[Senate Hearing 111-902]
[From the U.S. Government Publishing Office]
S. Hrg. 111-902
TARP FORECLOSURE MITIGATION PROGRAMS
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
OCTOBER 27, 2010
----------
Printed for the use of the Congressional Oversight Panel
S. Hrg. 111-902
TARP FORECLOSURE MITIGATION PROGRAMS
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
OCTOBER 27, 2010
__________
Printed for the use of the Congressional Oversight Panel
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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CONGRESSIONAL OVERSIGHT PANEL
Panel Members
The Honorable Ted Kaufman, Chair
Kenneth Troske
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Statement of:
Opening Statement of Hon. Ted Kaufman, Chairman,
Congressional Oversight Panel.............................. 1
Statement of J. Mark McWatters, Member, Congressional
Oversight Panel............................................ 6
Statement of Damon Silvers, Deputy Chair, Congressional
Oversight Panel............................................ 13
Statement of Kenneth R. Troske, Member, Congressional
Oversight Panel............................................ 18
Statement of Richard H. Neiman, Member, Congressional
Oversight Panel............................................ 22
Statement of Phyllis Caldwell, Chief, Home Ownership
Preservation Office, U.S. Department of the Treasury....... 26
Statement of Guy Cecala, CEO and Publisher, Inside Mortgage
Finance Publications, Inc.................................. 60
Statement of Julia Gordon, Senior Policy Counsel, Center for
Responsible Lending........................................ 70
Statement of Katherine Porter, Professor of Law, University
of Iowa College of Law..................................... 108
Statement of Joseph Evers, Deputy Comptroller for Large Bank
Supervision, Office of the Comptroller of the Currency..... 124
Statement of Faith Schwartz, Senior Advisor, HOPE NOW
Alliance................................................... 139
HEARING ON TARP FORECLOSURE MITIGATION PROGRAMS
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WEDNESDAY, OCTOBER 27, 2010.
U.S. Congress,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10 a.m. in Room SD-
138, Dirksen Senate Office Building, Washington, DC, Hon. Ted
Kaufman, Chairman of the Panel, presiding.
Present: Hon. Ted Kaufman [presiding], Mr. Richard H.
Neiman, Mr. Damon Silvers, Mr. J. Mark McWatters, and Dr.
Kenneth R. Troske.
OPENING STATEMENT OF HON. TED KAUFMAN, CHAIRMAN, CONGRESSIONAL
OVERSIGHT PANEL
The Chairman. Good morning. This hearing of the
Congressional Oversight Panel will now come to order. My name
is Ted Kaufman. I'm the Chairman of the Congressional Oversight
Panel for the Troubled Asset Relief Program. We are here today
to evaluate the progress of Treasury's foreclosure prevention
programs and to examine the impact of recently reported
irregularities in the foreclosure process.
I have always believed that sound oversight must start with
an understanding of a program's goals. So let us begin by
recalling the Administration's original goal for foreclosure
prevention. In February 2009, the President announced an aim to
help, and I quote, ``as many as 3 to 4 million homeowners to
modify the terms of their mortgage to avoid foreclosure.''
At that time, our economy was on track to experience more
than 8 million foreclosures, so the goal was always modest
compared to the incredible scale of the problem. Certainly it
was modest compared to the boldness shown in rescuing AIG,
Fannie Mae, Freddie Mac, Bank of America, Citigroup, and the
auto companies. Yet now, two years later, we can see that even
this modest goal will not be met. To date, fewer than half a
million homeowners have received permanent mortgage
modifications through Treasury's programs. As many as half of
these borrowers will ultimately redefault and lose their homes.
Recently, as the goal of preventing 3 to 4 million
foreclosures has appeared increasingly distant, Treasury has
redefined its aim. The goal now is to offer a temporary
mortgage modification to 3 to 4 million homeowners. Let me
repeat that. The goal, Treasury now says, is to offer--offer--a
temporary mortgage modification to 3 to 4 million homeowners.
The distinction may sound subtle. I don't think it is. But
the difference is vast. Borrowers who are offered temporary
modifications may not accept. Those who accept may not complete
the steps required to receive a permanent modification. Those
who receive a permanent modification may redefault and lose
their homes. At the rate that homeowners are falling through
these cracks today, 3 million modification offers may translate
in some cases to as few as 100,000 foreclosures prevented.
For all these reasons, a goal of offering 3 to 4 million
modifications is hardly a goal at all. It divorces the
program's measurement of success from its ultimate aim, as
expressed by the President, to keep homeowners in their homes.
In many ways it's like a major league batter pledging to swing
at every pitch. What matters is not how often you swing. What
matters is how often you get on base.
I hope the Treasury takes today's hearing as an opportunity
to define in a detailed public way more concrete goals for
success in foreclosure prevention. Most fundamentally, here are
my main questions: How many foreclosures must be prevented?
What redefault rate can we expect? How many temporary
modifications will convert to permanent status? Clear answers
are critical not only for our oversight work, but really, much
more importantly, for Treasury's own ability to measure and
improve its results.
I also hope to hear evidence that the foreclosure picture
improved dramatically since the Panel last examined the issue.
Yet all evidence seems to be to the contrary. Of particular
concern are reports that banks and loan servicers may have
rushed their foreclosure process by relying on affidavits, as
they say, robo-signed by employees with no knowledge of the
underlying facts. These reports are already undermining
investor and homeowner confidence in the mortgage market and
they threaten to undermine Americans' fundamental faith in due
process.
If these reports reflect a disregard on the part of banks
for legal requirements of foreclosure, that alone would be
unconscionable. Yet it is conceivable that the banks' problem
is even worse, that the banks have failed to follow the legal
steps necessary to ensure clear title. If investors lose
confidence in the ability of banks to document their ownership
of mortgages, the financial industry could suffer staggering
losses. The possibility is especially alarming coming so soon
after taxpayers spent billions of dollars to bail out these
very same institutions.
I do not want to prejudge what we will hear from today's
witnesses, but I must say this. I am concerned. I am concerned
in part because it is the Panel's mandate to oversee Treasury's
foreclosure programs and the overall stability of the financial
system. But much more critically, I am concerned because across
America our mothers and fathers, sons and daughters, are losing
their homes.
I do not pretend that every foreclosure in this country can
or even should be eliminated. But even so, every foreclosure is
clearly a tragedy. Every time a family is cast out of their
home, their future is cast into doubt, their neighborhood's
home prices plummet, and their town's stability diminishes. The
American dream takes a step backward. Treasury cannot and
should not prevent every foreclosure in this country for sure,
but it can and must do far, far better.
Before we proceed, I would like to hear from my colleagues.
Mr. McWatters.
[The prepared statement of Chairman Kaufman follows:]
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STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. McWatters. Thank you, Senator.
Since this Panel last addressed Treasury's foreclosure
mitigation programs funded under the TARP, questions have
arisen regarding the identity of the true legal owners of
countless mortgage loans that serve as collateral for
residential mortgage-backed securities, or what are referred to
as RMBS, and whether the alleged owners may deliver clear title
upon foreclosure or other transfer of the mortgaged properties.
Although the securitization trust organized with respect to
each RMBS should hold clear legal title to the mortgage loans,
such assertion is not free from doubt. It is possible that some
of these special purpose entities may be divested of their
putative ownership rights in their mortgage loans are required
to incur substantial fees and expenses so as to reflect the
proper chain of title to the promissory notes, mortgage liens,
and security interests in accordance with applicable law.
Investors in RMBS are also beginning to assert that
mortgage loan originators breached representations and
warranties provided in their RMBS securitization documents and
that the securitization trusts and their servicers should
undertake to put individual residential mortgage loans back to
their loan originators. These investors may also initiate
claims against the securitization trusts and their sponsors and
servicers for breach of contract, failure to comply with
applicable law, and fraud.
Individual mortgage loan borrowers or a class of such
borrowers may also initiate wrongful foreclosure and other
actions against the RMBS securitization trusts and their
servicers. Such claims may be compounded as the rights and
obligations of parties to collateralized debt obligations and
synthetic collateralized debt obligations are considered.
Since TARP recipients and other financial institutions
acted as mortgage loan originators, RMBS sponsors and
servicers, credit default protection buyers and protection
sellers under synthetic CDOs, and RMBS and CDO investors, they
could suffer substantial losses and capital impairment from the
exercise of these legal rights and remedies.
Further, since Fannie Mae and Freddie Mac had also acted as
RMBS sponsors, and given Treasury's unlimited support for the
GSEs, Fannie and Freddie may also serve as targets for
aggrieved RMBS investors and mortgage loan borrowers.
Conversely, the GSEs, acting on behalf of the RMBS
securitization trusts that they sponsor, may undertake to put
individual residential mortgage loans back to the TARP
recipients and other financial institutions that originated the
loans or perhaps--perhaps--cancel the guarantees issued for the
benefit of the RMBS holders. The enforcement of these rights
and remedies would no doubt create much uncertainty for TARP
recipients and other financial institutions, as well as for the
residential mortgage lending and RMBS markets.
These matters are particularly significant since the
operating costs of many TARP recipients are rising due to
commercial and consumer loan defaults and foreclosures, while
operating revenues remain relatively tepid due to weak loan
demand and an overall sluggish economy. If--if--another
liquidity or solvency crunch follows from these events, it is
not inconceivable that the rating agencies may downgrade the
credit rating of certain mortgage loan originators, RMBS
securitization trusts, and investors, and mortgage servicers,
which, as noted above, include TARP recipients and other
financial institutions. This action could adversely affect the
broader economy.
I also wish to note that in my view the Administration's
foreclosure mitigation program, including the HAMP and the
HARP, have failed to provide meaningful relief to distressed
homeowners and, disappointingly, the Administration has
inadvertently created a sense of false expectations among
millions of homeowners who reasonably anticipated that they
would have the opportunity to modify or refinance their
troubled mortgage loans under the HAMP and the HARP.
From my perspective, the best foreclosure mitigation tool
is a steady job at a fair wage, and not a hodgepodge of
government subsidized programs that create and perpetuate moral
hazard risks and all but establish the government as the
implicit guarantee of distressed homeowners.
I question why the taxpayers should subsidize mortgage
lenders and RMBS participants when it is most often in the best
interest of such parties to forgive principal--to forgive
principal--and to modify or refinance troubled mortgage loans
without government assistance. Why should the taxpayers provide
incentives when they are not needed or merited?
As such, I strongly recommend that each mortgage loan
holder and RMBS investor and servicer work with each of their
homeowners in a professional, good faith, transparent, and
accountable manner to reach an economically reasonable
resolution prior to proceeding with a foreclosure remedy. In my
view, foreclosure should serve as the exception to the rule
that only follows from the transparent and objective failure of
the parties to modify or refinance a troubled mortgage loan
pursuant to market-based terms.
Thank you, and I look forward to our discussion.
[The prepared statement of Mr. McWatters follows:]
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The Chairman. Thank you.
Mr. Silvers.
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Mr. Silvers. Thank you, Mr. Chairman.
Good morning. Before I begin with my statement, I just want
to say that I want to associate myself with the comments of the
Chair and my colleague Mr. McWatters. I haven't heard the
comments of my other colleagues. Perhaps I'll wish to associate
myself with them once I've heard them.
Today's hearing is the fourth that this Panel has held
addressing the foreclosure crisis. Congress explicitly required
in the Emergency Economic Stabilization Act of 2008 that the
powers it granted the Treasury Department in the Act be used in
part to reduce the incidence of foreclosures. In response, the
Treasury Department in the spring of 2009 created the HAMP
program, and since then the Treasury has created a number of
other programs aimed at reducing foreclosures. I'm pleased to
welcome Ms. Caldwell as the director of those programs on
behalf of the Treasury Department.
As I've said at every hearing on this subject since this
Panel was created, foreclosing on a family's home is not a mere
financial transaction. It marks a profound financial loss for
the family and often devastating emotional defeat for the
adults in that family, psychological trauma and social
dislocation for the homeowners' children, falling property
values and destabilized communities for the homeowners'
neighbors.
Mass foreclosures are a sure sign of a failing economy and
a society that has been unable to provide basic economic
security to its citizens. Mass foreclosures should no more be
encouraged by our public officials than should contagious
diseases or catastrophic floods or organized crime.
These reasons alone would justify aggressive government
action to prevent foreclosures in the wake of the housing
bubble and the epidemic of exploitative lending practices by
our financial institutions. But the social impact of
foreclosures is not by any means the full story of the harm
done to our country by the foreclosure epidemic. Mass
foreclosures drive down real estate prices. You can see that in
the price numbers that were announced this week. They shrink
the wealth of American households, not of the people being
foreclosed, but of all homeowners. Mass foreclosures weaken
consumer confidence, which underlies whether or not our economy
will recover from the economic crisis. And mass foreclosures,
as my fellow panelists and our Chair have mentioned already,
threaten the solvency of our financial system through their
effect on the strength of the real estate market.
Now, it has been clear since the beginning of the financial
crisis that borrowers, lenders, and the public at large had a
profound interest in restructuring loans to enable homeowners
who had the ability to make lower payments to stay in their
homes. By the way, for those who are concerned that somehow
there's something morally suspect about restructuring loans, I
should note that every day on Wall Street people of power and
privilege in this society restructure their debt. It is
commonplace for everyone but the poor.
Yet, as the financial crisis escalated, the banks in their
role as mortgage servicers simply did not restructure the
loans. The Treasury Department created HAMP, offering $50
billion in incentives for the banks to restructure the loans.
And yet, a year and a half later we have only 467,000 permanent
modifications, genuine restructurings, compared to 7 million
homeowners in the process of foreclosure.
Let me note--and perhaps this is a slightly different
emphasis than my fellow panelists who have spoken before--that
I think that helping 467,000 families avoid foreclosure is a
good thing. In fact, it's a very good thing. It's substantially
better than not helping them. But it does not appear by any
means, by any measure, to be good enough.
Now we have learned that the foreclosure process itself and
our system of property law is cracking under the strain of the
bubble and the bust in residential real estate markets. There
appears to be strong evidence, being investigated by 50 states
attorneys general and a Federal task force, that servicer banks
have improperly executed and filed with the courts a large
number of affidavits in the pursuit of foreclosures. Worse yet,
since the affidavit revelations, evidence has mounted that
there are substantive problems with the liens that support
significant numbers of securitized mortgages.
Today I hope we can shed light on whether 467,000 permanent
modifications plus another 20,000 or so a month is the best we
can hope for from HAMP. In particular, I am puzzled and
mystified as to why one community group that I am familiar
with, NACA, with a budget of less than $20 million, less than a
thousandth of the budget of HAMP, can process 20,000 people a
week in one city seeking mortgage modifications, whereas we get
permanent modifications on an annual number of 20,000 a year
across the whole country from HAMP.
By the way, I've seen the community group NACA do this.
I've watched 20,000 people come through the Washington
Convention Center not six blocks from here in a week. So I
don't understand what is going on here.
Secondly, I would like to know whether HAMP has paid out
money to servicers to ensure that they did not foreclose on
homeowners in situations where the servicer did not actually
have a valid lien or had filed a false affidavit with a court.
Further, I would like to know what plans the Treasury
Department has for finding out whether this sort of thing has
occurred and whether public moneys have been paid out
effectively under false pretenses or based on false affidavits.
Finally, I would like to know what plans the Treasury
Department and the OCC on our next panel have for dealing with
the possibility that either the major servicer banks will be
held liable for their failures to properly service $7 trillion
in mortgages or that the collateral for significant amounts of
mortgage loans will turn out to be invalid. These possibilities
would appear to present systemic risks of the type that TARP
was enacted to address, and in particular would appear to have
grave consequences for the very institutions that TARP
initially capitalized and who were allowed to exit TARP on the
theory that they were now healthy.
This hearing involves some of the most important issues
facing our country today. I look forward to the witnesses'
testimony. Mr. Chairman, I thank you for your indulgence.
[The prepared statement of Mr. Silvers follows:]
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The Chairman. Thank you.
Dr. Troske.
STATEMENT OF KENNETH R. TROSKE, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Dr. Troske. Thank you, Senator Kaufman.
So the issue before us today, foreclosures and the
government's efforts to mitigate foreclosures, remains,
obviously, quite contentious and fraught with strong feelings
among the people debating this issue and making policy.
However, when considering the effectiveness of programs
designed to mitigate foreclosures, in my opinion, it is
important to keep in mind that one of the primary goals and one
of the goals I believe of the original legislation is to return
the economy to a place where it can begin to grow at a pace
that helps everyone currently in distress.
Certainly all of us would like to return to a world where
we have steadily rising home prices, low unemployment rates,
and an economy that is growing at 4 to 5 percent per year.
However, this is not the world we currently live in. Instead,
we are in an economy where housing prices nationwide have
fallen by 14 percent from their peak, where prices in the
largest metropolitan areas have fallen by almost one-third, and
annual existing home sales have plunged by over 40 percent.
Without a doubt, the housing market has been in
disequilibrium for several years, even before the recent
discoveries of problems with foreclosures. The important
question is what are the best policies for helping the housing
market return to stability? Because until we achieve stability
in the housing market, the economy will continue to limp along
at 1 to 2 percent growth per year and unemployment will remain
unacceptably high.
One of the main problems in the housing market is that
during the 2004 to 2006 period many people borrowed money to
purchase houses or took out home equity loans predicated on the
belief that housing prices would continue to rise. As long as
home values kept rising, homeowners and other investors could
refinance these loans at lower rates based on the accumulation
of equity. When housing prices started to decline, many of
these people were left with homes that were valued at less than
the amount they owed. They were unable to refinance their loans
and face loan payments that are beyond their means. The
question is, what can we do about this problem now?
One of the government's responses, the Federal Government's
responses, is the program that we're focusing on today, the
Home Affordable Modification Program, or HAMP. This program is
presumably designed to help what Treasury refers to as ``at-
risk borrowers'' stay in their homes. The questions we are
grappling with at this hearing are whether the program is
effective and how the program affects the broader economy.
HAMP works by reducing the monthly mortgage payments of
borrowers through capitalization of arrears, a term extension
of forbearance, and/or a reduction of interest rates or
principal for up to five years. Then the program ends and the
interest rates can gradually return to the prevailing rate in
place at the time the modification was made.
Given the structure of the program, it seems unlikely that
borrowers, especially those with negative equity, will be able
to keep their homes, unless we see dramatic improvements in the
housing market, which seems unlikely at this point. The median
borrower in the program has monthly debt payments equal to 80
percent of their income and it is hard to imagine any
government program putting a significant dent in this number.
This program is focused on borrowers who can't make their
monthly payments, even though they are currently employed and
not underwater, this despite evidence from researchers at the
Federal Reserve Banks of Atlanta and Boston showing that
helping workers who have experienced temporary shocks, such as
losing their jobs, is much more likely to result in the owners
keeping their home. In the end, it appears that for most
participants HAMP will only postpone the inevitable.
So what would be the downside if all HAMP does is postpone
foreclosures for a few years? Well, as my fellow panelist Mark
McWatters has pointed out in an earlier Panel report, despite
all the attention they have received, homeowners with mortgages
were not the only group hurt by the financial crisis. Millions
of homeowners who didn't have mortgages saw the value of their
homes plummet, and this was devastating for those who were
going to use the equity in their home to finance their
retirement. Millions of others saw the value of their
retirement savings decline significantly and families lost
substantial amounts in their children's college savings
accounts.
For all of these people, relief will only come once the
economy starts growing again. That growth will only occur once
the housing market is stabilized and that stability will not
develop until people move out of homes with mortgages that they
cannot afford and into housing they can afford. So to the
extent that HAMP simply kicks the foreclosure can down the
road, it ends up hurting all of these people who are desperate
for the economy to start growing again so that their lives can
return to normal.
I want to be clear. I recognize that some borrowers may
have been misled into taking out loans they could not afford,
and to the extent that people were defrauded, the perpetrators
need to be prosecuted. I also recognize that there have been
serious mistakes and perhaps fraud committed by servicers and
lenders in the lending and foreclosure process, and any illegal
activity on the part of banks needs to be fully prosecuted.
Finally, I recognize the tremendous pain that accompanies any
foreclosure. Homelessness is devastating for families and needs
to be avoided whenever possible.
However, there is $30 billion allocated to HAMP and I
believe we need to ask whether it could be used more
effectively to help all homeowners in need move towards stable
and more economically appropriate housing arrangements. In
other words, perhaps we need to start examining whether HAMP is
a program that will bring stability to the housing market so
that the economy can start growing again. I am hopeful that our
discussion today can assist us with this evaluation.
[The prepared statement of Dr. Troske follows:]
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The Chairman. Thank you.
Superintendent Neiman.
STATEMENT OF RICHARD H. NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman. Thank you, Mr. Chairman.
Ms. Caldwell, you and the Department of the Treasury
deserve substantial credit for pushing an industry toward
mortgage modifications and preventing avoidable foreclosures in
a standardized format when the industry itself failed to
appropriately act. In this way, Treasury's HAMP program has
shown great potential. Thanks to your work, we have a new
industry standard that has kept more people in their homes than
otherwise would have been able, certainly more than HAMP's
monthly reports demonstrate on their own.
But to be frank, it's been a major disappointment that the
public and this Panel have no way of meaningfully measuring
success pertaining to the alternative non-HAMP mortgage
modifications that Treasury points to in defense of HAMP. The
available sources of data are simply inadequate for anyone to
meaningfully assess performance among servicers or determine
that these proprietary modifications are indeed helping,
successfully helping, people. In addition, the current reports
do not provide the public an effective means to assess
performance among servicers or to serve as an effective
supervisory tool.
HAMP's metrics on their own--and people in Treasury have
publicly stated this--have fallen fall short of our hopes. We
now have nearly 700,000 families who have been kicked out of
HAMP's trial modifications, many of whom may be worse off,
despite the fact that they were making timely monthly payments
for many, many months. Even worse, these 700,000 families far
exceed the 500,000 families who remain in the program with
permanent modifications.
The future also looks somewhat bleak. The number of new
homeowners entering the program each month is now near its
lowest point, and there have been more than enough redefaults
after a long-term modification has successfully occurred to
raise serous questions.
Now, this may be our last hearing on Treasury's foreclosure
mitigation initiatives, so it is not just critical that we help
the public fully understand HAMP's success and failures, but we
must also get to the bottom of the biggest question: Is HAMP
really the best the government can do to demonstrate a way
forward?
Ms. Caldwell, for whom I have the greatest respect, knows
better than anyone that unemployment and deep negative equity
have been driving foreclosures in a manner that HAMP simply
cannot address. And these forces will continue to hit families
hard. Treasury announced several new unemployment and negative
equity initiatives in response. But again, it is disappointing
that six months later the public still has no meaningful way to
ascertain how these new initiatives are performing.
As a final matter, I intend to explore with all our
witnesses the issue of confidence. Given many of the mortgage
servicers' poor track records of errors, including losing
homeowners' submitted documents, how do we continue to look
homeowners in the eye and ask them to continue to work with
their servicers, given the latest news pertaining to faulty
documents and fraudulent affidavits? The servicers at a minimum
now have even a higher burden of proof in demonstrating that
they are serious about their stated efforts to work with
American families.
I am grateful to you for being here today and I want to
thank you and highlight not just your public service at
Treasury, Ms. Caldwell, but throughout a long career of work
for the underserved. I also very much look forward to speaking
with our other five knowledgeable witnesses today and look
forward to our question and answer session.
Thank you.
[The prepared statement of Mr. Neiman follows:]
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The Chairman. Thank you.
I am pleased to welcome, genuinely pleased to welcome, our
first witness, Phyllis Caldwell, the Chief of the Department of
the Treasury's Office of Home Ownership Preservation. Ms.
Caldwell, thank you for joining us and thank you for your truly
great public service.
We'll ask you to keep your oral testimony to five minutes
so that we'll have adequate time for questions. Your complete
written statement will be printed in the official record of the
hearing. Please proceed with your testimony.
STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOME OWNERSHIP
PRESERVATION OFFICE, U.S. DEPARTMENT OF THE TREASURY
Ms. Caldwell. Chairman Kaufman and members of the
Congressional Oversight Panel: Thank you for the opportunity to
testify before you today on progress the Administration is
making on helping responsible homeowners stay in their homes
and stabilizing the housing market.
My opening remarks will focus on three things: one, the
Administration's response to recently reported problems in the
foreclosure process; two, efforts that Treasury is taking to
ensure servicer compliance with HAMP guidelines; and three, a
look at the impact the HAMP program has had to date.
There are three key points on the recently reported
foreclosure process problems. First, we expect banks to follow
the laws. Any bank that hasn't done so should be held
accountable and should take prompt action to correct its
mistakes. The Administration supports the efforts of the 50
state attorneys general in their investigations of foreclosure
irregularities and reviews by the Department of Justice and
other Federal agencies.
Second, we have been working closely with the broad range
of Federal agencies and with the state attorneys general to get
to the bottom of these problems as quickly as possible. Last
Wednesday, Secretaries Donovan and Geithner met with
representatives from ten different Federal and regulatory
agencies for the latest in a series of meetings to coordinate
reviews on this issue. These state and Federal agencies and
regulators are requiring major banks to look at their servicing
across the board, not just on this issue.
Third, there have been recent calls for a national
moratorium and I'd like to address that. An important part of
assuring longer term stability in the market is to enable
properties to be resold to families who can afford to purchase
them. President Obama has said that we can't stop every
foreclosure and he's right. But we are making progress.
I'd like to now turn to the relationship of these
foreclosure problems to the Administration's Making Home
Affordable program, of which HAMP is a part. HAMP is intended
to help eligible homeowners before they are in foreclosure.
HAMP does not require a judicial process for homeowners to
receive a modification, nor does it require affidavits to be
filed with the courts. Therefore, HAMP is not directly affected
by the robo-signers or false affidavits with state courts.
Under HAMP guidelines, participating servicers must
evaluate all eligible homeowners for HAMP modification prior to
referring them to foreclosure. Should a homeowner not qualify
for HAMP or if the homeowner falls out of HAMP or cancels the
modification, participating servicers are required to evaluate
that homeowner for alternative foreclosure prevention programs,
such as one of the servicers' proprietary modifications or even
the Administration's short sale program.
If all of these efforts are unsuccessful, HAMP servicers
may not proceed to foreclosure unless they have issued a
written certification to their foreclosure attorney or trustee
stating that all avoidable loss mitigation alternatives have
been exhausted a non-foreclosure option could not be reached.
Only after these steps are taken and the certification is
delivered may the foreclosure process proceed.
To date, HAMP has achieved three critical goals. It has
provided immediate relief to struggling homeowners; it has used
taxpayer resources efficiently; and it has helped transform the
way the entire mortgage servicing industry operates. HAMP
established a universal affordability standard, a 31 percent
debt to income ratio. More than 460,000 homeowners who are
currently in permanent modifications have experienced a 36
percent median reduction in their mortgage payments, or more
than $500 per month.
In the year following initiation of HAMP, home retention
strategies changed dramatically. In the first quarter of 2009,
nearly half of mortgage modifications increased borrowers'
payments or left their payments unchanged. By the second
quarter of 2010, 90 percent of mortgage modifications lowered
payments for the borrower. This means homeowners are receiving
better solutions.
HAMP uses taxpayer resources efficiently. HAMP's pay-for-
success design utilizes a trial period to ensure that taxpayer-
funded incentives are used only to support homeowners who are
committed to staying in their homes and making monthly
payments.
While the housing market is showing signs of stabilization,
it still remains fragile and too many homeowners are suffering.
The nature of this crisis has changed and we will continue to
focus our efforts on stabilizing the housing market and
preventing avoidable foreclosures.
Thank you and I look forward to taking your questions.
[The prepared statement of Ms. Caldwell follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Caldwell.
HAMP--I'm trying to get at some of these hard objectives. I
think it's hard to do oversight and I think it's definitely
hard, as I said in my statement, to run a Department if you
don't have some hard objectives. Realizing that you don't
always make the hard objectives, but, just like when John
Kennedy said we'd get to the Moon by the end of the decade, it
worked out. So I think it's hard objectives.
So one of my concerns is HAMP was announced 18 months ago.
How much now do you think you're going to spend on the HAMP
program?
Ms. Caldwell. For the HAMP program, we currently have $29
billion in TARP funds allocated to the Making Home Affordable
program, which includes HAMP's financial funding first lien
modifications, the second lien modifications, and some of the
enhancements for principal reduction, as well as a little bit
for the FHA short refinance program. So it's really all of the
housing programs.
The Chairman. $29 billion?
Ms. Caldwell. $29 billion.
The Chairman. And how many foreclosures do you think you'll
be preventing?
Ms. Caldwell. Our goal still remains to help up to 3 to 4
million homeowners avoid foreclosure, and we continue to expand
and enhance the programs to respond to the changing housing
crisis. So our programs targeting unemployment and negative
equity are just under way and we continue to focus our efforts
on making sure we reach as many homeowners as possible.
The Chairman. What was this 3 to 4 million offers that I've
read in some of the testimony from Treasury, that the objective
of the program was to make 3 to 4 million offers?
Ms. Caldwell. I think, as you said, there is an objective.
The GAO in its August 2009 report also confirmed that the goal
is offers. And while we at Treasury agree that offers do not
always translate into modifications, and while we can measure
the offers because that is something we control, we also
measure how many of those offers are accepted, and then how
many of those offers perform, and for those that don't perform,
where they go. Then we learn from those and continue to expand
our programs, with the still overall objective of assisting 3
to 4 million people avoid foreclosure.
The Chairman. Great. And what's your forecast for
redefaults over a 5-year period?
Ms. Caldwell. It's still very early to tell. We've had very
few modifications in the program for more than a year. Early
indications are that HAMP modifications will perform better
than historical modifications, which have been 60, 75 percent
redefault. In the permanent modifications in HAMP at 9 months,
over 90 percent of homeowners still remain in the program. So
the data is young, but early signs indicate the same. The OCC-
OTS metrics report also confirmed that HAMP modifications are
performing well and attribute it to the trial period program
that makes sure homeowners are committed to staying in the
home, the collection of documentation, and the 31 percent
affordability standard.
The Chairman. Do you have any projection on what the
default rate will be?
Ms. Caldwell. No, we don't. Again, we are watching it very
closely, but early signs are that HAMP modifications will
perform well.
The Chairman. I'd recommend you try to come up with some
kind of an objective for where you're shooting for. You've got
a lot of data on it now. So I'm looking forward to what the
redefault rate is.
How many temporary modifications do you think become
permanent modifications?
Ms. Caldwell. During the first year of the program, less
than 40 percent of temporary modifications became permanent.
But that was because, in response to the crisis, we gave
servicers the ability to offer homeowners a trial modification
and then submit documentation. Those servicers that collected
documentation up front experienced conversion rates to
permanent modification in the 75 to 80 percent range.
Beginning in June, Treasury's program requires upfront
documentation so we expect that trial modifications will slow,
but the conversions for permanent will be much, much higher.
The Chairman. How do you think the widespread problems with
foreclosure documents will impact on the stability of our
financial markets?
Ms. Caldwell. That's something we're following closely. At
this point in time there is no evidence that there is a
systemic risk to the financial system. But we are making sure
that, one, in our programs focused on foreclosure prevention,
that servicers are doing everything that they are supposed to
do. Second, we are making sure that we're coordinating with
agencies across the Federal Government and the state and local
attorneys general to make sure that those servicers that are
breaking the law are held accountable. And three, we're very
closely monitoring any of the litigation risk to see if there
is any systemic threat. But at this point there's no indication
that there is.
The Chairman. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you, Senator.
And thank you, Ms. Caldwell, for appearing here today. When
you consider these factors--the foreclosure documentation
irregularities, that's one. Two is the failure of some
securitization sponsors to assign, properly assign, notes and
to record transfers of mortgage and deeds of trust in
accordance with applicable law; that's number two. As well as
the exercise of the put rights by securitization trusts to
force the mortgage loan originators to in effect buy back the
loans. And given that a lot of those mortgage loan originators
are TARP recipients, other financial institutions, is Treasury
concerned, given these three factors, and particularly the put
rights--and that's an emerging thing particularly now that the
RMBS investors are beginning to coordinate their efforts and
file lawsuits and the like--is Treasury concerned that any of
the large, ``too big to fail'' financial institutions may
experience a solvency or liquidity or a capital crisis over the
next few years?
Ms. Caldwell. Thank you for the question. As I said
earlier, we're still very early in this issue and are
monitoring it closely. I think, as you suggested in the
question, there are really three separate issues. In terms of
the robo-signing, the documentation issue, that is one that we
are following closely and we are anticipating that servicers
will do what they need to do and fix those problems, and where
they have not been following the law be held accountable.
The second one that you discussed, the litigation. While
I'm not a lawyer, and I don't want to go through all the legal
structure, it is something as a practitioner that has been in
the industry for a long time and the courts are used to dealing
with that, and they will continue to deal with that. It's
certainly, because of the affidavit issue, increased in
visibility. But it's not a new issue in the market. But it is
one that we are following very, very closely.
Then third, the put-back risk on the large financial
institutions. Again, we are looking at the situation very, very
closely and will be following the institutions to make sure.
But at this point there is no evidence of a systemic risk.
Mr. McWatters Is this being discussed within Treasury? I
mean, there was a lawsuit I think filed the other day, a put-
back right of $47 billion to a Bank of America loan. That was
one. That was one lawsuit. I suspect there will be many, many
more to come.
I believe in one of the other--on panel two, one of the
panelists I think projected there were something like $2.8
trillion of subprime loans, and that even if a relatively small
percentage of those are put back and the banks have to buy them
back at face, this could be a substantial problem.
Also, considering that this is not just a one-shot deal. I
mean, when a mortgage is originated and put in an RMBS it may
be multiplied through synthetic CDOs. So you may have the
synthetic CDO problems also going back to the banks.
So it sounds like Treasury as of today has not done even a
back of the envelope sketch as to what the potential put-back
rights could be to the TARP financial institutions.
Ms. Caldwell. Let me just say that at Treasury we are
monitoring this situation daily. The news continues to have a
wide range of projections and numbers, so I'm not prepared to
say that there is a particular scenario. But it is something
that Treasury is working closely with all of the Federal
agencies involved with these institutions, including the
regulators and including the reporting agencies, to make sure
that the risks are appropriately disclosed and measured and
that we have a better understanding of what the potential risks
could be. But it is something that we're monitoring daily.
Mr. McWatters Okay. I would certainly encourage you to do
that.
One of the problems is the inability of some of these
securitization trusts to deal with the local land title
records, in other words to properly endorse notes and to assign
deeds of trust and mortgages. So I ask you this: When an
American homeowner sits down at the kitchen table to write the
monthly mortgage check, how does that homeowner know that he or
she is paying the correct lender?
Ms. Caldwell. That's a very important question, and I think
it's important to separate the legal framework of the mortgage
securitization process versus the steps that individual
servicers are taking to make sure they follow the law. As I
said earlier, we have a group of Federal agencies and state
attorneys general in with these entities making sure that they
are following the law, and those entities that are not
following the law should and will be held accountable.
So again, it's important to separate the legal structure
from what is actually happening.
Mr. McWatters. Okay, thank you. My time is up, but I'll
just make one quick comment. There are courts, state courts,
which have held the MER System, the Mortgage Electronic
Registration System, which I know Fannie and Freddie uses, and
others, to simply not work. So the deeds of trust and the
mortgages assigned under those, under MERS, doesn't work.
Endorsement of the notes, unless it was done in accordance with
applicable state law, doesn't work also, and that can create a
problem.
Thank you.
The Chairman. Thank you.
Mr. Silvers.
Mr. Silvers. Ms. Caldwell, I would like to continue to
pursue Mr. McWatters' train of thought. I'm concerned about
Treasury making representations categorically that you don't
see a systemic risk. Let me walk you through exactly why.
Mr. McWatters referred to a demand letter sent by a number
of bondholders, including the Federal Reserve Bank of New York,
one of the institutions I believe that is encompassed by your
list of regulators and the like that Treasury coordinates with.
You're familiar with that letter?
Ms. Caldwell: Yes, I am.
Mr. Silvers. All right. That letter asks for $47 billion of
mortgages to be--of mortgage-backed securities to be
repurchased at par. Do you know what those mortgages are
currently carried--what those bonds, the market value of those
bonds today?
Ms. Caldwell. At this point, I'm not prepared to comment on
pending litigation.
Mr. Silvers. Okay, fine. Let me tell you what the Fed says
they're worth. The Fed tells us they're worth 50 cents on the
dollar. So if the Fed's request of Bank of America is honored,
Bank of America, assuming they are carrying these bonds--
assuming when they buy them back they mark them to market, Bank
of America will take a $23 billion loss.
The Federal Reserve further informs us that there is
nothing particularly unique about that particular set of
mortgage-backed securities, meaning they have not been chosen
because they're particularly bad. They believe they are of a
common quality with the rest of Bank of America's underwritten
mortgage-backed securities. There are $2 trillion of Bank of
America's underwritten mortgage-backed securities.
Five such deals, five such requests, if honored, to Bank of
America, will amount to more than the current market
capitalization of Bank of America, which is $115 billion.
Now, do you wish to retract your statement that there is no
systemic risk in this situation? And the word is ``risk,'' not
``certainty,'' but ``risk.'' I would urge you to do so, because
these things can be embarrassing later.
Ms. Caldwell. My statement, as I said earlier, is that it
is still early. We're working very closely with 11 regulatory
and Federal agencies. We are watching this every day. And that
at this stage there appears to be no evidence of a systemic
risk. But again, it is early, and it is something we are
monitoring daily.
Mr. Silvers. Let me suggest to you that the ``it is still
early'' is a perfectly acceptable position. The notion that
there is no--is it your position that Bank of America honoring
five of these things would not present a systemic risk? Five of
these requests, the first of which has been made by the Federal
Reserve. Is Bank of America not systemically significant?
Ms. Caldwell. At this point I'm not prepared to comment on
a particular institution, but I think as we look at the put-
back risk, the litigation involved, the severity and the
probability, and the time that it would take to go through
these, those are all important factors to be considered in
looking at the risk. And again just to reaffirm, we didn't say
there was no risk. We said there didn't appear to be evidence
of a major systemic risk.
Mr. Silvers. I hope that if we come--if the Treasury comes
back to us and is discussing whether or not we need to deploy
further public funds to rescue Bank of America or such other
institutions as might be affected by these events, that we get
a similar kind of indifference to their fate after it's too
late, because it strikes me that, in light of the mathematics
I've gone through with you, it is not a plausible position that
there is no systemic risk here.
I want to take up two other statements you made that I
think are just simply not plausible. The first is, you suggest
at the beginning of your statement--and I can't quote it
because my memory's not that good, but you suggested that it is
a good thing that more homes be put on the market as a result
of foreclosure. Is that the Administration's position?
Ms. Caldwell. When you look at the current market for sale,
close to----
Mr. Silvers. Do we want more homes put on the market right
now, as prices are falling?
Ms. Caldwell. We want homes to be sold to homeowners that
can afford them and stay in them.
Mr. Silvers. That's not my question. My question is do we
want to increase the inventory right now in the marketplace and
drive down home prices? Is that the public position? Is that
the position of the Administration as to what is good for our
country right now?
Ms. Caldwell. I think the position is we want houses to be
sold to homeowners that can afford them.
Mr. Silvers. But do we want more or less? I'm asking you a
binary question: More houses on the market right now, less
houses on the market right now?
Ms. Caldwell. I would just say that if you have a home,
whether it's in inventory for sale in the market----
Mr. Silvers. You're not answering my question. Yes or no?
More or less?
Ms. Caldwell. We need to have the homes on the market to go
through and be resold to homeowners who can purchase them and
afford to stay in them and stabilize neighborhoods. Many of the
homes that are in REO are vacant and that hurts the
neighborhood.
Mr. Silvers. You still haven't answered my question.
You still haven't answered my question. Do we want to drive
housing prices down? Are we so concerned at ensuring that the
banks don't have to write these loans down that we would rather
drive housing prices down?
Ms. Caldwell. Again----
Mr. Silvers. How can it possibly be the position of the
United States Government that it is in the national interest to
drive down housing prices?
Thank you.
The Chairman. Thank you.
Dr. Troske.
Dr. Troske. I'm going to change gears a little bit, and not
because I'm not concerned about the issues that my fellow
panelists have raised, but I think they've raised them quite
strongly and I have other concerns about the program I'd like
to explore.
Your stated goals, at least the goals that you've been
willing to articulate, are that you'd like HAMP to help 3 to 4
million borrowers, and ``help'' you're defining now is even
people just entering temporary modifications. 1.2, 1.3 million
people have entered temporary modifications so far, I think.
Many of these people entered the HAMP program when about
150,000 borrowers a month were entering the program. Currently
I think we're at the rate of about 20,000 to 30,000 a month are
entering the program. The program's got about 24 months to run.
If my math is correct, we're at 1.2 million. We're getting
about 20 to 30,000 more a month for 24 months. We're not going
to get to 2 million. So can you tell me how you're going to
judge it a success if we're not even going to make the minimum
standard that you've already articulated as one of the goals,
given the rate that people are entering the program?
Ms. Caldwell. That's a question we talk about very
regularly in my office. The numbers that you stated are correct
about the first lien modification. If you look back on what
HAMP was started to address, it was unaffordable payments
resulting from a reset of mortgage rates. As the crisis has
moved to unemployment and principal reduction, our programs
have changed. So the numbers that you're discussing relate to
the first lien modification. In addition to that, we have the
unemployment forbearance program, which became effective in
August. We have a partnership with the FHA program on a
refinance program that became effective in September, that
allows principal reduction and refinance into an FHA mortgage.
We also have additional incentives for principal reduction
along with the Hardest Hit Fund initiative.
So we have to look across all of those programs and respond
to a changing housing market in our efforts to reach 3 to 4
million.
Dr. Troske. I guess originally your goals were stated for
the HAMP program, and these are other programs that are outside
the HAMP program; am I mistaken about that? So you're sort of
saying as we add more things we can sort of--presumably, we're
trying to help additional people. The goal we set for the HAMP
program, sort of we lower that?
So I guess, what's your goal for the HAMP program, the
modifications that are running through the traditional HAMP
program? Is it no longer 3 to 4 million? Is it lower than that
now?
Ms. Caldwell. The other programs, the add-on programs for
unemployment and principal reduction, are in fact part of the
HAMP program. They're ways that we have adapted the HAMP
program to change with the economy. The one program I mentioned
that is not officially part of HAMP is our help for the
hardest-hit markets, where we took $7.6 billion out of the HAMP
allocation and moved it over to enable state housing finance
agencies to provide tailored assistance to unemployed
homeowners and work with principal reduction in those markets.
Dr. Troske. Another question. You talked about redefaults
and I think you correctly stated that it's still early. But let
me ask you about, so the permanent modification under these
programs is for 5 years. It's not permanent. It's a 5-year
modification. And when that 5-year period is up, borrowers
return to their previous payment levels.
Presumably, if something hasn't changed in the housing
market, like a significant increase in prices, at least back to
2006 levels, these are going to be borrowers who are still
seriously underwater, with rates that have reset, back to
making payments that they can't currently afford. So why do we
think in 5 years they're going to be able to afford the
payments that they can't afford now? What's going to change
between now and 5 years that's going to result in something
close to a success, that's not going to produce an enormous
increase in redefaults when they reset in 5 years?
Ms. Caldwell. Thank you. Let me first just make a
clarification to the permanent modification and the reset.
After 5 years, the rates adjust to the current rate, the
current Freddie Mac rate. So while there will be some
adjustment up from 2 percent, it will be an adjustment up to
rates that are still consistent with today's historic low
rates.
In terms of the 5 years, the homeowner has gotten some
additional principal reduction because of the amortization at a
very low rate. So they have paid down more principal than they
otherwise would have. In addition, homeowners that stay current
on their HAMP modification receive $1,000 a year in principal
reduction, or $5,000 over the 5-year period, which is some
meaningful principal reduction at certain house values.
Then there is time for the employment situation or other
hardship in that family's circumstance to improve, and
certainly over 60 percent of homeowners in HAMP permanent
modifications have had either a reduction in wage or loss of a
job of one of the wage earners.
Dr. Troske. Thank you.
The Chairman. Thank you.
Superintendent Neiman.
Mr. Neiman. Thank you.
Ms. Caldwell, as I stated in my opening, Treasury often in
its defense of HAMP, defense of the success of HAMP, refers to
the significant number of non-HAMP proprietary modifications.
Year to date there have probably been more than twice as many
non-HAMP mods as HAMP mods. And while it's positive that these
borrowers are not currently in foreclosure, questions still
remain on the sustainability of these proprietary mods and
whether homeowners are actually better off.
The quarterly OCC and OTS reports on the issue and the HOPE
NOW reports are a step forward. But we really do need to know
more information about the specific terms of these proprietary
mods in order to compare them among servicers as well as to
serve as an effective supervisory tool. Will Treasury or HOPE
NOW be providing additional data with respect to non-HAMP mods?
Ms. Caldwell. Thank you. This is something that you and I
have both discussed and something that we spend a lot of time
thinking about within Treasury. In terms of the HAMP contracts
with servicers, our contractual relationship with the servicers
goes to those modifications where we're paying taxpayer
incentives. We don't have supervisory authority over those
modifications outside of HAMP.
But because we are very focused on what happens and very
concerned about that, we have asked HAMP servicers, the large
ones, to participate in a monthly survey about what happens to
homeowners that are either not approved and not accepted for
HAMP, and what happens to homeowners who are in a trial
modification that gets cancelled. And we do publish those
results.
In addition, we work very closely with HOPE NOW and with
OCC-OTS metrics to try and use that as a validator or a reality
check for what we're getting in the survey data. But we have no
contractual authority over those.
Mr. Neiman. So I've been going over in the last few days
the various reports issued by Treasury in your monthly reports,
HOPE NOW in their monthly reports, and the OTS in their
quarterly reports. And though each of these reports continues
to expand, it is still not that easy for the public, nor for
the Oversight Panel, or for Congress to really assess the
effectiveness of these proprietary mods.
In fact, in many cases in the OCC report you cannot
understand what the actual terms are of some of those monthly
modifications. There's often groupings of all modifications and
then HAMP modifications, so that the numbers are not always
broken out for proprietary, non-HAMP mods, in order to
determine whether these reductions--are they for 1 year, 2
years, and to understand the impact of these mods, do they
include lump sum payments for late fees? How sustainable are
these really in the interests of the borrower?
Ms. Caldwell. Again, we share that concern and are
committed to transparency in the HAMP program. We expanded our
survey in the spring to include the disposition. As we continue
to follow this issue, we continue to expand our survey
requirements of the servicers, because we do recognize that
within HAMP we have contractual relationships with servicers
that are regulated by a number of different agencies, and this
is one place where we can try to put it all together.
Mr. Neiman. I think we all support those provisions in the
Treasury's monthly report that breaks down performance by
servicers. What you don't see is that in the OCC report. So it
is not--it cannot provide the public a means to distinguish
servicers' performance with respect to proprietary mods.
Would you support a greater ability for the OCC to provide
a breakdown by servicer with respect to proprietary mods?
Ms. Caldwell. I really can speak just for the Treasury
programs and just say that we are very committed to
transparency and we continue, as you know, to expand the
reports every month and put demands on servicers for more
information, such that they would almost say it's overload on
reporting. So we are committed.
Mr. Neiman. So because of the gaps, because your reports
are only with those servicers that have contracted, because the
OCC only covers 65 percent of the market, because HOPE NOW is
also a survey, would you support the need or recognize the need
for a national reporting requirement for mortgage performance
data similar to what banks are required to provide in mortgage
origination under HMDA?
Ms. Caldwell. We support transparency in the mortgage
modification business to make sure that the taxpayer dollars
are going to servicers for programs that are meeting guidelines
and following all applicable laws.
Mr. Neiman. Thank you, and I obviously intend to follow up
with the members on the next panel.
Thanks.
The Chairman. Great. Now we start a second round of
questions.
Can you tell us how many second liens have been modified or
extinguished through the relevant programs?
Ms. Caldwell. If I understand your question, you want to
know the second liens modified through all the relevant
programs?
The Chairman. Right.
Ms. Caldwell. That data we don't have for all the financial
institutions. We're beginning to collect data on the Treasury
program's second lien modification program, which is an
enhancement to HAMP, that has the major servicers and some
others. Again, we don't have data to report yet as the program
really got started at the beginning of October, but we will be
reporting that.
The Chairman. So you'll send that to us as soon as you get
that?
Ms. Caldwell. We will be putting it in our public report
when we have the data.
The Chairman. What about the reluctance of some financial
institutions to extinguish second liens because they're carried
on the books at 90 percent of value?
Ms. Caldwell. That particular thing we hear a lot. The
impact of second liens in the modification market is something
that we're very, very concerned about. It was why we put
together the second lien program in HAMP, which addresses
something that we hear from second lienholders about--it's
current and they may not know when a first mortgage is
modified. So that program has a platform that matches the first
and second, and then the second lienholder has to write it
down.
In addition, as part of our program for refinance into FHA
we offer incentives to reduce the second lien to enable the
first homeowner to refinance. So while we don't mandate second
lien writedowns, we're indifferent to it in the first lien
program and we try to provide incentives as best we can to
encourage second lien reductions to have more sustainable
mortgages.
The Chairman. But you talked in the beginning, and I think
you're right, in terms of your model, that HAMP is a model, and
one of the big things you did is set out a new standard. I
mean, isn't it pretty standard in the industry that you write
down the second liens first and then move to the first liens?
Ms. Caldwell. From a lien priority standpoint, that should
be the way it operates, yes.
The Chairman. So really shouldn't we be, as a model, be
putting the emphasis on that, so that people aren't carrying
the second liens at 90 percent? It seems to me the only reason
they're carrying the second liens is because they don't want to
write them down because they're carrying them at 90 percent of
value and they're worth nowhere near 90 percent of value.
Ms. Caldwell. Right, and they continue to be current. I
think that's a very important piece of the program--making sure
those firsts and seconds are matched.
The Chairman. In your testimony you say every person in a
temporary modification is getting significant benefit. Can you
kind of explain that? Because if a temporary modification
fails, then the person has to pay the money back, right? So
what is the benefit, the significant benefit, of every person
who's in a temporary modification?
Ms. Caldwell. Let me first talk about the permanent
modifications. Now, beginning June 1st, homeowners provide
upfront documentation and the homeowner is expected to convert
to a permanent modification. The only reason to not convert
would be failure to make payments. So they are getting a second
chance to qualify.
If you go back to where we were at the beginning of the
program, there was a huge backlog of homeowners who were
severely delinquent on their mortgages, struggling to find
their servicer, and struggling to get a modification. By coming
into the HAMP program, what those homeowners got was an
immediate reduction in their payments and an opportunity for
additional time to figure out if staying in the home was going
to be a sustainable solution for them or to make other living
arrangements. So it bought time.
The Chairman. To follow up on Mr. Silvers' question, GMAC
still has $17.2 billion in taxpayer funds and has been involved
in the document irregularities. What's Treasury doing to ensure
that financial institutions supported by the taxpayers are not
acting improperly?
Ms. Caldwell. Thanks. As I know this Panel knows very
clearly, Treasury has an investment in GMAC, but is not on the
board or management. But immediately upon learning of the
alleged robo-signing issues, we were in touch with management
at GMAC, and continue to be in touch with them regularly. They
have reported back, at least at this point, that other than the
time to correct some of those documentation problems, which
they are doing promptly, they don't see a major risk in their
system. But we are again watching that very, very closely and
take it very seriously.
The Chairman. So you're not sending anyone out to actually
find out whether they hold the mortgages, and some of the
stories we've heard about the robo-signing, that they actually
have the mortgage that they think they have or that MERS has
the mortgages for GMAC, or any kind of physical followup on the
fact that there are mortgages out there, do they actually have
the mortgages and they actually have title to the land that
they are trying to foreclose on?
Ms. Caldwell. At this point, we are supporting all of the
agencies that are doing investigations of those servicers,
including the GSEs, and are monitoring closely and will take
followup action when there are facts that we get from those
reviews.
The Chairman. So there really is no--Treasury is not doing
anything independently to determine that mortgages modified
under HAMP have all necessary loan documentation and a clear
chain of title? You're just taking the word of the people, of
the folks, the banks and financial institutions you're dealing
with, that they do have loan documentation and a clear chain of
title?
I think it's important for all these other people to look
into it, but it seems to me that these are programs where
Treasury has a direct involvement in this as an organization.
They're actually involved in the thing, and this seems to me to
be a pretty critical part of the process.
Ms. Caldwell. That is an important issue and something
that, at least at this point in time, we're looking at the
foreclosure prevention process separate from the actual
foreclosure sale process. To modify a mortgage, there is not a
need to have clear title. You need information from the note,
but you don't need a physical note to modify a mortgage.
So the focus of the HAMP program is to make sure that
homeowners stay in their home and don't go to foreclosure sale.
But to the extent that is not successful and that goes through,
we certainly expect all HAMP participating servicers to follow
the law.
The Chairman. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you, Senator.
Ms. Caldwell, let's say I want to buy a house, and the
house is foreclosed. How do I know that when I buy that house I
will receive good legal title to that house? I mean, there are
all sorts of questions about whether or not the securitization
trust or the servicer can deliver good legal title. How do I
know?
Ms. Caldwell. Homeowners buying a house get title
insurance. I think one of the things that we're very concerned
about in the overall recovery of the housing market is making
sure that homeowners have trust in the system and continue to
buy homes and don't have a lack of trust in that, because,
certainly reading the news, homeowners would have reason to be
concerned.
Mr. McWatters. Right. You anticipated my next question. Are
title insurance companies issuing clean mortgagor and mortgagee
title insurance policies today where the property liens are
recorded under the MERS system?
Ms. Caldwell. I think we have to separate the MERS system,
which certainly has a lot of discussion in court, from how
servicers are following the processes under MERS. To the extent
a home has gone through foreclosure, whether it's foreclosed
with the physical note or foreclosed with a judge, the judge
has granted title and the title has been insured, the homeowner
should be able to purchase the home and have title insurance.
Again, as I said earlier in my testimony, I'm aware of the
litigation around MERS. It's still in the lower courts. So I
can't really wade down for what will be the outcome, but
certainly we're watching the uncertainty in the market that
could be attributed to MERS.
Mr. McWatters. I read somewhere in the paper that one of
the ``too big to fail'' institutions went to title insurance
companies who were balking on issuing title insurance policies
and said: Hey, we'll indemnify you. Well, if a ``too big to
fail'' indemnifies and it blows up, guess who pays for it? We
have TARP II, unless Dodd-Frank liquidates them, which is not a
good answer to anyone.
So I think this thing is, as you said, is in play, but it's
a little bit frightening.
Speaking of frightening, I'll move on to Fannie and
Freddie, who are also co-owners of MERS and apparently did
billions of dollars of securitizations based upon MERS. So
surely someone at Fannie and Freddie thought about MERS. I
mean, what diligence did they do? Did Fannie and Freddie
receive legal opinions, and if they did could we see those
legal opinions, as to the efficacy of the MERS program?
Ms. Caldwell. I can't testify to what Fannie and Freddie
did in terms of MERS, but can just say that MERS has been a
part of the mortgage securitization system for a long time.
There have been a lot of legal cases on it.
Mr. McWatters. Let me ask this question. Is it the opinion
of the Department of Treasury that the MERS system works to
deliver good legal title to property, that it properly allows
notes to be endorsed, it allows for the proper assignment of
mortgages and deeds of trust?
Ms. Caldwell. This is something that we're still continuing
to dig deeper on. But at this early stage, it does not appear
to be a fundamental legal structural risk or issue with MERS,
but rather how MERS is used based on the different state and
local laws governing the real estate transactions across the
country. So there's still more work to be done there.
Mr. McWatters. Okay. Let's say that I'm a CEO of a ``too
big to fail'' and I've made a lot of second mortgage loans. And
I know that people are encouraging me to write those off, and
if I do my capital's going to be impaired and I'm going to book
a substantial loss and I'm going to be hurt, maybe put out of
business.
So my response to people who ask me to write them off is to
say: You know, they may be out of the money today, but in
another year or 2 years I expect the housing market will
recover; and maybe I'm out of the market today, but maybe I get
40 cents on the dollar in 2 years. So if I write them off
today, then my shareholders are going to sue me because they go
to the same economists and the economists tell them also, in 2
years you're going to get 40 cents on the dollar.
What do I do? I'm just not sure what to do.
Ms. Caldwell. You summarized the reason why principal
forgiveness is one of the most complicated parts of the
mortgage modification business, because once you take it you
lose that opportunity to get it back.
In the principal reduction alternative that we have under
HAMP, we require servicers to run two net present value
calculations, one with principal reduction, one without. And in
those cases where it is net present value positive to reduce
principal, we think there is a justification there for reducing
it.
Mr. McWatters. What if I say to you, yeah, okay, I'll write
these things down. That may start solving a lot of problems.
But I want an equity kicker here. So if this house turns
around, appreciates in value over the next 2, 3, 4, 5 years, I
get a piece of that. In fact, we're going to share that equity
appreciation three ways. We're going to give some of it to me
because I wrote it off. We're going to give some of it to
Treasury because Treasury expended taxpayer funds. And we're
going to give a substantial portion of it to the borrower
because I want to keep the borrower interested in staying in
the house and making the payments, keeping the house up and the
neighborhood up.
Is there a problem with that approach?
Ms. Caldwell. There is not. In fact, the principal
reduction alternative under HAMP does not prohibit shared
appreciation. I think at this point in time I'm not sure the
servicing industry has capacity to administer shared
appreciation, but it's not something that is prohibited, and we
put the guidance out with the expectation that that could be
something that changes in the marketplace.
Mr. McWatters. Okay. What I can say to them, it's a one-
page document. It's not a big deal.
Okay, thanks.
The Chairman. Thank you.
Mr. Silvers.
Mr. Silvers. Ms. Caldwell, I want to explore very briefly
this question of the relevance of irregularities in the title
system to HAMP. It's my understanding--I accept your testimony
earlier that, of course, you're not in foreclosure when you get
HAMP assistance. But HAMP does make payments to servicers,
correct, up front? Isn't there an assumption that that servicer
is representing someone with a good lien? Why would we make the
payment if that wasn't true?
Ms. Caldwell. There certainly is the assumption that the
servicer is following the laws, because that's required in the
contract. If we learn something after the fact that contradicts
that, we do have the ability to go in and claw back the
incentive.
Mr. Silvers. So my question in my opening statement was,
how do we know, in light of all of the discussions--and I think
Mr. McWatters has ably summarized what the issues are, and the
chairman has as well. How do we know that we're not--and in
light of all the state law issues that you mentioned a moment
ago--how do we know that people who don't have good liens
aren't getting public money essentially under the false
pretense that they have a good lien?
Ms. Caldwell. Again, we don't. Our focus at this point has
been on making----
Mr. Silvers. Okay. So that's the--hold it. That's the
issue. The issue that I would hope the Treasury would be
diligent about looking into is trying to answer. You say no, we
don't. I think that's fair enough. These are very complicated
questions. The data is huge, the legal issues vary from state
to state.
In view of the fact that what's potentially at play is
servicers and banks getting public money under false pretenses,
we ought to try to figure out whether that's true or not. I
take from your answer that you're looking into it.
Ms. Caldwell. Right, I would agree.
Mr. Silvers. I would hope that that clarifies the fact that
there is a relevance between the irregularities and the HAMP.
We've identified it here. I look forward to hearing what you
find.
Let me shift then from there to something that I'm very
supportive of Treasury's direction. I want to hear more about
how you intend to do it. I gather from your opening statement
and from your response to my fellow panelists' questions that
you want to expand the reach of Treasury's mortgage foreclosure
mitigation programs, that you feel the current numbers of
permanent mods and the like should be expanded, that you want
to reach the unemployed and be of greater assistance there, and
so forth. Did I hear you correctly?
Ms. Caldwell. Yes.
Mr. Silvers. What do you see as the major obstacles to
doing that? What do you see? Are we having difficulty reaching
and involving people in these programs?
Ms. Caldwell. I think there are a few points we can say
about unemployment. One is it differs across markets, and HAMP
is a national, one-size-fits-all program. So one of the changes
that we made to respond to the local nature of unemployment was
the Hardest Hit Fund, so that different states could create
programs to better target the unemployed in their own market.
So one is just making sure we can tailor programs to local
market conditions.
Second is outreach. Struggling homeowners are scared.
They're getting bills, not sure who to respond to, who to call.
So we do run outreach events. We've had 40 across the country
in the last year to reach homeowners.
Mr. Silvers. How many people have attended your outreach
events?
Ms. Caldwell. I don't have the number offhand, but I'd
estimate in the 30,000 range.
Mr. Silvers. Are you familiar with the Neighborhood
Assistance Corporation of America, called ``NACA,'' that I
referred to earlier?
Ms. Caldwell. I am.
Mr. Silvers. They have represented in a letter to us, to
our Panel, which I will introduce into the record, that in 23
outreach events of theirs they have had approximately 700,000
people attend. Do you have any reason to doubt that that's
true?
Ms. Caldwell. I don't have any reason to doubt, but I'm not
familiar with all of them.
Mr. Silvers. No, I understand. So can we learn something
from that? Is there a way that we can--that Treasury, with its
vast resources, can get to that level of participation? I'm not
talking about the back end about outcomes, but just getting
people in the door.
Ms. Caldwell. I think we work with a number of housing
counselors and state and local mediators, including NACA, to
figure out the best way to have outreach to homeowners.
Certainly NACA mods, where eligible, can get HAMP incentives.
Mr. Silvers. I'm actually not so much focused on the mods,
but I'm focused on the intake. You said 30,000 people for all
of your events around the country. NACA got more than that to a
single event in D.C. a few weeks ago. I visited that event. I
saw 5,000 people at the Convention Center on a Friday night at
10:00 o'clock at night.
Surely we can learn something from them, if nothing else,
how to get people in the door.
Anyway, my time has expired. Thank you.
The Chairman. Thank you.
Dr. Troske.
Dr. Troske. Thank you, Senator.
So help me here about something I still don't understand
about the program, and I'm still relatively--I was not involved
in the last report. But my understanding is if the NPV model
shows that the net difference between the modified mortgage and
the original mortgage is positive, this suggests that it's in
the best interests of the borrowers and the lenders to modify
the mortgage.
If that's the case, why do we have to pay them to do it?
Why do we have to pay people to do something that seemingly is
in their best interest? What's preventing them from doing it on
their own?
Ms. Caldwell. That's a very important question. Two things
to think about there. One, on the HAMP program, part of the
incentives for servicers is actually compensation for moving to
an affordability standard and certain protocols that required a
full change in their business model. So it is compensation for
things that they have had to do in a different way.
Second, within the HAMP program there are some cases where
the investor incentives are an important piece of the
modification being NPV positive.
Dr. Troske. So let me--the first question--your first
response was that there seem to be things apparently outside
the NPV model. The NPV model is not taking into account the
costs of changing the business model, so you have to pay them
because the NPV model doesn't include all the costs. Is that a
way of interpreting what you just said?
Ms. Caldwell. No. When you look back at the beginning of
the program, again, HAMP is a voluntary program, getting the
servicers, the investors, and the homeowners to the table and
to change the business model to do that required some
incentives. Even with those incentives, there was some doubt
that servicers would sign up, and indeed it took a full year to
get close to 100 non-GSE servicers signed up for HAMP, even
with those incentives.
Dr. Troske. So let me build on that a little. So much of
your claim about the success of HAMP has been that it set a
standard, that you've changed the way people are doing business
in this market. We can discuss it, but find, I'll give that to
you, great. You've set a new standard. You've shown servicers
there's a better way of doing business.
Why do you need to keep doing anything? What are you
accomplishing now that you've set a standard, everybody
recognizes the standard? Great, fantastic. They're now free to
live by the standard, recognize the benefits from the standard,
go to town. So why do we still need Treasury involved in this
once you've set the standard?
Ms. Caldwell. The HAMP program does a couple of important
things. One, because servicers that participate in HAMP are
required to evaluate homeowners first for HAMP, it keeps a
consistency across the industry in terms of at least where
homeowners are evaluated first.
Second, as this Panel has pointed out certainly to Treasury
a number of times, there's inconsistency in reporting across a
number of different servicing entities, and during a time of
crisis HAMP provides a standard platform on which other
modifications can be based.
Dr. Troske. But again, once the standard platform is
established, once you've established that platform, I'm still
struggling to understand what is there left to do? You've
established it. Now everybody knows what they should be doing.
Everybody should be doing it Treasury says.
Ms. Caldwell. I think that for the first lien program,
certainly we can talk about the change in the industry
standard. It's important, again as you've pointed out, that
there is the unemployment program that is still new in
Treasury. There is the entire platform for how short sales and
deeds in lieu of foreclosure are handled, that are still
operating under HAMP.
So having that standard platform can change a number of
things beyond first lien modifications.
Dr. Troske. Let me--I want to build on a little bit of my
fellow panelist Mr. Neiman's question. In her written
testimony--and we haven't heard it yet, but--Julia Gordon
claims that HAMP trial modifications make borrowers who do not
move into permanent modifications worse off, because they are
reported as being delinquent to credit bureaus and have late
fees and interest continues to accumulate, resulting in larger
arrears due at the end of the trial modification program.
So she--you've said that it makes them better off. She says
it makes them worse off. Is she right, and what's the
difference between what she's claiming and what you're
claiming?
Ms. Caldwell. Again, when we talk about the trial
modifications, I think it's important to refer to early on in
the program where people could come in without documentation
and just call up and get immediate payment relief. When I'm
talking about being better off, I'm talking about program-wide,
on the whole, having that many homeowners at that time in
crisis receive immediate assistance and get time was an overall
benefit.
Certainly when you provide time to a large number of
people, there are going to be cases where individuals say: You
know, if I knew it was going to be bad news, I'd rather have
the bad news now. We do hear of those cases and we take them
seriously and it's very troubling. But when you look at the
million homeowners that got immediate relief last year at the
time of the crisis, on balance I think it's the right thing.
Dr. Troske. Thank you.
The Chairman. Thank you.
Superintendent Neiman.
Mr. Neiman. I'd like to kind of follow up on your
discussion with Damon regarding your unemployment programs,
because I think even in your opening testimony you acknowledge
that unemployment is really going to be, particularly going
forward, a driving force in driving foreclosures.
I saw it up close when I, on behalf of the Panel, joined
your outreach forum in Atlanta. And in talking to both
counselors and individual borrowers, it was clear that there
were many individuals there who were in financial difficulty
with their mortgage because of unemployment or underemployment.
You referenced the Treasury's unemployment program, which
provides 3 months of forbearance. When will we be seeing--how
do you contemplate providing data to assess the results of that
program?
Ms. Caldwell. Again, that program became effective in
August and we will be incorporating data into the public report
once it's available and validated.
Mr. Neiman. So recognizing that many of the individuals I
spoke to there were out of work for 6 to 12 months, behind on
their mortgage payments for similar terms, who's the population
that this 3-month forbearance is intended to help?
Ms. Caldwell. A couple things to think about. It's a very
important issue, unemployment, in terms of the modification. I
think first and foremost, as was said earlier on the Panel, you
need a job to pay the mortgage. So unemployment forbearance is
really intended to provide temporary assistance for unemployed
to enable them to find a job.
Mr. Neiman. So people who are just unemployed and expect to
find a job within these 3 to 6 months?
Ms. Caldwell. The national unemployment program in HAMP
provides a minimum of 3 months. Servicers can go longer, as
long as they want, but it's a minimum of 3 months. Many go up
to 6 months.
So it's expected that some will not find a job and may end
up in a short sale or something that results in not being in
the home. Some may become quickly reemployed and become current
on their payment and had some benefit. Some may become
reemployed at a lower income level and be eligible for HAMP.
Again, that's a one-size national program. In those
markets, 18 states and the District of Columbia, with higher
than average unemployment rate, we have tailored programs where
each of the housing finance agencies can do something that
works in their market, and those include anything from the HFA
targeting certain professions that have been hardest hit and
sharing the mortgage payment, to some combining them with job
counseling and retraining.
Mr. Neiman. We look forward to the data on the success of
that program.
In my remaining minutes, I want to shift over to the web
portal, because this is something that we have talked about for
a long time at the Panel and have been urging Treasury to get
that web portal up and running so that there is an effective
means for borrowers and housing counselors to reach servicers
in order to facilitate the approval process.
Can you give me some indications as to where it stands, how
many borrowers, how many loans are being processed through the
portal?
Mr. Neiman. Home loan port.
Ms. Caldwell. Home loan port.
Again, I can't testify to Home loan port's specific
performance, but just say that we at Treasury are very
supportive of the Home loan port that's run by the HOPE NOW
Alliance and think it's a very important step to not only
automate the document collection process, but also to involve
counselors who can help assemble those document packages.
So we are very supportive of that effort. In addition, as
we've streamlined the documentation within Treasury, we've
tried to make sure all of our forms are available to be
downloaded on the web on our MakingHomeAffordable.gov website.
Mr. Neiman. Will Treasury be using that system or using--or
its agents, compliance agents, using the system to test for
compliance, to reach out to borrowers, to try to identify areas
of concern?
My understanding is it's not currently available for access
by regulators.
Ms. Caldwell. I'll follow up on that.
Mr. Neiman. You follow up. Our compliance is really focused
on the documentation issues more broadly across all of the
channels, whether it's Loan port or mail.
My time has expired.
The Chairman. Thank you.
Thank you, Ms. Caldwell, for your testimony. Again, thank
you for your service.
Will the second panel please come forward.
[Pause.]
The Chairman. Thank you. This panel is made up of: Faith
Schwartz, Senior Advisor for the mortgage industry's HOPE NOW
Alliance; Joseph Evers, Deputy Comptroller of the Large Bank
Supervision, Office of the Comptroller of the Currency;
Katherine Porter, Professor of Law, University of Iowa College
of Law; Julia Gordon, Senior Policy Counsel, Center for
Responsible Lending; and Mr. Guy Cecala, CEO and Publisher of
Inside Mortgage Finance.
Let's start with you, Mr. Cecala.
STATEMENT OF GUY CECALA, CEO AND PUBLISHER, INSIDE MORTGAGE
FINANCE PUBLICATIONS, INC.
Mr. Cecala. Thank you, Mr. Chairman and members of the
Panel, for inviting me to speak today. My name is Guy Cecala.
I'm the CEO of Inside Mortgage Finance, a specialized
information firm that publishes a variety of products related
to the residential mortgage market and its key players. We are
not affiliated with any lenders per se or consumers. We're kind
of just objective observers of the facts.
Any opinions expressed today are my personal opinions and
don't represent the views of Inside Mortgage Finance or any of
its publications.
In my written testimony, I think I've responded to just
about every one of the questions you guys have asked. But I'll
summarize some major points from that testimony. What I'd
really like to do is provide a reality check on what's going on
in the mortgage market, because I think sometimes that gets
lost.
First of all, the mortgage industry is really divided into
two separate businesses. One is the production side and one is
the servicing side. Briefly, I'll talk about the production
side. There's good news and bad news when we look at the
production side of the mortgage business these days. The good
news is that long-term mortgage rates are extremely low and
there's a plentiful supply of mortgages to borrowers who have
good credit and down payments. The bad news is about 90 percent
of all the mortgage funding is coming from the government and
not a lot of people qualify for that government funding.
What little private sector activity there is is pretty much
relegated to home equity and high-balance jumbo mortgage
lending, or basically places the government doesn't have any
activity.
To make matters worse, we seem stuck in a world where most
mortgage funding will continue to come from the government.
There is currently no secondary market or investor demand for
mortgages or mortgage-backed securities that don't carry a
guarantee from the U.S. government. As a result, private
lenders really can't compete with the government for mortgage
customers.
But we also seem to be afraid to reduce the government's
massive support of the mortgage market, for fear of disrupting
a very fragile housing market. So it pretty much leaves us in a
state of limbo.
Unfortunately, matters are probably worse in the mortgage
servicing business. I think to talk about the success or
failure of recent mortgage modification efforts or the scope of
current foreclosure problems, it's really necessary to look at
the massive problems we are attempting to deal with.
Between 2005 and 2007, which is really the housing boom
peak period and the mortgage boom peak period of the last few
years, about one-third of the $8.5 trillion mortgages that were
made, or roughly 13 million loans, could broadly be
characterized as non-prime. These loans were made to subprime
borrowers, those with little or no documentation, those with
low or no down payment, or those that had some other high risk
of default characteristic.
It is these groups of mortgages that made up the bulk of
mortgage defaults and foreclosures that we've seen over the
last 3 years. Add to this mix the fact that nearly one-third of
the homes sold during the 3-year boom period were sold to
investors or people buying second homes. Now factor in the
impact of high unemployment and the sharp nationwide drop in
home values, and you get a pretty good idea of the scope of the
problems we are facing.
It is literally a perfect storm of mortgage problems that
are very difficult to resolve with loan modifications or any
other foreclosure avoidance measure. Right now we have a
situation where the average borrower facing foreclosure is
somewhere around a year and a half behind on their mortgage
payments. By traditional mortgage industry standards, 6 months
is the point of no return.
I won't go into the HAMP numbers. You guys seem to know it
very well and have gone over in terms of it. Needless to say,
the number of HAMP modifications or even overall loan
modifications have been dwarfed by the number of increases in
defaulted mortgages and foreclosures over the past year.
The record high problems in the mortgage market have and
continue to take their toll on the housing market. Last month
48 percent of the home purchase transactions in this country
involved distressed properties, namely foreclosures or short
sales involving properties headed for foreclosures. That was up
from 45 percent a year earlier.
Meanwhile, the ongoing flood of problem mortgages and
efforts to consider modifications on a loan by loan basis have
severely taxed the mortgage servicing industry, used to dealing
with one-quarter of the current level of defaults and
foreclosures. Is it a surprise mortgage servicers and their
agents have been overwhelmed or that some shortcuts have been
taken with foreclosures to deal with the backlog of severely
defaulted borrowers? No, it isn't surprising, and unfortunately
it's a development that can only slow down a housing recovery
that is moving at a snail's pace if it is moving at all.
Thank you.
[The prepared statement of Mr. Cecala follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Ms. Gordon.
STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Good morning, Chairman Kaufman and members of
the Panel. Thank you so much for inviting me to address you
today. I serve as Senior Policy Counsel at the Center for
Responsible Lending, a nonprofit research and policy
organization dedicated to protecting home ownership and curbing
abusive financial practices.
As we're here today, mortgage servicers are in the process
of foreclosing on over 2 million families. About 3 million or
so more are just weeks away from receiving a notice of default.
Over the next several years, the toxic combination of high
unemployment and underwater loans could mean a stunning total
of more than 31 million foreclosures.
African-American and Latino families are much more likely
than whites to lose their homes, and we estimate that
communities of color will lose over $360 billion worth of
wealth.
So far, our major government response to this crisis has
been HAMP. HAMP, as we've discussed today, has fallen far short
of its initial goals and even left families who did not convert
to a permanent modification worse off than they were before.
Relatively few new trials are starting each month now, replaced
by a trend of servicers moving their modification activities
outside of HAMP, where there's little transparency or
accountability.
The principal reductions we need are not happening in HAMP
and they're not really happening out of HAMP either, except in
some small portfolios, usually ones that were marked down upon
acquisition.
The real problem is that servicers need to foreclose
quickly and in volume in order to make money. That's why people
get foreclosed on even when they're in the middle of being
reviewed for other solutions. That's also led to this utterly
unacceptable but routine practice of falsifying court documents
when it's too expensive or in some cases impossible to conduct
the process legally.
It's increasingly clear that one incomplete payment or one
accounting mistake can land you on an apparently unstoppable
conveyor belt to eviction.
The crisis didn't need to be this bad. If government had
acted quickly and forcefully at the beginning we could have
significantly limited the damage. But instead our government
believed servicers' early assurances that they would handle the
crisis on their own. When that turned out to be wrong, we
provided legislative tools such as the investor's safe harbor,
we added financial incentives through HAMP and related
programs, we cajoled and begged and threatened. None of those
strategies have worked. It's quite clear that servicers will
not do what needs to be done unless someone makes them do it.
The fact is the HAMP program has never had the tools it
really needed to succeed. A key part of the original
Administration foreclosure prevention plan was to involve the
bankruptcy courts, who serve as our nation's comprehensive
resolution authority when debt goes bad. The failed subprime
lenders got bankruptcy protection. So did Lehman Brothers.
Bankruptcy courts can modify mortgages on vacation homes,
farms, commercial properties, even yachts. But because they're
barred from saving the family home, homeowners had no
alternative but to rely on the voluntary assistance of the
servicers, and servicers had no real incentive to change doing
business as usual.
Those bankruptcy laws should be changed. In the meantime,
let's broaden and enforce a commonsense practice requiring
servicers to review all loans for alternatives to foreclosure,
either loan modifications when that makes financial sense or
short sales and deed in lieu. Congress and state legislatures,
the Administration, the banking regulators, and law enforcement
officials all have lots of tools available to do this. In fact,
the so-called mandatory loss mitigation standard already is
supposed to be in place in the government-backed housing
programs.
To make it work in practice, though, homeowners need a
chance to stop their foreclosures if their case hasn't been
properly reviewed. In many cases homeowners will need access to
legal help. Congress should appropriate the $35 million
authorized in the Dodd-Frank Act for that purpose. While that's
a very small amount compared to what will be spent on the
battalions of corporate lawyers for the other side, it will
make a real meaningful difference for the many homeowners who
can't afford an attorney.
We also recommend that the banking regulators use all their
supervisory and enforcement powers to let servicers know they
can no longer fly under the regulatory radar. This is a perfect
opportunity for the Consumer Financial Protection Bureau to
show what a difference it can make when an agency focuses
squarely on eliminating practices such as a predatory servicing
now taking place.
There's no silver bullet strategy to fix every mortgage and
not every foreclosure is avoidable. But even one unnecessary
foreclosure is devastating to that family and their neighbors,
and multiple unnecessary foreclosures are devastating to all of
us. Once and for all, let's make sure the system works, both
for families and for those who invest in our economy.
Thank you for your time and I look forward to your
questions.
[The prepared statement of Ms. Gordon follows:]
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The Chairman. Thank you.
Professor Porter.
STATEMENT OF KATHERINE PORTER, PROFESSOR OF LAW, UNIVERSITY OF
IOWA COLLEGE OF LAW
Ms. Porter. My name is Katherine Porter. I'm a law
professor who does research on consumer credit, consumer
protection, regulation, and mortgage servicing.
In the last month, allegations about serious and widespread
legal errors in the foreclosure process triggered moratoriums
by a few of the nation's largest servicers. These moratoriums
and the misbehavior that led to them are only the most recent
and the most visible symptoms of a chronically sick industry.
In 2007, almost exactly 3 years ago, I released an empirical
study showing that 40 percent of the mortgage companies'
paperwork in bankruptcy cases did not include a copy of the
note, despite a clear legal requirement that it be included.
Sadly, the problems we are hearing about today are largely
duplicative of those that I and others have described for
several years now. To summarize, the key problems with the
foreclosure process are: First, that the mortgage servicing
industry is a high-volume, cost-cutting industry. It relies on
staff with insufficient training. It provides weak oversight of
that staff. It operates with inadequate quality control checks
and it is not transparent about its profit structure and
affiliations with related entities.
These problems are at the heart of the robo-signing
scandal. That practice is entirely consistent with the
industry's business model and standard of ethics. Robo-signing
erodes confidence in the rule of law in this country.
Second, the paperwork on the troubled securitized loans
often does not seem to comply with legal requirements. The
primary concerns are: first, that some paperwork is missing,
evidenced by the increasing use of lost note affidavits to try
to remedy past mistakes; and two, that some transfers of loans
simply did not occur or were not properly conducted. The
proliferation of assignments in blank, the widespread use of
MERS that eroded the public property records, and confusion
about the location of the physical paper for these loans all
expose the industry to attack from investors and from
homeowners.
At the core is whether the securitization trust has the
standing to foreclose and whether the investors have been
defrauded. Contrary to what Ms. Caldwell suggested, I do think
that good title is a requirement to do an effective loan
modification. I think parties can't legally agree to override
and alter the rights of a party that's not at the table.
The third problem is a sort of melange of miscellaneous
problems we've seen in the servicing industry, including most
primarily the bloating of homeowners' accounts with bogus or
suspect default fees and the continuing difficulty that the
servicers are having in sweeping under the rug the fact that
the originations of these loans were themselves not documented
correctly and did not meet the underwriting standards for the
securitization.
If these practices are allowed to continue unchecked, I
think we're going to see several kinds of harm. I think an
increasing number of homeowners will challenge their
foreclosures in court. I think there will be class actions by
homeowners if problems are identified that exist across an
entire pool of securitized loans. And I think in non-judicial
foreclosure states we're going to see intense public
frustration about the lack of access to a court to adjudicate
these problems.
Second, I think investors will sue mortgage companies to
force them, to try to force them to buy back the loans. One
cannot easily put the genie back in the bottle with regard to
litigation, notwithstanding the servicers' protestations that
everything is basically all right.
The banks' argument that the foreclosures are not faulty
because the homeowner is in default should be given zero
weight. Regardless of whether a homeowner cannot pay, the
mortgage company must comply with the relevant laws to exercise
their rights. Due process does not bend in the wind. It is a
fundamental principle that protects all Americans, consumers
and businesses, as they invoke the law to their aid.
Finally, I think regulators will have to devote substantial
resources to investigating problems with faulty foreclosures. I
think it's crucial that the government investigation be
transparent. American taxpayers need to be shown in concrete
terms that the Dodd-Frank Act will change how regulators intend
to carry out their promises about consumer protection.
[The prepared statement of Ms. Porter follows:]
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The Chairman. Thank you.
Mr. Evers.
STATEMENT OF JOSEPH EVERS, DEPUTY COMPTROLLER FOR LARGE BANK
SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Evers. Chairman Kaufman and members of the
Congressional Oversight Panel: My name is Joe Evers. I'm a
Deputy Comptroller and National Bank Examiner in the Large Bank
Supervision Division of the Office of the Comptroller of the
Currency. In this role, I oversee the collection, analysis, and
reporting of data we collect from national banks relating to
the performance of first lien residential mortgages.
I appreciate the opportunity to share insights that this
data provides us on mortgage modification activities.
Consistent with the Panel's letter of invitation, my written
testimony includes data and charts from the most recent
mortgage metrics report that demonstrate the trends we are
seeing pertaining to loan modifications and delinquencies on
loan modifications for mortgages serviced by the largest
national banks and Federally regulated thrifts.
Beginning in 2008, the OCC began collecting mortgage loan-
level data from the largest banks it supervises and publishing
this information in quarterly metrics reports. The most recent
report, published last month, reflects data at the end of June
2010 and represents almost 34 million first lien mortgage loans
or 65 percent of all first lien mortgages outstanding in the
country, totaling nearly $6 trillion in outstanding balances.
Early in the mortgage crisis, servicers were generally
relying on traditional methods to assist borrowers who were
facing financial hardship, typically various informal payment
plans that allowed a borrower to defer his or her mortgage
payment for a period of time. These types of plans, which were
previously successful in normal economic times, gave delinquent
borrowers experiencing temporary financial problems a chance to
catch up on making their loan payments.
However, as the mortgage crisis deepened and the number of
delinquent borrowers increased to unprecedented levels, it
became clear that more formal and permanent modifications would
be needed. The OCC's mortgage metrics data provided factual
evidence that loan modifications completed in 2008 were
experiencing high redefault rates. As a result of those high
redefault rates, the OCC directed the largest national banks to
implement programs designed to achieve more sustainable
modifications.
Today servicers are using a combination of actions to
achieve more affordable and sustainable modifications. When
taking these actions, mortgage servicers are taking into
account both the needs of borrowers and the rights and
interests of investors.
Our mortgage metrics report provides data on how
modification actions affect the borrower's monthly payment and
how the modifications perform over time. This allows us to
evaluate the effects that certain modifications may have on
long-term sustainability.
Over the past several quarters, we have seen the servicers
offering more sustainable modifications. Modifications that
lower monthly principal and interest payments now represent
over 90 percent of all modifications provided. Modifications
made during the second quarter of 2010 reduced monthly payments
by an average of $427. This resulted in a 62 percent reduction
in the average monthly payment from a year ago.
Further, 56 percent of the modifications made during the
second quarter reduced the borrower's monthly payment by 20
percent or more, representing an average saving to the borrower
of $698 a month.
Our data also illustrates the rate at which previously
modified loans become delinquent or redefault. This is a useful
metric to gauge the payment sustainability of loan
modifications, identify unsafe and unsound loan mitigation
practices such as loss deferral, and determine loan loss
reserves.
Our data show that, while all modifications experience
redefaults, more recent modifications have performed better
than early modifications. As well, modifications that result in
lower monthly payments consistently perform better over time
than those that increase payments or leave payments unchanged,
and that better performance directly correlates to the amount
of payment reduction.
In conclusion, following our directive to large national
bank servicers to make more sustainable modifications, our data
show that servicers have adjusted their programs to provide
meaningful reductions in borrowers' monthly mortgage payments.
These actions are resulting in more sustainable modifications
and fewer redefaults.
Thank you for the opportunity to appear today. I will be
happy to answer questions.
[The prepared statement of Mr. Evers follows:]
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The Chairman. Thank you.
Ms. Schwartz.
STATEMENT OF FAITH SCHWARTZ, SENIOR ADVISOR, HOPE NOW ALLIANCE
Ms. Schwartz. Chairman Kaufman and member of the Panel,
members of the Panel: Thank you for having me here today. My
name is Faith Schwartz and I'm currently a Senior Advisor to
the HOPE NOW Alliance and HOPE LoanPort.
HOPE NOW was formed in 2007 to expand and coordinate the
industry response in the private sector and nonprofit
counseling sector to reach borrowers at risk, counsel borrowers
at risk, and work toward alternatives to foreclosure. We've
supported the Homeowner's HOPE Hotline, 888-995-HOPE, which has
to date manned over 4 million calls, which operates 24 hours a
day, 7 days a week, and is supported by over 600 housing
counselors, HUD-approved counseling agencies.
The HOPE NOW outreach events for homeowners have held over
90 events across the country in at-risk markets, with up to
75,000 families who've come through. While it doesn't mirror
the hundreds of thousands through other outreach events that
they've attracted, it's very targeted outreach and doesn't just
offer help to anyone who wants to talk to their servicer. So
they're 60 days or later past due or non-contact borrowers. In
fact, 30 to 40 percent of the borrowers who still come to these
events have never contacted their servicer.
We also support HOPE LoanPort, a neutral and independent
web-based system that addresses the issue of loan documentation
and allows for uniform intake of an application for all types
of loan modifications, which allows the stakeholders to see the
same information in a secure manner. This portal delivers a
completed loan application package to the servicer which is
actionable, with the ability to message back and forth until a
final decision has been made.
Currently, 14 nationwide servicers have adopted and signed
onto the portal, one mortgage insurer, a few state housing
agencies, and 320 housing counseling agencies across the
country in 48 states. We welcome more endorsement and use of
this portal.
HOPE NOW also, as you know, has collected data across the
industry for 3 years every month to report on loss mitigation
results. In August, we know that year to date we have 874,000
non-HAMP mods that were made. We know year to date that HAMP
modifications are 429,000, and we know that year to date
foreclosure sales are 775,000 sales.
The points and takeaways from some of the data points are
as follows. Loan modifications combined far exceed that of loan
sales to foreclosure. It's important to note the interventions
are working and should continue.
The vast majority of the non-HAMP modifications, much like
Mr. Evers has spoken to, in August 91 percent of them had a
lower principal and interest payment, and we know that that's
far better than it was a year or 2 ago.
I was asked to speak to the merits of HAMP and some of the
detraction from it. Let me say I quite agree, it's very
integral and important that the government step forward to put
a protocol in place for modifications, and that this protocol
would have been very difficult to get into place otherwise. I
am here to tell you, I've been 3 years on this project and it's
been a good step forward.
The first most important contribution of HAMP is that all
servicers that signed up for HAMP must review all homeowners
for eligibility. The HAMP process offers homeowners a first
line of defense to avoid foreclosure.
Second is the importance of the HAMP waterfall. Investors,
servicers, lenders, nonprofits, and homeowners have a uniform
map of activity that is necessary to ensure delinquent
homeowners who seek help are being considered for a solution
prior to foreclosure. HAMP offers uniformity of approach which
is fair and systematic, and it's an approach for all homeowners
at risk. That's important for fair lending and other
attributes.
There are many challenges around HAMP and I'll cite just a
few of them that have been addressed by Treasury. But these
challenges have impacted some of the uptake from the program.
Clearly, there are a lot of changes as it was being rolled out.
This is a complex effort and those changes had to require
retraining, hiring of staff, changing of legacy systems that
are outdated, and so execution made it difficult quickly.
It's a complex program. Definitions are unclear investor to
investor. GSEs don't agree with Treasury or FHA on what
imminent default would be. There are differences on principal
writedown attributions. Back-end consumer debt--while we are
addressing the first lien and made it an easier process to go
through, there's a broader debt issue in the country, not just
first liens, second liens, and consumer debt, and that's been
cited today.
Honestly, just lack of uniformity for all the mod
processes. If you wanted a cookie-cutter approach, it would be
a lot easier if everyone would accept the same processes,
documents, etcetera. Again, the servicers have legacy systems.
They have to train and get things in process.
Also, affordability and eligibility. Everyone thought that
31 percent was an awfully good and aggressive start, because
after years of looking at the front-end debt ratio, some of
which were very high, 31 percent seemed aggressive. Yet, many
of these borrowers come in under 31 percent; they don't
qualify, and in theory they'd go to foreclosure. So lots of
people don't qualify because they're under 31 percent, but yet
they're having trouble staying in their home.
High vacancy rate. 30 percent of the market, vacant homes,
investor properties. Those don't qualify and it's hard to get
people to contact if they're not in their homes. So when you
look at the uptake of HAMP, you need to accommodate for some of
the foreclosures going through that people aren't on the other
side of the conversation.
I do think all of us can do a better job to communicate to
the public, to policymakers, to stakeholders, about what the
process is and what the options are for all borrowers, whether
it's HAMP or non-HAMP. I believe a lot of the non-HAMP activity
is very positive and huge progress has been made versus a
couple of years ago.
You've asked me to speak a little bit about the current
documentation issues in the market. First of all, remember----
The Chairman. Can you finish, please?
Ms. Schwartz. Pardon me?
The Chairman. Can you bring it to a close shortly?
Ms. Schwartz. Pardon me?
The Chairman. Bring it to a close shortly?
Ms. Schwartz. Yes.
The Chairman. Thank you.
Ms. Schwartz. So the market issues are such that HOPE NOW
works on the pre-foreclosure process, and I think all the
stakeholders do agree no borrower should go to foreclosure
without due process and a thorough review of all alternatives
to foreclosure. That said, I'm confident the companies are
working through their documentation issues to execute that.
Thank you.
[The prepared statement of Ms. Schwartz follows:]
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The Chairman. Thank you very much. I thank the panel.
I'd like to ask a question to all the panel members. That
is, based on the fact the President said 3 to 4 million homes
saved from foreclosure was a realistic objective for HAMP, what
do you think the realistic objectives are for HAMP? I start
with Ms. Schwartz.
Ms. Schwartz. Well, I think if you look at HAMP and then
non-HAMP solutions you're already at about 1.3 million
modifications to date this year. That's combined. So if you
look at an annual rate, you can hit that if you give the
Treasury some credit for the protocols someplace.
The Chairman. At the end of the program--we're just getting
started with the program--what do you think? Is it a realistic
objective at the end of the program, after we're finished?
Ms. Schwartz. For the mod program?
The Chairman. Yes, for the mod program, the modification
program, number of homes protected from foreclosure.
Ms. Schwartz. Well, I think we do have systems and
protocols in place and NPV tests that now are used across the
market to look at foreclosure versus a modification that were
not in place probably 4 years ago in any systematic way. So
hopefully the systems in place will stay and the regulators
will I'm sure work with the banks and the investor community to
keep things moving.
The Chairman. Mr. Evers.
Mr. Evers. That's really a policy question I don't have a
real clear view on. All I can tell you is that over the last
five quarters there have been 902,000 mods completed, both HAMP
and proprietary. That compares to about 670,000 completed
foreclosures. So yes, I agree with Faith that you have to look
at what's happening with HAMP and the proprietary mods to get a
better sense of how many borrowers are being helped.
The Chairman. Professor Porter.
Ms. Porter. I apologize in advance, but I'm going to turn
your question a little bit and say that what concerns me is
that what I'm hearing is that we've gotten up to speed with
HAMP slowly, we're making progress. It took 3 years, it took 2
years, it took--what does that timeframe and that gigantic
learning curve mean for whether the servicers are going to be
able to address the kinds of procedural defects that we're
hearing about now in anything remotely approaching a timely and
effective fashion.
The Chairman. Ms. Gordon.
Ms. Gordon. Realistic objectives for HAMP. First of all,
what we need to do is fix HAMP, not end it. HAMP's the only
thing we've got out there right now and if we take that away we
go backward in time to a very dark place.
The concept of the NPV test has been a very useful one to
get out and it serves as a great benchmark for Federal
legislation or for states to work on incorporating it into the
requirements for foreclosure. There is lots of use for this.
I've provided in my written testimony what one might charitably
call an exhaustive list of ways in which we could fix HAMP and
make it work better. But until we've got something better in
place, let's fix it and not get rid of it. We need much better
programs in place. We need mandatory programs, and to the
extent possible we need third party involvement to make sure
everything is going as it should.
The Chairman. Mr. Cecala.
Mr. Cecala. The simple answer is I think the HAMP goals are
unrealistic, given the program restrictions and the types of
troubled borrowers we're dealing with. If there's any good
news, I think it's extremely unlikely that TARP or your Panel
will see anywhere near $30 billion spent on this program. My
understanding is in the first year and a half about $400
million has been spent in terms of incentives paid out. I think
that gives you a realistic expectation on, if we continue on
the current path, what we're going to spend.
The Chairman. Thank you.
The next question is, can you comment on the impact you
think these foreclosure problems will have on the mortgage
market?
Mr. Cecala. Obviously, that's a real tough question to
answer. There are a couple different areas we're looking at,
you have to look at the foreclosure problem. One of them is
just the issue of what is the liability in terms of servicers
improperly foreclosing on a property. The mortgage industry's
response is that these are paperwork problems, we can clean it
up, worst case we just refile the paperwork and we get to the
same point, maybe in 2 or 3 months.
Obviously, the states attorneys general and other
regulators are looking at whether laws were actually violated.
That brings up the question of legal action for criminal
behavior or whatever else. That's kind of hard to quantify,
too.
The other issue, of course, is the lawsuits that are
surfacing now regarding mortgage securities and mortgage
securities investments. Those are kind of interesting to
monitor because those lawsuits have been pending out there just
on different reasons in the past. The latest reason is to go
after them because of foreclosure paperwork.
I've been covering this industry and the mortgage security
industry for 25 years. I'm not aware of any successful
litigation involving procedures, foreclosure procedures that
have been violated, that would require a lender to buy back a
loan.
The Chairman. Thank you. I'm going to hold the rest of them
until my next set of questions.
Mr. McWatters.
Mr. McWatters. Thank you, Senator.
Mr. Cecala, in your opening statement you said there were
$8.5 trillion of new residential mortgages made between 2005
and 2007, and that about a third of those were subprime, with
documentation problems, around 2.8 or so. There are a lot of
lawsuits out there that are beginning and they're not based
solely upon foreclosure issues. They're based upon straight-up
misrepresentations and warranties, underwriting that was
misrepresented when the securitization trust bought those, and
the securitization trusts and their investors are undertaking
to put those back.
What is your estimate, do you have an estimate, of what of
that $2.8 trillion will be put back to the loan originators?
Mr. Cecala. I think it's important to identify what the
size of the universe we're really talking about now.
Mr. McWatters. Okay.
Mr. Cecala. There's approximately $6 trillion worth of
mortgage securities outstanding. $1.5 trillion is what we call
non-agency mortgage securities. The rest are basically
guaranteed or insured by Ginnie Mae, Fannie Mae, or Freddie
Mac. So that really means we're talking about a universe of
$1.5 trillion.
You're right, there's been litigation from day one. A
disproportionate amount of that volume has involved subprime,
Alt-A mortgages, mortgages with a lot of default
characteristics, and clearly they've performed a lot worse than
anyone expected. The normal recourse that the mortgage industry
uses is to require buybacks on those loans, and they go right
at the mortgage originator. If a mortgage originator originates
a loan that goes bad in 6 months, they're required to buy back
the loans.
What we saw is that process actually began in 2006. By
2008, basically all the major subprime mortgage originators in
this country were put out of business. What we've got left are
major banks that acquired subprime loans, either through
servicing or through some other capacity.
Bank of America was one of the few major mortgage lenders
out there that steered away from the subprime market.
Nevertheless, it's the target of all the litigation out there?
Why is that? First of all, they're the largest bank and they've
got a lot of money, so that helps.
But also the reason is they, for better or for worse,
acquired Countrywide Financial, which was the largest subprime
lender, and basically inherited the largest subprime mortgage
portfolio that they are trying to deal with now.
Mr. McWatters. Right. And as those loans moved into
securitization pools, BofA or Countrywide may have re-upped the
representations and warranties that were made by the subprime
lenders, because someone's going to have to do that or you
wouldn't take it.
Also, I'm not sure why you excluded Freddie and Fannie. I
mean, they were huge securitizers. If they took loans, mortgage
loans, under misrepresentation, why shouldn't Freddie and
Fannie--in fact, I think they are beginning to exercise their
rights to put back their loans to the mortgage originators.
Mr. Cecala. They are. Currently Fannie and Freddie are
requiring mortgage repurchases by the major banks and mortgage
servicers to the tune of about $2 billion a quarter. They
clearly have the most clout because they're still in business
and if you don't play ball with Fannie and Freddie they'll cut
you out of new business. So that is where most of the action is
going on in terms of repurchases, and Fannie and Freddie have
been very aggressive at pursuing it. But they're getting
pushback from the mortgage industry, too.
The most pushback you see is in the non-agency area,
because the parties are not around anymore who originally
committed the crime, such as it is, and you have no leverage
over the lenders other than legal action.
Mr. McWatters. Will, in your view, this present a systemic
problem, meaning a lot of TARP recipients that are going to
have to buy back loans?
Mr. Cecala. That's been a problem that's been going on for
2 or 3 years. Is the amount of buybacks going to increase
significantly? My personal opinion is not. It'll be managed and
spread out over time. However, if these non-agency security
litigation claims, particularly the more recent ones involving
foreclosures, gain traction, that's certainly going to increase
the liability and that's something really we haven't factored
into the system.
Mr. McWatters. Well, one new development is that the
investors in RMBS are beginning to recognize one another and
work in concert, and they are suing the securitization sponsors
and the securitization trusts and the servicers to force them
to put back loans, which they've been unwilling to do so far,
perhaps because of conflict of interest issues and otherwise.
How do you see that changing it?
Mr. Cecala. Well, as I pointed out, it's been very
unsuccessful to date. There are a lot of people who are
requiring mortgage repurchases, but they're not non-agency
security investors. Mortgage insurance companies, Fannie Mae
and Freddie Mac, they've been very successful. The investors in
non-agency securities haven't been, for a variety of reasons,
as I indicated. One, the original offending party is no longer
around. They're going after people who acquired other ones, and
it's hard to make a legal claim that Bank of America is really
liable for the quality of loans someone made 3 years earlier.
Mr. McWatters. Yes, but if Bank of America put those loans
into a securitization trust and re-upped the representations
and warranties, they're on the hook the same.
Also, I've read that there's an increased use of
statistical sampling, as opposed to having to prove each
individual loan was misrepresented, to do a statistical
analysis of the pool and if it's significant then put the whole
pool back.
Okay, my time is up.
The Chairman. Thank you.
Mr. Silvers.
Mr. Silvers. Thank you.
Mr. Cecala or anyone, any other member of the panel: In
view of the exchange, Mr. Cecala, you just had with Mr.
McWatters, I remain just deeply puzzled by what the Federal
Reserve Bank of New York is up to. Do you have a theory, or do
any other members of the panel have a theory as to why, in view
of--if I take your remarks of a few moments ago, why the
Federal Reserve Bank of New York is asserting the sorts of
claims that we were just discussing?
Mr. Cecala. I'll take a quick shot at that. The Federal
Reserve Board of New York inherited a bunch of non-agency
mortgage security investments as a result of the merger of
JPMorgan Chase, Bear Stearns is the most obvious one. Part of
the agreement required the Federal Reserve Board of New York,
or effectively the government, to take over the worst assets,
because no bank wanted to acquire those bad ones.
So basically the Federal Reserve Board of New York's in the
position of having acquired a sizable amount of these bad
assets and, in representing the government's interests, would
like to get any possible money they can get out of anybody who
does--so they basically helped lead that effort to reclaim
losses that those investors--that doesn't mean they've got a
great claim, but that's the motivation behind it.
Mr. Silvers. Well, they appear to have a good enough claim
to put their name behind it, which is a nontrivial thing in
terms of the Fed.
Other members of the panel have a theory about what's going
on here?
[No response.]
Mr. Silvers. Okay. Secondly, I just want to--Mr. Evers, I
know that your testimony is limited to matters of data. If you
were in the room when I was discussing with Ms. Caldwell Bank
of America's finances, did I make any mistakes in that
analysis?
Mr. Evers. I heard parts of it. What we're doing is we're
working with our banks to assess that put-back risk and
basically make sure it's properly dimensioned, and that the
banks have the reserves for that. We're making sure that they
do a very full, complete analysis of that.
Mr. Silvers. How many $47 billion buybacks of 50 cents on
the dollar securities could Bank of America do before it blows
through its capital?
Mr. Evers. Well----
Mr. Silvers. Isn't that a mathematical question, not a
policy question?
Mr. Evers. Yes, you could do the numbers.
Mr. Silvers. You could run the numbers. It's not ten,
right?
Mr. Evers. Right.
Mr. Silvers. It's less than ten.
Mr. Evers. Right.
Mr. Silvers. It's probably less than five before you guys
would be pulling the fire alarms.
Mr. Evers. Like I said, the banks have to assess, fully
assess and dimension the risk here. We're making sure that they
do that. I don't know whether the estimates thrown out there in
terms of exposure----
Mr. Silvers. I understand that. I just wanted to make sure
I wasn't making any mathematical mistakes.
Now, we have heard in this hearing I think from different
members of our panel and from different witnesses two kinds of
stories about what is in the public interest here broadly with
respect to what to do about the very large number, somewhere
between, I've heard, 7 million and 13 million homes and
families, homeowners, that are facing foreclosure, what outcome
we want.
I think there are two stories that have been put out there.
One is kind of the thing that Andrew Mellon said early in the
Great Depression, which is liquidate everything, let's get
these homes out of the hands of the homeowners and into the
hands of the banks and sold onto the markets as fast as we
possibly can. The second theory is--and one can look back at
how Andrew Mellon's advice worked out for him and Mr. Hoover.
But then we can look at the other sort of basic
inclination, which is to try to keep as many people as possible
in their homes and keep those homes off the market.
Those are the two sort of basic ideas in play here. In view
of what we know about housing prices, housing prices' effect on
consumer demand, basic supply and demand dynamics, which of
these ideas is right? Which is in the national interest? I ask
any member of the panel to respond.
Mr. Cecala. I'll start out responding. There's no question
that to resolve the housing crisis, such as it is, you have to
eliminate or reduce the number of distressed properties out
there. The question is just the timeframe of doing it. It would
be painful, there is no question, to try to burn through all
the foreclosures as quickly as possible, get over the
foreclosure mess in 2 or 3 years, but recover. Worst case is
you take action that drags it out for 5, 10 years.
Mr. Silvers. You didn't listen to my question. My question
is, is it a better idea to throw people out of their homes and
put the homes on the market or is it a better idea to try to
keep them in the homes paying something? Which is better for
the economy? Which is better for housing prices? Which is
better for the viability of the financial system? Which course
is better for the country, not if we're going to take one
course should we do it slow or fast, but which course is
better?
Ms. Gordon. I'm happy to provide a straight answer to that.
It is better to save the homes. We're talking--let's not
conflate two things. What we want to do is keep homes from
being sold in foreclosure. Once the homes are sold in
foreclosure and the family is gone, you want a family living
back in them. I in many cases would like to see the original
family get to buy that home right back at the same price that
they kicked them out for, that they wouldn't reduce their
principal to to prevent the costs of foreclosure in the first
place.
But before you get to the foreclosure sale, we should be
doing every single thing we can do to keep people in their
homes. Once that sale is over, putting Humpty Dumpty back
together again is very, very difficult. But before the
foreclosure starts, we've got lots of options to prevent it.
Mr. Silvers. My time has expired. Thank you.
The Chairman. Dr. Troske.
Dr. Troske. Thank you.
I have a question for I guess several of you, and maybe
I'll start with you, Mr. Cecala. Several of you in your written
statements indicated that you felt that the rules under HAMP
were sort of inappropriate, that they were overly onerous and
didn't address the problem directly, and also indicated that
HAMP rules may be pushing servicers to modify mortgages outside
of HAMP.
Could you sort of respond, do you think the rules of HAMP
are appropriate, and if not what do you think we should do to
be modifying them?
Mr. Cecala. Well, one of the significant things we've seen
with the HAMP program--particularly it was an unintentional
test of it--was when the program was launched you saw a lot of
people who were put in trial modifications without having their
paperwork checked or whatever else. One of the most
significant, I think, results of that is a lot of the borrowers
were able to make the payments at the reduced amount, but later
were kicked out of the program because they couldn't meet the
paperwork requirements.
Keep in mind, going back to what I said before, we've got a
huge number of borrowers who've got loans out there with no
paperwork, no documentation of income, and now we're asking
them to produce tax returns and other things to qualify for a
HAMP modification. I think that makes it very, very hard.
There are some other things. Talk about the present value
test; I think that's a good idea, but it basically favors
people who are under water on their mortgage. There are a
number of borrowers that I know who've come to me and said they
had equity in their home and that immediately almost
disqualifies them for HAMP, because you can certainly get a lot
more out of them with a foreclosure than you can with a loan
modification.
There are some basic flaws in the program that I think
discourage a lot of people and end up in rejections.
Dr. Troske. Ms. Gordon, would you like to--care to address
the question?
Ms. Gordon. Complexity is never our friend, and with the
kind of business model that the servicers have, having relied
on them alone to take on the task of reunderwriting all of
these mortgages, we didn't do the necessary things to make sure
they staffed up and increased capacity in a way to make that
happen right.
Now, I do want to point out that actually, particularly for
people who used nonprofit housing counselors or attorneys, many
of those borrowers in fact submitted all of their documentation
at the beginning of their trial modification, but the servicer
just didn't necessarily want to bother to look at it or wasn't
quite sure what to do with it.
So in my written testimony I give a lot of reasons why I
think there have been problems with HAMP. But ultimately the
problem is we're offering carrots and apples and oranges, but
we've got no stick. And there are so many different cross-
cutting incentives in the system right now, so many entities
are wearing two or three different hats. It's just very
difficult to untangle without involving neutral third parties
in some way.
Dr. Troske. Ms. Schwartz, I'd like to hear your response.
Ms. Schwartz. Sure. Well, it's my view that, while onerous,
these are taxpayer dollars and if they don't qualify, and if
there's a like solution outside of HAMP, which is happening, we
shouldn't necessarily say that's a bad thing. People that don't
qualify for HAMP could go to foreclosure.
If the person wants to stay in their home, has the capacity
to stay in their home, the servicer can accommodate that and
the investor. Modifications outside of HAMP are a good thing
and they are not with the use of taxpayer dollars.
So I think it's a complicated issue and I would say the
lost documentation, we also recognized that and that's why we
developed a safe and secure way for counselors to be involved
in the process. I really like the third party help for that
borrower, to have a trusted solution and an adviser to work
with as they submit things, and you know they won't get lost
through an electronic system.
Dr. Troske. Mr. Evers, I have a question for you. You talk
about mortgages that involve a larger reduction in payment. Do
you know, for those modifications, what the average increase in
payments is going to be when the permanent modification ends in
a 5-year period? Are they going to look--so the payment goes
down by $500 or $600. How much is it going to go up?
You've looked at these numbers. Can you speculate a little,
what you think is going to happen at that point?
Mr. Evers. Well, the mods are a permanent change in
contractual terms. So those reductions in payment are
permanent. So you're expecting the borrower to have lower
payments.
So when you look at HAMP, you're seeing a greater reduction
in payment----
Dr. Troske. But the reduction is only for--at some point it
resets. It may not reset all the way, but those payments are
going to go up. A previous witness did testify that at the end
of that period the interest rate is going to reset to whatever
the Fannie Mae interest rate at the time is. Presumably,
they're making higher payments at that time. Is that not true?
Mr. Evers. What we're tracking right now is basically the
contractual change in payment and we're basically saying at the
time of the mod that it's being done, we're comparing what the
payment was before and after the mod, and we're doing that for
HAMP mods and we're doing it for proprietary mods.
What we haven't done is looked out further, 5, 7 years, or
10 years.
Dr. Troske. Is it possible? That seems like something worth
doing to me. I guess I would encourage you to do that.
Mr. Evers. It's something we could look at.
Dr. Troske. Thanks.
The Chairman. Thank you.
Superintendent Neiman.
Mr. Neiman. Thank you.
I'd like to direct my first questions to our national bank
regulator, Mr. Evers, and to our industry representative, Ms.
Schwartz. You probably heard my dialogue with Ms. Caldwell
around the sustainability of proprietary mods. I also want to
point out that Ms. Caldwell has remained for this portion of
the panel, and I want to commend her for that, because we've
often asked Treasury representatives to stay for the second
panel and it has not been a practice in the past. So I think it
is very helpful for her, and we appreciate that, listening to
this round of dialogues.
You may also have heard Ms. Gordon, who shared my concerns
that borrowers in proprietary mods may be worse off than they
were before. So my question really goes to the data, and do you
share our frustrations in being able to assess the actual
sustainability of the proprietary mods? Though you point in
certain sections that proprietary mods, we understand the
reduction in payments may be half of what they are for HAMP
mods, we still don't even know the terms of those
modifications.
In a HAMP mod, we know that those reduced payments will be
for the existence of the trial mod, 5 years. We don't know the
reduction in the HAMP mod and for what term.
How comfortable are you and how can we improve these
reports so that we really can get our arms around the
sustainability of these proprietary mods? Mr. Evers.
Mr. Evers. That's a great question. It's something we've
looked at, so we've been trying to track that for the HAMP as
well as the proprietary. In the second quarter report, where
we're at right now is we know the change in payment for a HAMP
mod versus a proprietary. We also reported the redefault rate
for a HAMP mod versus a non-HAMP mod, and the HAMP mod
redefault rate is half of what it is for a proprietary mod.
Mr. Neiman. Ms. Schwartz.
Ms. Schwartz. Yes. I think it's an excellent question and
one that we need to address. We've been attempting to track, in
addition to how many loans have a lower principal and interest
payment, which is a good step forward. We've asked for, are
they at 5 years duration and at 10 percent or more a reduced
payment, so that you feel that affordability, and you can
measure that as well. We're looking at redefaults. We've been
working for a couple of months to collect that, and it's
probably this month or next we'll be able to start reporting
that.
All the government agencies have looked to us to try to
collect that, and I've worked with the servicers to do so.
Mr. Neiman. Mr. Evers, could you share our interest in
getting that performance data by servicer, so that we can
actually compare performance among servicers as well as, I
assume, provide a more effective supervisory tool for
regulators?
Mr. Evers. We can cut the data just about any way possible.
We can do it by----
Mr. Neiman. Is there a reason that you are not sharing that
information by servicer in the public reports?
Mr. Evers. It's confidential supervisory information.
Mr. Neiman. Why do you feel that that is supervisory
information, where the information of simply factual data
included in the Treasury's monthly reports do not present
similar issues?
Mr. Evers. Well, we're collecting our data directly from
our institutions. We're collecting loan-level data and we're
using that data as part of the supervisory process. So under
our legal authority, we deem it to be confidential supervisory
information, and our policy approach has been to disclose
aggregate data, but not individual bank-specific data.
Mr. Neiman. And you are using that information with respect
to supervisory responsibilities?
Mr. Evers. Right. So for example, in my testimony, when we
saw high redefault rates, we calculated that for each of the
reporting institutions and we criticized each of them using
their data and said: Here's your redefault rate, fix these
redefault rates, put in mod programs.
Mr. Neiman. Thank you.
Picking up on this, we in New York have for the first time
registering mortgage loan servicers. We now have oversight
responsibilities. We've adopted duties of care, business
conduct rules that are enforceable, including the requirement,
the authority, to receive quarterly data regarding not only the
mandatory modification efforts, but also performance data.
Our ability is limited because of the visitorial powers,
that we would be restricted in receiving data from national
banks. I also assume the industry would not necessarily like to
see different reporting structures among 50 states, even though
we do believe that this is a model that can be adopted either
nationally or at the CFPB level.
Would the industry support a national reporting requirement
for mortgage performance data?
Ms. Schwartz. I have not spoken to--for that specific
question, I couldn't comment on it. But I do believe there is
some call in the Dodd-Frank bill to have a loss mitigation
database created. So I thought that might be happening.
Mr. Neiman. Thank you.
The Chairman. Thank you.
Ms. Gordon, to continue on my other question, what do you
think the present foreclosure problems--the present foreclosure
problems have on HAMP? I mean, the problems with the robo-
letters and the rest?
Ms. Gordon. The problems with the robo-signing and whatever
title problems they are, these aren't a technical problem.
Also, just to set the record straight, these are not
allegations. This is stuff we now know.
But what it is, it's symptomatic of problems throughout the
servicing industry. What's interesting, Mr. Silvers before used
the term ``pull the fire alarms.'' The fire alarms only seem to
get pulled around here when the bank solvency is threatened,
when it's that kind of systemic threat. When it's the systemic
threat to the American people, when we could have a quarter of
homeowners with mortgages lose their homes, that seems to me to
be worth a few fire alarms.
The problems we're seeing now just demonstrate how broken
the system. These problems I don't think--they're not a cause.
They're a symptom of a broken system.
The Chairman. Professor Porter.
Ms. Porter. I echo that, the symptom of a broken system. I
think any foreclosure relief program that permits servicers to
craft the system around their choices, their preferences for
how to deal with homeowners, is going to fail largely. So I
think the leading problem--one of the leading problems with
HAMP from the very beginning that we've seen Treasury try to
peel back is putting the servicers front and center in charge
and saying, you steer the ship and we'll just sit, we'll be the
coxswain in the boat and every once in a while we'll shout
something at you.
I think that's a real problem. The other thing I'm
concerned about is in the talk from Mr. Silvers about how do we
get people to these events, how do we do outreach. I'm very
concerned that homeowners are terribly discouraged by HAMP.
There's this whole pool of people who've tried and failed, or
who had the lost paperwork, friends and neighbors who've had
that experience. There's sort of a community contagion effect
here.
Even as things improve, there's a big lag in getting the
word back out. So I'm a little concerned that the result of
that is we have people who are not coming into a HAMP program
that might be improved and instead their new plan is that
they're going to sue in court and they're going to prove the
chain of title, and they don't have the legal capacity to do
that and, with all due respect to our court system, they don't
have the legal capacity, without a lot of struggle, to litigate
those things.
So I'm concerned that people are clinging to a life raft.
There's sort of no good life raft, so they're looking from one
to the other and they're falling and they're drowning in
between.
The Chairman. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you.
You know, I come at this problem as a corporate lawyer, M
and A lawyer, tax lawyer. When I look at it, I'm sort of
mystified, because if someone came in my office and--to take
off our foreclosure mitigation hat and just think about a
workout deal, someone comes in and says, yeah, I paid $250,000
for something, it's worth $150,000 today, there's a second lien
on it of 50 and a first lien of 200. What do I do?
The first thing I'd ask them: Is it non-recourse debt? And
if it's non-recourse debt, I have an answer. If they say--then
I would ask them, if it's recourse debt and they say yes, it's
recourse, but I'm broke. Okay, now we have the facts.
In a commercial setting, what you would do is you would
write the loan down to 150. You wouldn't fool around. You would
just write it down to 150, because, guess what, that's what the
property is worth if you foreclose and nobody's going to pay a
dime over 150. So you go to economic reality, 150.
Now, first lien, first and second lienholders are not
chumps. They're going to say: Well, what if the market turns?
Okay, I'll give you an equity kicker. You give them an equity
kicker. And the second lien mortgage, what you should do is
write them down to zero. You can't write them down to zero.
They're going to extort something out of you, right? They have
a seat at the table. You give them 10 cents on the dollar, you
give them 20 cents on the dollar, you make them happy, you give
them an equity kicker, you write it down.
The second thing you do is you refinance the loan to a
market rate of interest, not 7 percent, not one of these
ridiculous adjustable rate things which people can't pay. You
take it down to a 3.75, 4 percent, risk-adjusted, 30-year fixed
rate.
Okay, what am I missing? Why doesn't that work in this
environment? Yes, Ms. Schwartz.
Ms. Schwartz. Well, you have investor contracts that won't
let you write down mortgages. You have Fannie Mae, Freddie Mac,
and FHA who won't allow for a writedown like that.
Mr. McWatters. Well, those rules need to be changed.
Someone needs to talk to them.
Ms. Schwartz. The NPV test requires something north of what
it's worth, and those workouts then take that into
consideration. One thing this program has done through HAMP and
others is target affordability. It's not negative equity per
se. So 2 percent, 40 years, gets you that $500 payment, versus
just writing off the full amount.
Mr. McWatters. So you're saying there are rules that would
inhibit a commonsense market-oriented response?
Ms. Schwartz. Of course.
Mr. McWatters. Oh, that's encouraging.
Anyone else?
Ms. Porter. I would say that what you described--I'm a
bankruptcy lawyer, so what you described----
Mr. McWatters. I'm trying to keep everyone out of
bankruptcy here. I'm trying to cut a deal.
Ms. Porter. Right. But the idea is, what you described is
exactly right and exactly consistent with where parties get to
when they don't want to go into bankruptcy court because they
know that's exactly the deal the judge is going to get them.
Mr. McWatters. Of course.
Ms. Porter. So the point here is that if you like what you
described and you think it makes sense, and I do, and the
servicers aren't doing it, because they're the intermediary--in
your negotiation, you weren't negotiating with someone that
hung up on you, that you had to call--I don't know what your
calling is like at your law firm, but----
Mr. McWatters. I've been hung up on a few times, yes.
Ms. Porter. But the basic idea is that it wasn't this
intermediary that had a profit center and had misaligned
incentives and was inept, frankly.
Mr. McWatters. I would tell them that's a personal problem.
They cut that deal back in 2004. I'm sorry they cut a bad deal.
But guess what, if that deal had turned out to be a really good
deal, do you think they would be calling Secretary Geithner and
saying, hey, we made a whole bunch of dough, we want to give
you some more? No, they would keep every dime of it. So they
should live with the downside, too.
Ms. Porter. I agree, and I think this is one of the reasons
that we have pushed and pushed for cramdown, is our sense is
that servicers will not reach the rational conclusion that
you're talking about, and that negative equity--while
affordability is important, so is negative equity. And because
they won't get there on their own, we need this system to force
them. And bankruptcy courts in my view are not the perfect
system for this. I have concerns about putting more families
into bankruptcy, but the point that Ms. Gordon raised about we
need a stick--these people have gorged themselves on a buffet
of carrots and they're still not doing what we want them to do,
and so we need something stronger, I think.
Mr. McWatters. I'm way over my time. Thank you.
The Chairman. Mr. Silvers.
Mr. Silvers. I just want to get a couple relevant pieces of
data on the table.
Mr. Evers or other panel members: The prior testimony today
was that there have been 600,000 actual foreclosures this year.
Do we know what portion of those were on homes whose mortgages
were held by Fannie, Freddie, or another agency, as opposed to
what percentage were in the private label market?
Mr. Evers. I don't have that data available. I may be able
to follow up with you.
Mr. Silvers. If you could please follow up with us.
Does anyone have a guess roughly, I mean in orders of
magnitude?
Mr. Cecala. Sure. It's got to be close to half, and
particularly if you thrown in FHA and VA, or the whole
government.
Mr. Silvers. The whole government.
Mr. Cecala. The whole government share of the market is 60
percent. Even assuming the mortgages perform better than, let's
say, non-agency mortgages, it's got to be close to half. So the
answer is Fannie Mae, Freddie Mac, FHA, VA have a large role in
terms of controlling those foreclosures.
Mr. Silvers. Ms. Gordon, you think that's correct, that
it's close to half? I would have thought, given what we've
heard about the relative balance of quality, that it would not
be.
Ms. Gordon. You know, I don't know, but I'm pretty sure
someone in my office does, and I can get back to you. But I
think there's no doubt that some of the foreclosures happening
are agency loans.
Mr. Silvers. Oh, yes. Just the percentages.
Mr. Evers, I think you probably have the definitive
information on this. If you could provide the Panel with it,
that would be very helpful.
Secondly, Mr. Evers, in your testimony, in your written
testimony, I believe you said that approximately 2 percent of
mods both under HAMP and private mods--and Ms. Schwartz can
comment--2 percent involved principal reductions; is that
correct?
Mr. Evers. Correct.
Mr. Silvers. Ms. Schwartz, does that make sense to you?
Does that sound right, in thinking about, say, the press
release that's in your testimony----
Ms. Schwartz. Yes.
Mr. Silvers [continuing]. And the breadth of what your
members are doing?
Ms. Schwartz. Well, I think I don't have distinct knowledge
of the 2 percent, but early indications show that we know
investor roles--and of course, the HAMP waterfall is rates,
term, and then principal forbearance or deferral as the three
tools, until the market has a standard NPV test that includes
the principal writedown first, which is coming, I believe,
through Treasury. We can then see a little more activity under
that, where applicable.
Mr. Silvers. If there's any more data on that, I'd
appreciate it.
I have a final question for the panel. I think one could
characterize the testimony and the remarks of my fellow Panel
members, particularly Mr. McWatters' remarks, which I fully
agree with, just a few moments ago, that we are faced with a
choice here. We can either have a rational resolution to the
foreclosure crisis or we can preserve the capital structure of
the banks. We can't do both.
Which should we do?
Ms. Schwartz. I think we can do both.
Mr. Silvers. I'm not surprised.
Any other panel members?
Ms. Gordon. I'm not sure. I think that we can--I think
either way, down the road we can't--these homes are worth what
they're worth. No matter what anybody's carrying them on their
books at, we can't--we're not going to change that, and in fact
the best hope we have of changing that is fixing the
foreclosure crisis and stopping this death spiral that the
housing sector is in.
So if we do that right, maybe we can help make the banks'
books hew closer to reality. If we do neither, everybody can
lose their home and then the banks are going to lose all the
money anyway.
Mr. Silvers. My time is up. But, not surprisingly, you
appear to favor keeping people in homes and perhaps having to
deal with the bank balance sheets as a result.
Ms. Gordon. Yes.
Ms. Porter. Can I just say one more thing? If the banks got
their deleveraging--we had too much leverage.
Everybody was overleveraged, families and the banks. They
got their chance to dump some of their bad stuff on the Fed of
New York, and they got their chance to get an infusion of cash.
Mr. Silvers. But the Fed wants it back.
Ms. Porter. Yes, I know.
But the point is, the American family is still very highly
leveraged. We're still at a point of debt for most families
that is unprecedented in the history of America. Even with
their making a little more saving, their not using as much
credit card, they're still really vulnerable going forward.
That long-term affects the ability of the financial sector to
be stable and be profitable.
So there's some benefit to getting the homeowners'
positions. There's pain in the short term for the banks, but if
your whole base or pool to lend to is highly risky and highly
unstable, you'll just keep running the risk of more blowups, of
more very poor lending.
Mr. Silvers. Thank you.
The Chairman. Thank you.
Dr. Troske.
Dr. Troske. So I'd like to sort of preface my question a
little, and I'm actually going to answer the question that my
fellow panelist Mr. Silvers asked before, since I'm always
happy to answer his questions, to the previous witness, because
I'm actually an economist and I understand a little bit about
supply and demand, and I also understand a little bit about
dynamics and the growth of the economy over time.
Mr. Silvers is exactly correct. If we push a lot of homes
on the market, prices will go down, unequivocally. Now, why
would that be a rational policy for a government to do?
Because, of course, there are tradeoffs. As people have noted,
we are at a point where--we're at a point. We're at a point
where house prices are worth less than they were. Banks need to
write that off, and of course people need to write that off as
well.
But again, the point I made before is, well, is that there
are lots of actors in this economy, many of whom were hurt and
any of whom will only recover when the economy begins to grow
again. And there is a tradeoff. There is a tradeoff between the
short-term growth, taking losses in the short term, for the
potential of a quicker long-term growth in the long run. Part
of what we're looking for is what's the best way to get to the
long-term solution, a solution in which we have people in
affordable housing situations.
So, Ms. Gordon, you seem to be the one that was willing to
address this question before, so I guess I'll ask you again, or
I'll ask you to expand on what you thought. Should we not take
any of the rest of the actors in the economy's well-being into
consideration when thinking about this tradeoff ? Because we
are where we are, and the question is--part of the question
should be how we got here and we need to address the issues
that got us here. But the other question is how do we move
forward in a way that gets us back to a growing economy as
quickly as possible.
Ms. Gordon. I don't want us to be posing false choices
here. There are foreclosures that are unavoidable. What we need
to do is figure out a reliable way to separate out the ones
that are avoidable from the ones that are not avoidable. We do
not have that reliable way right now. That is the system in
which the public has lost confidence and now the buyers have
lost confidence, and we are in a pickle as a result.
Foreclosures that are unavoidable, I completely agree,
let's do them. Let's get that home resold, hopefully to someone
in the community and get some of these communities rebuilt. For
the ones that are unavoidable, where, as Mr. McWatters has
pointed out, it just makes no sense to go through these very
costly foreclosures when both the investor and the homeowner
end up worse off.
I mean, I'm not an economist, but I'm pretty sure that's
not an optimal scenario there.
Dr. Troske. As an economist, I'll agree with you 100
percent. What Mr. McWatters said is entirely correct. If it's
in the interests of the borrower and the lender to modify the
mortgage, that should be done, and we shouldn't have rules that
prevent that from occurring.
Ms. Schwartz. And that is what we--we want that to happen
in all of those situations.
Dr. Troske. Thank you.
The Chairman. Superintendent Neiman.
Mr. Neiman. Thank you.
One of the main frustrations with HAMP has been regarding
issues around lost documents and delays in decisioning. That's
why I've been so strongly interested in a web portal, the Hope
LoanPort that Ms. Schwartz is an executive on. What is the
level of usage? When are we going to begin seeing data
regarding access and volumes of mortgages and counselors and
borrowers who are using the system?
Ms. Schwartz. It's a great question. We just left our pilot
phase in June of this year and signed on some of the nation's
largest servicers over the summer, which is what you need to
get the volume. And of course, you need housing counselors to
help direct that volume, and we've worked with NeighborWorks
America and HUD to help endorse the system for counselors
across the country.
We have thousands of loans now on it that have entered the
system.
Mr. Neiman. Thousands meaning?
Ms. Schwartz. Up to 6,000.
Mr. Neiman. 6,000.
Ms. Schwartz. What's most important is that we tested it
thoroughly, and you should know that it was banks and
counselors that developed it together and that accommodated
each other's requests on how it could work for statusing of
loans. We have good agreement among the banks and the
counselors on how to operate and tell each other what's going
on in a more timely manner and kind of guidelines of that sort.
So we're working very closely with the community groups,
counseling groups, as well as the banks and servicers.
Mr. Neiman. Plans for direct access by borrowers?
Ms. Schwartz. We'd like to see that happen. We do have--one
of the state housing agencies already has direct access through
the tool to borrowers and we'd like to see that more broadly
offered, and we'll offer it to counselors directly, to have
direct borrower access.
We think third parties should be helpful to the borrower in
that document retrieval and scanning to make sure it all works
well. But we believe it's a fine way to go.
Mr. Neiman. So my last question is also directed to you.
You heard Mr. Evers talk about the limitations on sharing data
regarding proprietary mods based on supervisory considerations,
something I certainly know something about. However, the same
restraints would not apply to the industry itself to
voluntarily share that information to the public on performance
data by servicer.
Ms. Schwartz. You know, we went through a long process to
get all the servicers to agree to share data. One of the
constraints I have is I don't see anyone's individual data. I
just have the aggregate information. I would leave it up to the
regulators and the supervisors to work with you on bank by bank
and servicer by servicer. We're here to kind of tell you the
results otherwise.
Mr. Neiman. Well, ideally, Treasury and HOPE NOW and the
regulators, if they can find a way to share the servicers--I
see Ms. Gordon. How important do you think getting that data
out is?
Ms. Gordon. You know, our goal is to make evidence-based
policy, and when you can't see the evidence that makes it
harder. We've been particularly frustrated by the fact that we
have yet to see the public release of the loan-level HAMP data,
which has been promised for months and months and months. The
people at my organization who do the research using this data
really, really need it.
Mr. Neiman. Thank you.
My time has expired.
The Chairman. Well, thank you very much. Thank the panel
very much. The record will be open for a week for any further
questions the Panel members want to raise.
I also want to thank Ms. Caldwell for staying behind. I
thought this was an excellent panel and I think we all learned
a lot from it.
So thank you, and with that the hearing is adjourned.
[Whereupon, at 12:53 p.m., the hearing was adjourned.]
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