr. Ohayon, a similar question to you. Are
there subs of Wells Fargo parent that I need to know about
behaving differently than the numbers that you just described?
Mr. Ohayon. The numbers I described are part of Wells Fargo
Home Mortgage, which includes loans that we originated directly
or those that we acquired the servicing. It's that umbrella
itself. It doesn't include like corporate trusts or things with
trustees.
Mr. Silvers. It includes Wachovia mortgages that you know;
the Wachovia servicing?
Mr. Ohayon. I don't think so.
Mr. Silvers. Because again, I think we have an issue here
where the Wachovia numbers are really not so good. Again, if
you could just explain why that's so since that would
apparently be a pool of mortgages that really needs help.
Mr. Ohayon. I certainly will. A big part of the Wachovia
portfolio that we service is the pay option ARMS portfolio. As
I mentioned would be for a solution on the pay option ARMS
portfolio for HAMP.
Mr. Silvers. We heard you on that and that was very helpful
testimony to educate us on that subject. I want to come back to
you Mr. Ohayon, one more time. Wells has a large, I believe,
portfolio of second mortgages held in-house. Is that right, not
laid off on the securitized markets?
Mr. Ohayon. We do.
Mr. Silvers. Can you just give me a dollar value of that in
number of loans?
Mr. Ohayon. I believe its $129 billion portfolio size
between junior liens as well as the equity lines that we have
out there. I can't give you a loan count.
Mr. Silvers. That's alright because it gives us some
dimensions. What are the circumstances in that portfolio in
terms of 60-day no payments foreclosures arising out of that,
do you know?
Mr. Ohayon. I don't and I apologize. I don't directly
manage the home equity group.
Mr. Silvers. I would appreciate it if you could respond in
writing giving us that data on that book and also the face
value of that book and also what it's current at.
Mr. Ohayon. Absolutely.
Mr. Silvers. Thank you very much.
Mr. Neiman. I very much like again to thank this panel. As
I said for our earlier panels, this is not a one time. We hope
that you can continue to have this level of dialogue with us. I
know we've been in contact with you previously to this public
hearing and I look forward to continuing this level of
cooperation with your organization. So, thank you again and you
may leave. Thank you very much. Now, we're going to try to take
as many questions or comments--not questions--this is an
opportunity for members of the public who would like to share
any comments with us that we can take away with us. We would
not like to engage in and it wouldn't be appropriate for us to
engage in a dialogue of answering any questions, but it is an
opportunity for anybody to make a statement. We would like you
to try to keep that to a minute.
Mr. Haver. My name is Lance Haver. I will encourage you, as
you do your analysis to think about people like me. I pay my
mortgage, but my house becomes worthless as mortgage companies
who I support through my tax dollars refuse to do the workouts.
And I encourage you to explain to other homeowners why it's so
important that you force these mortgage companies or you come
up with the money necessary to help unemployed people pay their
mortgages. That you help other homeowners understand that every
time a house is foreclosed, their neighbor's house is
foreclosed, the house across the street is foreclosed, the
value of their house goes down. And frankly, living in
Philadelphia with two houses on my block that are vacant, it
would be almost impossible for me to sell my house now at the
price that I think I would've gotten two years ago. If the
mortgage company would've helped those families out and those
houses were occupied, I would be able to sell my house for what
it was worth. Thank you.
Mr. Neiman. Thank you. Any other comments? Well, thank you
all. We very much appreciated being here. I think this was a
very constructive hearing for the panel and for those who are
listening or who will read about this in the future. So, I
thank everybody who participated here. I also want to thank
members of the public who were here for their time and
patience. Again, appreciate the efforts of the staff that
helped put this together as well as the hospitality of the City
of Philadelphia and others who contributed to this event. Thank
you very much. Meeting is adjourned.
[Whereupon, at 1:01 p.m., the hearing was adjourned.]
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