[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
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001



                 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

                              ----------                              
                                                                   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

                              ----------                              


                        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

[GRAPHIC] [TIFF OMITTED] 42718.001

[GRAPHIC] [TIFF OMITTED] 42718.002

[GRAPHIC] [TIFF OMITTED] 42718.003

[GRAPHIC] [TIFF OMITTED] 42718.004

[GRAPHIC] [TIFF OMITTED] 42718.005

[GRAPHIC] [TIFF OMITTED] 42718.006

[GRAPHIC] [TIFF OMITTED] 42718.007

[GRAPHIC] [TIFF OMITTED] 42718.008

[GRAPHIC] [TIFF OMITTED] 42718.009

[GRAPHIC] [TIFF OMITTED] 42718.010

[GRAPHIC] [TIFF OMITTED] 42718.011

[GRAPHIC] [TIFF OMITTED] 42718.012

[GRAPHIC] [TIFF OMITTED] 42718.013

[GRAPHIC] [TIFF OMITTED] 42718.014

[GRAPHIC] [TIFF OMITTED] 42718.015

[GRAPHIC] [TIFF OMITTED] 42718.016

[GRAPHIC] [TIFF OMITTED] 42718.017

[GRAPHIC] [TIFF OMITTED] 42718.018

[GRAPHIC] [TIFF OMITTED] 42718.019

[GRAPHIC] [TIFF OMITTED] 42718.020

[GRAPHIC] [TIFF OMITTED] 42718.021

[GRAPHIC] [TIFF OMITTED] 42718.022

[GRAPHIC] [TIFF OMITTED] 42718.023

[GRAPHIC] [TIFF OMITTED] 42718.024

[GRAPHIC] [TIFF OMITTED] 42718.025

[GRAPHIC] [TIFF OMITTED] 42718.026

[GRAPHIC] [TIFF OMITTED] 42718.027

[GRAPHIC] [TIFF OMITTED] 42718.028

