[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 5579, THE EMERGENCY MORTGAGE
LOAN MODIFICATION ACT OF 2008
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 15, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-106
U.S. GOVERNMENT PRINTING OFFICE
42-718 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma KEVIN McCARTHY, California
DEAN HELLER, Nevada
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York DEBORAH PRYCE, Ohio
BRAD SHERMAN, California JEB HENSARLING, Texas
GREGORY W. MEEKS, New York CHRISTOPHER SHAYS, Connecticut
DENNIS MOORE, Kansas MICHAEL N. CASTLE, Delaware
MICHAEL E. CAPUANO, Massachusetts PETER T. KING, New York
RUBEN HINOJOSA, Texas FRANK D. LUCAS, Oklahoma
CAROLYN McCARTHY, New York DONALD A. MANZULLO, Illinois
JOE BACA, California EDWARD R. ROYCE, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia ADAM PUTNAM, Florida
NYDIA M. VELAZQUEZ, New York J. GRESHAM BARRETT, South Carolina
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, TOM FEENEY, Florida
LINCOLN DAVIS, Tennessee SCOTT GARRETT, New Jersey
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
C O N T E N T S
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Page
Hearing held on:
April 15, 2008............................................... 1
Appendix:
April 15, 2008............................................... 25
WITNESSES
Tuesday, April 15, 2008
Daloisio, Ralph, Managing Director, Natixis Structured Finance
Group, on behalf of the American Securitization Forum.......... 4
Story, Robert E., Jr., CMB, President, Seattle Financial Group,
and Vice Chairman, Mortgage Bankers Association, on behalf of
the Mortgage Bankers Association (ABA)......................... 6
Young, Marlo A., Partner, Thacher Proffitt & Wood LLP............ 7
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 26
Carson, Hon. Andre........................................... 27
Daloisio, Ralph.............................................. 28
Story, Robert E., Jr......................................... 44
Young, Marlo A............................................... 49
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
Letter from the National Association of Realtors, dated April
3, 2008.................................................... 53
H.R. 5579, THE EMERGENCY MORTGAGE
LOAN MODIFICATION ACT OF 2008
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Tuesday, April 15, 2008
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Sherman, Moore
of Kansas, Miller, Scott, Davis of Tennessee, Donnelly;
Hensarling, Castle, and Brown-Waite.
Also present: Representative Watt.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order.
Without objection, all members' opening statements will be
made a part of the record.
Good afternoon. We meet today to examine H.R. 5579, the
Emergency Mortgage Loan Modification Act of 2008.
I worked with Congressman Castle on revising his initial
proposal and introducing this new bill. Nearly 6 percent of all
loans on single family properties outstanding in the fourth
quarter of 2007 were delinquent, which is the highest total
delinquency rate in 20 years. Moreover, slightly more than 2
percent of the homes are already in the process of foreclosure.
That is the highest level ever. These numbers, coupled with the
general anxiety and unease brought on by the housing crisis and
the ongoing credit crunch underscore the importance of this
hearing and the need for our bipartisan legislation.
Many in Washington and throughout the country are
preoccupied with playing the blame game and performing
postmortems as to what caused the subprime fiasco. I believe
that such exercises must wait for another day. We can try to
figure out how it all went wrong some other time. The immediate
problems faced by many borrowers demand our attention. The
search for innovative solutions in an increasingly complex
financial world should be our priority. This afternoon's
hearing represents part of that search.
One of the main obstacles that we face in attempting to
decrease the number of mortgage foreclosures is the reluctance
of servicers to modify loans and conduct workouts because they
fear investor lawsuits. The legislation under consideration
today will provide servicers a safe harbor from legal
challenges. If the servicers meet certain conditions, a safe
harbor should embolden servicers to ramp up loan modifications.
Without the fear of litigation, servicer efforts toward loss
mitigation should also greatly increase.
Some contend that adoption of this legislation will result
in the abrogation of existing contracts. In drafting this new
legislation, however, we addressed these concerns and sought to
create a bill that honors the terms of existing contracts.
Those parties who remain opposed to loan modifications on these
grounds should remember that rigid principles sometimes must
yield to urgent solutions that demand immediate action. This
situation is one such instance.
For every mortgage that does not fail but rather is saved
by the servicer through loss mitigation, the value of the
underlying loan pool should increase. After all, mortgages in
foreclosure amount to much less than a modified loan. But more
importantly, these modifications by the private sector will
keep more families in their homes. To me, these benefits
considerably outweigh the costs.
Some may, however, continue to question certain provisions
of this bill in good faith and on fair grounds. My mind is by
no means closed on these matters. If a better way exists to
address this issue or to write this legislation, I want to hear
it. This hearing provides us with a forum for a thoughtful
exchange of ideas and, I hope, a productive series of questions
and answers.
In closing, I look forward to hearing the thoughts of our
witnesses on these matters. I also want to thank each of them
for appearing. Their views will assist us as we navigate our
way through this complicated situation.
We must act where we can to lessen the severity of this
crisis. Moreover, we should do so in a way that respects the
efficiency of the capital markets, but which is not afraid to
find solutions to redress its excesses.
I yield back the balance of my time and recognize the
gentleman from Delaware, Governor Castle, for an opening
statement.
Mr. Castle. Mr. Chairman, first, thank you very much for
holding this hearing today, first, and second, I agree with
your comments entirely, that we need to be as open-ended as
possible about whatever changes are necessary to put into
effect what we all think is in the best interest of everybody,
which is to deal with the mortgage crisis which we have in our
country today. I am anxious to hear what our panelists have to
say, so I will be brief.
The goal of this legislation has been straightforward from
the very beginning to provide added assurance and thus safer
legal footing for servicers modifying mortgage loans. To that
end, it has been my belief that homeowners and investors alike
could benefit by finding terms and conditions that would allow
at-risk homeowners the opportunity to stay in their homes while
providing the investors some rate of return on their
investments.
Today's economic conditions are very challenging for both
borrowers and investors. Borrowers didn't enter homeownership
and the mortgage market in the expectation of losing their
home, and investors purchased mortgage-backed securities with
anticipated rates of return. That was then and this is now. All
along, I worried that lawsuits could become a drag on the loan
modification process, or worse, bring it to a complete stop.
Thankfully, we have not seen that materialize.
However, the risk of that occurring still exists. In fact,
the risk may be greater in the coming months as servicers move
on to modify marginally more difficult loans.
In closing, Mr. Chairman, I want to thank you, Chairman
Frank, and Deb Silberman of the committee staff for assistance
with this bill. I look forward to the testimony and suggestions
for further improvement from the servicer and investment
witnesses.
Chairman Kanjorski. Thank you very much, Mr. Castle. The
gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman. And I want to thank
you, Mr. Chairman, and the ranking member for holding this
important hearing. I am pleased that we have chosen to again
address the mortgage meltdown and credit crunch in our markets,
and as I have said repeatedly, I think it is very important
that we move with the same urgency and aggressiveness to help
homeowners and families as we have to help Wall Street and
specifically Bear Stearns, which I concurred with.
There are 2.2 million homeowners in this country who could
lose their homes in the next few years. Many people are just
barely hanging on by their fingernails. This is a call to all
involved that we have to work together in a hurry with great
urgency to find positive ways and long-term solutions to those
facing foreclosures. We must have a policy that is grounded on,
first and foremost, keeping people in their homes. We have to
refinance, we have to restructure, we have to do what is
necessary to keep people in their homes.
I would like to know again, as I have asked before, why it
has taken regulators, who were well aware of the subprime
mortgage crisisand issue early on, long before it hit a peak,
why it took them so long to act, despite the clear evidence of
problems in the markets, evidence that was pointed out time and
time again, if I may say so, Mr. Chairman, by this very
committee in areas dealing with predatory lending, in areas
dealing with extending credit to people who should not have
gotten that credit, and in the lack of accountability and
responsibility within the lending market.
As more and more of our creditors are now cracking down on
certain lending practices, we must ensure that there are sound
underwriting of these loans, and that sound underwriting on
these loans is rewarded, and those players who continue to prey
on individuals with predatory practices realize that there are
consequences. We have to put them out of business, and we
should ensure that credit continues to be available to those
who qualify, and are feasible candidates for home loans, such
as first-time buyers, lower income households, and African-
American and other minority families and communities.
Not only are foreclosures causing problems for families
financially, but they are placing undue pressures on city and
local, municipal, and county services such as code enforcement.
In my own district in Georgia, for example, there are certain
neighborhoods with an inordinate number of foreclosures, and
they have become magnets for crime. That is why we have to keep
people in their homes. Vacant buildings bring about crime. They
bring added downward pressures on local governments.
I am concerned about the foreclosure numbers in Georgia,
especially. We have a high rate of foreclosures. We rank 8th in
the Nation, and one or two of our counties are right there
within the top 5 in terms of overall foreclosures and
delinquencies.
We must be alert to economic indicators and I hope to hear
today more detail about the risk of a prolonged housing slump
and potential ideas and solutions to the problems.
I am very pleased that the Emergency Loan Modification Act
will remove the legal liability roadblock for servicers that
provide for specified loan modifications and workouts and will
help borrowers to restructure and refinance their loans at a
faster pace. That is the key, ladies and gentlemen:
restructuring and refinancing at a faster pace with the
underlying move at all costs to keep people in their homes.
Thank you very much, Mr. Chairman. I look forward to the
distinguished witnesses and their testimony.
Chairman Kanjorski. Thank you, Mr. Scott.
We now move to our witnesses, and without objection, all
witnesses' written statements will be made a part of the
record. Each of you will be recognized for a 5-minute summary
of your testimony.
First, we have Mr. Ralph Daloisio of Natixis Structured
Finance Group, testifying on behalf of the American
Securitization Forum. We have reserved 5 minutes for you, sir.
STATEMENT OF RALPH DALOISIO, MANAGING DIRECTOR, NATIXIS
STRUCTURED FINANCE GROUP, ON BEHALF OF THE AMERICAN
SECURITIZATION FORUM
Mr. Daloisio. Chairman Kanjorski, Congressman Castle, and
distinguished members of the subcommittee, as chair of the
investor committee of the American Securitization Forum, I have
been asked to share my views on H.R. 5579.
I have reviewed a March 11th draft of the bill, and I can
see great care was exercised in its construction. Those who
were involved in this drafting should be commended for their
thoughtfulness. There are, however, certain elements of the
bill that give me pause, and I would like to share those with
you today.
The bill establishes a standard of care for servicers when
effecting mortgage loan modifications, or workout plans, and a
safe harbor for performing a qualified loan modification, or
workout plan, provided there are no specific contractual
provisions to the contrary. The contractual standards to which
the bill relates, the duties of servicers with respect to
modifying or otherwise mitigating losses on distressed mortgage
loans are typically established through general provisions and
securitization contracts rather than specific ones. Though the
provisions are often framed in general terms, they create
legally enforceable expectations of conduct by the parties to
whom the provisions pertain, including duties and
responsibilities of servicers to investors when engaging in
loss mitigation activities. To the extent the bill would
supersede these general provisions, it would be, in effect,
overruling the contracts.
Furthermore, the standard of care prescribed by the bill in
its Section 2(a) may be weaker and less protective of investor
interests than that found in most servicing contracts today,
whereas the bill requires a servicer to compare the net present
value of defaulted loan assuming foreclosure, with its net
present value assuming modification. Typical servicing
contracts require the net present value analysis to be
performed across a wider range of modification and loss
mitigation alternatives with the servicer being bound to choose
action based on the alternative that maximizes MPV among the
other alternatives, not just one of them.
Finally, the bill would protect servicers complying with
its standard of care who grant a qualified loan modification,
or workout plan. By designating one kind of loan modification
over other kinds of loan modifications, the bill creates a
clear incentive for servicers to make only the protected
modifications rather than other modifications which might be
more beneficial to the securitization trust and to investors.
That incentive itself would be contrary to the contractual
standard of care to which servicers are generally bound by
their contracts and would again introduce the possibility of a
legislative overruling of preexisting contractual provisions.
Overall, if the intent of the bill is to clarify the
existing and customary contractual servicing standards and
incentivize servicers to apply those standards to minimize
losses and avoid foreclosures, I see nothing fundamentally
wrong with that from an investor's perspective. If this is the
case, then some relatively simple drafting revisions to the
bill would better align its wording to its intent.
If, however, the intent is to replace the legal duties and
commercial expectations of transaction parties with a different
set of duties and expectations supplied by Congress, I am
concerned that the passage of this bill would represent a de
facto modification of existing contracts. Since all parties to
a contract, including investors, rely on legal, valid, binding,
and enforceable provisions of the governing contracts, any
legislation that would dilute, amend, or modify such
contractual obligations or prejudice how the obligor fulfills
its obligations is considered by the American Securitization
Forum and by a consensus of the investor constituency within
the American Securitization Forum to represent dangerous
policy.
Legislative intervention into otherwise valid legal
contracts could potentially threaten the stability and
predictable operation of the contractual legal framework
supporting our capital markets system, and carried to its
logical conclusion, could have a chilling effect on the
willingness of investors to make investments in our markets.
Beyond the comments I have made, I would actually go so far
as to question the premise and also the need for the bill. The
underlying premise of the legislation appears to be the view
that mortgage loan servicers are inhibited by a fear of
investor lawsuits from doing more to avoid foreclosures.
However, servicers are already reasonably well-protected from
such lawsuits, since under typical servicing contracts, they
are liable only if they are negligent in performing their
duties. Usually, one of these duties is the duty to reduce
losses by avoiding foreclosures wherever possible. I therefore
generally believe that servicers have adequate legal
protections for granting modifications and are uninhibited from
doing so. The bill would neither change such duty nor would it
allow servicers to avoid liability for their own negligence in
performing that duty.
If there are cases where the servicers do need to minimize
loss by avoiding foreclosure is not clearly established, then
servicers and investors would have an alignment of interest in
making the necessary amendments and would seemingly have
sufficient economic motivation for doing so, especially since
foreclosure is usually the most costly means of resolving a
defaulting mortgage loan, it is in everyone's interest,
including investors', to avoid foreclosures wherever possible
and the damage that foreclosure is causing to our balance
sheets and to our communities.
I hope that my comments here today will prove to be helpful
to you, and I thank each of you for inviting me to share them
and for taking the time to listen.
[The prepared statement of Mr. Daloisio can be found on
page 28 of the appendix.]
Chairman Kanjorski. Thank you very much, Mr. Daloisio.
Next we will hear from Mr. Robert E. Story, Jr., president
of the Seattle Financial Group and vice chairman of the
Mortgage Bankers Association.
Mr. Story.
STATEMENT OF ROBERT E. STORY, JR., PRESIDENT, SEATTLE FINANCIAL
GROUP, AND VICE CHAIRMAN, MORTGAGE BANKERS ASSOCIATION, ON
BEHALF OF THE MORTGAGE BANKERS ASSOCIATION (ABA)
Mr. Story. Mr. Chairman, and Congressman Castle, thank you
for the opportunity to appear before you. MBA appreciates your
attention to this important issue, and in particular, we
appreciate the work of Congressman Kanjorski and Congressman
Castle. We are all focused on the same goal: keeping people in
their homes.
H.R. 5579 would protect servicers from litigation risk if
they engage in certain loss mitigation efforts. MBA identified
litigation risk as a barrier to workouts some months ago, and
we have been working as an industry to address this issue. We
are focused on improving clarity between investors and
servicers. Significant strides have already been made and
continue to be made.
The industry formed HOPE NOW to help homeowners avoid
foreclosure. We are funding counseling and promoting the HOPE
NOW hotline for borrowers, 1-888-995-HOPE. We have improved and
standardized our servicing practices.
The investor community has stepped up in many ways. For
example, investors have created guidelines to define the term
``foreseeable default'' that helps us help more borrowers. This
was a major advance. Many servicers have also instituted
foreclosure pauses to help give borrowers and lenders more time
to work out a solution that keeps borrowers in their homes.
These industry practices allow servicers to do to more to
help borrowers. Nearly 1.2 million repayment plans and
modifications were executed from July 2007 through February
2008, according to HOPE NOW. This is an unprecedented response
by the mortgage industry. Given what the industry has done
already, we recognize that more needs to be done. H.R. 5579 is
a thoughtful proposal to help us do more.
Our concern, however, is that the potential harm may
outweigh the potential benefits. Borrowers and mortgage
companies desperately need greater stability and liquidity in
the market. The best way to improve liquidity is through
investor confidence. Any effort that increases investor risk,
including protecting servicers from liability, hampers this
goal. We are concerned this bill may create investor
uncertainty similar to recent bankruptcy proposals, despite the
care the drafters took in trying to balance the interests of
investors and servicers.
MBA believes policy efforts should be focused on giving
lenders and borrowers more options to work together such as new
loan products to allow borrowers behind on their payments or
upside down on their mortgages to refinance. The committee is
currently working on such a proposal, and we look forward to
participating constructively throughout that process. MBA is
also eager to partner with Congress to finish work on FHA
modernization, GSE oversight reform, housing tax incentives,
and expanded mortgage revenue bond authority.
The Mortgage Bankers Association appreciates your efforts
to help borrowers stay in their homes. Servicers will continue
to use their contractual authority to perform loss mitigation
to the extent permissible and prudent. It remains unclear to
us, however, whether the benefits of H.R. 5579 outweigh the
potential harm the bill may cause the mortgage market overall.
Thank you for the opportunity to appear before you, and I
look forward to answering your questions.
[The prepared statement of Mr. Story can be found on page
44 of the appendix.]
Chairman Kanjorski. Thank you, Mr. Story.
And now we will hear from Marlo Young, partner, Thacher
Proffitt & Wood, LLP. Mr. Young.
STATEMENT OF MARLO A. YOUNG, PARTNER, THACHER PROFFITT & WOOD
LLP
Mr. Young. Chairman Kanjorski, Congressman Castle, and
distinguished members of the subcommittee, good afternoon and
thank you for the opportunity to testify here today. I am
honored to be here representing Thacher Proffitt & Wood to
discuss the Emergency Mortgage Loan Modification Act of 2008
and ways to prevent foreclosures and mitigate losses. We
commend you for calling this hearing and look forward to
offering our views on these important matters.
Although a substantial number of loans have been modified
to date, servicers have been unable to complete the desired
amount of loan modifications, primarily due to operational
challenges. The servicers must choose among a variety loss
mitigation alternatives to achieve a sustainable arrangement
with the borrower that is also in the best interest of
investors. This can be a very labor-intensive and time-
consuming endeavor for the servicer and unfortunately, there is
not one particular type of loan modification that is suitable
in every circumstance.
The loan modification process would benefit from more
streamlined approaches and enhanced automation. The ASF
framework released last December was a worthy attempt at
streamlining the loan modification process. However, the recent
reduction in short term rates lessened the anticipated payment
shock and has resulted in a smaller number of adjustable rate
loans that are eligible for modification under the streamline
framework.
We do not believe there are major legal or contractual
impediments to making loan modifications. Rather, our study of
typical servicing agreement provisions for the ASF concluded,
generally, servicers of loans and securitizations have the
authority to implement loan modifications and other forms of
loss mitigation alternatives when the loan is in default, or
default is reasonably foreseeable, provided that the action
taken is in accordance with accepted service and practices and
it is in the best interest of investors.
The provisions of Section 2(a) of the Emergency Mortgage
Loan Modification Act of 2008 employ concepts that are
consistent with the servicing provisions found in most
agreements. We support the inclusion of the provision in Secion
2(a) of the bill that reads, ``Absent specific contractual
provisions to the contrary, removing any requirement that a
loan modification or other loss mitigation not contradict the
terms of the servicing agreement may interfere with the
existing contractual terms of servicing agreements and result
in actions that are not necessarily in the best interests of
investors.'' We think Section 2(a) should clarify that the
servicer should select from all available loss mitigation
alternatives, the one that maximizes recovery, and not compare
the alternative selected solely to foreclosure.
In addition, as long as the servicer's procedures for
evaluating the net present value of a particular loss
mitigation alternative are reasonable, the servicer's decision
should not be challenged on the grounds that other evaluation
procedures might have led to a different result.
We question whether the safe harbor in Section 2(b) is
necessary or desirable if the standards in Section 2(a) are
adopted. As Section 2(a) requires that any loss mitigation
action not contradict any terms in the servicing agreement, and
sets forth standards that are generally consistent with
existing servicing provisions, the safe harbor contained in
Section 2(b) does not appear to be necessary. In fact, the safe
harbor provision may interfere with existing contractual
provisions and bring into question the rights of investors on
the servicing agreements.
We believe that portions of the bill, in particular Section
2(a), will be helpful in providing certainty regarding
appropriate loss mitigation standards. Section 2(a) would
clarify that the phrase ``in the best interest of investors''
refers to all investors in the given securitization trust in
the aggregate without regard to the effect of any specific
class. This would make the servicers task of determining the
appropriate loss mitigation more manageable.
We believe that a major impediment to a servicer utilizing
the full range of loss mitigation alternatives is the absence
of an available loan product for funding a short refinancing,
or a refinancing that pays off only a portion of the existing
first lien for borrowers who are in default or are in immanent
default. Accordingly, we think that proposals to expand FHA
Secure or create a new FHA program for this purpose can serve
as a key role in reducing foreclosures. My testimony includes
some recommendations for such a program that I hope this
committee will consider.
I thank you for the opportunity to participate in today's
hearing. Finding solutions to the current mortgage and housing
crises and preventing foreclosures should be a high priority
for all market participants in our communities.
Again, I commend your leadership on these important
matters. Thank you.
[The prepared statement of Mr. Young can be found on page
49 of the appendix.]
Chairman Kanjorski. Thank you, Mr. Young, and all the
members of the panel.
Before I get into my questions, I ask unanimous consent
that Mr. Watt be considered, for the purpose of this hearing,
as a full member of the committee with all the rights and
privileges thereto. Is there any objection? Hearing none, Mr.
Watt is so recognized. Mr. Watt, do you have an opening
statement?
Mr. Watt. No, Mr. Chairman.
Chairman Kanjorski. Very good. It seems to me that the
three witnesses, if I am hearing you correctly, really do not
feel there is a need for this legislation. Is that a reasonable
conclusion?
Mr. Daloisio. From what I have said, and what I have heard
the others say, I think that is where we are coming out.
Chairman Kanjorski. Well, I think that is interesting. But
the reason I am interested in seeing a safe harbor and other
encouragements to redo modifications in the mortgage field is
that, what kind of a signal are we sending? Just go along as we
have gone along over the last year? And catch as catch can. How
are we going to really encourage a lot of people who are
working with failing mortgages at this point to do something
about restructuring and modification of those mortgages? What
would you suggest we do, in other words?
Mr. Story. One of the suggestions that mortgage bankers
have is to find more products and new programs available so
people who may be delinquent or upside down can refinance. We
commend the House's approval of the FHA modernization bill, as
well as GSE reform, and that is one of the ways we can help
this problem.
Chairman Kanjorski. Would you not think, though, that the
easiest and fastest way to handle a million, million-and-a-
half, or two million mortgages is to have the servicers contact
these mortgage holders and say, ``Look, before you get any
further in, before we run into any further problems, come on
down, we want to talk, we can do things to keep you in your
home, reduce the price, reduce the strain, and get you there.''
I mean, testimony that I am hearing from people and just
general statements is that 40, 50, or 60 percent of the people
never contact the holder of their mortgage before they go into
default and foreclosure. How are we going to encourage the
servicer to get more aggressive and to work with these people
who are tending to go toward default?
Mr. Story. Well, we actually have a couple of issues there.
One is that there have been 1.2 million repayment plans and
modifications that the servicers have accomplished at this
point. Also, the servicers are actively trying to help this
problem. They are sending letters, they are actually going out
to people's homes and knocking on doors. There is a number of
people who choose not to respond to the calls that the
servicers make to them because they are afraid of having to
have that discussion with the mortgage company. That is one of
the reasons that the HOPE NOW initiative has been put together,
to help people so that they can call that number if they don't
want to talk to the servicer, they can also look on a Web site,
the Mortgage Bankers' homelearningcenter.org, which has numbers
of all the servicers in there where they can make a phone call.
Our goals, from the Mortgage Bankers Association, are
pretty simple. You know, one is we want to stabilize the
market. The second is obviously, to help homeowners stay in
their homes. We also want to ensure that this doesn't happen
again, and we don't want to do anything that would be a
permanent damage as we go forward during this situation.
Chairman Kanjorski. Well, I am sure there is nobody on this
committee or in the Congress or in the general public who wants
to see it happen again. Going to that issue, I am astounded
that it happened the way it happened, to be quite honest with
you. I had the CEO of a monoline insurance company in my office
a couple of weeks ago, and he showed me a study that his
insurance company had undertaken of his five competitors in
monoline insurance. In 2006, he found that, of the securitized
loans or securitized mortgages that his competitors had written
policies on, as many as 18 percent of the mortgages did not
have a first installment payment.
Now, that is last year or 2 years ago, 2006. And why did a
``tilt'' bell not go off? Why did something not go up in the
sky, fireworks or something to indicate, ``We have a problem.''
Before I got to Congress, I served on a little bank board,
and when our default rate used to get up above one-half of one
percent, we used to start sweating. When it got above 1
percent, blood was coming out. Why did the organizations and
associations not start yelping? Why did the regulators not run
in and shut some of these things down?
I was hearing in 2007 that there were a bunch of cowboys
out there selling any garbage that they can put together
because Wall Street has all the money in the world. Come down
with any packages and sell them.
Now I know everybody did not do that. And I know there were
very good operators, and they all should not get tarnished with
the same brush, and I have a tendency to do that. But what I am
saying is, we are in a situation now where we have the
potential to surgically prevent what I would consider a
depression or a meltdown of the financial system. I am all in
favor of--and that is why I supported Mr. Castle's position
when he came up with the idea--making sure that all the
encouragement in the world is out there for people who are
servicers of these mortgages to get involved to try to contain
the problems. And if we just do what you are talking about,
handling the things as they normally occur, letting the
marketplace and the general market rules prevail, it seems to
me we are going to end up probably with a tougher situation
than we have right now or at least as bad as we have right now.
I think that is intolerable. So how do you respond to that?
Mr. Story. Well, first of all, those are all very important
comments, and the MBA isn't opposed to this bill; we are more
concerned about the possible litigation that may occur in the
future, so it is a balancing act, it is a fine line in terms of
our Association's agreement as we go forward.
Chairman Kanjorski. Very good. And I know I am taking up
all of my time now. Mr. Castle.
Mr. Castle. Thank you, Mr. Chairman. You know, I don't mean
to speak for everybody else, but I would imagine everybody
here, and probably all of you, are of the mind that we would
like to save people from going through the foreclosure process.
I don't know who wins in the foreclosure process, and we are
all looking for answers to that, and I don't think any of us
are married to any particular proposal; we are just looking for
the best solutions possible in order to reach that.
I appreciate some of the suggestions which you made in your
testimony. While I don't necessarily agree with your full
conclusions, I think you made some positive suggestions that we
need to look at in terms of what we are doing.
Mr. Story, in answer to the question Mr. Kanjorski asked
you, you indicated the advantage of new products, but we all
know that there are a couple million people who are facing
foreclosure processes right now, and that is a matter of
concern to all of us, not just how we might fix things as far
as the future is concerned, and it seems to me, I am in favor
of those proposals too, FHA and GSE or whatever, but all of
that is going to be a little bit down the road in terms of
getting both done and in place.
But we are concerned about those who are going into default
now, is what we are trying to deal with. Do you all have ideas
as to how to deal with this beyond what we have already heard?
I mean, we have heard about the servicers, and I don't frankly
put as much credence in what some of you said about the
servicers going out and trying to accommodate people or
whatever it may be. I am from Delaware and I have not seen a
lot of that at home at this point. We don't have a particularly
significant percentage problem with this compared to other
jurisdictions, but it is there, we see it, it has increased a
great deal, and it just seems to me that we are doing a lot of
sitting on our hands with respect to this, so we need to be
more proactive.
My question is, is there anything that Congress could be
doing immediately, or anything further that can be done in the
servicing banking community at this time, that would provide
immediate help to those who may already be in default and
getting ready for foreclosure? Any one of you can answer that.
Mr. Story. Well I think this, and I go back to what I said
earlier, getting that FHA reform bill passed and approved as
quickly as possible will help the whole market. Specifically,
if there are some opportunities for people to refinance out of
some of these situations. And secondly, I would offer new
homeowners, new home buyers an opportunity to qualify for loans
and therefore we need to work on the depreciation of home
prices in the marketplace as well, which is causing some of
these problems. So if we can get that to level out, and get new
people into homes, that would help as well.
Mr. Castle. I don't mean to argue with you, but I am not
really talking about new homeowners. I understand that, and
that is one reason I am for the bill. But I am most concerned
about those who are presently in default, and I am not sure all
of that is, even if we move quickly through the Senate or
whatever, all that is going to happen quickly enough to really
be able to help and rescue those particular people in that
circumstance. Some are in foreclosure, some are in default
getting ready to go into foreclosure or whatever.
What we are trying to do is do something that is much more
immediate than that and deal with people on a faster basis,
because we think that is needed at this point.
Mr. Story. I appreciate that. We feel that the 1.2 million
people we have already helped is a significant positive stride
moving forward, and we hope that we can help more people as we
move forward.
Mr. Castle. Well, I don't know the exact numbers, but my
estimates, based on what I have heard, would be that would be
about \1/3\ of the people who might be having some problems, so
that would mean \2/3\ or a couple million have not yet been
helped. And it seems to me that it has slowed down, and I am
not sure what is happening now with respect to that. It seems
to me we all have a responsibility to try to do something about
it.
And I would think the investor community would care a great
deal about that. I don't understand the investor community on
the downside of mortgages. I always thought you took a mortgage
out, and your bank held it forever, and then you find out about
assigning mortgages and the securitization of them or whatever
it may be, but I would think on the security aspect of it, you
would be vitally concerned about the defaults and the
foreclosures. I would assume, unless it is some sort of insured
situation, that is a loss of principal on the investment, so I
am a little concerned that the attitude is, ``Let's leave it
alone, it is okay the way it is.''
If you have problems with our legislation, I don't mind
fixing it. If you have problems with the concept, the way we
are going, I don't mind changing that, but I think the idea
that these sort of longer term things we are talking out will
eventually bail us all out, that may be true of the economy in
a couple of years. In the meantime, another million people may
have gone into foreclosure, which is, I think, our underlying
concern.
Mr. Daloisio. If I may, I think the investor community is
very concerned, you know, with the direction that things are
moving right now within the free market system. Even though
free markets do tend to self-correct, if allowed to self-
correct, the pain of self-correction here may be more than most
are willing or able to bear.
The question becomes what are the most appropriate and most
effective measures to implement. The question also becomes if
implementing those measures would even be able to bring about a
turn of events sooner. I think overall, there is a lot of focus
on the direction home prices, and I have heard it said by
others and I believe this myself, that I don't think we will
see a natural turn in events until we see expectations that
home prices are falling change.
And to the Congressman from Georgia's point earlier, one of
the concerns that investors have is exactly the kind of domino
effect that we are seeing in communities where you have not
just one or several foreclosures, but multiple foreclosures,
which has the impact of reducing the willingness of others in
that community to stay in their home, so even if they were
given an affordable option to stay in that home, they may no
longer have the desire to stay in that home.
How we address that, I am not entirely sure. I definitely
agree that servicers need to be encouraged to provide as much
modification activity as is economically sensible. In the
current environment, the economics of foreclosure cannot be
superior to the economics of modifying to a payment or series
of payments which in the aggregate are economically superior,
and I don't believe investors stand in the way of that
happening, and I also don't believe that it is the threat of
litigation that is preventing servicers from doing that by and
large. Maybe infrastructure issues, adaptation issues. I think
the wave that has come upon us has come upon us so quickly that
the time required to adapt to that is a bit longer than we had
hoped.
Mr. Castle. My time is up, and I will yield back, but I
don't disagree with you necessarily. I do feel that the threat
of litigation is part of the problem, and the other things you
mentioned are also, I think, a part of the problem. I don't
expect you to answer this, but I just remain vitally concerned
about the issuance of mortgages in a market in which the
appreciation of real estate was going up tremendously, and I
think a lot of mortgagors were basically issuing mortgages
without paying as much attention as they should have to the
background of individuals on the basis that it doesn't make any
difference. The property will go up, and that is our asset,
that is our lien, and so we are going to be okay. I think,
hopefully, there is a lesson in all of this in terms of how we
have to issue mortgages in the future. I yield back, Mr.
Chairman, thank you.
Chairman Kanjorski. Thank you very much, Mr. Castle. The
gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman. I have a
couple of questions. First, I would like to deal with what some
of the opponents of this bill are saying, because I think it is
good to make sure that we get the full perspective from you.
What are your thoughts on opponents of the bill, when they
claim it would abrogate the terms of existing contracts, but
without providing legal recourse which they believe would have
a detrimental effect on investors and set bad precedent? Do you
believe this to be true, why, or why not, and further, they
have noted that servicers already have a duty to engage in loss
mitigation as part of the mortgages they oversee, and so they
believe the legislation is unnecessary. Would you give me your
thoughts on that please, quickly. Then I have another question.
Mr. Young. Congressman, I can first speak to the second
point, which is that, in our review of most securitization
documents, there is already the ability of servicers to look at
all loss mitigation alternatives as well as foreclosure in
trying to fulfill their obligation as I see it, which is to
maximize proceeds to the investor. So I do believe that there
are times where the documentation may not be clear and so there
may be points and parts of the bill that may be worthy of
implementing.
Certainly, there was a concern at some point, what it meant
to do what is best in the interest of the holders, the
investors. And given the various interests of the investors at
every part capital structure and the securitization, that
raised concerns for investors that they would be subject to
liability from those that would suffer most of the losses in
these securitization structures. But I think given the volume
of defaults and the magnitude of the losses that these
investors are facing, I do not believe that is as much of a
concern because I think that a lot of investors at all parts of
the capital structure are being affected.
However, I do believe that there are positives in
clarifying exactly what it means to be acting in the best
interest of investors as a whole as well as maybe pointing out
what is reasonably foreseeable default or imminent default. I
think those are positives in the bill in clarifying where there
is a need for interpretation in these various documents, which
there is a lot of variation.
Mr. Scott. So basically, you see a need for the bill, but
not as much of a need that is in the bill currently?
Mr. Young. Well, I think to the extent the bill advocates
for a safe harbor from liability, servicers are already
performing loan modifications, so I suspect that in doing so,
that is not the main concern for servicers. As I noted, I think
it is more about dealing with the large volume of defaults and
modifications that need to be done that seems to be the focus
now.
Mr. Scott. Okay. That is fine. My time is ticking away, and
I did have another question I wanted to get a response to, and
that is, on the issue of moratoriums on foreclosures, very
select, maybe 60 days, what is the value of that? And it is
particularly true because in some parts of the country, some
move closer to have your home foreclosed in the county
courthouse in a month or 2 months, you miss one payment, or 2
months' payment, that there may be some value to that.
I would like to get your thoughts on imposing a selected
moratorium on foreclosures and mortgage payment resets for
owner-occupied homes and what you believe would be an adequate
time span, and wouldn't this provide some time for establishing
a well-rounded plan which would include establishing some sort
of board to deal with this, which includes Secretary Paulson,
the Fed Chairman, and financial experts and consumer groups?
Mr. Story. One of the concerns we have about the
foreclosure moratorium is that would just increase the amount
owed after that period of time, so it would create a more
difficult situation for that person to deal with after the
moratorium was over. And secondly, the uncertainty from the
investor market whether or not this could happen in the future
that would cause some liquidity issues that we are having right
now. Thank you.
Chairman Kanjorski. The gentleman from California, Mr.
Sherman.
Mr. Sherman. Thank you. One of the major aspects of the
bill we have under consideration is to clarify existing
contracts between those who invest in mortgages and those who
serve them. I will ask all three gentlemen here, are you
confident, in the absence of this bill, that every servicer
will understand with every pool they are administering whether
their obligation is a separate fiduciary obligation to each
class or investor or whether their obligation is to the pool as
a whole? I will go right down the list starting with the
gentleman here. In other words, in the absence of this bill, is
everybody going to be really clear about what their fiduciary
duties are?
Mr. Young. Congressman, I think the efforts of the ASF and
other industry groups have provided some guidance about what it
means to be--
Mr. Sherman. If I can back off, I used to be a lawyer, some
of my best friends are lawyers, I still admit it, and I can't
imagine you getting out of liability by waving around a paper
from a private industry group and saying, ``Hey, we meet these
standards.'' So, do you have any legal opinion that says that
an unclear servicing contract or an unclear trust agreement can
be made clearer by an ASF statement?
Mr. Young. No, Congressman. As I was going to proceed and
say, I do believe, and I have stated in my testimony that I do
think there is worth in part and portions of the bill being
enacted, specifically that point, to clarify that when the
servicers are acting in the best interest of investors, that
they are acting in the best interest of investors as a whole,
namely all the investors in that particular transaction. So I
do believe there is worth in that particular portion of the
bill.
Mr. Sherman. I will ask the other two witnesses whether
they disagree with your comments.
Mr. Story. We think that not everything is clear in some of
these situations, and we would be supportive of this bill if
the investor community was also supportive of the bill.
Mr. Daloisio. To answer your question, I think there is
likely a group of contracts out there that could benefit from
increased clarity that would be aligned with the interest of
investors. There was a time, early in the development of this
crisis, where I thought servicers would be more concerned
whether or not their action would benefit a certain part of the
capital structure at the expense of another part and therefore
open themselves up to liability to the disadvantaged part of
the capital structure.
However, I think the losses that have been crystallized so
far and the losses that are near certain to crystallize
themselves as RIO converts into losses which are posted into
these securitization structures are of sufficient magnitude to
cause the permanent cash flow triggers in these deals to fail,
and once they fail, that would be more of a permanent fail
rather than a temporary one, and therefore that structural
operation itself should cause servicers to think solely along
the lines of what is in the best interest in the aggregate to
the economics of the trust rather than to any class of
investors because it is out of their hands.
Mr. Sherman. I thank you for the tremendous compliment of
assuming that I understand all the jargon that you just
included. The record will reflect that I understood every word
you said and every jargon.
So I am trying to figure out what harm this bill would do,
and I realize I may be taking up the time of my colleagues
here, but I will just ask the third witness here, since this
bill basically clarifies the rights of servicers to do things
in the best interest of the investors as a community, how would
this bill deter future investment in mortgage pools?
Mr. Daloisio. Yes, I am not saying that it would deter
future investment in mortgage pools. I think what I am saying
or what I am trying to say is that it runs the risk of
deterring future investments in mortgage pools, and I think as
Chairman Kanjorski opened, he opened with remarks that gave
consideration to the practicality of doing something over the
principle of not when it comes to looking at the contract law
and legislative solutions that could be in partial opposition
to the contract law.
Mr. Sherman. I would just point out that if you want to
deter investment in mortgage pools, just do nothing. Allow my
friends, the lawyers, to sue on behalf of each of the different
investor groups with regard to each of the different contracts.
And I assure you that there will be more investment in law
schools and less investment in mortgage pools as the years go
forward.
I realize with every bill there is a risk of having a bad
effect, but I think doing nothing and leaving these contracts
to be determined through litigation and determine the rights
and the obligations of the trustees through litigation strikes
me as also posing a risk.
And I will ask--I have my reading glasses on, so I am just
going to point to, I guess it is Mr. Young, on this end. I
can't read your name, believe it or not, because the reading
glasses are that strong. Do you have any comment on how this
bill, which is designed to simply clarify the rights and the
duties of trustees and those doing the servicing, how this
would deter investment in mortgage pools?
Mr. Young. Well, I think, as some of the other witnesses
alluded to, the risk that legislation can be enacted after a
contract has been affected runs the risk of uncertainty going
forward for future investors in those particular transactions
and so, given that, and given moratoriums on foreclosures and
other legislation that will basically interfere with the
understandings under the contract may have a chilling effect on
future investment.
Mr. Sherman. Well, I will point out there are a lot of
bills that have been introduced in the House and the Senate
that I could see investors really hating and State legislatures
changing their foreclosure laws, etc. But I don't know why you
would oppose this bill because you are afraid of other bills.
If anything, if we do this bill, we are less likely to pass
bills that are more extreme.
But the other thing that I will point out to you is, yes,
you can say it is extraordinary for Congress to pass a law that
defines vague elements of contracts. Usually that is done by
the courts. As an investor, I would be more afraid of the
courts redefining my contract or influencing how vague terms
would be defined than the Congress, and I know that if somebody
is going to have to define the rights and obligations of
trustees, and if we do it, my lawyer friends will be
considerably less wealthy, so I will yield back.
Chairman Kanjorski. Ms. Brown-Waite.
Ms. Brown-Waite. Thank you, Mr. Chairman. Just this
morning, my district office called and said that they had two
constituents who were trying to work with the lenders and they
were not getting very much response. These are people trying to
avoid foreclosures, and I would just ask, do you think that the
industry has done enough to work with property owners?
Mr. Story. I think they are trying very hard to help
everyone, and obviously they can do more. Some people discuss
some issues with probably some technology issues maybe, or some
staffing issues. It is a big concern for everyone in the
mortgage industry. Nobody wins in a foreclosure. It is the
worst-case scenario that nobody wants to get to, so there is
always room for improvement.
Ms. Brown-Waite. I certainly always thought that myself,
sir, but when the property owner makes an attempt to pay off at
least half the delinquent payments, and the servicing company
won't even accept it, they want everything or nothing, and this
is someone who had previous loans and never ever was foreclosed
on.
Mr. Story. Well, I can't comment on an individual company's
procedures, but as I said earlier, there is a huge effort on
the part of mortgage servicers to try to work with people as
much as possible. There have been 1.2 million repayments and
modifications since this last summer, so there is an effort out
there, I can guarantee you, that people want to help these
people out.
Ms. Brown-Waite. Well, when they won't return phone calls,
and they won't accept a large amount of the back money due,
well over half, it certainly doesn't appear that way to the
taxpayer and the homeowner out there and certainly the
neighbors who would not want foreclosed property in their
neighborhood. I know I don't. I have a neighbor who is very
close to foreclosure. All that does is drive down the price of
neighboring real estate at a time when we certainly cannot
afford it.
Can Congress' approach to the loan modification issue
address the concerns of individuals came to Congress who
believe we need less government involvement in our lives,
because that certainly is a philosophical conflict?
Mr. Story. That is a good question. I think that in certain
times there are certain situations that need help from the
Congress. As I discussed earlier, things like the FHA
modernization bill, the GSE reform, all those things are very
important for industry moving forward and hopefully helping the
existing situation as well.
Ms. Brown-Waite. I have a question which maybe Mr. Young
or--I must need to wear my glasses because I apologize, I can't
read your name, Mr. Daloisio?
Mr. Daloisio. Close enough.
Ms. Brown-Waite. I apologize. I always murder names, I
apologize. Are we creating a situation of an echo problem. In
other words, those who are in adjustable rate mortgages now
don't have the ability to go to a 30-year fixed so they enter
into another adjustable loan. Are we going to have an echo
problem when those ARMs come due again because I know a large
number are going to the ARMs because they cannot afford to go
to the traditional 30 year?
Mr. Daloisio. I think there is a chance of that. It seems
to me the way the rate markets have aligned with the property
markets we are seeing home prices fall and short term interest
rates come down. It might be likely to believe that as home
prices stabilize and start rising, so too might interest rates
then do that. But then the ability of those people in those
homes to service an adjustable as it is resetting higher, I
think would have a concomitant as well.
Ms. Brown-Waite. So, is that ``No, there won't be an echo
financial problem?''
Mr. Daloisio. It is not a ``no,'' because I think there is
risk there. I think an increasing number of homeowners elected
to take out an adjustable rate mortgage because it had the
benefits of a lower initial rate. They left themselves with the
risk that if rates went higher, they may end up in an unstable
product.
I think one thing we need to consider very carefully is
making sure that the product offering is well-suited to the
ability of the homeowner and the intention of the homeowner and
whether or not they intend to stay in the home for a long
period of time or whether or not they intend to move in a short
period of time.
Ms. Brown-Waite. Thank you. I yield back the balance of my
time.
Chairman Kanjorski. Mr. Miller of North Carolina.
Mr. Miller. Thank you, Mr. Chairman, and I apologize for
having missed the bulk of this hearing. I have a couple of
questions based upon just the few minutes that I have heard.
Mr. Story, you mentioned the cost of foreclosure as being
something that would be a strong disincentive to your industry.
And foreclosure, of course, is governed by State law. I don't
know the law in all States, but I am familiar with North
Carolina law, and I understand it is similar to that of other
States in that the cost of foreclosure is actually recoverable
by the mortgagee out of the proceeds of the foreclosure sales
so that if there is equity in the home, the mortgagee recovers
their cost. Is that not correct?
Mr. Story. I believe that is correct.
Mr. Miller. Okay, so as long as there is equity in the
home, it really isn't an economic problem for the mortgagee,
isn't that right?
Mr. Story. That is correct, but most people who have equity
in their homes don't go into foreclosure because they can sell
their home because they have equity in their home and they can
reduce the price.
Mr. Miller. Right. It is only when a substantial number of
mortgages are underwater, when people have more mortgage than
they have house or have relatively little equity, that there is
an economic problem for foreclosure. Let me put it differently:
In an appreciating market, foreclosure cost is not really a
problem for the lenders or for the mortgagees, is it?
Mr. Story. Most likely not.
Mr. Miller. And Mr. Daloisio?
Mr. Daloisio. Yes.
Mr. Miller. Okay. You said that the borrowers understood
that they were getting a low rate initially, and it was an
unstable product, but they couldn't afford anything but the
initial rate. The Wall Street Journal estimated that 55 percent
of the people who took out or got subprime mortgages in 2006
and 2007 qualified for prime mortgages. Do you have any
information that contradicts that?
Mr. Daloisio. I don't necessarily have information that
contradicts that, although I think there may have been
preferences in those situations that led the borrower to elect
a higher rate of interest over a lower rate of interest, and
although that sounds like it doesn't make sense, for example,
they may have qualified for a conforming prime mortgage given
some of the criteria, but maybe they wanted a loan or a debt
service amount that was larger than what would otherwise have
qualified them because they were looking to buy a bigger home.
It is very difficult to tell simply based on the kinds of
surveys that are being performed in the marketplace today
exactly what led those particular individuals into products
that were non-prime products.
Mr. Miller. Quickly, you said buying a home. Isn't it the
case that more than 70 percent or about 70 percent, 72 percent
I think is the statistic based on the Mortgage Bankers
statistic, 72 percent of subprime loans are not home buyers,
but are for refinance. Isn't that correct?
Mr. Daloisio. Maybe you were looking at 18 percent were
non-owner occupants, is a number that we have. So 18 percent of
those loans were for investors.
Mr. Miller. The statistic I have heard on that is 6
percent. What is the origin of this 18 percent are non-owner
occupants? Where does that come from?
Mr. Daloisio. It comes from a third quarter 2007 survey
that the mortgage bankers do.
Mr. Miller. Mr. Daloisio, the Federal Trade Commission,
among others, has done a study of people who had just gone
through closing and then quizzed them with their closing
documents in front of them. Essentially, very few people knew
anything about their closing. Most people have observed this as
an intentionally opaque process. So I know that you said that
people chose, but in fact all the evidence to the contrary. The
point that I really wanted to ask about, and I have used up
most of my time, I hope there is some indulgence from the
Chair. In the proposal, all of the justification for providing
some certainty or some protection from liability is as against
investors in the mortgage pools. Is there any justification or
any other arguments that would apply to any kind of shield from
borrower lawsuits, and do you understand that the legislation
would apply to any kind of insulation from liability by
borrowers?
Mr. Daloisio. Just to make sure we understand the question,
you are asking if we are aware that this piece of legislation
would insulate servicers and securitization trusts from
litigation brought by borrowers?
Mr. Miller. Right. All of the justification has been that
it is needed for insulation from liability by investors. And
there has been not a word about insulation from liability by
borrowers. Do you understand that it applies to borrower
lawsuits?
Mr. Daloisio. I had not focused on that particular
dimension of this legislation.
Mr. Miller. Have any of the justifications given for it,
would any those extend to litigation by borrowers?
Mr. Daloisio. Any of the justifications for this
legislation, you are asking if those justifications, in our
view, are valid?
Mr. Miller. Or do they extend to borrowers?
Mr. Daloisio. Do they extend to borrowers?
Mr. Miller. Right. The justifications have all been why
servicers need some assurance that they will not be liable to
investors. Investors have different interests, they have
different tranches, whatever, different risks and they may be
affected differently by any kind of modification. None of those
justifications appear to have applied to any kind of lawsuit by
borrowers, isn't that right?
Mr. Young. I did not focus on that particular aspect of the
bill, but I do realize that there is protection for servicers
for various parties, including borrowers. But we did not focus
on that particular point. I think there was--
Mr. Miller. When you say you didn't focus, you haven't
talked about that in terms of justifying the bill or explaining
the need for it, but it isn't part of your intent? What do you
mean when you say haven't focused?
Mr. Young. That was not a focus in my testimony. I did not
focus on that particular aspect in my testimony.
Mr. Miller. Well, should the legislation then clarify that
the limitation from liability is insulation from liability to
investors, not to borrowers?
Mr. Young. I think most of the concern that at least has
been publicized is the servicers' concern against, or liability
to the investor community. I think that is why the focus of my
testimony was mainly on that particular aspect. And I do
believe that the particulars of the bill speak to clarification
of the servicing agreements as they related to obligations
between the servicer and the investor, and so that was why my
particular focus was on that aspect of the bill.
Mr. Daloisio. I might just add, in being able to consider
it a bit, that it doesn't seem like there would be a natural
line of responsibility between the borrower and the servicer
that would give rise to the need for that kind of protection in
this piece of legislation since it does appear that the
servicer is well within its rights to collect all principle and
interest due from the borrower.
Mr. Miller. Okay. Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you. Finally, Mr. Watt of North
Carolina.
Mr. Watt. Thank you, Mr. Chairman, and let me express my
thanks to the Chair for allowing me to participate in today's
hearing as if I were a member of this subcommittee.
I came because I knew this was a sensitive subject, but I
am glad I came because after 16 years of service on the
Judiciary Committee, I think this is the first time I have
heard business groups say that they oppose limiting litigation
against business groups, and after 16 years of service on the
Financial Services Committee, I think it is the first time I
have heard a business group say that they don't support a safe
harbor for business groups, so this is kind of a first for me.
It leads me to a realization that litigation and legislation
and politics is primarily about self-interest, so perhaps we
have the wrong witnesses here. Who are these servicers? Are
they members of the American Securitization Forum?
Mr. Daloisio. Yes, some of them are.
Mr. Watt. Are they members of the Mortgage Bankers
Association?
Mr. Story. Yes.
Mr. Watt. Do they have their own organization?
Mr. Story. Some of them have members of other organizations
as well. Banks--
Mr. Watt. I mean, is there something called a servicers
organization that would have--so, some of them are the same
people who actually make the loans, they service the loans,
some of them are securitizers of loans, is that what the case
is?
Mr. Daloisio. That is correct.
Mr. Watt. Okay. Alright. So, in a sense, this bill would be
protecting servicers from lenders, one in the same person, left
pocket, right pocket.
Mr. Daloisio. The bill would protect them in accordance
with the provisions of the bill, yes.
Mr. Watt. So if a lender was made a loan and the servicer
was a subsidiary of that lender, basically it would be
protecting liability against the lender side of the
organization as opposed to the servicer side?
Mr. Daloisio. I don't believe that is correct, because I
think the protection would only be afforded to the servicer,
not to an affiliated lender of the servicer for an act that
took place prior to servicing.
Mr. Watt. So you are saying a servicer in this case is
always somebody other than the lender?
Mr. Daloisio. Well, I think the servicer in this case is
the entity acting in its capacity as a servicer. They may have
acted in another capacity as lender, but I don't believe--
Mr. Watt. Well, sir, I think we are saying the same thing.
If a servicer is a subsidiary of a lender, it might be one and
the same institution, expect that one is a subsidiary, but it
is the same corporate entity and the bill would protect the
servicer side from potential liability from the lender side.
Mr. Daloisio. I don't think the bill would end up
protecting the lending aspect, I think it would only protect
the servicing aspect.
Mr. Watt. Yes. I think we are saying the same thing.
Mr. Daloisio. Okay.
Mr. Watt. Okay. Actually, I am on your side of this issue.
I am not much on limiting liability, and I get suspect every
time we have the legislative process interfere with the legal
process, so you might find an ally on this, so I am glad to
hear you say that you don't like the bill. Because I am not
sure if you don't like it the servicers don't like it--you are
speaking for the servicers here, right?
Mr. Daloisio. I am not speaking for the servicers; I am
speaking for investors.
Mr. Watt. You are speaking for investors. You are speaking
for servicers, Mr. Story?
Mr. Story. Yes. As I said before--
Mr. Watt. You are not speaking for the mortgage lenders,
the bankers side, you are speaking for the servicers side?
Mr. Story. Well they are the same, in a sense.
Mr. Watt. Well, who are you here representing?
Mr. Story. The mortgage bankers who have members that are
servicers and are also lenders--
Mr. Watt. And your servicers oppose this bill too?
Mr. Story. Not necessarily, no. They have some concerns
about parts of the bill, but as I said before, we would support
the bill if the investors supported the bill.
Mr. Watt. Investors are Mr. Daloisio's group, so if they
supported it, you all would support it?
Mr. Story. That is correct.
Mr. Watt. Okay. Mr. Young is going to profit either way
because he is in a law firm, so he is smiling regardless of how
this comes out.
So Mr. Daloisio, does the fact there may be some protection
against borrower liability, that will make you go back and look
at this a second time, won't it?
Mr. Daloisio. I will go back and look at that, although I
don't--
Mr. Watt. It might change your opinion.
Mr. Daloisio. I don't think it will because in giving it
consideration here and now--
Mr. Watt. As I recall, you all weren't too keen on any kind
of potential liability vis-a-vis borrowers when we were doing
the predatory lending bill.
Mr. Daloisio. Right. That is correct, and the concern there
was investors are by and large passive recipients of the
economics that are passed through these securitization trusts,
they really had no active hand in whatever--
Mr. Watt. But they had a responsibility to look at what
they were buying, didn't they?
Mr. Daloisio. It depends on which type of investors you are
speaking of. If you are speaking of investors in asset-backed
securities, by the time those loans are packaged in security
format, what investors are looking at are somewhat different
than what investors will be looking at--
Mr. Watt. Which level is in your organization? All levels?
Mr. Daloisio. Within my organization, all of them are
within the part of the organization that I am involved with,
just the securities.
Mr. Watt. So that is the secondary tertiary further down
the line, not the original buyers of the loans.
Mr. Daloisio. That is correct.
Mr. Watt. Okay, so that was your concern in the predatory
lending bill, that we might be talking about some potential
liability against secondary tertiary buyers of loans, not the
people who should have had responsibility for looking at the
loans themselves or the responsibility for looking at the
quality of the loans that they were buying, only first purchase
basis.
Mr. Daloisio. That is correct.
Mr. Watt. That's fine. That helps me because I have been
trying over a long period time to understand what your concern
was and how to address it since you all wouldn't talk to me in
that process.
I will yield back. This has been helpful in a number of
respects, so I thank the chairman for allowing me to
participate.
Chairman Kanjorski. Thank you very much, Mr. Watt.
Mr. Castle, do you have any further questions?
Mr. Castle. I really don't, but I will ask just one of Mr.
Story. I am confused about who is in your organization or who
you represent when you said that you were speaking for
servicers. Are you speaking for pure servicers, or are you
speaking for servicers who are also investors, or are you
retracting that altogether as to whom--
Mr. Story. I am speaking for members of the Mortgage
Bankers Association who are servicers.
Mr. Castle. Are you saying 100 percent of them are
servicers?
Mr. Story. No, I am saying--
Mr. Castle. If the answer to that is ``no,'' are you saying
that 100 percent of the servicers you are speaking for are in
opposition to this bill?
Mr. Story. No, I didn't say that we were in opposition of
this bill. I said we had some concerns about this bill, but we
were not opposed to it. But I am only speaking for the members
of the Association that are servicers. There are some servicers
that are not members of our association.
Mr. Castle. What would be the criteria for a servicer to be
a member of your organization?
Mr. Story. Basically, a mortgage banking firm or a bank
that wanted to be a member of our Association that paid dues
based on the size of their company. They range from small
companies to Bank of America, to big companies. My company used
to be a servicer for a number of years. We were in the mortgage
business since the 1940's, and we serviced loans until probably
2000 or 2001, so that was an example of a smaller company doing
it. Most of the servicers now, the economy of scale and the
business anymore, servicers are mostly larger mortgage banks,
bank sorts of companies.
Mr. Castle. Okay. I thank you. I am not sure I totally
understand it, but that is something for me to work out.
Mr. Story. Well we can help you out if you have some more
questions, certainly we can help you with that.
Mr. Castle. Thank you very much. I yield back.
Chairman Kanjorski. Thank you, Mr. Castle.
I want to thank the panel for helping us out today. I think
you certainly straightened out Mr. Watt's questions. We
appreciate your presence and your offering all the good
testimony that you did. Before we wind this up though, I have a
statement addressed to the Chair from the National Association
of Realtors, dated April 3, 2008. Without objection, I am going
to make it a part of the record.
With that, we thank the panel for their participation and
close the hearing. The chairman notes that some Members may
have additional questions for today's witnesses which they may
wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to any of today's witnesses and to place
their responses in the record.
The panel is dismissed and this hearing is adjourned.
[Whereupon, at 3:31 p.m., the hearing was adjourned.]
A P P E N D I X
April 15, 2008
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