[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                 H.R. 5679, THE FORECLOSURE PREVENTION
                AND SOUND MORTGAGE SERVICING ACT OF 2008

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 16, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-108


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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               THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia                KEVIN McCARTHY, California
DAN BOREN, Oklahoma                  DEAN HELLER, Nevada
BILL FOSTER, Illinois
ANDRE CARSON, Indiana

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
           Subcommittee on Housing and Community Opportunity

                 MAXINE WATERS, California, Chairwoman

NYDIA M. VELAZQUEZ, New York         SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
EMANUEL CLEAVER, Missouri            STEVAN PEARCE, New Mexico
AL GREEN, Texas                      PETER T. KING, New York
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
GWEN MOORE, Wisconsin,               GARY G. MILLER, California
KEITH ELLISON, Minnesota             SCOTT GARRETT, New Jersey
CHARLES A. WILSON, Ohio              RANDY NEUGEBAUER, Texas
CHRISTOPHER S. MURPHY, Connecticut   GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana                JOHN CAMPBELL, California
                                     THADDEUS G. McCOTTER, Michigan
                                     KEVIN McCARTHY, California


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 16, 2008...............................................     1
Appendix:
    April 16, 2008...............................................    69

                               WITNESSES
                       Wednesday, April 16, 2008

Allnut, Jason, Vice President for Credit Loss Management, Fannie 
  Mae............................................................    33
Bailey, Steve, Chief Executive for Loan Administration, 
  Countrywide Financial Corporation..............................    53
Beckles, Ingrid, Vice President, Servicing and Asset Management, 
  Freddie Mac....................................................    34
Caden, Judith, Director, Loan Guaranty Service, U.S. Department 
  of Veterans Affairs (VA).......................................     9
Deutsch, Tom, Deputy Executive Director, American Securitization 
  Forum (ASF)....................................................    52
Gordon, Julia, Policy Counsel, Center for Responsible Lending....    27
Kittle, David G., CMB, President and Chief Executive Officer, 
  Principle Wholesale Lending, Incorporated, and Chairman-Elect, 
  Mortgage Bankers Association (MBA).............................    50
Maggiano, Laurie, Deputy Director, Office of Single Family Asset 
  Management, Federal Housing Administration, U.S. Department of 
  Housing and Urban Development..................................     7
Schwartz, Faith, Executive Director, HOPE NOW Alliance...........    48
Stein, Kevin, Associate Director, California Reinvestment 
  Coalition......................................................    29
Twomey, Tara, Senior Counsel, National Consumer Law Center (NCLC)    25
Wade, Kenneth, President and Chief Executive Officer, 
  NeighborWorks America..........................................    31

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    70
    Allnut, Jason................................................    72
    Bailey, Steve................................................    77
    Beckles, Ingrid..............................................    87
    Caden, Judith................................................    95
    Deutsch, Tom.................................................   101
    Gordon, Julia................................................   114
    Kittle, David G..............................................   124
    Maggiano, Laura A............................................   134
    Schwartz, Faith..............................................   139
    Stein, Kevin.................................................   154
    Twomey, Tara.................................................   168
    Wade, Kenneth................................................   183

              Additional Material Submitted for the Record

    ``Servicing Best Practices for Subprime Borrowers,'' an 
      insert from Countrywide and ACORN..........................   188
    Additional information submitted for the record by Judith 
      Caden......................................................   193
    Additional information submitted for the record by Laurie 
      Maggiano...................................................   198
    Statement of Clifford J. White, III, Department of Justice...   199
    A Letter of Support for H.R. 5679 to Chairwoman Maxine Waters 
      from various consumer law, civil law, and other 
      organizations, dated March 31, 2008........................   210
    Statement of the National Alliance of Community Economic 
      Development Associations (NACEDA)..........................   212
    Statement of Professor Katherine Porter, University of Iowa 
      College of Law.............................................   214
    Statement of the American Bankers Association (ABA)..........   221


                 H.R. 5679, THE FORECLOSURE PREVENTION
                      AND SOUND MORTGAGE SERVICING
                              ACT OF 2008

                              ----------                              


                       Wednesday, April 16, 2008

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Waters, Cleaver, Green, 
Ellison; Capito, Shays, Miller of California, and Neugebauer.
    Also present: Representative Watt.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order. Good 
morning, ladies and gentlemen. I would like to thank Ranking 
Member Capito and the members of the Subcommittee on Housing 
and Community Opportunity for joining me for today's hearing on 
H.R. 5679, the Foreclosure Prevention and Sound Mortgage 
Servicing Act of 2008.
    Yesterday, RealtyTrac released data on foreclosures for the 
month of March. The figures are sobering. Over 234,000 
homeowners nationwide were hit with foreclosure filings, which 
include default notices, auction sale notices, and bank 
repossessions; this represents an increase of 5 percent since 
February, and 57 percent compared to March 2007. Of these 
filings, over 51,000 homes were actually repossessed by banks; 
in other words, actually foreclosed upon, a 10 percent increase 
over February. Year-to-date, such foreclosures have taken place 
at a rate that is a shocking 129 percent greater than during 
the same period last year. Clearly then we have not emerged 
from the biggest foreclosure wave to strike this country since 
the Great Depression.
    Today's hearing is about strategies to prevent further 
increases in foreclosures. I took a careful and comprehensive 
look at the subprime mortgage and the subsequent foreclosure 
crisis before introducing H.R. 5679, the Foreclosure Prevention 
and Sound Mortgage Servicing Act of 2008. It became clear to me 
early in this debacle that mortgage servicers hold the key to 
any foreclosure prevention strategy. Simply put, they are the 
direct point of contact for nearly all borrowers in the 
contemporary mortgage market.
    The vast majority of home mortgage loans do not remain on 
the books of the bank or the financial entity that originated 
them. Rather, they are typically bundled together and 
securitized, and then sold in the secondary market as a part of 
investment trusts in which the investors hold financial 
interest in particular bundles or tranches of the underlying 
mortgages. The trust then contracts them with the mortgage 
servicer, which takes payments and is responsible for taking 
all steps to address delinquency, including foreclosing on 
behalf of the investment trust. Loss mitigation refers to a 
range of activities that a mortgage servicer may offer a 
homeowner as an alternative to foreclosure, including repayment 
plans, loan modification, short sales, and deeds in lieu of 
foreclosure.
    On November 30, 2007, this subcommittee convened a field 
hearing in Los Angeles entitled, ``Foreclosure Prevention and 
Intervention: The Importance of Loss Mitigation Strategies in 
Keeping Families in Their Homes.'' There homeowners, 
homeownership counselors, legal aid attorneys, and local 
government officials testified as to difficulties they 
encountered in getting prompt, reasonable loss mitigation 
action by the mortgage servicers. Witnesses described 
challenges in finding and speaking directly to a person at the 
servicers who was empowered to engage in meaningful loss 
mitigation. Additionally, individual borrowers and even their 
trained advocates found it difficult to obtain accurate 
information on the status of their loans. Those that did 
receive loss mitigation offers were sometimes required to waive 
their legal rights or agree to pursue further complaints only 
through arbitration.
    Unfortunately, since that hearing, I have not been 
satisfied with the progress made by the voluntary loss 
mitigation efforts undertaken by the industry. I think the 
rising foreclosure figures speak for themselves, although I 
look forward to hearing from our witness panels today on that 
issue.
    Meanwhile, the data provided by industry to date has struck 
me as opaque at best, in terms of whether distressed borrowers 
are being offered sustainable repayment plans or loan 
modifications that will remain affordable over the long term. 
In my view, the fundamental problem is that the mortgage 
servicers have no legal obligation to engage in reasonable loss 
mitigation efforts to keep a borrower in delinquency in his or 
her home even where that borrower may have been the victim of a 
predatory or unaffordable loan. The only duty is to the 
investment trust that holds the bundle of mortgages they 
service. Simply put, absent a statutory duty of some kind, I am 
concerned that consumers have little leverage with mortgage 
servicers in the current crisis and will continue to lack it in 
the future.
    H.R. 5679, the Foreclosure Prevention and Sound Mortgage 
Servicing Act, creates this enforceable legal duty. 
Specifically, the legislation amends the Real Estate Settlement 
Procedures Act, or RESPA, in the following ways:
    First, it would permit foreclosures to proceed only after 
reasonable loss mitigation. Loss mitigation analysis would be 
required to consider the long-term affordability of the home 
loans using the standard employed by the VA Loan Guaranty 
Program, including analysis of junior liens and the borrower's 
other secured or unsecured debt.
    Second, it would provide fair compensation for a servicer's 
loss mitigation activities. The bill ensures that mortgage 
servicers have a monetary incentive to engage in loss 
mitigation by authorizing reasonable fees for these activities.
    Third, it would facilitate referrals to housing counselors. 
Servicers are required to refer homeowners who are late on 
their mortgage payments to HUD-certified housing counselors.
    Fourth, it would institute comprehensive loss mitigation 
activity data reporting. Servicers are required to report 
various loss mitigation activities with specific geographical 
designations just as lenders must report data on loan 
originations under the Home Mortgage Foreclosure Act.
    Fifth, it would strengthen the duty of servicers to respond 
to a homeowner's request for information. Servicers must 
provide timely responses to requests from homeowners and 
housing counselors for payment histories, loan documents, and 
loss mitigation documents. In addition, all servicers must 
provide a toll-free or collect-call phone number that provides 
the borrower with direct access to a person with the 
information and authority to fully resolve issues related to 
loss mitigation and undertake all loss mitigation activities in 
the United States.
    Lastly, it would better protect borrowers' legal rights. 
Servicers may not condition a loan modification on a borrower's 
limitation or waiver of legal rights. The bill would also allow 
damage actions for individual violations and increases maximum 
damages.
    In sum, I believe that H.R. 5679 is a prudent piece of 
legislation designed to balance the needs of lenders and 
servicers and borrowers in an effort to reduce foreclosures. I 
also see it as an important step in regulating what has been to 
date a largely below-the-radar-screen and underregulated sector 
of the mortgage industry.
    With that, I will now recognize Ranking Member Capito for 
her opening statement.
    Mrs. Capito. Thank you, Madam Chairwoman, for scheduling 
this hearing today on how to address the Nation's rising 
foreclosure rates and whether the lending industry has all the 
tools necessary to perform loss mitigation activities. As a 
result of plunging home prices, many borrowers now find 
themselves underwater, owing more on their home than it is 
actually worth. Economists have estimated that some 8.8 million 
mortgages are now underwater and expect that figure to rise as 
housing prices decline further.
    Some analysts believe that even if a percentage of these 
borrowers can afford to make their mortgage payments, the 
difference between what they owe on their houses and the home's 
market value, a difference that has become known as negative 
equity, may encourage these borrowers to walk away from their 
homes. Some commentators have even gone so far as to say that 
in these circumstances, it is in fact economically rational for 
borrowers to purposefully default on these mortgages.
    Investors have also found themselves affected by the 
decline in home prices. The values of the mortgage-backed 
securities they hold are not only threatened by greater risks 
of default and foreclosure, the collateral that secures these 
loans, these mortgages, is worthless, which in turn further 
increases the risk of loss. As a result, investors have found 
that the market for mortgage-based securities has become 
increasingly illiquid with other investors reluctant to 
purchase these securities because of the increased risk of 
loss.
    The climb in home prices has moved the discussion from ARM 
resets, which have not been as sizeable as initially feared, to 
discussions of negative equity and its relationship to defaults 
and foreclosures. While I understand and share Chairwoman 
Waters' goal of preventing foreclosures, it is important that 
we take care as we consider legislative remedies such as H.R. 
5679 to not make the situation worse.
    Many who are testifying here today have significant 
concerns about the unintended consequences of the provisions 
included in this legislation; specifically, that H.R. 5679 
could have a negative impact on the availability of credit and 
the willingness of industry to enter into new mortgage 
contracts. With investor appetite for U.S. mortgages in flux, 
any legislative solution must not do additional harm and 
further disrupt market liquidity.
    There is concern that the provisions in this bill are 
overly broad, burdensome, and could ultimately redefine 
existing mortgage contracts. There is certainly enough 
editorial comment on both sides of these issues, some urging 
quick action, others making the case that action would only 
further prolong the current mortgage crisis and exacerbate the 
problem. I realize it is difficult to know how best to proceed.
    Several weeks ago, much of the attention relating to the 
mortgage crisis was focused on the pending resets and the 
ability of homeowners to make their payments after the reset. 
But recent reduction in rates have made the resets less of a 
problem, although they are still a problem for some.
    Today, as I mentioned earlier, the focus is more on those 
homeowners who are underwater, families living in homes that 
are worth less due to declining markets than the current 
mortgage on their home. The change in focus serves to highlight 
the importance of being cautious before taking action that may 
only exacerbate the housing crisis and then weaken our economy.
    I am anxious to hear from our witnesses today on the 
current condition of the mortgage markets and foreclosure 
statistics and how you are addressing these problems, what kind 
of progress is being made to improve market conditions and to 
help stem the tide of families facing foreclosure, and what 
action is being taken by advocacy agencies and industry to 
address this current mortgage crisis.
    Again, I would like to thank Chairwoman Waters for her 
continued interest in this issue, and I look forward to the 
testimony of the witnesses. Thank you.
    Chairwoman Waters. Thank you very much. I will now 
recognize members of the subcommittee for opening statements. 
First, we will have Mr. Cleaver for 2 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman. I want to thank 
you and Ranking Member Capito for holding this hearing. The 
issues that are coming before us at this juncture are Herculean 
when you look at what is happening around the Nation. In 
particular, 20,000 foreclosures a week would suggest that we 
have more than a casual problem. I happen to be one who 
believes that we have to take some dramatic and drastic actions 
to address a dramatic and drastic problem.
    I listened to Ambassador Crocker this past week on NPR, and 
one of the questions he responded to dealt with whether or not 
al Qaeda was in Iraq before we arrived. He said, ``No, they 
were not, but the reality is that they are there now; we have 
troops there now and so what can we do except address the 
problem that we find ourselves in now.''
    Chairman Frank has laid out, I think, a very ambitious but 
workable plan to deal with a major problem. There are a lot of 
reasons we can choose not to do it. I mean, there are people 
who actually lied about their incomes and purchased a home far 
bigger than they could afford, and some people with terrible 
credit who repeatedly missed their mortgage payments and found 
themselves in trouble. But the truth of the matter is we are in 
it now and we have to figure out a way to get out.
    I think this happens to be the best way I have heard so 
far, and so I am anxious to engage in some dialogue with those 
of you who are testifying. Thank you for coming today, and I 
yield back the balance of my time.
    Chairwoman Waters. Thank you very much, Mr. Cleaver. Mr. 
Green for 2 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and thank you to 
the ranking member as well. I am pleased and honored to be here 
today. I was also pleased to be in California when the 
subcommittee met and we delved into these issues. It was quite 
revealing because we had persons who actually had experiences 
who were sharing with us their personal stories. I am looking 
forward to hearing some of the concerns that were raised at 
that hearing addressed at this hearing.
    We heard concerns with reference to loss mitigation and the 
whole question of whether or not there is an incentive to 
perform loss mitigation or is there an inducement not to 
perform loss mitigation. That is a serious question that has to 
be addressed.
    Also, we heard concerns about the HOPE NOW Alliance, and 
the clarion call from the persons that we talked to was an 
indication of a need for help now. And the question became 
whether HOPE NOW was going to become a cure or was it some sort 
of a lure, was it a long-term cure or was it a short-term lure 
that would get persons to sign certain documents that might 
cause them to find themselves in a position that would not be 
to their best benefit in the long term, but doing so because 
there was some short-term gain, meaning that they could stay in 
their homes for a little while longer.
    I am also concerned about the whole question of tranche 
warfare. Apparently, there are some tranches that hold 
positions that are antithetical to allowing some sort of 
settlement, some sort of restructuring to take place, because 
they have these superior positions and foreclosure in effect 
can benefit some persons in certain tranches. So you have this 
tranche warfare; higher tranches having one position, lower 
tranches having another position.
    These are the kinds of concerns that I think we have to 
address at the hearing, but we need a bill, we need some sort 
of act of Congress to ultimately propose solutions for the 
questions that we can address at a hearing but we cannot 
resolve without an actual piece of legislation from Congress. I 
yield back the balance of my time.
    Chairwoman Waters. Thank you very much. Mr. Watt, do you 
have an opening statement for 2 minutes?
    Mr. Watt. Thank you, Madam Chairwoman. I won't take 2 
minutes. I just want to thank the Chair for allowing me to sit 
in on this hearing. The luck of the draw on our subcommittee 
assignments didn't allow me to get on the Housing Subcommittee, 
but what I have been doing--I am not on the Capital Markets 
Subcommittee either, but yesterday I attended a Capital Markets 
Subcommittee hearing. I am here this morning because I want to 
hear every idea that is out there to try to address this crisis 
that we are in and try to get us out of it and try to save 
homes in my congressional district, and particularly homes in 
vulnerable communities. And while we have seen some progress, 
we certainly haven't seen the kind of progress that we need to 
see.
    I think the chairwoman's bill will push further in the 
direction that kind of impels all of the players to play a role 
in solving this crisis. And anything we can do to do that, I 
think, is advantageous. I thank the gentlelady for allowing me 
to be here. I won't try to ask questions, but I did want to 
hear the testimony of some of the witnesses. Thank you, and I 
yield back.
    Chairwoman Waters. Well, I thank you very much. And since I 
must follow procedures, I will ask unanimous consent to allow 
Mr. Watt to participate in today's hearing. Without objection, 
certainly as much as he ought to. Also Mr. Watt, I want you to 
know that I thought I heard you voluntarily removed yourself 
from my Housing Subcommittee, and I take that personally. 
However, I did sign up for your Committee on Oversight and 
Investigations.
    Mr. Watt. If the gentlelady will yield, I will go out of my 
way to explain that.
    Chairwoman Waters. I will yield to the gentleman so he can 
defend himself.
    Mr. Watt. I will defend myself. I think it was I had to 
either get off the subcommittee or go through another hour of 
rebidding the whole process, and I figured that I would come 
and participate in your subcommittee as often as I could 
anyway. You know I am your supporter and I will be here trying 
to protect your back even when some of your subcommittee 
members may not show up.
    Chairwoman Waters. Well, I appreciate that. Thank you, Mr. 
Watt. Mr. Shays for 2 minutes.
    Mr. Shays. Thank you. I want to thank the chairwoman and 
our ranking member for conducting this hearing. This is a huge 
issue for the entire country and a very significant issue in my 
district. I have three urban communities. Bridgeport, where I 
live, is faced with the potential of many foreclosures. 
Subprime loans are basically loans that are extended to people 
whose credit may not be good or whose income may not be strong, 
and it was an effort to get more people into the marketplace as 
homeowners. So the general thrust of subprime loans is not the 
issue; the issue is how they were extended. I am deeply 
concerned that we do everything we can to minimize the number 
of foreclosures so that people who were truly never involved in 
this issue don't get pulled down with it.
    We have, I think, a national interest, a regional interest, 
in dealing with this issue and I am very grateful, Madam 
Chairwoman, that you are conducting this hearing, and I don't 
think we should be afraid to go wherever the truth takes us. 
Thank you.
    Chairwoman Waters. Thank you very much, Mr. Shays. At this 
time, I will introduce our first witness panel: Ms. Laura A. 
Maggiano, Deputy Director, Office of Single Family Asset 
Management, U.S. Department of Housing and Urban Development; 
and Ms. Judy Caden, Director, Loan Guaranty Service, U.S. 
Department of Veterans Affairs. I thank both of you for 
appearing before the subcommittee today. Without objection, 
your written statements will be made a part of the record, and 
you will now be recognized for 5 minutes. I will start with Ms. 
Maggiano.

STATEMENT OF LAURIE MAGGIANO, DEPUTY DIRECTOR, OFFICE OF SINGLE 
 FAMILY ASSET MANAGEMENT, FEDERAL HOUSING ADMINISTRATION, U.S. 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Ms. Maggiano. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the subcommittee. On behalf of Secretary 
Jackson and Commissioner Montgomery, thank you for allowing the 
Federal Housing Administration to participate in this hearing 
to discuss the critical difference that sound servicing 
practices can make in preventing mortgage foreclosures. This 
dynamic is well-illustrated by looking at the highly successful 
FHA loss mitigation program, which encompasses a series of 
flexible workout options for managing seriously delinquent 
loans, which we define as those that are 90 days or more past 
due. These workout options are administered not by government 
staff, but by FHA servicers. FHA, however, provides monetary 
incentives to encourage servicers to use the program and 
carefully monitors their performance. It is important to 
stress, however, that although loan servicers have delegated 
authority, participation is not optional.
    Within 45 days of default, every delinquent borrower must 
be provided with comprehensive written information about 
workout options, including contact information for HUD-approved 
housing counselors. Each borrower must be evaluated for loss 
mitigation before the 90th day of default and servicers must 
consider loss mitigation right up until the day of the 
foreclosure sale if the borrower's financial circumstances have 
changed.
    To ensure servicer compliance, FHA has developed a 
sophisticated ranking system. Top rank servicers are eligible 
to earn extra incentives. And servicing lenders that don't use 
loss mitigation seriously are subject to sanctions, including 
fines equal to triple the cost of a foreclosure claim.
    FHA's home retention workout options are targeted at 
delinquent borrowers who want to keep their homes but who 
require more than just a short-term payment plan to help them 
regain financial footing. These include special forbearance, a 
long-term repayment plan that provides one or more special 
provisions such as a temporary reduction or suspension of 
payments.
    Mortgage modification: This represents a permanent change 
in the mortgage that may include capitalization of delinquent 
payments, reamortization of the term, or a change in the 
interest rate.
    And a partial claim: This is a loan provided by FHA in an 
amount necessary to reinstate the delinquent mortgage. The loan 
is interest free and is not due until the first mortgage is 
paid off. This option provides up to 12 months of mortgage 
payment assistance. Until recently this option was only 
available through FHA, but Fannie Mae has just introduced a 
home saver advance workout that is patterned on the FHA partial 
claim.
    For borrowers who are financially unable to keep their 
homes, FHA provides pre-foreclosure and deed in lieu of 
foreclosure options. These workouts relieve the borrower of the 
mortgage debt without the emotional and social stigma of a 
foreclosure sale. Unlike most investors, however, FHA provides 
borrowers who utilize these disposition options with 
compensation of up to $2,000 to help them transition to more 
affordable housing.
    The disposition options are important. FHA's commitment and 
focus is on home retention. In Fiscal Year 2007, for example, 
95 percent of all loss mitigation workouts allowed borrowers to 
keep their homes.
    The dual goals of the FHA loss mitigation program are to 
help FHA borrowers and to maximize losses to the insurance 
funds. The program is successfully achieving both goals. Last 
year alone, FHA helped 85,500 seriously delinquent borrowers 
retain homeownerships. And these are not temporary fixes. FHA 
has an 87 percent long-term success rate with loss mitigation. 
As foreclosure prevention has increased, there has been a 
corresponding reduction in foreclosure claims.
    Contrary to the incorrect report in last Sunday's 
Washington Post, the percentage of FHA insured loans that 
terminated in foreclosure has decreased every year for the past 
3 years, from 1.64 percent of all FHA loans in 2004 to 1.42 
percent in 2007. And in terms of preserving the financial 
integrity of the funds, the $158 million paid in home retention 
claims last year resulted in $2 billion in loss avoidance.
    The FHA loss mitigation program is a prime reason that FHA 
loans are considered safe and affordable. For too long, 
however, borrowers who would have benefited from an FHA loan 
were steered to higher risk subprime products. Fortunately, 
many of these borrowers now have the option of refinancing into 
FHA Secure. Under this program borrowers who became delinquent 
as a result of an interest rate reset have the option to 
refinance to FHA. And as of April 15th, 158,000 borrowers have 
closed on a fixed rate FHA Secure loan.
    Just last week in this hearing room, Commissioner 
Montgomery announced additional mortgage assistance for 
subprime borrowers who are a few payments late or who have 
received a voluntary mortgage principle writedown. With this 
new flexibility, FHA Secure is expected to assist 500,000 at-
risk borrowers by the end of December 2008.
    In closing, I would like to again thank the committee for 
its thoughtful consideration of loss mitigation. The 
Administration is committed not only to helping American 
families achieve homeownership, but also to helping them 
preserve it.
    [The prepared statement of Ms. Maggiano can be found on 
page 134 of the appendix.]
    Chairwoman Waters. Thank you very much. Ms. Judy Caden.

  STATEMENT OF JUDITH CADEN, DIRECTOR, LOAN GUARANTY SERVICE, 
            U.S. DEPARTMENT OF VETERANS AFFAIRS (VA)

    Ms. Caden. Good morning, Madam Chairwoman, and members of 
the subcommittee. I appreciate the opportunity to appear before 
you today to discuss the underwriting standards used by VA's 
Loan Guaranty Program, the loss mitigation tools available to 
our borrowers over the course of their loans, including 
guidance given to loan servicers, and performance data of loans 
guaranteed by VA over the past 10 years.
    Lenders underwriting VA loans must ensure that the 
contemplated terms of repayment bear a proper relation to the 
veteran's present and anticipated income and expenses and that 
the veteran is a satisfactory credit risk. VA's credit 
standards employ the use of residual income deadlines and debt-
to-income ratios in determining the adequacy of the veteran's 
income.
    Residual income is the amount of net income remaining after 
deduction of debts and obligations and monthly shelter 
expenses, to cover family living expenses such as food, health 
care, clothing, and gasoline. VA considers minimum residual 
income as a guide. It does not automatically trigger approval 
or rejection of a loan, instead, underwriters should consider 
it in conjunction with all other credit factors. If residual 
income is marginal, underwriters should look to other 
indicators, such as the applicant's credit history and in 
particular whether and how the applicant has previously handled 
similar housing expenses. However, an obviously inadequate 
residual income alone can be a basis for disapproving a loan.
    We also use a borrower's debt-to-income ratio to compare 
total monthly debt payments to gross monthly income. A ratio 
greater than 41 percent generally would require close scrutiny 
of the loan package. This is also a guide and lenders are to 
consider that in conjunction with all other credit factors. And 
in practice, it is a secondary underwriting factor to residual 
income.
    The committee also requested that I describe VA's guidance 
given to mortgage servicers regarding loss mitigation for loans 
guaranteed under the VA Loan Guaranty Program. In 1994, we 
published a VA servicing guide which states that we expect 
every realistic alternative to foreclosure which may be 
appropriate in light of the facts in each case to be explored 
before a loan is terminated. The guide provides specific 
information on extended repayment plans, forbearance, loan 
modifications, short sales, and deeds in lieu of foreclosure.
    Over the years, VA has also taken an active role in 
supplementing the servicing of private loan holders by 
attempting to contact veteran borrowers when their loans are 
reported as being seriously delinquent. We provide financial 
counseling and assistance in developing reasonable repayment 
plans which are then proposed to the private loan servicers. 
Our efforts in fiscal year 2007 resulted in foreclosure 
avoidance of more than 57 percent of the seriously delinquent 
loans. We helped arrange more than 8,000 repayment plans or 
other forbearance agreements in cases that otherwise would have 
gone to foreclosure and thereby avoided claim payments 
estimated at more than $181 million.
    In February of this year, we published an extensive 
regulatory package that was a result of a business 
reengineering effort to assess the servicing of VA loans. The 
goal was to improve service to veterans by standardizing our 
internal operations while also recognizing best practices 
within the mortgage servicing industry. We have developed 
procedures to ensure that servicers will utilize the full range 
of alternatives previously considered by VA in its supplemental 
servicing in order to help veterans mitigate potential losses.
    That new environment is called VALERI, which is VA Loan 
Electronic Reporting Interface. And under those regulations we 
have definitions for repayment plans, special forbearance 
assistance, and we have described the conditions for 
consideration of loan modifications, short sales, and deeds in 
lieu of foreclosure. We are also going to provide incentives to 
servicers who properly follow those guidelines and offer those 
alternatives.
    Lastly, the committee asked that I describe the performance 
of loans guaranteed under the Loan Guaranty Program under 
recent standards, including the number and percentage of loans 
ending in foreclosure. The numbers are in my written statement, 
but I will summarize by just saying that the VA program has 
fared well in recent years with regard to foreclosure rates. 
According to data from the Mortgage Bankers Association, the 
quarterly delinquency rate for VA loans during the past 5 years 
has steadily declined while the rate for other loan programs 
has increased. And during that same period, the percentage of 
VA foreclosures has decreased while the rates for other 
programs has increased.
    This concludes my testimony. I do appreciate the 
opportunity to speak before you today, and I would be pleased 
to answer any questions you may have.
    [The prepared statement of Ms. Caden can be found on page 
95 of the appendix.]
    Chairwoman Waters. Thank you very much. I will recognize 
myself for 5 minutes for questioning. Ms. Maggiano, I would 
like to make sure that I understand exactly who the servicers 
are, as well as their relationship to FHA. Who do you contract 
with to provide servicing activities?
    Ms. Maggiano. FHA does not contract directly with anyone. 
FHA, unlike GSEs, doesn't actually own loans. We insure those 
loans against default. So an originator would either service 
their own loans or they may sell the servicing rights to their 
loans. There are currently 1,200 FHA approved servicers in the 
United States. However, 8 of them have 75 percent of the 
business.
    Chairwoman Waters. So if you are guaranteeing loans from 
Countrywide, for example, Countrywide would be responsible for 
servicing their own loans because they also provide servicing 
to other entities, is that right?
    Ms. Maggiano. Countrywide may service some of their own 
loans, they may sell the servicing rights to some loans that 
they actually own, or they may service on behalf of other 
holders of the mortgage.
    Chairwoman Waters. Is Countrywide one of the big eight you 
just referred to?
    Ms. Maggiano. Yes, ma'am.
    Chairwoman Waters. So they do a lot of servicing--
    Ms. Maggiano. Yes, they do.
    Chairwoman Waters. --of their own loans that were 
originated by Countrywide, is that right?
    Ms. Maggiano. That is correct.
    Chairwoman Waters. All right. Now, having said that, you 
have a responsibility to ensure that the loan originator whose 
loans you are guaranteeing and whose loans are being serviced 
by the same originator are doing a credible job?
    Ms. Maggiano. Yes, ma'am.
    Chairwoman Waters. And if not, you have the ability to fine 
them, is that right?
    Ms. Maggiano. That is correct.
    Chairwoman Waters. Now, tell me who you fined in the last 2 
years and how much were those fines?
    Ms. Maggiano. Madam Chairwoman, I don't have that 
information with me, but I can provide it.
    Chairwoman Waters. Ms. Maggiano, have you fined anybody? I 
don't want you to put me off.
    Ms. Maggiano. Yes.
    Chairwoman Waters. You have had some fines?
    Ms. Maggiano. There have been servicing violations.
    Chairwoman Waters. Just one second, because this is in the 
record.
    Ms. Maggiano. Yes, ma'am.
    Chairwoman Waters. My question to you is, are you aware or 
do you know of any of your servicers who have been fined by you 
who were not in compliance with your rules and your guidelines?
    Ms. Maggiano. I personally cannot give you any names. 
However, we do have an aggressive servicing audit program. We 
audit servicers every 18 months.
    Chairwoman Waters. Do you have anybody with you today who 
can help you with that information?
    Ms. Maggiano. I am sorry, but I don't.
    Chairwoman Waters. Did you bring anybody with you who could 
help you with that information?
    Ms. Maggiano. No, but I would be happy to provide it to the 
committee.
    Chairwoman Waters. Do you think there have been any fines?
    Ms. Maggiano. Yes.
    Chairwoman Waters. About how many do you think there have 
been?
    Ms. Maggiano. Madam Chairwoman, I can't answer that 
question.
    Chairwoman Waters. But you do think there have been some?
    Ms. Maggiano. Yes, ma'am.
    Chairwoman Waters. All right. That is very good. Thank you. 
Let me ask you also, listening to Ms. Caden describe the 
servicing of veterans leads me to believe that they may have 
guidelines for their servicers that may be a little bit or much 
more directed and provided than you do. Let me ask Ms. Caden, 
who are your servicers?
    Ms. Caden. Well, like FHA, we don't contract. The loans are 
guaranteed, so it is whoever is holding the loans. Countrywide 
is a large servicer. Wells Fargo has the most. They are our 
biggest servicers of VA loans.
    Chairwoman Waters. And do you have the ability to fine?
    Ms. Caden. I don't believe we fine. We do audit. We do look 
at what they are doing. What we are trying to do now is build a 
program of incentives and disincentives for doing proper 
servicing.
    Chairwoman Waters. So right now, while you are trying to 
build a program for incentives and disincentives, let us take 
Countrywide, for example, have your audits shown that they were 
not doing a good job or they could be doing a better job or did 
you caution them, did you do anything in working with 
Countrywide as a servicer to say something is wrong, we don't 
think that you are doing the kind of mitigation that we think 
can help keep people in their homes?
    Ms. Caden. I would have to go back and look and see, but I 
don't think we have taken them to task. In fact, I think 
Countrywide has been doing an adequate job on the VA loans that 
they service.
    Chairwoman Waters. That is why they have so many 
foreclosures?
    Ms. Caden. Well, I don't believe that so many foreclosures 
are on VA loans, on the VA guaranteed loans. It may be on other 
parts of their portfolio.
    Chairwoman Waters. All right. I am going to turn to the 
ranking member. But let me just say to both of you, you knew 
you were coming here today, and it seems to me you would have 
come armed with the kind of information that can help us to 
learn about how this business works. Unfortunately, our 
regulators don't have any responsibility to regulate the 
servicers, and we have to learn the best way that we can. We 
are picking information out of people to learn this servicing 
business, and I really don't like the idea that you can't tell 
me how you monitor and oversight your servicers.
    Mrs. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. I would like to 
make a bit of a distinction here the way I heard your 
testimony. Both FHA and VA, you both stated in your opening 
statements that the rate of foreclosure for both of your loans 
had actually gone down over the last, I think you both said, 
did you say 5 years? In light of the fact that many, and we 
heard earlier that 57 percent, you know nationwide 57 percent 
more mortgages are in foreclosure than were at this time than 
last year, am I correct to assume that these would not in a 
general way, not to say you don't have foreclosures, but FHA 
and VA guaranteed loans are not a part of that 57 percent 
increase?
    Do either of you have a comment on that?
    Ms. Caden. I will go first. VA loans are not considered to 
be subprime, and that is where most of the problems are. We 
have always underwritten, as I described, using the credit 
underwriting standards that we have. So I don't believe that we 
are part of the big problem right now. In fact, our loans have 
performed very well.
    Ms. Maggiano. FHA has a very standard loan product. And we 
don't have balloon loans, we don't do interest only, we don't 
do stated income, we don't allow many of the risk factors that 
were inherent in many of the subprime products that caused them 
to have the high default rates that they have.
    Mrs. Capito. Are many of your loans then considered 
underwater? I think this may be a distinction here, because an 
FHA loan, a traditional one has been--what was the max on the 
property until we made it larger in the stimulus package?
    Ms. Maggiano. The standard was about $230,000 and then it 
was higher, up to $340,000 in high-cost areas.
    Mrs. Capito. But in consideration of, say, my area, that 
would certainly cover the grand majority of every home in my 
district. But I would say in a lot of places in California, 
that doesn't even scratch the surface.
    Ms. Maggiano. We have a very small loan portfolio in 
California, so yes.
    Mrs. Capito. And then, a final question. In looking at the 
chairwoman's bill and then in responding to what Ms. Maggiano 
had said about what you are moving forward with--and I hope we 
can get those statistics, maybe you can get them before the end 
of our hearing because we have two more panels on the 
servicers--would you say that the VA--oh, no, I wanted to ask 
about the VA loan guarantees, so I am going to switch over 
here. Would you say that the loan guarantee of 41 percent debt-
to-value ratio--or what is it called, debt-to-loan ratio--
    Ms. Caden. Debt-to-income ratio.
    Mrs. Capito. Yes, debt-to-income ratio. Has that worked 
well for you? Is that a little bit lower than what the VA has? 
What do you have to say about that, because I believe that is 
part of the chairwoman's bill as well?
    Ms. Caden. It is a little bit lower than what FHA--I think 
they have a 43 percent ratio. We think it has worked well. And 
I think in combination with that, with looking at the residual 
income guidelines that we use with the general underwriting 
standards that we use, as I said VA loans have performed very 
well so we think it has been working.
    Mrs. Capito. My final question: I actually forgot the other 
question. You probably figured that out. When you talked about 
your responses that you had, you talked about making sure that 
people are being directed toward FHA counselors, you talked 
about making sure that the servicers are paying attention and 
sitting down before you get into the 90 days of delinquency. 
Does that match pretty much what is already in this bill? I 
mean, do you feel like those are--and have you stepped up those 
rates since the spotlight has been on the foreclosure 
situation?
    Ms. Maggiano. There are many provisions in the bill that 
are extremely similar to written FHA policy with respect to 
loss mitigation, so yes, there is quite a bit of similarity. 
There are also some areas that are different. Have we stepped 
it up? We work very closely with our servicers to encourage 
them to continue to use loss mitigation, we do constant 
training of servicers and nonprofit housing counselors, and so 
we carefully monitor use of the program.
    Mrs. Capito. Is this a joint effort? Do FHA and Fannie Mae 
and Freddie Mac all get together and talk with the servicers at 
the same time, do you do it individually or is this an 
industrywide effort?
    Ms. Maggiano. There certainly is some amount of discussion 
between the GSEs and the agencies, but that tends to be not 
directly related to the servicers. We talk together about 
various policies and where we are going and sharing best 
practices. But in terms of providing specific guidance, we have 
a very different program and we all have fairly unique loss 
mitigation characteristics. As I indicated earlier, we have a 
special program which has been incredibly effective for FHA 
borrowers where we will actually loan them the money to 
reinstate their loan and carry back a second note, but that 
note has no payments due.
    Mrs. Capito. Until the first one is paid off?
    Ms. Maggiano. Yes, until the first one is paid off. So it 
doesn't impact the ability to service the first mortgage.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Thank you very much. Mr. Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman. The loss 
mitigation is, I think, very helpful to those who are trying to 
maintain their homes, and this is certainly a better option 
than foreclosure. I am becoming concerned as I read more about 
who is involved and the fact that there is no regulation of the 
servicers. And if there is no regulation of servicers, can you 
tell me what the fee schedule is like, what it is based on? 
When Countrywide, Bank of America, or Wells Fargo are engaged 
in loss mitigation, how do they develop their fee?
    Ms. Maggiano. My remarks on loss mitigation were specific 
to loans insured by the FHA.
    Mr. Cleaver. I understand.
    Ms. Maggiano. And we do have regulation.
    Mr. Cleaver. Let me ask it another way.
    Ms. Maggiano. Certainly.
    Mr. Cleaver. Do you think we should have regulations over 
the servicers, those who are engaged in loss mitigation?
    Ms. Maggiano. The Administration has not taken a formal 
position on this bill.
    Mr. Cleaver. Okay. Not the bill. Do you think we should 
have some kind of regulation? I mean, they are regulated 
because they are banks. But I am talking about for the 
particular services they provide, there are no regulations.
    Ms. Maggiano. I think it is a worthwhile discussion. I 
don't think that we have an opinion on whether or not having a 
nationwide loss mitigation program of that magnitude is the 
appropriate course of action, but certainly it is a worthwhile 
discussion.
    Mr. Cleaver. I want to go to the seminar that government 
employees go to that teach you how to do that; you know, go all 
the way around the question. That is really great. I mean, I 
admire almost all of the people who do it. There are a couple 
who can't do it well, but you do it well. The loss mitigation 
program, which I support, and FHA's loss mitigation program is 
required?
    Ms. Maggiano. Yes, sir.
    Mr. Cleaver. How do you think a loss mitigation program 
would impact the current crisis if it were a nationwide 
mandatory loss mitigation program for all existing loans, 
including those not guaranteed by FHA?
    Ms. Maggiano. I believe very strongly in the importance of 
loss mitigation in keeping home buyers in their homes.
    Mr. Cleaver. Would it reduce foreclosures if we--this is 
the same question. Would it reduce foreclosures if we 
implemented it nationwide, including the existing loans and 
those not guaranteed by FHA?
    Ms. Maggiano. It certainly has reduced foreclosures in the 
FHA portfolio, absolutely. What is very different in this 
particular marketplace is the huge impact of substantial 
amounts of negative equity and what to do with that negative 
equity. And that is not an issue that we have had a problem 
with in the FHA portfolio specifically.
    Mr. Cleaver. So, is that a ``yes?''
    Ms. Maggiano. I don't have a crystal ball. I can't tell you 
what the outcome would be.
    Mr. Cleaver. What do you think?
    Ms. Maggiano. Loss mitigation is very important. And 
clearly, the more loss mitigation the more likely we are to see 
borrowers be able to retain homeownership.
    Mr. Cleaver. That is a yes. Thank you. I yield back the 
balance of my time.
    Chairwoman Waters. Thank you very much.
    Mr. Shays.
    Mr. Shays. I am still formulating my question. You have 
more Democratic members, so I will wait two more rounds. I am 
sorry, I didn't see you. I am going to pass. I am going to ask 
questions in a bit.
    Chairwoman Waters. Mr. Neugebauer.
    Mr. Neugebauer. Okay. Thank you. One of the things that I 
think is kind of interesting, that we have to kind of 
discriminate in terms of what the roles of servicers are in 
this process. And I think some people have been talking about 
certain companies that have higher foreclosure rates. That 
doesn't necessarily have anything to do with their servicing 
capability. Would you say that is a true statement?
    Ms. Maggiano. Yes, I would say that.
    Mr. Neugebauer. Because people who service mortgages may be 
servicing mortgages that they didn't originate. And so a lot of 
the problems that are in our mortgage dilemma today really are 
more about origination than servicing. Would you say that is 
true?
    Ms. Maggiano. I think certainly origination is a major 
factor. I think good servicing can ameliorate some of the 
mistakes of origination, but certainly not all of them.
    Mr. Neugebauer. But your relationship with a servicer 
generally only kicks in when they are beginning some process of 
loss mitigation at that particular point in time, is that 
right?
    Ms. Maggiano. Primarily. FHA certainly has guidelines that 
servicers must follow for all performing loan servicing 
functions as well.
    Mr. Neugebauer. You have to be approved to be one of your 
servicers?
    Ms. Maggiano. Absolutely.
    Mr. Neugebauer. So you have a certain criteria for them to 
follow?
    Ms. Maggiano. That is correct.
    Mr. Neugebauer. One of the things--I think we have all kind 
of been on a witch hunt here, I think some of us, not me 
particularly, but others who are looking for who is to blame 
for all of this, and we kind of started looking around trying 
to find that person to blame. I think the thing about the 
industry is that I haven't heard of anybody saying that there 
is a huge problem with servicing in this country. In fact, over 
the break I sat down with a number of companies that say today, 
as far as loss mitigation goes that if someone, if a borrower 
will call their mortgage company today and make some effort to 
offer up some kind of a solution here, that most all of those 
companies are interested in working with the borrowers. But 
that primarily most of the people who are getting foreclosed on 
today, and this was a quote from a company that handles a lot 
of loss mitigation for some very big mortgage holders, that in 
most of the mortgages that they are foreclosing on, they never 
hear from the borrower, that the borrower just doesn't return 
their call. And so it is really hard to do loss mitigation with 
someone who won't--you know, that is a two-way street.
    Would you agree with that?
    Ms. Maggiano. I do agree with that. And in my remarks, when 
I said that servicers must evaluate a borrower for loss 
mitigation before they are 90 days past due, they can only do 
that if they have been able to reach the borrower. Most 
servicers, certainly FHA servicers, use a variety of techniques 
to attempt to reach borrowers including predictive dialers and 
unusual types of mailings. Most of our servicers, if not all, 
are members of the HOPE NOW Alliance--I believe you will hear 
from them later--and they have developed some really aggressive 
targeted mailings to delinquent borrowers to try to get them to 
contact the servicer, because without that contact you can't do 
a workout in a vacuum.
    Mr. Neugebauer. Are either one of you aware of, and maybe 
this question was asked a while ago, but I didn't hear the 
answer, have you ever removed someone's privileges to be a 
servicer while you have served in the capacity you are in?
    Ms. Caden. For VA, no, we have not.
    Ms. Maggiano. I don't know the answer to that. I have not 
been involved in removing someone's privileges, although there 
have been a number of entities with FHA approval to originate 
and service that have been removed from our program. I haven't 
been personally involved in that activity.
    Mr. Neugebauer. What is the role that--maybe you can 
explain. In other words, you are the guarantor of these loans, 
but then other people hold and own these loans or made an 
investment in them. What latitude contractually do you have in 
working with the people who actually hold that note on being 
able to provide certain modifications or loss mitigation 
without violating the rights of the person who holds that note?
    Ms. Caden. For VA, we work with the servicer and we would 
work with the veteran; and, as I said in my statement, we have 
been fairly successful in working with a veteran and the 
servicer, the holder of the loan, to work out loss mitigation 
efforts, loan modifications, repayment plans, that type of 
thing. Basically, we just do it in tandem with them.
    Mr. Neugebauer. But it has to be in concurrence with a 
servicer.
    Ms. Caden. Yes.
    Chairwoman Waters. Thank you very much.
    Ms. Caden. I should say that there are some cases in which 
we evaluate the veteran and we will do what we call refund the 
loan, and we will buy the loan back, and then they will have a 
VA direct loan at that point. So we will do that in certain 
cases.
    Mr. Neugebauer. May I just have a quick follow-up?
    Have you done that a lot here lately?
    Chairwoman Waters. Mr. Cleaver. Please, we have to move on. 
We have to be out at a certain time.
    Mr. Green, I am sorry. Please go ahead.
    Mr. Green. That is quite all right. Thank you, Madam 
Chairwoman.
    Let me start by making a basic statement, and hopefully I 
will get some agreement on it. Is it true--and I am speaking to 
the representative from HUD, if you would kindly pronounce your 
last name for me, please?
    Ms. Maggiano. ``Maggiano.''
    Mr. Green. Ms. Maggiano, is it true that while you don't 
have a perfect paradigm, you have perfected a paradigm that 
produces lower foreclosures, in your opinion?
    Ms. Maggiano. Yes, sir.
    Mr. Green. And is it true that the reason you believe this 
paradigm works as effectively as it does is because the basic 
premise that it is built upon is one of home retention?
    Ms. Maggiano. Yes.
    Mr. Green. And is it true that you have a contractual 
agreement with your servicers, a codified agreement that 
requires certain things if a borrower falls into the class of 
possibly being foreclosed upon?
    Ms. Maggiano. Yes.
    Mr. Green. Would these things that are codified that must 
be done include special forbearance, mortgage modification, 
partial claim adjustments, pre-foreclosure sales, and deeds in 
lieu of foreclosure? Would these be the essence of what must be 
done when--or options that are available as opposed to 
foreclosure?
    Ms. Maggiano. Those are certainly the options that are 
available. It is important to make a distinction that we 
delegate to servicers the responsibility to evaluate the 
borrower.
    Mr. Green. Agreed, but let me intercede. You also have 
something else. Along with that delegation, you have the power 
to punish.
    Ms. Maggiano. That is correct.
    Mr. Green. Now, that is for an FHA loan.
    Ms. Maggiano. Yes, sir.
    Mr. Green. Let's talk about a loan that is not FHA. For our 
conversation, we will call it conventional. In the conventional 
market, do we have the same paradigm in place? I assume your 
answer would be no? Same paradigm as FHA?
    Ms. Maggiano. FHA has no authority.
    Mr. Green. I agree with you. I am not asking now whether 
FHA has authority. I am asking if the paradigm that FHA employs 
is the same paradigm that is employed in the conventional 
market. Or maybe it should be reversed. Is the conventional 
markets paradigm the same as FHA's? I assume your answer is 
``no.''
    Ms. Maggiano. Actually, it is not ``no.'' All of the loans 
that are--where Freddie Mac and Fannie Mae are an investor, 
those loans also are subject to very, very similar loss 
mitigation programs with oversight and monitoring by the GSEs. 
As a matter of fact, we--
    Mr. Green. Is the power to punish there?
    Ms. Maggiano. Yes.
    Mr. Green. Is that power to punish employed?
    Ms. Maggiano. You'll have to ask the representatives of the 
GSEs when they speak.
    Mr. Green. So, in your opinion, the paradigm that includes 
special forbearance, mortgage modification, partial claim, pre-
foreclosure sale, and deed in lieu of foreclosure is the same 
paradigm being employed in the conventional market?
    Ms. Maggiano. Not exactly the same, but a similar paradigm.
    As I mentioned in my remarks, partial claim is a rather 
unique workout structure that, until very recently, was really 
only employed by FHA; and Fannie Mae has adopted something not 
exactly the same but similar. But both of the GSEs have very 
strong and aggressive workout tool boxes, and they do monitor.
    Mr. Green. Then the question becomes, if I may, if the 
paradigms are the same or similar, why are the results so 
vastly different?
    Your contention might be that you received a product that 
is not the same as the product that the GSEs received. Is that 
a fair statement?
    Ms. Maggiano. Yes.
    Mr. Green. Meaning 3/27s, 2/28s, prepayment penalties, and 
no-doc loans, you did not receive these products? Is that your 
contention?
    Ms. Maggiano. That is correct.
    Mr. Green. And as a result of the lack of those products, 
your contention is that the results are different?
    Ms. Maggiano. I believe that would be my conclusion, yes.
    Mr. Green. Do the GSEs, by way of conventional loans, 
monitor the servicers to the same extent that you do? You have 
indicated clearly that you have a very close relationship with 
the servicers.
    Ms. Maggiano. Yes.
    Mr. Green. Do we have that same circumstance?
    Ms. Maggiano. I don't wish to speak for the GSEs. They will 
be testifying later in the morning.
    Mr. Green. Would that monitoring make a difference, in your 
opinion?
    Ms. Maggiano. Monitoring always make a difference, yes.
    Mr. Green. Finally, if I may, tell me quickly about your 
debt-to-income residual analysis, please.
    Ms. Maggiano. We--were you referring to VA or--I didn't 
mention debt to income.
    Mr. Green. My time is up, and I will yield back. Thank you.
    Chairwoman Waters. Thank you very much.
    Mr. Shays, are you ready now?
    Mr. Shays. Thank you.
    Mr. Green, she is a tough chairman.
    Mr. Neugebauer, you had a question.
    Mr. Neugebauer. I thank the gentleman.
    I just wanted to follow up, because I think you made a very 
good point a while ago, that you were about to make, which is 
that the Veterans Administration has the ability to repurchase 
a loan. That the servicer doesn't agree to that, you think it 
is in the best interest of the veteran, and so that you can 
repurchase that.
    Ms. Caden. Right, and we do that after going through an 
evaluation of the veteran's financial picture, what is going on 
right now. If we think there is a chance for them to maintain 
that home and the loan payment, we can do that.
    Mr. Neugebauer. Do you do that a lot?
    Ms. Caden. I can provide for the record the numbers of what 
we have done. I wouldn't say it is a lot, but it is fairly 
significant.
    Mr. Neugebauer. Say that again?
    Ms. Caden. Significant.
    Mr. Neugebauer. I thank the gentleman. I yield back.
    Mr. Shays. Thank you.
    I want to get into this issue. I am deeply concerned, like 
the rest of us are, about the impact of foreclosures. I am 
deeply concerned that it strikes me the banks force you to go 
into foreclosure, to be delinquent before they negotiate with 
you, which seems nonsensical to me. So this is what I want to 
know first: If your loan is divided into three parts, the 
servicer has the right to negotiate loss mitigation. Is that 
correct, first?
    Ms. Maggiano. Yes.
    Mr. Shays. Leave your microphone on, thanks.
    Secondly, does that right extend to writing down the 
interest rate or writing down the principal?
    Ms. Maggiano. The servicer certainly is allowed to write 
down the interest rate, but FHA will not reimburse them for 
that interest rate, the cost of that interest rate reduction. 
They could also write down principal, but FHA does not have the 
authority to reimburse them for principal reduction.
    Mr. Shays. Let me understand. So there is no motive for 
them to do that?
    Ms. Maggiano. No, the motive for them to do that, and 
again--
    Mr. Shays. Give me the short version.
    Ms. Maggiano. There needs to be a real distinction between 
FHA and other products. Because FHA has nearly 100 percent loan 
guarantee.
    Mr. Shays. So there is really no incentive for the servicer 
to negotiate?
    Ms. Maggiano. Well, there is an incentive for the servicer 
to negotiate, because we provide them financial incentives, and 
we monitor their performance.
    Mr. Shays. I don't know what ``monitoring their 
performance'' means, but let me ask you this: What right does 
the borrower have? Do I have the right to say that I want to 
negotiate before I am delinquent?
    Ms. Maggiano. For FHA-insured loans, a servicer may not 
refer a loan to foreclosure until they have evaluated the 
borrower for loss mitigation.
    Mr. Shays. I don't know what that means, but please answer 
my question.
    Ms. Maggiano. I am sorry.
    Mr. Shays. Does the borrower have the right to negotiate 
with the service provider before they go into default?
    Ms. Maggiano. The borrower always has the right to discuss 
whatever they wish with their service provider.
    Mr. Shays. Does the borrower have the right to demand that 
they negotiate with them before they go into default? Because 
we are hearing that they say, don't call us until you are in 
default.
    Ms. Maggiano. Again, I am trying to relate this to an FHA 
insured--
    Mr. Shays. No, I hear you.
    Ms. Maggiano. And we don't tend to have the interest rate 
reset issue where payments are going to skyrocket next week and 
people are concerned about the impact of those increased 
payments on their ability to make their--
    Mr. Shays. You have less potential foreclosures, right?
    Ms. Maggiano. We have potential foreclosures for different 
reasons. Our borrowers tend to have more issues with 
unemployment, with health--
    Mr. Shays. Someone is out of work. They can't pay. Do they 
have the right to call up and expect that they will be treated 
humanely?
    Ms. Maggiano. Yes.
    Mr. Shays. And that the service provider will say, well, 
let's talk about when we do about this, or do they say, we 
can't help you until you are in default?
    Ms. Maggiano. I am sorry. I do understand your question, 
and they absolutely have the right to have the servicer treat 
them with respect.
    Mr. Shays. What happens if the service provider doesn't? 
What if the service provider says, we are not talking to you 
until you are in default?
    Ms. Maggiano. I haven't--that hasn't been raised.
    Mr. Shays. I will tell you why it has been raised for me. 
It may not be your loans, but the bottom line is I had two 
forums on this in my district, and I have had people testify 
they wanted to not be in default, wanted to deal with this 
issue, and they were told, don't call us until you are in 
default. It may not be an FHA loan, but--
    Ms. Maggiano. That is certainly not guidance we would ever 
give our servicers.
    Mr. Shays. Madam Chairwoman, I know my time has run out, 
and I don't want you to treat me any nicer than anyone else. I 
hope that we really have a good discussion about this issue.
    Chairwoman Waters. Thank you very much, Mr. Shays.
    Mr. Ellison.
    Mr. Ellison. Thank you, Madam Chairwoman, for having this 
important hearing.
    Ms. Maggiano and Ms. Caden, one of the major goals of H.R. 
5679 is to ensure that loss mitigation efforts by servicers 
result in offers to distressed borrowers, be they repayment 
plans, loan modifications, or some other options that are 
sustainable for the longer term. The key to such long-term 
sustainability, it seems to me, is whether the resulting 
payment plan is affordable to the borrower, barring some other 
significant drop in income. Can you help me understand if and 
how HUD and VA make this evaluation for their servicers?
    Ms. Maggiano. FHA has a financial evaluation requirement; 
and servicers, when they are evaluating a borrower for any of 
the options, even if it is a pre-foreclosure sale or a deed in 
lieu, must gather the borrower's income and expenses and use 
that in a formula that we have published in writing to 
calculate what we call surplus income, and that is the income 
over and above their household living expenses and their other 
debts like car payments that they need to make that they have 
available to support a repayment plan. It is not acceptable in 
FHA to put a borrower into a repayment plan if you cannot 
demonstrate that they have sufficient surplus income to make 
that plan.
    Mr. Ellison. I wonder if you could perhaps put a finer 
point on your response, and I am wondering if you could be very 
concrete in describing the debt-to-income and residual-income 
analysis your agencies undertake in determining whether a 
particular loss mitigation offer is workable.
    For example, I have heard the VA requires at least $200 in 
residual income be left over after a borrower's household 
expenses, including payments on all secured and unsecured debt, 
are taken into account and that would be a good standard across 
the industry. So could both of you provide details of your 
agency's DTI and residual-income analysis for loss mitigation?
    Ms. Caden. I would be happy to provide that in more detail 
for the record.
    But, basically, we don't have a standard such as the one 
you mentioned of the $200. There is no hard-and-fast rule, and 
residual income is looked at as a guide. It is mainly used, 
both residual income and the debt-to-income ratio, at the time 
of loan origination. That is part of the underwriting standards 
to make sure a veteran can afford the loan they are attempting 
to get for the house they are trying to buy.
    We would expect servicers to use the same guidelines, but 
there is no hard-and-fast rule of the $200 over or under.
    Mr. Ellison. Thank you very much.
    I had more questions right in front of me, and they just 
disappeared. I don't know what happened to them. I have too 
much stuff sitting here, I guess.
    I do have a question that I didn't write out, and it is off 
the cuff. And that is, so FHA has a requirement to do 
mitigation services. That is FHA. But what about the rest of 
the industry? You guys only address about 40 percent of the 
industry, am I right about that? What other incentives are in 
place for the non-FHA mortgages, those trusts, those PSA trusts 
to do loss mitigation?
    Ms. Maggiano. Again, FHA provides loss mitigation for FHA-
insured loans only. The GSEs have very similar programs for all 
of the loans that they either own or securitize, that are 
securitized through them. And then I am not aware of any formal 
overarching loss mitigation program for loans that don't fall 
within those categories. However, most of the investors, also, 
it is clearly in their interest to keep borrowers in their 
homes. So there are loss mitigation requirements in many of the 
trusts.
    Mr. Ellison. One of the reasons I was kind of surprised 
when it sounded like there was the provision, the so-called 
cram-down provision--I am sure you guys know what I am talking 
about--when we were going to try to give bankruptcy judges the 
power to restructure debt going forward on a primary residence. 
There was a lot of resistance to that.
    My thought would be, you know, why would there be 
resistance to that? I mean, we want people to stay in their 
homes, and most people will, out of their own incentives, try 
to do loss mitigation. But for those who don't, there is a 
social purpose in trying to make sure people can stay in their 
homes. Why then doesn't Congress--why wouldn't this be a good 
idea?
    Could you help me understand some of the push-back? Not 
that it is your responsibility, but just in terms of your 
expertise in the field, would you mind sharing your ideas on 
that with me?
    Ms. Maggiano. Well, I believe the primary objections that I 
have heard are that it would sort of undermine the sanctity of 
contracts and prevent mortgage originators from being willing 
to enter into contracts over which they thought other people 
then had control.
    Mr. Ellison. But we have always--I think I'm done.
    Chairwoman Waters. Thank you.
    Mr. Miller.
    Mr. Miller. Thank you, Madam Chairwoman.
    Welcome. I know it is hard answering questions based on 
somebody else's bill, but the bill requires the mortgagees of 
mortgages that are in default to basically do a number of 
things. These things are called ``reasonable loss mitigation 
activities.'' These activities can be waiving of late fees, 
penalty charges, engaging in prepayment plans, or writing down 
the principal for the loan. Does a lender have to basically 
fulfill one or all of these things to be in compliance with 
``reasonable mitigation activities?''
    Ms. Maggiano. Again, I can speak only to the FHA portfolio, 
and they absolutely must consider all of our options in a 
priority order in order to be considered to be doing--
    Mr. Miller. Let's say somebody bought a $300,000 home, and 
the rate was 6\1/4\ percent, but now they can only afford a 
$250,000 home at 5\1/4\ percent. What are your options?
    Ms. Maggiano. I--
    Mr. Miller. That is a tough one. You have to engage in 
reasonable loss mitigation activities based on the criteria 
that is defined and that is part of the criteria, so what will 
you do when that situation arises?
    Ms. Maggiano. FHA's loss mitigation program is based on 
keeping as many borrowers in their homes as possible.
    Mr. Miller. Based on this bill, as defined in this bill, 
the language, and that is the circumstance placed before you, 
what would you have to do? Not what you do currently, but what 
do you have to do based on this bill? That is what we are 
talking about.
    Ms. Maggiano. I am sorry. I don't think I understand the 
question.
    Mr. Miller. Do you understand the language in this bill?
    Ms. Maggiano. Yes, sir.
    Mr. Miller. That is considered reasonable loss mitigation 
activities, and you have to do these things.
    Now let's say a person owns a $300,000 home. They bought it 
for $300,000, and they were paying 6\1/4\ percent interest, and 
they are in default and 3 months behind in their payment. Now 
you are trying to deal with this. You look at their capability 
based on income, and they can only afford $250,000, and they 
can only afford to pay 5\1/4\ percent interest. How would you 
deal with that?
    Ms. Maggiano. The way I read the bill, it was not clear to 
me whether or not a servicer would be required to provide a 
repayment plan or a loan restructure based on the borrower's 
ability to pay, regardless of what that ability was.
    Mr. Miller. But the language says, such as waiving all late 
fees and their penalty charges, engaging in a repayment plan 
and writing down the principal for the borrower. That is in the 
language of the bill.
    Ms. Maggiano. Yes.
    Mr. Miller. If you have to comply with that criteria, how 
will you do that? Because it says, writing down the principal 
for the borrower and engaging in a repayment plan. If they can 
only afford 5\1/4\ percent interest and they can only afford 
that on a $250,000 loan, how do you accomplish that?
    Ms. Maggiano. FHA does not have a--it is not our intention 
to keep every borrower in their home. We do a very aggressive 
job in home retention, but the reality is that there are 
borrowers who can't afford the home they have.
    Mr. Miller. I am not trying to argue with you. I am trying 
to understand the language and how you can apply it. It says 
``includes writing down the principal for the borrower.'' It 
includes that.
    Ms. Maggiano. Right.
    Chairwoman Waters. Will the gentleman yield?
    Mr. Miller. Sure.
    Chairwoman Waters. Affordability is only one criteria that 
you have to consider. It does not mandate that you would have 
to write down that loan. It deals with reasonableness, business 
sense. That is what it deals with.
    Mr. Miller. That is what I am trying to figure out, what is 
considered reasonableness?
    Chairwoman Waters. I think to ask that in a vacuum without 
all of the information before you places the witness at a great 
disadvantage.
    Mr. Miller. I have great respect for you, and you know 
that. And I have read this bill, and I can't come to a 
reasonable conclusion of how we do it. And when I can't come to 
a conclusion on how we do it, I try to ask a professional who 
is a witness in the industry based on language that is in the 
bill. And when the language in the bill says, such as waiving 
all late fees, penalty charges, engaging in repayment plans, 
and writing down principal for the borrower, that is very 
specific. But when I can't determine how we do that--
    Chairwoman Waters. We will have some people on another 
panel who will help to show you how it is done. While the 
witnesses before us today talk about the standards that they 
have developed in order to instruct their services, they are 
not doing the workouts themselves.
    Mr. Miller. Yes, but the standards that currently exist are 
being changed.
    Chairwoman Waters. No, the standards are not being changed. 
You will find that the standards differ. We happen to have 
before us today FHA and VA, and we are hearing about their 
standards. You have servicers who are working with completely 
different standards, and we will hear some of that today.
    Mr. Miller. Is HUD currently writing down the loan amounts?
    Ms. Maggiano. No, we do not have regulatory authority to do 
that.
    Mr. Miller. Do you currently write down interest rates?
    Ms. Maggiano. FHA does not write down interest rates.
    Mr. Miller. So, Madam Chairwoman, that is the problem.
    Chairwoman Waters. No, it is not the problem.
    Mr. Miller. Well, let me finish. The language says that 
they should do these things.
    Chairwoman Waters. No, the language does not mandate that 
they do anything that is not reasonable.
    Mr. Miller. But it defines reasonable as--that is what we 
need to get to.
    Chairwoman Waters. All of those are different things that 
would be criteria that could be considered.
    Mr. Miller. Then they are reasonable.
    Chairwoman Waters. Your time is up.
    Mr. Miller. Okay.
    Chairwoman Waters. Thank you very much.
    Mr. Watt.
    Mr. Watt. Thank you, Madam Chairwoman.
    Ms. Maggiano, you know, Representative Green used to be a 
judge, and I love the precision of his questions. But 
Representative Cleaver earlier stated that witnesses who come 
over here must take a lesson at answer avoidance, and perhaps 
the most adept at doing that are the folks from HUD. Even with 
the precision of Representative Green's questions, you managed 
to miss a category.
    You have FHA and VA loans. You have conforming loans that 
the GSEs back. All of those categories have some form of 
mitigation arrangement. And most of them, at least VA and FHA, 
have some specific guidelines to get the loan. Most of the GSE 
conforming loans have some specific guidelines. You have to 
document income. You have to do all the things.
    And then you have a third category--which is the one that 
you missed--which is the nonconforming loans that are not VA, 
not FHA, not GSE-backed at all. And those are the ones that 
have the highest rates of default in this crisis, isn't that 
right?
    Ms. Maggiano. Yes.
    Mr. Watt. Those are the ones that have the least amount of 
obligation to mitigate in this market, isn't that correct?
    Ms. Maggiano. I can't speak to their obligation, because--
    Mr. Watt. You know they are not under FHA's mitigation 
standards.
    Ms. Maggiano. That is correct.
    Mr. Watt. And you know they are not under the GSE 
mitigation standards, and we know that the loans were written 
outside--substantially outside any regulatory framework. They 
are the most risky loans, and yet they have the least amount of 
obligation to mitigate, and that is the circumstance that we 
are in.
    So I guess the question I am asking is, under those 
circumstances, if you assume all of that to be the case--and it 
is okay for you to assume that, because it is true--
    Ms. Maggiano. Yes.
    Mr. Watt. --would a reasonable approach be to apply this, 
some standards of mitigation, perhaps the ones in this bill, 
perhaps the ones that FHA applies, perhaps the ones that the 
GSEs apply to that third category of people who have no 
obligation to mitigation? Would that be a reasonable approach, 
do you think?
    Ms. Maggiano. Yes.
    Mr. Watt. Okay, all right.
    With that, Madam Chairwoman, I am happy to yield back to 
the Chair.
    Chairwoman Waters. Thank you very much.
    If there are no other members here to ask questions, we are 
going to thank our panel for being here today and thank them 
for helping us to learn more about how mitigation works, 
particularly in their own agencies, and helping us to 
understand the standards that you have set, and we certainly 
are going to use these as guidelines as we talk to some of the 
other persons responsible for servicing. Thank you very much.
    Some members may have additional questions for the panel 
which they may wish to submit in writing. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses and to place their 
responses in the record.
    Thank you. The first panel is dismissed.
    I would like to call the second panel to the witness table.
    I am pleased to welcome our distinguished second panel: Ms. 
Tara Twomey, senior counsel, National Consumer Law Center; Ms. 
Julia Gordon, policy counsel, Center for Responsible Lending; 
Mr. Kevin Stein, associate director, California Reinvestment 
Coalition; Mr. Kenneth Wade, president and chief executive 
officer, NeighborWorks; Mr. Jason Allnut, vice president for 
credit loss management, Fannie Mae; and Ms. Ingrid Beckles, 
senior vice president, Freddie Mac.
    Thank you for coming today. We will ask you to keep your 
testimony to 5 minutes. You do not have to read the testimony 
if you do not wish. You can basically concise it.
    Ms. Tara Twomey, senior counsel, would you begin our panel?

STATEMENT OF TARA TWOMEY, SENIOR COUNSEL, NATIONAL CONSUMER LAW 
                         CENTER (NCLC)

    Ms. Twomey. Yes. Good morning, Chairwoman Waters, and 
members of the subcommittee. Thank you for inviting me to 
testify today.
    My name is Tara Twomey and I am an attorney, currently of 
counsel at the National Consumer Law Center. On a daily basis, 
NCLC provides assistance on consumer law issues to legal 
services, government and private attorneys representing low-
income clients. Prior to joining NCLC, I was a clinical 
instructor at Harvard Law School, where my practice focused on 
foreclosure prevention.
    As we all know, we are facing the worst foreclosure crisis 
since the Great Depression. The statistics for 2007 are grim, 
and the outlook for 2008 is not any brighter. The consequences 
of the mortgage market meltdown have not only ripped through 
Wall Street, but they are taking a heavy toll or Main Street.
    For nearly a year now, the financial services industry has 
been encouraged to meet this growing foreclosure crisis by 
scaling-up voluntary loan modification efforts. Unfortunately, 
the magnitude of the problem continues to dwarf the industry 
response. And we would suggest to you that the reason that 
voluntary measures have fallen short is because the mortgage 
servicing industry, that is, the servicers and the industry to 
which they belong, is fundamentally broken when it comes to the 
needs of borrowers.
    Mortgage servicers have two primary goals: The first is to 
maximize their own profit; and the second is to maximize the 
return to the investors. In the name of cutting costs and 
maximizing profits, the needs of the borrowers are too often 
sacrificed.
    And what recourse do the borrowers have? Very little. They 
do not get to choose their mortgage servicer. They do not get 
to choose the subcontractors that the mortgage servicers hire 
to deal with the borrowers. They cannot vote with their wallets 
or their pocketbooks. They cannot change the mortgage servicer 
if they are dissatisfied. Even refinancing will not necessarily 
protect a borrower from a bad or abusive servicer, because they 
may end up with the same servicer again.
    For borrowers, the first hurdle in the loan modification 
process is finding a live person who can provide reliable and 
consistent information, a person who has the authority to make 
decisions about the homeowner's loan.
    To date, industry efforts to staff loss mitigation 
departments have been woefully inadequate. We know that leaving 
homeowners to navigate a maze of voicemail is less expensive, 
that it cuts costs for the servicers and improves their bottom 
lines. But borrowers deserve better. We know that, under 
current regulations, mortgage servicers can ignore borrowers' 
requests for information, they can ignore borrowers' disputes 
about their accounts, and they can still proceed with 
collection activities, including foreclosure.
    We know that pushing homeowners into repayment plans is 
cheaper and easier for mortgage servicers. A recent Mortgage 
Banker's Association report finds that repayment plans 
outnumber the loan modifications by an 8:1 ratio for subprime 
adjustable rate mortgages. Even recent numbers from HOPE NOW 
show little progress in long-term or life-of-loan 
modifications. We know the disparity and bargaining power 
between financially distressed homeowners and mortgage 
servicers present new opportunities for abuse.
    We are pleased to support H.R. 5679, which recognizes these 
industry shortcomings and will align mortgage servicers' 
interest with those of borrowers trying to save their homes.
    Industry may say that the burdens of this bill are too 
great. We believe that the industry claims that H.R. 5679 will 
reduce market liquidity are overstated. Providing clear 
guidance to mortgage servicers on how to determine how much a 
borrower can afford to pay should give investors comfort that 
long-term modification will be successful.
    H.R. 5679 requires servicers to provide borrowers with 
timely, competent, and consistent information about their 
loans. It requires that borrowers be permitted to speak to 
someone who has authority to modify their loan, if that is 
appropriate. Is it too much to ask that a borrower be able to 
obtain competent and consistent information about their loan? 
We say no.
    H.R. 5679 requires servicers to resolve borrowers' disputes 
before foreclosing on them. We don't think that is too much to 
ask.
    H.R. 5679 requires servicers to engage in reasonable loss 
mitigation, to focus on home savings options instead of home 
losing options. Is that really too much to ask? We don't think 
so.
    We commend you, Chairwoman Waters, for introducing a bill 
that addresses some of the systemic problems in the mortgage 
servicing industry, for introducing a bill that will provide 
real benefits to homeowners, and for introducing a bill that 
can save millions of homes without costing the government a 
penny. We look forward to working with you and other members on 
the subcommittee on H.R. 5679 and other mortgage servicing 
issues. Thank you.
    [The prepared statement of Ms. Twomey can be found on page 
168 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Gordon.

     STATEMENT OF JULIA GORDON, POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Gordon. Good morning, Chairwoman Waters, Ranking Member 
Capito, and members of the subcommittee. Thank you for inviting 
me to speak about the Foreclosure Prevention and Sound Mortgage 
Servicing Act of 2008, a bill that my organization supports.
    I am policy counsel at the Center for Responsible Lending, 
a nonprofit, nonpartisan research and policy organization 
dedicated to protecting homeownership and family wealth. We are 
an affiliate of Self-Help, which consists of a credit union and 
nonprofit loan fund.
    For the past 28 years, Self-Help has focused on creating 
ownership opportunities for low-wealth families, primarily 
through providing more than $5 billion of financing to 55,000 
low-income and minority families who otherwise might not have 
been able to get loans.
    Self-Help's experience suggests that the high rate of 
foreclosure in the subprime market cannot be explained solely 
by the slightly higher risk of lending to people with blemished 
credit. In our experience, while homeowners may fall behind 
temporarily on mortgage payments, they will make every effort 
to catch up and hold onto their home if the lender and servicer 
are committed to working with them.
    While Self-Help's delinquency rate is similar to that of 
many other subprime lenders, its foreclosure rate is under 1 
percent, far lower than other subprime lenders, in part because 
we only sell 30-year fixed-rate, fully amortizing loans, and in 
part due to our strong corporate emphasis on loss mitigation 
aimed at keeping homeowners in their homes.
    The foreclosure crisis continues to gather steam. We are 
now seeing 20,000 subprime foreclosures every single week. Each 
foreclosure represents an incalculable loss to the individual 
family, but the effects go far beyond that. For each 
foreclosure, lenders and investors lose money, property values 
in neighborhoods decline, crime increases, community tax bases 
are eroded, and millions of Americans who depend on the housing 
sector lose jobs and income. What is more, the worst is yet to 
come.
    The rate of foreclosure on subprime hybrid ARMs will 
continue to rise throughout this year, but even after that rate 
begins to level out, we face a second and possibly even larger 
wave of problems.
    Beginning in 2009, we will see a large spike in reset in a 
type of loan called a payment option ARM. These loans permit 
homeowners to opt for a monthly payment that does not cover 
either principal or interest. They can continue to pay these 
rates for a set number of years or until the loan reaches what 
is called a negative amortization cap, usually 110 or 115 
percent of the original loan. At that point, the loan resets, 
and the homeowner suddenly has to pay a much larger monthly 
payment. These resets are not tied to interest rates in the way 
that subprime hybrid ARMs are, and the current decline in 
interest rates is not likely to change the shock of these 
resets very much.
    The fact that these loan balances are growing while overall 
home prices are declining is a recipe for disaster. This wave 
of loans will be even harder to refinance than the current crop 
of hybrid ARMs, and most of these loans are the not confined to 
the subprime market.
    While we applaud the voluntary loss mitigations now taking 
place, as Ms. Twomey noted, they are simply not reaching the 
critical mass necessary to extend the tide of foreclosures. A 
working group of State attorneys general and bank commissioners 
estimates that only 24 percent of seriously delinquent 
borrowers receive the assistance they would need to prevent 
foreclosure.
    While the HOPE NOW Alliance reports that loss mitigation 
activity in the first quarter of this year has risen 
significantly from the first quarter of 2007, servicers have 
still not been able to get ahead of the escalating crisis. 
According to the numbers, although 1.8 million loans were 
delinquent by 60 days or more in the first 2 months of 2008, in 
that time, only 114,000 received permanent loan modifications, 
and just under 200,000 received a temporary repayment plan.
    There are many reasons why servicers don't engage in loss 
mitigations. Many get paid more for doing foreclosures than for 
doing loss mitigation, some fear investor lawsuits and tranche 
warfare, and many simply face a staff's training and capacity 
issue. But no party right now has the leverage to push them to 
do better.
    Homeowners have no choice in selecting a servicer. If the 
servicer doesn't provide them with the help they need, they are 
not able to take their business to a different servicer. 
Typical market incentives are absent here. That is why this is 
an appropriate area for the government to step in with 
legislation.
    As a final note, I would like to mention that even if this 
bill passes, there are going to be loans that cannot be 
modified by the servicer even when the homeowner qualifies for 
an affordable solution. Most frequently, this will be when 
there is a conflict between senior and junior lien holders. In 
those cases, we believe it is crucial to permit bankruptcy 
courts to adjust the mortgage if the borrower can afford a 
market rate loan.
    In conclusion, we believe that this legislation is a 
narrowly tailored proposal that will provide an effective tool 
for reversing the downward cycle of losses in the mortgage 
market. We commend the subcommittee for focusing on loss 
mitigation, and we urge the committee to include in this bill 
the broader foreclosure prevention package. Thank you.
    [The prepared statement of Ms. Gordon can be found on page 
114 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Kevin Stein.

   STATEMENT OF KEVIN STEIN, ASSOCIATE DIRECTOR, CALIFORNIA 
                     REINVESTMENT COALITION

    Mr. Stein. Madam Chairwoman and members of the 
subcommittee, I want to thank you very much for holding this 
important hearing today and for inviting us to testify.
    My name is Kevin Stein, and I am the associate director at 
the California Reinvestment Coalition. We are a statewide 
advocacy group comprised of 250 community-based organizations 
throughout California. We work to increase access to credit in 
underserved neighborhoods throughout the State and to fight 
predatory lending practices.
    The main point I want to make today is that our current 
framework for preventing subprime foreclosures which relies on 
voluntary industry efforts is not working, and our working 
families and their communities are suffering as a result.
    Today, one of the most important conversations that takes 
place day-to-day is between loan servicers and their borrowers 
or their representatives, and, amazingly, in the subprime 
market, there are virtually no rules and no oversight and no 
consistent data that relates to these critically important and 
life-changing conversations: Will a family be able to stay in 
their home or not?
    In light of a large disconnect we were hearing between what 
the loan servicers were telling us and what we were hearing 
from borrowers and from counseling agencies, we conducted a 
survey to find out what exactly was happening on the ground. We 
were able to talk to 38 home loan counseling agencies who had 
served over 8,000 consumers in the month of December alone. The 
results of the survey were sobering, and I will share a few key 
findings:
    First, servicers were not modifying loans for long-term 
affordability. Not one counseling agency reported that the 
industry was modifying loans for the long term. Agencies 
reported that where they were able to get loan modifications, 
they were for about 1 year, which merely postpones the problem.
    Second, and I guess most compellingly, the outcomes for 
borrowers are poor and unacceptable. Foreclosure was the number 
one outcome cited by counseling agencies. And, again, these are 
folks who have expertise, hopefully have some relationship with 
servicers, have borrowers who have the wherewithal to come find 
them, and a shocking 72 percent of these agencies reported 
foreclosure as a very common outcome. Fifty percent reported 
short sales, which was the second most common outcome and, in 
our view, not a good outcome. Loan modifications came in with 
only 17 percent of groups reporting that these were common 
outcomes.
    Third, outreach to borrowers is poor, despite what lenders 
have said. A surprising 91 percent of groups said that, in 
their experience, servicers were not reaching out to borrowers 
before rates reset, to the Congressman's point. And when that 
happened, they were often told to call back when the borrower 
was in default.
    Fourth, servicers are hard to work with. We listed in our 
report--we reproduced the comments from counseling agencies. I 
will read some:
    One, they do not return calls;
    Two, they take 30 to 60 days to give us a written answer;
    Three, they require their own authorization to release 
information forms;
    Four, they take too long to assign cases;
    Five, they keep changing officers when cases are assigned;
    Six, they give wrong information regarding the loan;
    Seven, you always have to re-fax and explain the situation 
to different people;
    Eight, customer service sends us to the wrong department;
    Nine, they hang up; and
    Ten, they are never willing to work any details.
    In anticipation of this hearing, I tried to check back in 
with folks in the last few days to confirm, since the study was 
based on December experiences. Unfortunately, we hear a lot of 
the same problems repeating themselves.
    A few things I will pull out. Counseling agencies and legal 
services offices are reporting seeing a lot of loans which are 
clearly unaffordable and never should have been made, including 
an increasing prevalence of spotted broker fraud--being told to 
call back by the servicers when the borrowers are in default, 
despite industry pronouncements to the contrary--and being 
strung along by servicers who say a borrower can get a loan 
modification, only to later decline the modification right 
before foreclosure.
    And a growing concern in light of data that is being 
reported is that borrowers are being pushed into loan 
modifications and workouts that are, in the words of some of 
the counseling agencies, either ridiculous or make no sense. We 
are hearing more about this, of so-called loan modifications 
and workouts that are really not in the best interests of the 
borrower; and, unfortunately, we believe it would be reported 
as a loan modification by servicers.
    This experiment with voluntary industry initiatives has 
failed, and hundreds of thousands of borrowers are falling 
through the cracks into foreclosure. H.R. 5679 will help 
borrowers remain in their homes by creating an obligation on 
the part of loan servicers to act reasonably and by requiring 
detailed reporting on loan servicing outcomes.
    I appreciate the analogy to the Home Mortgage Disclosure 
Act. We think that when light is shed on industry practices, 
the effect will be better industry practices.
    Madam Chairwoman, thank you for the opportunity to testify. 
We look forward to working with you to keep borrowers in their 
homes and to help communities.
    [The prepared statement of Mr. Stein can be found on page 
154 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Kenneth Wade.

   STATEMENT OF KENNETH WADE, PRESIDENT AND CHIEF EXECUTIVE 
                 OFFICER, NEIGHBORWORKS AMERICA

    Mr. Wade. Thank you, Chairwoman Waters, and members of the 
subcommittee. Thank you for inviting us to be here to share 
with you some of the things we are doing and our perspective on 
this very challenging issue we are all facing on the 
foreclosure front.
    We are involved in a broad variety of efforts out there. We 
are working with anybody and everybody, both nationally and 
locally, in order to address this very challenging problem. We 
are in partnership with the Housing Preservation Foundation to 
support the toll-free number that homeowners can call, and our 
network is one of the referral sources that they refer 
consumers to when they need a face-to-face counseling.
    We are members of the HOPE NOW Alliance which has been 
convened by the Department of the Treasury, and you will hear 
more about their efforts as well, recognizing that working with 
the industry is obviously something we felt we had to do to get 
a handle on this issue.
    We are encouraging borrowers to reach out through outreach 
efforts that we are conducting through our National Ad Council 
campaign, designed to reach those consumers who have been 
difficult to reach. And since the launch of that Ad Council 
effort in June of 2007, we have had more than 12,500 public 
service announcements. The estimated value of those ads are 
about $16 million, and they have been targeted in 126 of the 
200 media markets that are hardest hit by foreclosure.
    We also were named in the Fiscal Year 2008 Consolidated 
Appropriations Act to administer a national foreclosure 
mitigation counseling program. We are pleased to be able to say 
that, within 60 days of enactment, we were able to award $130 
million to 130 organizations that were eligible through that 
legislation to support foreclosure prevention counseling. That 
is, basically, counseling that will be available all over the 
country.
    And then, we are working on a new tool that we think will 
greatly aid the counselors in their ability to develop 
solutions that will help keep borrowers in their home. We have 
a secondary market organization of ours called Neighbor Housing 
Services of America. They have developed what we are calling a 
best-fit tool that we are rolling out today. That tool will 
allow counselors to assess a borrower's ability to pay in an 
automated way.
    It will also be able to provide an automated valuation of 
the borrower's current property and allow the counselor to 
propose or to do a number of ``what if'' scenarios to help 
determine how you can best create a loan solution that would 
keep that borrower in their home, including whether they 
qualify for any of the existing refinance products that might 
be out there, whether they be those offered by the FHA or local 
State housing finance agencies.
    And it will allow the counselor to do ``what if'' 
scenarios, so that if you reduce the interest rate by ``X,'' 
will that meet the borrower's ability to pay? Or if you reduce 
the principal by ``Y,'' or do some combination thereof?
    One of the challenges that the counseling community has is 
their ability to develop an automated way to interface with the 
servicers and do this in a more efficient manner.
    Despite all that is going on, and the many things that we 
and others are doing, I would like to highlight five major 
challenges:
    One, I would concur that there is still a challenge that we 
hear from our members about servicer responsiveness. I think 
the scale and scope of the challenge obviously has grown much 
beyond what any of us would have imagined, and I think the 
challenge to the servicing industry to keep pace with that 
seems to be a challenge.
    Two, there does seem to be a language of standardization 
around approaches and rules to loan modifications that 
counselors will reasonably be able to expect that they can 
recommend to servicers and allow a consumer to stay in their 
home.
    Three, we also have identified that the counseling 
community does not have a sustainable funding model to help 
support quality counseling. Thus far, most of the counseling 
has been supported by public funds and charitable 
contributions. The industry--we are working very closely to 
come up with a means by which the industry will share some of 
the cost of this counseling.
    Four, we also are very concerned about the disparate impact 
that the foreclosure problem is having, and then we also 
recognize that there is a rising problem with foreclosure scams 
that are taking advantage of consumers while promising to try 
to keep them in their homes.
    Five, we also think that, basically, the best remedy is 
good pre-purchase counseling. Our own loan performance bears 
that out. Loans from our network performed 10 times better than 
subprime loans, 4 times better than VA and HUD loans, and 
slightly on par with prime loans.
    Thank you for providing me the opportunity to say a few 
things today, and I look forward to answering any questions you 
might have in the course of this hearing.
    [The prepared statement of Mr. Wade can be found on page 
183 of the appendix.]
    Chairwoman Waters. Thank you very much.
    We have two more witnesses to give their testimony, and 
then we are going to have to break for the vote, and we will 
return for the questions for this panel right after we take the 
votes on the Floor. I don't know exactly what the time is for 
each of those votes. I will ask my staff to inquire so that I 
can give you some reasonable speculation about exactly when we 
will return.
    With that, we will go right to Mr. Jason Allnut. Thank you.

   STATEMENT OF JASON ALLNUT, VICE PRESIDENT FOR CREDIT LOSS 
                     MANAGEMENT, FANNIE MAE

    Mr. Allnut. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the subcommittee. I appreciate the 
opportunity to be here today to describe Fannie Mae's 
foreclosure prevention practices. I will share with you our 
view on how our loan servicing practices can best be directed 
to reducing foreclosures that are damaging families, 
neighborhoods, and local communities across the country.
    Fannie Mae has been investing in mortgage credit for 70 
years, through many housing cycles, and the collective 
knowledge and expertise of those many decades are reflected in 
our loss mitigation practices. Underlying all of our efforts in 
that area is a simple principle: As a holder of mortgage credit 
risk, our interests are, in fact, closely aligned with those of 
the borrower.
    Our loss mitigation efforts are undertaken in close 
partnership with our loan servicers, who have the most direct 
and meaningful contact with borrowers having trouble making 
monthly payments. I would like to outline the way in which our 
servicing relationships operate and how our policies and 
tactics around foreclosure prevention are working today.
    First, Fannie Mae continuously monitors and measures 
servicer loss mitigation activity. For Fannie Mae, that means 
granting servicers as much leeway as possible to prevent 
foreclosure, while at the same time monitoring and rewarding 
their activities to make sure foreclosure prevention is 
occurring in accordance with our policies.
    To accomplish this, we lay out the results we want and work 
with servicers to come up with the best possible tactics to 
achieve them. We do not require a standard one-size-fits-all 
workout. Rather, Fannie Mae leverages a combination of monthly 
servicer score cards and on-the-ground presence to ensure 
foreclosure prevention performance and compliance.
    Our close monitoring of servicers, setting targets for 
their results and the regular feedback we receive from them has 
led to some important changes in our policies. For instance, 
since the market turmoil began last summer, servicers have 
requested 18 operational changes to resolve prior loans without 
prior approval from Fannie Mae. We have granted all 18. These 
changes have helped streamline the process and empowered 
servicers to resolve problems more quickly.
    Second, we offer cash incentives to servicers to pursue 
alternatives to foreclosure, but we also pay foreclosure and 
bankruptcy attorneys to reach out directly to delinquent 
borrowers. As many have reported, borrowers don't necessarily 
respond to letters from a servicer, but may respond to a letter 
from an attorney, and we pay the attorney to prevent a 
foreclosure, not just to conduct it.
    Third, we pursue a variety of ways to work with a 
delinquent borrower to prevent the foreclosure.
    But, historically, our most effective method has been a 
renegotiation of the terms of the loan or a loan modification.
    As noted in our annual report for 2007, Fannie Mae worked 
on more than 37,000 troubled loans last year. The majority, 
about 70 percent, were loan modifications.
    The choices we make with our servicers and borrowers on the 
types of loan workout options we pursue are designed for the 
best long-term outcome. In other words, they are not designed 
to ``kick the problem down the road.'' In fact, of the 
modifications, forbearances, and repayment plans we made 
between 2001 and 2005, only 9 percent of those workouts 
ultimately went to foreclosure.
    The affordability standards we use when doing a loan 
workout is fairly straightforward. Our servicing guidance 
allows servicers to create an affordable plan whereby borrowers 
are required to have at least a $200 residual after monthly 
expenses are subtracted. The reworked loan needs to be 
sustainable, and it must allow for unexpected household 
expenses. A broken water heater is the rule of thumb. The final 
outcome must meet a basic test: Can the borrower sustain the 
payments over the long term?
    As I said in my opening, these loss mitigation practices 
reflect the long experience we have in preventing foreclosure. 
But they also are a reflection of the long-standing 
underwriting practices of Fannie Mae and the basic safety and 
sustainability of our loans. The vast majority of our 
business--close to 90 percent of our entire single family 
mortgage book--is made up of fixed-rate mortgages with strong 
credit scores and plenty of borrower equity.
    Before I close, I would like to offer a few points on the 
legislation currently under consideration by this committee, 
specifically H.R. 5679. We share Congress' concern that the 
tide of troubled loans has made it more difficult for servicers 
to address the growing need of borrowers who want foreclosure 
alternatives.
    My view on legislation remedies to this problem is informed 
by my own experience at Fannie Mae. We have dedicated the time, 
people and resources needed to work through tens of thousands 
of problem loans since the market turmoil began last year. 
Loans are made one at a time, and loss mitigation happens one 
loan at a time. Creating a legislative standard for loss 
mitigation activities prior to a foreclosure may actually have 
unintended consequences by making solid loss mitigation 
activities, negotiated between a borrower and a servicer, less 
flexible. It could create an added cost to an already expensive 
process and ultimately, we believe, make home mortgages more 
expensive.
    I want to thank the committee again for inviting me here 
today. With that, I would be happy to answer questions. Thank 
you very much.
    [The prepared statement of Mr. Allnut can be found on page 
72 of the appendix.]
    Chairwoman Waters. Thank you. Ms. Ingrid Beckles.

  STATEMENT OF INGRID BECKLES, VICE PRESIDENT, SERVICING AND 
                 ASSET MANAGEMENT, FREDDIE MAC

    Ms. Beckles. Madam Chairwoman, Ranking Member Capito, and 
members of the subcommittee, good morning. My name is Ingrid 
Beckles, and I am the Vice President of Servicing and Asset 
Management for Freddie Mac. As you know, historically Freddie 
Mac's guarantee and securitization activities have centered 
around the conforming conventional prime market. Freddie Mac's 
mortgages continue to perform very well relative to other 
market sectors despite the turmoil in the market. At year end 
2007, only 1 in about every 150 Freddie Mac mortgages were 
seriously delinquent or in foreclosure compared to about 1 in 7 
subprime mortgages; this is less than \2/3\ of 1 percentage 
point, or about 65 basis points.
    So while we may be experiencing relatively low 
delinquencies, Freddie Mac is not immune to the worsening 
conditions of the overall housing market. At Freddie Mac, we 
start from the proposition that a foreclosure is not in 
anyone's best interest, not the lender, not the investor, and 
certainly not the homeowner or the community. This is also the 
proposition underlying H.R. 5679. We know from experience that 
the earlier the servicer and the borrower begin to work out 
their delinquency, the more likely the borrower will be able to 
avoid foreclosure. For that reason, we emphasize early and 
frequent intervention with delinquent borrowers as early as the 
first missed payment. In 2007, we worked out \2/3\ or 3\1/2\ 
times as many mortgages as we had to foreclose upon.
    Under our seller servicer guide, which is our basic 
contract with our servicer, we require, not just recommend, 
that our servicers work with borrowers to try to resolve 
troubled loans prior to foreclosure. As a result, in 2007, we 
entered into approximately 50,000 workout situations last year, 
nearly 1,000 per week, where we prevented a family from losing 
their home. This is an exceptionally high proportion of our 
significantly delinquent portfolio which stood at 79,000 at the 
end of 2007. Our workouts fall into three categories: 
forbearances; repayment plans; and modifications.
    In every case, we want the borrower to be able to sustain 
the workout based on the circumstances at the time the family 
enters into that workout. When we do a loan modification, for 
example, we not only assess the borrower's current income and 
other debts, but also whether the family's other living 
expenses, such as food and fuel, are such that the modified 
loan will be sustainable. We want to ensure that the family has 
a sufficient cushion. Our guideline is 20 percent of disposable 
income, to cover unanticipated expenses that might otherwise 
force a loan back into default. Since a workout must be 
sustained based on the borrower's present financial situation, 
we do not support H.R. 5679's requirement that the 
affordability be assessed on the income information derived at 
origination. Rather, our approach, which uses current financial 
information, has given us a very low redefault rate. And in 
fact, our loans have a success rate of 80 percent.
    My staff and I work with our servicers every day to ensure 
that we can do the best job possible for our delinquent 
borrowers. We have found, however, that while mandates may 
provide clarity, the best way to encourage effective 
delinquency management is to combine carrots with sticks. We, 
therefore, reinforce good behavior by providing financial 
incentives on a per loan basis for completing repayment plans, 
modifications, and foreclosure alternatives. These incentives 
are in addition to the fees that we pay the servicers 
contractually for our mortgages. We also absorb these 
incentives rather than pass them on to our already distressed 
borrowers because we believe that they are cost effective in 
the long run.
    In 2007, we paid approximately $12 million in incentives to 
the servicers for performing this good work. We concur with the 
objective of H.R. 5679 to ensure that every delinquent borrower 
has a reasonable opportunity to work out his or her loan prior 
to foreclosure. We do not, however, believe that it is 
necessary to create an affirmative statutory duty that imposes 
particular loss mitigation activities on the entire mortgage 
market. Such a measure could add unneeded costs and complexity 
to delinquency management.
    And moreover, no matter what standard is chosen, be it 
Fannie Mae, Freddie Mac, FHA, or VA, the standard in the 
underlying principles may not be equally effective to all 
borrowers at a given point in time. In the long run, a Federal 
standard could chill innovation, discourage some investors from 
getting into the mortgage market, and ultimately raise costs 
for all borrowers. We are committed to working with Congress, 
the Administration, our customers, and other industry 
participants to find and implement effective solutions to this 
very difficult problem. Thank you for the opportunity to 
address the subcommittee and I look forward to questions.
    [The prepared statement of Ms. Beckles can be found on page 
87 of the appendix.]
    Chairwoman Waters. Thank you very much. The committee will 
stand in recess. We ask you to be patient; we should return in 
about 30 minutes.
    [Recess]
    Mr. Cleaver. [presiding] I think, as you can see, the 
chairwoman is on the Floor. She is managing a bill. And we are 
going to proceed with questioning. And hopefully, you heard me 
earlier apologize, as you can see, Chairwoman Waters is on the 
Floor and should be back shortly. But we are going to proceed. 
Your time is valuable and we wanted to go ahead and try to 
minimize the time away from saving people. Let me begin the 
questioning. I raised questions earlier with the first panel 
about whether or not there was any value in spreading a program 
across the country that seems to be valuable to FHA so far. And 
so loss mitigation seems to have some great value. Let me ask 
you, Ms. Twomey, do you think there would be value in us having 
such a mandatory program all over the country?
    Ms. Twomey. Yes.
    Mr. Cleaver. You know, I like that ``yes,'' because we 
don't get those normally.
    Ms. Twomey. I thought you might appreciate that.
    Mr. Cleaver. I do. I think everybody does, including the 
Judge, I think. The other issue that I raised that I am 
interested in getting all of your feedback on is the whole 
issue of regulation. Those who are involved with the loss 
mitigation are not normally regulated in what they do, except 
for the banking portion of their portfolio. Is there any 
downside to some form of regulation? Ms. Beckles?
    Ms. Beckles. I think that we have to be careful with how we 
go about applying regulation. We have practices at Freddie Mac 
that we find are doing a very good job at managing 
delinquencies and keeping people in their homes, which is the 
objective of your regulation. I do believe there are sectors of 
the market that would require further attention and possibly 
regulation. But I think that if we spread a broad knife across 
all industry players, especially those who are performing the 
objective that you seek, it would be detrimental to those who 
are doing well.
    Mr. Cleaver. Let me amend my question about whether or not 
the servicers should be regulated. Do any of you have any idea, 
as you answer the first question, how the fee schedule is 
developed for the servicers?
    Ms. Twomey. I might take a crack at that one. Servicers are 
generally compensated in three different ways through the 
pooling and servicing agreement, which is the agreement that 
governs the relationship between the servicer and the 
investors. And the three different ways that servicers are 
generally compensated are, one, a servicing fee. And the 
servicing fee is based on the outstanding principle balance of 
the loan pool. So they take a fractional interest in all the 
monies that they collect. And that is their primary source of 
income. Their second source of income is what is called float 
income, which is derived from short-term overnight investments 
of their deposits. And then they get fees; late charges, 
property inspection fees. All of these things servicers 
generally get to keep. I don't think that there is in most 
pooling and servicing agreements a specific fee allocated, 
unlike some of the FHA or Freddie, some kind of fee incentive 
for doing loan modifications.
    There is not a line item in these pooling and servicing 
agreements that says if you do a modification, you get $500, or 
whatever it is. And so that has created a problem. There is no 
incentive for mortgage servicers, there is no financial 
incentive certainly in a majority of the market for them to do 
these types of work-out arrangements. They are focused on their 
servicing fee, their float income, and getting as much in these 
ancillary fees as they possibly can. I am not sure if that 
directly answers your question.
    Mr. Cleaver. It does answer the question. Yes, Mr. Allnut.
    Mr. Allnut. I would only clarify by looking at the same 
revenues that were just outlined, the servicing fee is only 
paid on performing loans. The float is only paid when a 
borrower pays. And the late fees and other ancillary fees are 
only received when a borrower reinstates from a late status. If 
a borrower goes through to foreclosure there is a disincentive 
on servicing fees, a disincentive on float and a disincentive 
on ancillary fees. And on top of that Fannie Mae, as well as 
Freddie Mac, pay a servicer $200 if they do a repayment plan, 
$500 if they do a modification, and zero if they go to 
foreclosure. So from a revenue standpoint, I think the 
alignment is closer to what we all hope it is, which is keeping 
a borrower in their home, in their mortgage, versus taking that 
borrower to foreclosure.
    Mr. Cleaver. Anyone else?
    Ms. Beckles. I just want to agree with Mr. Allnut that our 
servicing structure is probably a little bit higher than that. 
But we do pay $250 for repayment plans. We pay $300 to $700 for 
our modifications. We even pay them to help a borrower in what 
H.R. 5679 would call secondary loss mitigation for deeds in 
lieu and short sales when the borrower cannot remain in the 
home upwards of $1,100. So our incentive to the servicer is 
really to work this situation out and not go to foreclosure. 
And on top of that, like Mr. Allnut, Freddie Mac also incents 
their foreclosure attorneys because many times that is the only 
person that a distressed borrower will contact because they 
really see that the rubber is meeting the road here despite the 
efforts of the servicer. So we actually incent our foreclosure 
attorneys, not just to proceed with foreclosure. So take that 
incentive away, work with the borrower on working out the 
product and getting them back in touch and in a performing 
state with their servicer.
    Mr. Cleaver. Yes, Mr. Stein.
    Mr. Stein. So if your question was broader, if it is the 
case that what they describe relates to the GSE purchase loans, 
most of the loans that were problematic to begin with and that 
are going into foreclosure are these private label securities. 
And so if it is the case that there is no clear incentive for 
servicers on those loans to do modifications or engage in loss 
mitigation, and there are basically no rules to say that it 
should happen, then I don't know that we should be surprised 
that it is not happening.
    I think that is why this bill that is being put forth is so 
important. And on kind of the general concern about regulation 
and access to credit, this is kind of a frustrating argument to 
hear, because we have been hearing it over and over again for 
years from the industry, that if there is too much regulation, 
it is going to dry up access to credit. And I think they have 
been very successful in making that argument. So successful 
that we have had a basically unregulated insufficiently 
regulated mortgage market for years. That is why we have the 
problems we have today; the loans that were originated weren't 
sufficiently regulated.
    Now they have all gone into default and foreclosure. The 
investors are scared. And that is why we have a liquidity 
crisis, because there is a crisis of confidence on the part of 
the investors because we didn't have sufficient regulation to 
begin with. So we think reasonable regulation around 
origination and reasonable regulation around servicing would 
bring back investors and bring back some sanity to the market.
    Mr. Cleaver. Following that line of thinking, the brokers 
are not regulated either, which are the first people who, I 
will try to say this diplomatically, the people who, in many 
instances, took advantage of financially illiterate home 
buyers. What is to prevent--my final question, what is to 
prevent less desirable companies from becoming servicers? I 
mean, we have some reputable companies involved, like Wells 
Fargo, Citibank, and Bank of America. What is to prevent 
``Joe's Home Company'' from becoming involved?
    Ms. Twomey. I think the question is less desirable from 
whose perspective; the investors or the borrowers? The 
investors really control this game. And the investors want to 
make sure that a servicer is going to maximize their return. 
And so they are not going to let ``Joe's Servicing Agency,'' 
that has no experience servicing loans, sign up to be the 
servicer in a pooling and servicing agreement. They want to 
make sure that that investor or that servicer has the 
institutional capabilities to meet their needs. The problem is 
that doesn't necessarily help borrowers because borrowers don't 
choose at all.
    Mr. Cleaver. The paranoia exists today because of what has 
happened. And so I am just interested in, and I think our 
responsibility is not to do any damage to the lenders, but I 
think the ultimate responsibility is just to protect the 
borrowers. That is why I am inclined to think that something 
related to regulation should occur. Every hearing we have, 
without exception, when we are dealing with this issue we hear 
recollections are a bad thing, that it will destroy the 
country, cause the Super Bowl to move to another continent.
    I mean, it is the worst thing to happen when we listen to 
people. By now, the mantra has become one that irritates. 
Congressman Green.
    Mr. Green. Thank you Mr. Chairman, and I commend you on how 
well you have acclimated to your new station in life. Let me 
ask questions to the panel as a whole, if I may. And if you 
would, you may respond by raising your hand. Does everyone 
agree that aside from FHA and the GSEs, we have other 
institutions that are involved in this market, what we are 
calling subprime, that are making loans and having homes 
foreclosed on and that these institutions--well, let us just 
find out if you agree that market exists. If you agree that it 
exists, would you raise your hand, please? Okay. Is there 
anybody who doesn't agree that it exists? I am asking you aside 
from conforming conventional loans, do you also have 
nonconventional conforming, conforming nonconventional?
    Ms. Twomey. The answer is ``yes.'' What is interesting is 
that Countrywide or Wells Fargo or any of these lenders that 
you have heard service for GSEs and service for Fannie and FHA 
also service the subprime loans.
    Mr. Green. I understand. But we all agree that they exist. 
I just want to make sure that nobody assumes that they don't 
exist.
    Ms. Gordon. Can I add one other comment?
    Mr. Green. Well, let me just do this. For the record, all 
persons agree that they exist. Do you agree that there are a 
substantial number of foreclosures in this market? Everybody 
agree? Raise your hand if you would, please? Good. For the 
record, everybody has raised their hand. Do you agree that this 
market is, when compared to FHA and the GSEs, not nearly as 
regulated? Do you agree that they are not as regulated as FHA 
and GSEs? Do you agree that they are not regulated? Yes, Ms. 
Holmes, do you agree that they are not regulated? Excuse me, 
that is Ms. Beckles. Do you agree that they are not regulated 
to the extent that GSEs and FHA?
    Ms. Beckles. Based upon the outcome, they appear not to be.
    Mr. Green. Well, do you have any empirical evidence of 
actual regulation?
    Ms. Beckles. I don't spend time studying the other markets.
    Mr. Green. So your answer would be no, you don't have it, 
is that correct?
    Ms. Beckles. I do not have empirical evidence.
    Mr. Green. All right. That will be sufficient. Thank you. I 
did not hear from Mr. Allnut. You did not respond.
    Mr. Allnut. I have no empirical information one way or the 
other.
    Mr. Green. As to whether they are regulated or not, okay 
now, given that you have no empirical evidence, Mr. Allnut, why 
do you defend that of which you have no empirical knowledge? 
And I would ask the same thing of you, Ms. Beckles. You have no 
empirical knowledge of their regulations, but you defend the 
notion that they should be regulated, or am I incorrect and you 
do not defend that?
    Ms. Beckles. I am not making that assumption.
    Mr. Green. Excellent. Okay. You do not defend. So then let 
me ask now of the entire panel, if they are substantially 
unregulated when compared to the others, would you agree that 
some regulation can be of help? If so, would you kindly raise 
your hand? Okay. I have three persons. Are you a yes or a no or 
a maybe? That would be Mr. Wade, is that right?
    Mr. Wade. Yes. I just wanted to clarify that the way we 
experience it, there is no question the inconsistencies create 
a challenge for the consumer and those trying to help the 
consumer.
    Mr. Green. I understand. But do you agree that if all 
markets were regulated to the extent that FHA was regulated 
that we would probably have fewer foreclosures?
    Mr. Wade. Well, I do agree that if standards were in 
place--
    Mr. Green. You know how FHA is regulated?
    Mr. Wade. Absolutely.
    Mr. Green. Would we have fewer foreclosures?
    Mr. Wade. If the same products--
    Mr. Green. If FHA requires the same products.
    Mr. Wade. So, if--
    Mr. Green. Assume whatever you like as it relates to FHA. 
But if they were regulated to the same extent that FHA is 
regulated, would we have fewer problems?
    Mr. Wade. There would be fewer problems.
    Mr. Green. So again, let me ask, do you think that some 
regulation would help these markets, this market that is 
apparently not regulated to the extent that FHA and their GSEs 
are regulated? If so, would you raise your hand please. Okay. 
Now we will get back to Mr. Allnut.
    Mr. Allnut, you have no empirical evidence of what their 
standards are yet you conclude that no regulations should apply 
to them, is this correct?
    Mr. Allnut. No that is not my conclusion.
    Mr. Green. Well, if it is not your conclusion, and I say 
some regulations, and you don't agree with some, then some 
would include a scintilla to some large amount. But you don't--
I have to conclude that you wouldn't even want a scintilla of 
regulation?
    Mr. Allnut. That is not my conclusion.
    Mr. Green. So you would want some?
    Mr. Allnut. What I am suggesting is that the regulations 
that Fannie, Freddie, HUD, and VA abide by have to do with 
products that are available to the marketplace, and had those 
same regulations been applied to this other category that you 
are talking about, many of the products that are out there 
right now would not be out there and could have a positive 
impact on the rate of--
    Mr. Green. Well, you are in agreement with me then?
    Mr. Allnut. Yes.
    Mr. Green. All right. For the record, Mr. Allnut is in 
agreement. Now let us go to Ms. Beckles. Is it your opinion 
that there should be no regulations with reference to this 
market?
    Ms. Beckles. Freddie Mac's opinion is probably that there 
should be some form of--
    Mr. Green. Well, if you say ``some,'' then your hand should 
have gone up with the others.
    Ms. Beckles. I think there is a difference between 
regulation, statutory requirements and oversight.
    Mr. Green. In your mind, define it however you like. Should 
there be some regulation?
    Ms. Beckles. There should be something.
    Mr. Green. Something. Can we call that thing 
``regulation?''
    Ms. Beckles. I am not sure how you are going to define 
regulation. There should be some things--
    Mr. Green. You define regulation in your mind as it relates 
to your business and then apply it to this question. Some 
regulation of the market that has an overwhelming majority of 
problems, should there be some?
    Ms. Beckles. I believe that there should be oversight and 
consequences.
    Mr. Green. Okay. Does oversight entail regulation and 
consequences? Isn't that a form of regulation? Let me ask you 
this: Is it hard to say regulation as it applies to this 
market?
    Ms. Beckles. It is hard to say regulation when at times 
regulation is taken with a broad brush and does impede 
practical business.
    Mr. Green. Okay. But let us not talk about impeding 
practical business. Let us just talk about a market that we 
conclude has not been regulated to the extent that FHA has and 
whether there should be some regulation given that this is the 
market where we have the problem? Should there be some?
    Ms. Beckles. There should be some form of oversight and 
consequences in management.
    Mr. Green. Okay. I am going to define oversight and 
consequences as regulations. With that definition, should there 
be some regulation?
    Ms. Beckles. Yes, there should.
    Mr. Green. Thank you. And I yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. I would like to 
yield myself some time to raise some questions. Before I get 
into some of the questions that I prepared to ask you, I need 
to be educated some more about this business. Let me ask Fannie 
and Freddie. You have underwriting standards, is that right?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And you have loan originators such as 
Countrywide, is that correct?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And you buy the products, you buy the 
loans from Countrywide on the secondary market?
    Ms. Beckles. Yes, ma'am. Those that meet our standards, 
yes, ma'am.
    Chairwoman Waters. Those that meet your standards?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And some of those loans--well, all of 
your loans are serviced by Countrywide and others, is that 
right?
    Ms. Beckles. By Countrywide and others, yes, ma'am.
    Chairwoman Waters. So Countrywide is servicing some of the 
loans that you picked up from them?
    Ms. Beckles. That we purchased from them.
    Chairwoman Waters. That you purchased from them; they are 
servicing some of those?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. All right. They meet your standard for 
the loan origination?
    Ms. Beckles. And for the loan servicing, ma'am.
    Chairwoman Waters. How does the loan servicing that they do 
for you compare with loan servicing they do on loans that they 
would keep in their portfolio? Is there a difference?
    Ms. Beckles. Well, I cannot comment as to what they do on 
the loans that they keep in their portfolio or that they sell 
to other people. But they are required to follow our strict 
standards. We monitor their performance. We actually model our 
loans loan-by-loan to determine their probability of default. 
We put those into their call campaigns. They use our models to 
drive their call campaigns to make sure that we are reaching 
out to borrowers. And then we compensate them when they do 
successful workouts to keep borrowers and loans.
    Chairwoman Waters. Describe to me how the loans that you 
have picked up from Countrywide perform in relationship to 
foreclosure, what is the percentages?
    Ms. Beckles. One moment, I do not have specific lender 
percentages. I have some State information. But on the whole, 
they are performing at par with their peer groups, I can tell 
you that. Because they are one of our largest customers and we 
do look at our larger customer performance. So our loans are 
performing on par with our peer groups.
    Chairwoman Waters. Well, that is not good enough. Let me 
just say this.
    Ms. Beckles. Our overall foreclosure rate is--
    Chairwoman Waters. For Countrywide loans.
    Ms. Beckles. If they are performing on par?
    Chairwoman Waters. For Countrywide loans, that is all I 
want to know.
    Ms. Beckles. Countrywide loans are performing on par, which 
is less than 100 basis points.
    Chairwoman Waters. I want the exact information. And I 
guess I will have to write and ask you for it, because you 
obviously don't have it with you today.
    Ms. Beckles. I did not bring lender specific information, 
ma'am, but I can certainly get it.
    Chairwoman Waters. This is important. We have a crisis out 
there in America. I have been to areas not only in my own city, 
but in Cleveland, Ohio, and Detroit, Michigan, where whole 
blocks are boarded-up, and other people who are living on those 
blocks, their values are being driven down, the homes are not 
being taken care of, they are being vandalized. We have a 
really serious problem.
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. Obviously, Countrywide emerges big in 
this problem. Do you understand that?
    Ms. Beckles. I do understand that, ma'am.
    Chairwoman Waters. Okay. So it is reasonable that when you 
are coming here, you would know that we would want to ask you 
about your relationship with Countrywide and the performance 
level of Countrywide.
    Ms. Beckles. Our relationship with Countrywide is very 
strong. They perform on par with their peers, and that is a 
very good group of folks. As they are a large customer, you 
would think that they would drive down our overall performance 
rate and they are not. So when I say that they are performing 
on par, they are not aberrant to our average or 90-plus 
foreclosure rate.
    Chairwoman Waters. I am going to ask you some specific 
information that obviously you don't have today. But let me ask 
you this, do you know whether or not the loans that were 
originated by Countrywide are originated by a combination of 
individuals who either are hired or contracted with by 
Countrywide in California? For example, we have licensed and 
unlicensed brokers. Were your loans, any of your loans, 
originated by unlicensed brokers with Countrywide?
    Ms. Beckles. I will have to get that information for you, 
ma'am. I am focusing on the servicing side, so I will get that 
information to you.
    Chairwoman Waters. Let us get to servicing.
    Ms. Beckles. Okay.
    Chairwoman Waters. You have standards?
    Ms. Beckles. Yes, we do, ma'am.
    Chairwoman Waters. And they are monitored?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And they are audited?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And you have written documentation on 
the auditing of the servicing that Countrywide is doing for 
you?
    Ms. Beckles. Yes, ma'am.
    Chairwoman Waters. And you can make that available to this 
committee?
    Ms. Beckles. Yes ma'am.
    Chairwoman Waters. We shall require of you, we will ask of 
Freddie and Fannie, to give us that information. We want to 
take a look at what you do. Now, how many times have you 
determined that Countrywide was not in compliance with your 
servicing standards?
    Ms. Beckles. We haven't found that--okay. How many times 
have we determined? They have an acceptable rate of performance 
on our audit. That means that they do have some outliers, just 
like any other mortgage servicer. And when we find outliers in 
the performance of the servicing duties, we develop work plans 
with them, we give them correspondence, and we go onsite and 
actually train them on how to improve or remediate that 
performance. Their inability to service properly for us also 
affects their ability to receive the incented compensation 
because they will not perform well on their workout status if 
any of our servicers are not following our standard.
    Chairwoman Waters. Do they subcontract any of the servicing 
they do for you?
    Ms. Beckles. I beg your pardon, ma'am?
    Chairwoman Waters. Do they subcontract any of the servicing 
they do for you? They service for you. Do they hire other 
people, do they have contractual relationships with others who 
are doing servicing for you?
    Ms. Beckles. To my knowledge, Countrywide uses 
Countrywide's employees on the Freddie Mac portfolio.
    Chairwoman Waters. Fannie Mae?
    Mr. Allnut. Same question?
    Chairwoman Waters. Same question. Do they subcontract, does 
Countrywide subcontract its servicing?
    Mr. Allnut. I focus on the borrower contact aspect of who 
Countrywide uses for servicing and those are Countrywide 
employees.
    Chairwoman Waters. So your answer is either you don't know 
or no they do not subcontract out their servicing?
    Mr. Allnut. The portions of the work that they do that I 
oversee are not subcontracted out.
    Chairwoman Waters. Okay. Well, let us talk about the work 
that maybe you don't oversee directly, but because you are a 
smart employee, you know what goes on around you. Do you know 
or have you heard that they subcontract out any of their 
servicing? Have you heard any of that from anybody, maybe from 
somebody who sits next to you, works in the same area that you 
work in, who is doing what maybe you don't do, but it is 
connected to servicing?
    Mr. Allnut. No, I have not.
    Chairwoman Waters. So you don't know, is that it?
    Mr. Allnut. No. No, I have not heard through conversations 
or elsewhere that Countrywide subcontracts out the servicing 
portion of their responsibilities.
    Chairwoman Waters. Okay. For either of you, whether it is 
Countrywide or any of your other servicers, have you heard that 
they utilize foreign operations to do some of the servicing? 
Have you heard that some of the servicing that is done by 
Countrywide or any of your other services is actually being 
done from India or anyplace else?
    Mr. Allnut. I have had conversations with servicing 
management at Countrywide relative to their desire to use 
offshore call centers.
    Chairwoman Waters. Not their desire. I don't care about 
their desire. I want to know whether or not they are doing it 
and whether or not you know about it?
    Mr. Allnut. I am not familiar with them doing it today, and 
I have voiced my perspective that they not do so.
    Chairwoman Waters. So you had a conversation with them 
because you heard they were interested in doing it?
    Mr. Allnut. I heard that there was a possibility that 
Countrywide was looking into offshoring early borrower contact 
and voiced my concern and opinion that was not in the best 
interest of our borrowers.
    Chairwoman Waters. Okay. So you know that they don't do 
that for Fannie Mae; they are not doing offshore contracting 
for services?
    Mr. Allnut. That is correct.
    Chairwoman Waters. And the same thing for Freddie Mac?
    Ms. Beckles. Freddie Mac, yes, ma'am.
    Mr. Allnut. That is my understanding.
    Chairwoman Waters. Now, I want to hear about the 
incentives.
    Ms. Beckles. Okay.
    Chairwoman Waters. You have alluded to incentives, and this 
is one reason why you know they are doing the best job that 
they could do. Would you explain those incentives to us?
    Ms. Beckles. Certainly, ma'am. We measure our loans and 
model our loans based upon their probability of default. Those 
models are used to drive call campaigns. So since we have 
access to all of our loan data and can track the progression of 
a loan we can determine how well or how the loans are moving 
through their performing cycle, as well as their default cycle. 
We measure our servicers based upon their ability to mitigate 
losses to the borrower and to the organization.
    Servicers are ranked according to their effectiveness at 
doing this. So on a loan-by-loan basis we watch the population 
of loans that become early stage default such as, you know, day 
one after 30 and watch its movement through the pipeline. And 
based upon our models, we give them benchmarks that say you 
should not be exceeding these thresholds, and when you do you 
get disincented for exceeding thresholds at each of the major 
categories.
    Chairwoman Waters. How do you get disincented?
    Ms. Beckles. The first way they get disincented is that 
they don't get as many points. I know that sounds pretty 
mundane, but the points add up to their tier ranking. If you 
maintain a Tier 1 or Tier 2 standard, which is basically an 
industry standard, you are able to get delegations of 
authority, which means that you can respond to borrower 
situations more quickly.
    Chairwoman Waters. Let us back up. Now, hold it for one 
second. I think it is very important, because like I said, 
since we have no regulation of mitigation services, we don't 
know this stuff.
    Ms. Beckles. That is fine. I am sorry. I did not mean to go 
so fast. I apologize.
    Chairwoman Waters. When you talk about Tier 1 or whatever 
else you just said, you are basically explaining to us that if 
you do a good job, you get more flexibility--
    Ms. Beckles. You get more flexibility.
    Chairwoman Waters. --to work out--
    Ms. Beckles. To work out product.
    Chairwoman Waters. --and to do modifications?
    Ms. Beckles. And to do other foreclosure alternatives, yes, 
ma'am.
    Chairwoman Waters. So that if they are not in the top tier, 
as you alluded to, they are doing servicing and doing 
modifications with less flexibility and less authority, and 
some of those people whom they are servicing don't have the 
advantage of the flexibility because this servicer is not in 
the right tier, is that correct?
    Ms. Beckles. What happens, unfortunately, is that if they 
are in a lower tier, that means that they are not effective at 
mitigating losses and doing workouts for the borrowers. And in 
those cases, we work with them to bring them back up. So we 
look at case files to understand why they are missing hand-
offs. In many cases, the reason that a servicer is not able to 
catch a borrower before foreclosure is because sometimes they 
miss the hand-off between the collection call and the loss 
mitigation activity. So we go through all of that with a fine 
tooth comb to help them see where they can harvest more 
borrowers who want to stay in their homes and have the 
potential to stay in their homes through a workout of some kind 
of foreclosure alternative.
    Chairwoman Waters. Okay. I get it. You don't have to go any 
further. And I am going to--Mrs. Capito, I was out. Have you 
not had an opportunity? I am understanding more than I thought 
I was going to get out of understanding, of trying to 
understand how mitigation works. I have a lot more questions. I 
will ask some of the financial institutions that are here 
today. But I am more convinced than ever that mitigation needs 
regulation. Mrs. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. I would like to 
ask Mr. Wade a question about NeighborWorks America. This came 
up in a hearing we had last week when we were--you know, a lot 
of the emphasis is on good sound home counseling, financial 
counseling to keep people in their home, to get them into a 
mortgage, on the beginning, the end, the middle, the whole 
deal, and I know that you are very involved with this. The 
money that we put into the economic stimulus package, I 
believe, had financial counseling money.
    Mr. Wade. Yes.
    Mrs. Capito. Can you give me the amount of that? I can't 
remember.
    Mr. Wade. $180 million.
    Mrs. Capito. $180 million. What has been the result of 
that? I will tell you what kind of disturbed me was the 
gentleman from Ohio said that NeighborWorks had gotten the 
money, then he applied on the benefit of 18 housing counseling 
agencies in Ohio for the money. And all I am thinking is 
administrative fee, administrative fee and what is going down 
to the actual person who needs the help. Can you explain to me 
how that works?
    Mr. Wade. Absolutely. That is a good question. The 
legislation was pretty specific about how the money could be 
allocated. Of the $180 million, we were required to only use 4 
percent, up to 4 percent to administer the program.
    Mrs. Capito. That is just NeighborWorks, though?
    Mr. Wade. That is just NeighborWorks America. There were 
three classes of eligible applicants: State housing finance 
agencies; HUD-approved national intermediaries that do housing 
counseling; and then NeighborWorks organizations. We were 
required to set up an application process. Those folks applied. 
And we awarded within the 60 days that we were required to make 
at least $60 million worth of awards, we awarded a little more 
than $130 million of the $180 million.
    Mrs. Capito. And what was that deadline date?
    Mr. Wade. Well, it was 60 days from enactment, so it is 60 
days from December 26th. We announced the awards within that 
timeframe. We were only required to get a minimum of $50 
million awarded. We awarded $130 million. Of the awards that we 
made, the groups could only use a--well, let me just clarify. 
The amount that groups could use to administer the program was 
capped.
    So there were limitations on what any of the national 
organizations could use to administer the program. And then the 
funding that went to the NeighborWorks organizations, there was 
no allowance for any administrative costs in that case.
    Mrs. Capito. Okay. Thank you. You mentioned in your, I 
think it was you who mentioned in your testimony, foreclosure 
scams?
    Mr. Wade. Yes.
    Mrs. Capito. Could you just give me a short--what should 
people be watching out for; things in the mail, on the 
telephone?
    Mr. Wade. It is always that people are being approached. 
Many times people go to the registry of deeds, the people who 
are perpetrating the scams, find out what people have been, 
where there have been foreclosure filings. They approach those 
folks. And there are two main things that end up happening at 
the end of the day on the negative. They either end up taking 
possession of the home from the borrower without their 
knowledge, usually with the premise that they can help save 
them from foreclosure, sometimes disclosing that they have to 
take short-term possession of the property in order to cure the 
foreclosure, oftentimes the consumer being asked to sign a 
paper not being clear that they are signing the home over to 
someone else.
    And then the other general circumstance that we see are 
people whose equity is taken from them in the context of the 
notion that they are going to help cure the foreclosure. So 
those are the two major things that we see.
    Mrs. Capito. A question for Ms. Gordon.
    Ms. Gordon. Yes.
    Mrs. Capito. I wasn't here for your testimony. At least I 
didn't hear all of it. In it, you mention a self-help 
organization where you actually do lend money separate and 
apart from your research?
    Ms. Gordon. Correct.
    Mrs. Capito. What is your foreclosure rate and delinquency 
rate on those loans?
    Ms. Gordon. The foreclosure rate on our loans, which are 
all to what you would consider a prime population, is under 1 
percent.
    Mrs. Capito. Under 1 percent. And do you have a--does 
somebody service your loans for you?
    Ms. Gordon. Yes. We do have a company that does servicing 
for us. We work very closely with them. And in a situation 
where the servicing company is having trouble for whatever 
reason in helping the homeowner come to a resolution that will 
help them remain in the home, we will often step back in as the 
lender and try to help work it out as well.
    Mrs. Capito. Now, is that a servicing organization that is 
affiliated with you, or is it separate and apart? Is it one of 
the 1,200 that are FHA approved? What is the name of it?
    Ms. Gordon. You know, I don't know the name of that. I can 
get that to you. But they are a separate organization, although 
not one of the large servicers that we have been talking about.
    Mrs. Capito. Okay. I think that is it for me. Thank you.
    Chairwoman Waters. Thank you very much. All members 
having--Mr. Cleaver, you had your chance too. Thank you very 
much, panel. Thank you for being patient and waiting for us to 
return after having gone to the Floor. Actually, we could do 
this for hours because there is so much information that we 
need to learn. I am pleased to have some of our consumer 
advocates here who are concerned about this area of servicing 
and who have gathered a lot of information. We will continue to 
work with you and get advice from you about what we can do to 
assist our homeowners in staying out of foreclosure.
    To our friends here who do not think we need to do 
anything, let me just say that we have to pursue this. We have 
to pursue this because servicing is unregulated. And it appears 
that the complaints are overwhelming about the lack of being 
able to reach anybody on the telephone, the lack of being able 
to talk with anybody before a foreclosure actually takes place, 
and also what appears to be in some cases, we have to continue 
to investigate, that servicers are actually making a profit on 
foreclosures. So we have to continue to investigate this and 
see what we can do to provide some assistance to our 
homeowners. Thank you all very much for coming.
    The Chair notes that some members may have additional 
questions for this panel that they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses, and to place their responses in the record. The 
panel is dismissed.
    I now welcome our third panel: Ms. Faith Schwartz, 
executive director, HOPE NOW Alliance; Mr. David G. Kittle, 
CMB, president and chief executive officer, Principle Wholesale 
Lending, Incorporated, in Louisville, Kentucky, and chairman-
elect, Mortgage Bankers Association; Mr. Tom Deutsch, deputy 
director, American Securitization Forum; and Mr. Steve Bailey, 
senior managing director, Countrywide Financial. I would like 
to thank you all for being here today. I would like to ask you 
to present your testimony. You don't have to read all of your 
testimony; you can condense it and concise it. You will have 5 
minutes.
    We will start with Ms. Faith Schwartz.

   STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW 
                            ALLIANCE

    Ms. Schwartz. Chairwoman Waters, and Ranking Member Capito, 
thank you for the opportunity to testify today. My name is 
Faith Schwartz, and I want to tell you about the HOPE NOW 
Alliance's real progress to reach out to at-risk borrowers and 
find solutions to prevent foreclosures. The HOPE NOW Alliance 
is an unprecedented broad-based collaboration among 
homeownership counselors, lenders, investors, mortgage market 
participants, and trade associations that is achieving real 
results. From July 2007 through February 2008, nearly 1.2 
million homeowners have avoided foreclosure through the efforts 
of HOPE NOW members.
    HOPE NOW has also brought more of the industry together in 
this effort. And as of April 10th, the Alliance's 27 loan 
servicers represent over 90 percent of the subprime market, a 
vast majority of the prime market. We have strong participation 
from respected nonprofits led by NeighborWorks America, the 
Homeownership Preservation Foundation, and HUD counseling 
intermediaries. HOPE NOW has a three-pronged approach to 
preventing foreclosure, and it is reaching homeowners in need, 
counseling homeowners in need, and assisting homeowners in 
need.
    Under reaching homeowners in need, a major challenge is 
that borrowers in trouble are reluctant to ask for help; 50 
percent of the borrowers who go into foreclosure never 
contacted their servicers for help. We are working to 
drastically reduce those numbers and help as many troubled 
homeowners as possible to avoid foreclosure. HOPE NOW has an 
aggressive monthly direct mail outreach campaign to at-risk 
borrowers. This effort is in addition to the thousands of 
letters already underway from individual companies to their 
customers.
    Since November, HOPE NOW has mailed out 1.2 million letters 
in an attempt to reach the most at-risk borrowers. On average, 
20 percent of those receiving the HOPE NOW letters do contact 
their servicer, and there was zero contact before these 
letters. In addition, the Homeownership Preservation Foundation 
reports that in the first quarter of 2008, over 11 percent of 
the people calling the hotline heard about it from a HOPE NOW 
letter. HOPE NOW has launched homeownership preservation 
workshops in a series of public outreach events across the 
country to reach more at-risk borrowers and provide them with 
an opportunity to meet in person with their loan servicer or a 
HUD-certified counselor to develop a workout solution. We have 
held three events in California, as well as forums in Ohio and 
Pennsylvania, reaching over 1,400 borrowers in person. In 
Philadelphia, HOPE NOW reached 328 homeowners at risk for 
foreclosure.
    Present were 14 mortgage servicers who participated and 
local counseling organizations, such as the Philadelphia 
Unemployment Project, the Urban League, Advocates for Financial 
Independence, and ACORN Housing. We have had very positive 
feedback from the homeowners who attended these events. 
Homeowners have shared the following: ``It gave me hope that I 
will survive; we received a reduction in our payment and were 
not meant to be belittled or intimidated; without your help, we 
would have lost our home; and I am too choked up to talk.'' 
This month, we are continuing the outreach in Atlantic, 
Milwaukee, Indianapolis, and Chicago, and we are working with 
Members of Congress and other officials from those areas to 
promote those events and will continue to do so.
    For counseling homeowners in need, HOPE NOW is actively 
providing nonprofit counseling to homeowners through the 
Homeownership Preservation Foundation's HOPE Hotline, which 
connects the homeowners with 450 trained counselors at HUD-
certified nonprofit counseling agencies. Counseling is free, 
and it is offered in English and Spanish 24 hours a day, 7 days 
a week.
    To date, the HOPE Hotline has received 632,000 calls, with 
over 250,000 calls in the first quarter of 2008. We greatly 
appreciate the Dear Colleague letter that Chairwoman Waters, 
Ranking Member Capito, Chairman Frank, and Congressman Bachus 
sent to the House Members to remind them of the HOPE Hotline 
and the dedicated service or phone numbers for consumers.
    Assisting homeowners in need--HOPE NOW members are 
providing help to at-risk homeowners through loan modifications 
and repayment plans and targeted efforts such as Project 
Lifeline to freeze forecloses in a method for fast track 
modifications based on the American securitization framework.
    From July 2007 through February 2008, again, nearly 1.2 
million homeowners avoided foreclosure through these efforts of 
HOPE NOW members. Subprime workouts totaled 717,500 workouts, 
including 485,000 repayment plans and 232 loan modifications. 
HOPE NOW members do understand that workouts must be viable, 
more than a short period of time, workouts including loan 
modifications and repayments help borrowers avoid foreclosure 
and stay in their homes and servicers are rapidly increasing 
their efforts and were modifying subprime loans during the 
fourth quarter at triple the rate of that of the third quarter.
    The increase in the number of loan modifications shows that 
this effort is real and it is seeking the best solutions for 
borrowers. HOPE NOW is measuring and reporting on our results 
and helping homeowners. We are continuing to gather data on 
these results, and this is an enormous undertaking, but we are 
confident that we will be able to systematically inform you and 
that will help measure what servicers are doing to support 
homeowners.
    In conclusion, the members of HOPE NOW are committed to 
producing results. Loan servicers joining HOPE NOW agree to a 
statement of principles on reaching out and helping distressed 
homeowners remain in their homes. My written statements 
contains those principles which include contacting borrowers 
early, and having a dedicated hotline, e-mail address and fax 
number available to all HUD-approved counselors.
    In February, we released a list of loan numbers on HOPE NOW 
servicers that consumers can call to receive assistance. This 
is a serious effort and it will continue until the problems in 
the housing market and the mortgage market abate. It is neither 
a silver bullet nor a magic solution, but HOPE NOW is helping 
homeowners, and we will continue to report on that progress to 
assist homeowners in distress and to prevent foreclosures 
whenever possible. Thank you for inviting the HOPE NOW Alliance 
to testify today and I am happy to answer any questions.
    [The prepared statement of Ms. Schwartz can be found on 
page 139 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Kittle.

    STATEMENT OF DAVID G. KITTLE, CMB, PRESIDENT AND CHIEF 
 EXECUTIVE OFFICER, PRINCIPLE WHOLESALE LENDING, INCORPORATED, 
     AND CHAIRMAN-ELECT, MORTGAGE BANKERS ASSOCIATION (MBA)

    Mr. Kittle. Good afternoon, Chairwoman Waters, Ranking 
Member Capito, and members of the subcommittee. Thank you for 
the opportunity to discuss the loss mitigation process. The 
bill before us, H.R. 5679, seeks to specify and require certain 
procedures to reduce the level of foreclosures. All of us are 
focused on the same goal; keeping people in their homes. Such a 
goal serves the interest not only of borrowers, but also of our 
own members and the communities where they do business. That is 
why MBA is a founding member of the HOPE NOW Alliance. And as 
of the end of February, we have helped nearly 1.2 million 
troubled borrowers establish affordable mortgage payments. 
Mortgage servicers have done this through informal forbearance, 
repayment plans, and loan modifications; all forms of loss 
mitigation.
    As we seek to do more to help ease this crisis, MBA is 
eager to partner with Congress to finish work on FHA 
modernization, GSE reform, housing tax incentives, and 
expanding the use of tax advantaged mortgage revenue bonds to 
include refinancing. When Congress completes work on these 
important initiatives, it should avoid taking action that would 
inadvertently increase interest rates or borrowing costs, 
constrain the availability of legitimate offers of credit, or 
that would encourage borrowers not to make mortgage payments.
    While a considerable effort is being made by lenders, 
borrowers, and public officials to avoid foreclosures, we all 
recognize there will be cases where the goal cannot be 
achieved.
    Ultimately, the mortgage contract rests on two pillars: 
First, the promise of the borrower to pay; and second, the 
ability of the lender to rely as a last resort on the value of 
the house the borrower has pledged as security for the loan. It 
is the pledging of the house as security that makes mortgage 
credit considerably less expensive than unsecured consumer 
debt. The rate of interest on mortgage loans is significantly 
lower than the rate on unsecured consumer loans. If borrowers 
are deprived by legislation of the ability to reliably pledge 
their homes as security for mortgage loans, it is probable that 
rates they pay for mortgage credit will approach the rates paid 
for unsecured credit. In evaluating the legislation, we believe 
that Congress should ensure it enhances borrowers' chances to 
remain in their homes; does not deprive investors of the value 
of their investments; and preserves for all consumers the 
benefits of reasonably priced mortgage credit by maintaining 
the essential elements of the mortgage contract.
    Our review of H.R. 5679 revealed that there are a number of 
elements of the bill that fail one or more of these criteria. 
First, the bill would authorize borrowers' counsel to use 
qualified written requests to block foreclosure indefinitely. 
Second, the bill's overly prescriptive loss mitigation 
provisions could increase the cost of mortgage credit for 
future borrowers. Third, mandating debt-to-income ratios on 
first loans would require holders of first liens to subordinate 
their economic interest to the interest of junior lien holders 
and unsecured creditors, which may be the source of the 
borrower's inability to stay current on the mortgage payments 
in the first place. Fourth, prescribed and detailed mitigation 
procedures would deprive lenders of the flexibility required to 
negotiate effectively with borrowers to achieve a manageable 
debt payment schedule. And finally, the bill would impose 
expensive and time consuming paperwork requirements on lenders 
without any corresponding benefit to the borrower.
    Though we are committed to working with you to improve H.R. 
5679, the harmful provisions in this bill currently outweigh 
its potential benefits. Thank you for the opportunity to appear 
before you, and I look forward to your questions.
    [The prepared statement of Mr. Kittle can be found on page 
124 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Tom Deutsch.

 STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE DIRECTOR, AMERICAN 
                   SECURITIZATION FORUM (ASF)

    Mr. Deutsch. Thank you, Madam Chairwoman, Ranking Member 
Capito, and distinguished members of the subcommittee. My name 
is Tom Deutsch, and I am the deputy executive director of the 
American Securitization Forum. I very much appreciate the 
opportunity to testify before this subcommittee again on behalf 
of the 370 member institutions of the ASF and the 650 member 
institutions of the SIFMA. These members include all of the 
major lenders, servicers, underwriters, and institutional 
investors and all forms of mortgage and asset-backed 
securitization throughout the country.
    Since I last testified before this subcommittee on November 
30, 2007, in Los Angeles, California, a significant amount of 
progress has been made by the industry to help struggling 
homeowners stay in their homes. One very significant initiative 
was launched on December 6, 2007, less than a week after your 
hearing, Madam Chairwoman. On that day, the ASF announced, and 
President Bush and Secretary Paulson supported and endorsed, 
the ASF streamlined loan modification framework for industry 
servicers to fast track subprime ARM borrowers into interest 
rate loan modifications in certain circumstances. The ASF 
framework uses objective criteria to determine the continued 
affordability of subprime loans based on such factors as the 
borrower's payment history, credit standing, owner occupancy, 
and amount of home equity. The primary purpose of the ASF 
framework was to address the rising tide of subprime ARM 
borrowers who may not have been able to meet their higher 
payments at their initial reset.
    Most subprime 2/28s and 3/27 borrowers pay a fixed 
introductory rate for say 2 or 3 years and then adjust to a 
floating rate, based on 6-month LIBOR thereafter. Importantly, 
since the ASF framework was announced, 6-month LIBOR has 
dropped precipitously from 5 percent on December 6, 2007, to 
2.6 percent as of today, April 16, 2008. What has really 
changed then for subprime ARM borrowers since December 6th is 
that every single resetting subprime ARM borrower in America 
has experienced the equivalent of a 2.5 percent loan 
modification through the normal contractual functioning of 
their mortgage note.
    As a result, the average subprime ARM borrower has had 
little or no rate increase at their reset. Falling rates, then, 
have obviated the need to make systematic contractual rate 
modifications for these subprime ARM borrowers which largely 
explains why an even more significant increase in industry 
contractual rate modification activity hasn't been observed 
over the past few months. But let me turn, Madam Chairwoman, to 
some of our views and perspectives on your proposed bill, H.R. 
5679.
    We fully agree that all servicers should engage in 
reasonable loss mitigation activities, which is described 
above. Servicers are already contractually obligated to engage 
in these activities for the benefit of security holders. But 
the new Federal duty that the bill would propose is 
unreasonably compelling, all servicers nationwide to rewrite 
existing mortgage and pooling and servicing agreed contracts 
solely to benefit borrowers in default rather than to act in 
the best interest of security holders as the mortgage and PSA 
contract specify. By analogy, it would suggest that all forms 
of repayment on consumer credit should be measured not by what 
the borrower has agreed to pay, but instead ultimately, by what 
the borrower can pay at any time during the life of the loan. 
This bill then, we believe, disregards the original loan terms 
to which the borrower agreed as well as the servicer's 
obligations under the pooling and servicing agreements to 
institutional investors.
    Now as a general matter, we have very strong concerns with 
any legislation that would retroactively abrogate or interfere 
with previously established private contractual obligations. We 
believe the bill would do just that, and that it would 
fundamentally alter the contractual obligations of pooling and 
servicing agreements to require servicers to be the agent of 
the borrower, rather than the MBS institutional investors or 
loan portfolio manager.
    Changing the standard would alter the commercial 
expectations of investors and would seriously undermine the 
confidence of investors and the sanctity of contracts, which 
are the bedrock to extension of consumer credit in the process 
of securitization. Any legislative intervention into otherwise 
valid legal contracts threatens the stability and predictable 
operation of contractual legal framework supporting our capital 
markets system.
    While we fully support and encourage servicers to meet 
their contractual obligations to engage in reasonable loss 
mitigation, we have very significant concerns about this bill 
from the very premise that it starts from, that is, that 
mortgage contracts should be modified to serve solely the 
borrower's interests rather than the interests of the original 
contractual obligations that the borrower has agreed to 
fulfill.
    A shared goal of participants in the mortgage financing 
markets is to keep people in their homes. Unfortunately, there 
is no comprehensive solution that will fix all the current 
problems in the mortgage market today and the current home 
price correction. Market participants have and continue to 
collaborate and work towards developing coordinated solutions 
to the current issues in the mortgage financing market. 
Recognize it is essential to balance the interests of borrowers 
and investors while preserving the significant benefit of the 
continued availability of mortgage and consumer credit. I thank 
you very much for the opportunity to testify here on behalf of 
our members, and we look forward to working with you, Madam 
Chairwoman, and this committee to develop even more solutions.
    [The prepared statement of Mr. Deutsch can be found on page 
101 of the appendix.]
    Chairwoman Waters. Thank you.
    Mr. Steve Bailey.

      STATEMENT OF STEVE BAILEY, CHIEF EXECUTIVE FOR LOAN 
             ADMINISTRATION, COUNTRYWIDE FINANCIAL

    Mr. Bailey. Good morning, Madam Chairwoman, Ranking Member 
Capito, and subcommittee members. Thank you for the opportunity 
to appear here today to discuss the efforts of servicers like 
Countrywide to help families prevent avoidable foreclosures. 
Countrywide has long been a leader in providing home retention 
solutions to our borrowers.
    Today's market conditions have created unprecedented 
challenges for servicers and mortgage investors, in developing 
new approaches to mitigating losses for security holders while 
keeping as many borrowers in their homes as possible. We know 
that foreclosures are financially and emotionally damaging to 
our customers and very costly to us and the security holders. 
Because of the high financial costs of foreclosures, we cannot 
emphasize enough that as a matter of basic mortgage servicing 
economics, foreclosure is always and absolutely the last 
resort. The home retention personnel who report to me at 
Countrywide fully comprehend the human implications of 
foreclosure.
    They are committed to doing all they can to help keep 
families in their homes whenever possible. We don't have a loss 
mitigation division. We have a home retention division. We 
don't have a workout department. We have a hope department. 
There is a campaign in our home retention division called the 
Life Behind the Loan that focuses on connecting and humanizing 
conversations and circumstances, such as learning the names of 
the children. I know from personal experience that it is 
euphoric to tell a customer that you have a plan for them to 
save their home. It is equally heartbreaking to tell a borrower 
that they may lose their home. Last November, we testified 
before the House Financial Services Committee and before a 
housing subcommittee field hearing. At that time, they had just 
announced a number of new ground-breaking home retention 
programs. Today, I want to update you on the impact of those 
initiatives and what effect they have had on our efforts to 
keep families in their homes.
    During the last 6 months, we have completed more than 
91,000 home retention workouts, saving an average of more than 
15,000 homes each month from foreclosure. That compares to an 
average of 6,700 home retention workouts during the first 9 
months of 2007. In short, the pace of activity in the past 6 
months is more than twice the pace of the first 3/4 of 2007. 
Just last month, we completed 16,500 home retention plans, a 
nearly 150 percent increase compared to March a year ago. 
Moreover, that increase was driven by an almost 600 percent 
jump in loan modification plans from 1,800 in March of 2007 to 
almost 13,000 last month.
    Clearly, the efforts of our home retention team are paying 
off. Let me explain. Through October of last year, the average 
number of completed foreclosures each month had been steadily 
increasing over an extended period. However, since October, 
when we announced our new programs, the number of completed 
foreclosures has actually leveled off and has slightly 
declined. While it is too soon to tell if this 5-month period 
will become a long-term trend, we will continue to do all we 
can to help every borrower we can. We directly associate the 
dramatic increases in workouts with the leveling and declining 
of the foreclosure completions in our portfolio.
    In addition to sharply increasing the pace of workout 
completions, we have also become more aggressive in the types 
of workout plans completed. During the last 6 months, loan 
modifications have become the predominant form of workout 
assistance at Countrywide, accounting for nearly 70 percent of 
all home retention workouts, while repayment plans accounted 
for less than 20 percent. While previously rare, rate relief 
modifications now account for almost 43 percent of all loan 
modifications. The majority of these rate relief modifications 
have a duration of at least 5 years. They are targeted to 
borrowers experiencing payment difficulties caused by 
disruption of income or other financial stress as well as a 
result of rate resets.
    We have also continued to expand our outreach initiatives 
and partnerships in order to ensure that every customer who 
needs help is reached. In addition to our NACA partnership, 
which we discussed with the committee last fall, we have 
strengthened our relations with NeighborWorks America, the Home 
Ownership Preservation Foundation, and the National Foundation 
for Credit Counseling. And in February 2008, Countrywide signed 
a national counseling partnership and best practices agreement 
with ACORN. Countrywide remains committed to helping our 
borrowers avoid foreclosure whenever they have a reasonable 
source of income and a desire to remain in the property. 
Foreclosure is always a last resort for Countrywide and the 
investors in the mortgage securities we service. I am happy to 
respond to your questions at the appropriate time.
    [The prepared statement of Mr. Bailey can be found on page 
77 of the appendix.]
    Chairwoman Waters. Thank you very much.
    I thank you, Ms. Capito, for allowing Mr. Cleaver to ask 
his questions first. He has to leave for another meeting. Mr. 
Cleaver.
    Mr. Cleaver. Let me thank you, Madam Chairwoman, and the 
ranking member. I have another committee hearing. I apologize.
    Mr. Deutsch, this is a general question. What is 
objectionable about the Chair's legislation? And say it in as 
few words as possible.
    Mr. Deutsch. Sure. I think the bill has been characterized 
as servicers being required to engage in reasonable loan 
modification activity. I think we share that goal. There is no 
question about that.
    Mr. Cleaver. Okay. I have another committee hearing. Just 
tell me--
    Mr. Deutsch. Sure. But what the bill does is define what is 
reasonable loan modification activity and then it goes into 
great specificity.
    Mr. Cleaver. Who should define that?
    Mr. Deutsch. I think what is defined currently under the 
contractual arrangements is that either the holders of those 
mortgage notes, whether that is in a loan portfolio or whether 
that is in a securitization trust, is those servicers are 
acting on behalf of the holders of those mortgage notes.
    Mr. Cleaver. So you are saying, leave it like it is.
    Mr. Deutsch. Correct.
    Mr. Cleaver. In spite of the fact that we have 20,000 
foreclosures a week.
    Mr. Deutsch. I believe there is a lot of--
    Mr. Cleaver. And we are having a negative impact on the 
world economy. And we are just going to continue the way things 
are going?
    Mr. Deutsch. I believe there are a lot of solutions out 
there, and I believe the industry is working very hard on a 
number of different solutions. But this solution will restrict 
significantly the availability of credit on an ongoing forward 
basis.
    Mr. Cleaver. Just give me one of your solutions.
    Mr. Deutsch. Well, I think the first one, as I mentioned in 
my testimony--
    Mr. Cleaver. That is the Chair's solution. That was the 
Chair's solution that you were getting ready to mention.
    Mr. Deutsch. No. I was going to mention the solution that 
the ASF put out on December 6th, that would address any 
adjustable rate mortgages and any higher interest rate resets 
that those would address to be able to fast track or streamline 
those into loan modifications. Other areas that I might suggest 
would be FHA modernization, for Congress to complete the 
modernization of that Act. I would also suggest mortgage 
revenue bonds, that those be allowed to push through to allow 
more borrowers to be able to access affordable credit for 
refinancing.
    Mr. Cleaver. Okay. Some people suggest that we may end up 
with as many as 8 million foreclosures. What about those 8 
million people?
    Mr. Deutsch. Well, I think that is a very high estimate on 
the number of foreclosures.
    Mr. Cleaver. Okay, let's say there are 200. That means 
there are 200 human beings, families who no longer possess a 
home--200 humans.
    Mr. Deutsch. Right.
    Mr. Cleaver. I would say we are actively pursuing as many--
to prevent as many foreclosures as possible. But I would be 
remiss if I didn't say that not every foreclosure is 
preventable.
    Mr. Cleaver. You said--I am sorry?
    Mr. Deutsch. I would be remiss in saying I didn't believe 
every foreclosure was preventible.
    Mr. Cleaver. Okay. I think everyone--well, I agree that 
they are not. Some people bought homes who shouldn't. But I 
don't know if you were here earlier when I talked about the 
fact that we are forced to deal with things the way they are.
    Mr. Deutsch. Correct.
    Mr. Cleaver. And the way things are, we have millions of 
people who are going to lose their homes. Don't you agree?
    Mr. Deutsch. I think there will be a significant number, as 
there historically has been a significant number of people who 
go through the foreclosure process.
    Mr. Cleaver. And what do we do about those people?
    Mr. Deutsch. I think we continue working--to work with 
every one of those borrowers to be able to try to find a home--
a sustainable solution for those homeowners to stay in their 
homes. But again, as we--
    Mr. Cleaver. Okay. Because time is running out, what do we 
do? If you are suggesting to me that I shouldn't support the 
Chair's bill, what should I do?
    Mr. Deutsch. Right, well I just walked through a--
    Mr. Cleaver. I know you did. And I am asking you about the 
people whose homes are being foreclosed even as we speak. What 
do we do about them?
    Mr. Deutsch. I think if a number of those initiatives were 
passed through the Congress, that many of those borrowers would 
be helped.
    Mr. Cleaver. If this bill is approved?
    Mr. Deutsch. If many of the other things that I discussed 
were to pass, many of those borrowers would receive assistance.
    Mr. Cleaver. Have you made any attempt to work with the 
Chair and her staff about your recommendations?
    Mr. Deutsch. Absolutely. I think there has been a lot of 
activity by the industry to work with the House Financial 
Services Committee generally on a number of these--on all of 
these issues.
    Mr. Cleaver. Yes. I have to go. You know, the frustration 
for me is that there does appear to be an absence of 
intentionality about dealing with people who are hurting. I 
mean, it seems as though many in your industry are interested 
in nothing that would regulate anything or anybody, which means 
that it can happen again. And it troubles me that we don't seem 
to have the anxiousness to help people who are losing their 
homes every day. I mean, we did not receive much outrage from 
the financial services industry when Bear Stearns was bailed 
out. The objection comes when we begin to deal with human 
beings, those human beings who live down the street from me on 
Gregory Boulevard in Kansas City. What about them? What do I 
tell them in my neighborhood meetings?
    Mr. Deutsch. Well, Mr. Cleaver, my folks live in Kansas 
City, and I would be very concerned about any foreclosures in 
my folks' neighborhood in Kansas City. I believe it is very 
important that any and all foreclosures be addressed by 
servicers in the best way they can and to do--to engage in a 
reasonable loss mitigation. But I don't believe that those 
should be created and new standards and Federal duties of care 
should be created after the fact that would allow borrowers to 
potentially stay in their homes when they can't simply afford 
at any payment to stay in those homes.
    Mr. Cleaver. I am sorry. I have to go. Thank you.
    Chairwoman Waters. Mrs. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. I thank the 
panel. I have a couple of questions. First, Mr. Bailey, in the 
panel before this one, there was quite a bit of conversation 
about servicers. And Countrywide is a major servicer of 
mortgages, yours and others, correct?
    Mr. Bailey. That is correct.
    Mrs. Capito. The chairwoman made a statement or question 
that possibly servicers could make a profit from a foreclosure 
or profit by people going under. Could you respond to that 
statement and clarify that? Or your opinion on it?
    Mr. Bailey. Sure. I will make two points. The first one, I 
think Mr. Allnut touched on pretty clearly. The way that 
servicers make money, it starts with borrowers making payments. 
So if you don't have a borrower who makes a payment, you don't 
obtain any service fee. And as they went through, you don't 
obtain any income that continues through any sustainable time. 
If you just look at the general finances of foreclosure, 
whether it is your own loan and portfolio or one that you are 
servicing for another, just the raw numbers, the credit loss 
that will be suffered through a foreclosure that is avoidable 
dramatically outweighs any kind of income that might come 
through a foreclosure, revenue of any kind. But in general, the 
fees and the compensation to a servicer and when payments are 
not flowing from a customer. So there is no general incentive 
to do that.
    Mrs. Capito. Thank you. So it would be an accurate 
statement to say that that if a person is delinquent or if a 
loan is going bad or a mortgage is going bad, that is really 
not to anybody's advantage, certainly not to families and the 
individuals that we are all trying to keep in their homes. But 
you don't see that as a profit-making venture?
    Mr. Bailey. Well, again first, it leads to a credit loss 
for someone, either if you hold it in your portfolio or whoever 
you are servicing for. That credit loss will be significant. 
Any short-term thinking that there would be some kind of desire 
or incentive to pursue a foreclosure when a workout was 
available, there isn't any income from that. So you don't get 
any payments, you don't get any reimbursement. But you do build 
costs and those costs then are not reimbursed. You also are 
advancing payments to the investor generally. If you make 
significant errors in loss mitigation, you risk having your 
servicing pulled, your risk not being reimbursed for your 
advances. You risk punitive damages, depending on what the 
contract says. There is no incentive to stop the stream of 
income.
    Mrs. Capito. Okay. Thank you. Ms. Schwartz, quickly, on 
wonderful statistics on what you are all doing with the HOPE 
NOW Alliance, I have referred a lot of people and try to talk 
about it publicly quite a bit. When you are working on a 
workout or trying to help somebody, how do you get to the point 
that, this is a person who has lost a job or is having a tough 
time or they are in an adjustable mortgage and they can no 
longer make the payments, how can you differentiate that person 
from the person who maybe bought a house knowing that they 
weren't ever going to be able to fulfill their commitment, but 
were relying on the real estate going up, or this was their 
second home, or they got a higher appraisal, took the money, 
and bought a boat.
    Well, these are the kind of people that I think taxpayers 
don't want to see--well, there are two different types of folks 
there. How do you differentiate that?
    Ms. Schwartz. Well, first of all, the HOPE NOW Alliance is 
just an aggregation of all these servicers and the contracts 
are with the servicers and the borrowers. And between them one 
by one.
    Mrs. Capito. How would you help them differentiate?
    Ms. Schwartz. Typically, and why we are tracking repayment 
plans and modifications is that repayment plans might be for a 
temporary or short-term disruption, whether it is 3 months, 1 
year, something has happened or changed in the borrower's 
circumstance versus when a modification occurs, it could be at 
a higher rate. They can't afford the higher rate, and it is 
clear. That is an affordability issue. That is more than a 
short-term disruption. And you may see some appropriate 
modifications happening in those circumstances. So the 
workouts, as Tom Deutsch spoke to, are on behalf of investors. 
And everyone's interests are quite aligned right now in that 
the best thing to do is work through avoiding foreclosure and 
keeping people in their homes. And we are outpacing 
foreclosures through these workouts, whether they are repayment 
plans or modifications. And it is loan level and I don't speak 
for all the servicers, and that is very individual with the 
contracts.
    Mrs. Capito. Right. Okay. Thank you. And Mr. Kittle, next 
week, the committee will be considering legislation that 
provides a mechanism for lenders to write down problem loans 
and refinance and do a FHA loan. Are you familiar with that 
proposal? And could you make a comment on that?
    Mr. Kittle. Excuse me. FHA Secure, FHA modernization?
    Mrs. Capito. Yes.
    Mr. Kittle. We think it is an excellent program. We 
actually have--to go just slightly on a tangent--we have over 
200 individual members in Washington, D.C., today and tomorrow 
who will be on Capitol Hill promoting Chairwoman Waters' FHA 
modernization bill. So we have something here that we can agree 
on, something that we can support. And we think FHA 
modernization, GSE reform, FHA Secure, all of those programs 
will go a long way toward helping us. But it will help long 
term, not provide a quick short fix.
    Mrs. Capito. All right. Thank you.
    Chairwoman Waters. Thank you very much. Let me just take a 
few minutes here to raise some questions.
    I think it was Mr. Kittle who just said--are you supporting 
the Barney Frank draft bill that would do a couple of things, 
it would support FHA being able to refinance when there has 
been a write-down on a mortgage? I think it is about 85 percent 
and it would also appropriate maybe up to $15 billion that 
would go to cities and maybe counties and States in order to 
assist in purchasing foreclosed properties, rehabbing them and 
putting them back on the market. Have you taken a look at that?
    Mr. Kittle. Yes, ma'am. And we are still considering that. 
We have not come out with a position on it but we worked very 
closely with Congressman Frank over the years and have a great 
relationship with him.
    Chairwoman Waters. So you are not supporting the bill as of 
now?
    Mr. Kittle. We have not come to an opinion either pro or 
con for it.
    Chairwoman Waters. Ms. Schwartz.
    Ms. Schwartz. Yes.
    Chairwoman Waters. Did I hear you in your testimony say you 
sent out 1.2 million notices or alerts of some kind?
    Ms. Schwartz. The servicers agreed under HOPE NOW 
letterhead to send out to at-risk borrowers whom they have not 
been able to contact, 60 days or later in delinquency, the no-
contact borrowers, and we sent in 4 months 1.2 million letters 
to those borrowers at risk of foreclosure, yes.
    Chairwoman Waters. And that is the same number of borrowers 
that you have been able to help, 1.2 million?
    Ms. Schwartz. Yes. In aggregate. And what we are measuring 
that is from July through February, just to get a snapshot of 
where the market was and where it is today and what is moving 
through the loss mitigation. So those are additional at-risk 
borrowers who could be going into foreclosure.
    Chairwoman Waters. Let me see if I understand how you work. 
We have an alliance of the financial services industry, which 
includes some nonprofits, banks, securitizers, everybody. And 
do you think you are doing an adequate job without any 
government support or intervention?
    Ms. Schwartz. I think for an industry alliance that has 
come together--
    Chairwoman Waters. No, no, no. Do you?
    Ms. Schwartz. Yes. I think we are doing adequately. Can we 
do better? Sure, we can.
    Chairwoman Waters. You don't think the government needs to 
do more? Like Mr. Frank's bill that would get these properties 
rehabbed and back on the market, helping to stabilize the 
market with the support of government, you don't think you need 
that?
    Ms. Schwartz. You know what, I actually don't comment on 
any of the legislation because I represent a very broad variety 
of people. And what I do, my job is to keep HOPE NOW focused on 
what we can do today with today's laws.
    Chairwoman Waters. Well, every day--I don't know what the 
numbers are. I wish someone would tell me. Every day we are 
getting information about increased numbers of foreclosures. It 
seems there is no end in sight. And you think you are handling 
that well enough and the American people should be appreciative 
and understanding of that because you are doing a great job?
    Ms. Schwartz. Actually, in our testimony, I was quite clear 
that this is not a silver bullet. This is about people coming 
together and seeing what we can do to do better and to raise 
standards and bring more focus on the contacting borrowers who 
are not calling the servicers, working with housing counselors 
who will help--
    Chairwoman Waters. Where do you get your numbers from about 
how many people you have served? Some of the organizations that 
you have worked with, you have asked them, some of the 
nonprofits, others you have asked them, how many, what did you 
do? How do you compile that?
    Ms. Schwartz. The actual loss mitigation data is from the 
HOPE NOW servicers, which comprises the majority of the 
mortgage market. This is the most comprehensive set of mortgage 
industry data in loss mitigation that is available. And it is a 
voluntary alliance and I see it in aggregate. It is released 
monthly, and we will have State and national data. I am happy 
to walk through that any time with you.
    Chairwoman Waters. Well, I am not so sure I want to do that 
because it is not audited information. I mean, I have asked 
some of our regulators: How do you know what HOPE NOW is doing? 
How do you document that? How do you audit that? Nobody is able 
to tell me how it is done. And I am getting some disjointed 
information about how you collect the information. First of 
all, you are telling me that you basically get it from the 
servicers--
    Ms. Schwartz. Yes.
    Chairwoman Waters. --who tell you what they are doing, and 
from others?
    Ms. Schwartz. From their servicing system.
    Chairwoman Waters. A combination of the counseling and the 
modifications that have been done by some of the nonprofits and 
the workouts and modifications that are being done by the 
servicers.
    Ms. Schwartz. Right.
    Chairwoman Waters. This is where you are compiling this 
information.
    Ms. Schwartz. That is right.
    Chairwoman Waters. All right. Let me go over something. You 
state that 5,607 of 80,652 subprime ARMs rescheduled to reset 
in January or February are not paid in full through refinancing 
or sale received loan modifications, and 60 percent or 3,334 of 
them received modifications for 5 years or longer. And I guess 
I have two questions. First, do you think that a rate of long-
term--of long-term loan modifications of subprime ARMs of 4 
percent, 3,334 out of 80,652 is sufficient to stem the tide of 
foreclosures?
    Ms. Schwartz. Well, those numbers, Chairwoman Waters, are 
because the rate environment has decreased, and that was based 
on the streamlined modifications that Tom Deutsch has testified 
to. We can do more, and we want to do more. But we are trying 
to report every month no matter what the data says. So whether 
we will be disappointed or not disappointed, we are going to 
report the actual data. So we inform the public and inform 
Congress and everyone what is going on in the market. I think 
that is additive. I think 5,000 borrowers who get a 
modification is better than no borrowers getting one under 
those circumstances. And more importantly, we showed in January 
and February that modifications and repayment plans exceeded 
300,000 loans for prime and nonprime borrowers.
    Chairwoman Waters. Let me stick with the ARMs that I am 
talking about. What evidence do you have that the remaining 
77,318 resetting ARMs, which presumably are subject to 
repayment plans, some other loss mitigation offer, or nothing 
at all, are affordable for the short and long term for the 
borrowers?
    Ms. Schwartz. Well, all of the repayment plans or the 
modifications are presumed to be affordable because it is 
between the borrower and the servicer and they are reworking 
loans so that they are sustainable. It is in no one's interest 
to have a redefaulting modified loan or a short-term repayment 
plan for servicers. It is a high cost to keep going back time 
and time again, and they will go back if it redefaults to look 
at another solution. But it is in no one's interest to the 
first time have no one get it right.
    Chairwoman Waters. Let me go to Countrywide and ask you, 
you heard a description from Freddie Mac about its servicing 
arrangements that they have with you. And they talked about the 
tiered system. Are you familiar with that?
    Mr. Bailey. Yes.
    Chairwoman Waters. And how many tiers are there in the 
contract?
    Mr. Bailey. There are four possible tier rankings.
    Chairwoman Waters. Describe those tier arrangements for us.
    Mr. Bailey. Well, they are generally set off of points that 
you receive for different levels of effectiveness within a 
range of different servicing functions. So you receive points 
for or points against, based on your performance in those 
different categories. And then depending on how many points you 
receive, it stacks up to which tier you would achieve.
    Chairwoman Waters. Okay. What do you receive points for?
    Mr. Bailey. Things like doing effective workouts, staying 
effective in the foreclosure process, reporting, things of that 
nature.
    Chairwoman Waters. What you have is a tiered system. And I 
can't tell from talking with you right now what the incentives 
or disincentives really are. But you get some points. And if 
you are high up in the system, the tiered system, you get 
points. You get a certain number of points. But if you are low 
in the system and you are not getting the points, let's say, 
that means you are not doing a good job, whatever a good job 
is, but the people whom you service don't know whether or not 
you are good, bad, or indifferent. But those people just get 
bad services. Those people don't get fired, they don't get the 
contract separated. You just go and work with them and try and 
make them better. Is that what you do?
    Mr. Bailey. What Freddie Mac would do with us or any 
servicer, first the incentive reimbursement that you would get, 
for example, for doing workouts, if you were the top tier, you 
would get the full reimbursement--
    Chairwoman Waters. Are you getting paid because you have 
stopped the foreclosure?
    Mr. Bailey. Yes. Essentially if you do effective servicing, 
Freddie Mac, you are entitled to those incentives.
    Chairwoman Waters. No. No. That is not my question. My 
question is, are you getting paid because you have stopped a 
foreclosure? Or are you getting paid because the criteria that 
is evaluated shows that you did a good job, whether you stopped 
the foreclosure or not?
    Mr. Bailey. No. One of the key measurements in stopping 
foreclosures is performing loan workouts compared to the 
foreclosures that proceed.
    Chairwoman Waters. Are these tiers spelled out in the 
contract?
    Mr. Bailey. Yes. They are clear.
    Chairwoman Waters. Okay. I would like to request from you 
copies of the contracts that you do with Freddie and Fannie.
    Mr. Bailey. Sure.
    Chairwoman Waters. And they should be one and the same. I 
think I have one more question that I would like to--well, I 
won't raise a question at this time. We have other members who 
need to ask questions. Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman. Let me go quickly 
to Mr. Deutsch. Am I pronouncing that correctly, sir?
    Mr. Deutsch. Correct.
    Mr. Green. It is good to see you again. We were together in 
California. You talked about the 3/27s and 2/28s, and you 
mentioned LIBOR and how under the current conditions with LIBOR 
having declined to the extent that it has, this means that when 
the ARMs adjust, people will be paying something lower than 
they actually are paying currently. And you seem to indicate 
that this will act as a means by which the mitigation that we 
are looking for will take place and hence, things are getting 
better and there is no need to do more.
    My concern with your perception is this--the 3/27s and 2/
28s don't end right away. We are talking about 27 additional 
years of adjustable rates or 28 additional years of adjustable 
rates. And as a result, if we don't do something now when these 
loans can adjust and have them refinanced into a fixed rate, 
all we do is say, you are really doing well now, but 2 years 
from now, you could very well be paying twice the rate that you 
are paying currently. Do you agree?
    Mr. Deutsch. I agree. And that is why I would say that 
right now, the American Securitization Forum is working 
feverishly to put together a proposal where our framework would 
be extended to where not only would existing rates but if LIBOR 
rates were to rise again on subsequent rates--
    Mr. Green. Well, I am glad you said that because you left 
the impression with me and I suspect many others that because 
of the current conditions, the 3/27s and 2/28s were going to be 
okay. They are really not okay. And we agree that they are not 
okay. There is still a problem there. All right. You and I are 
familiar with the term tranche warfare, aren't we?
    Mr. Deutsch. Correct.
    Mr. Green. And you and I agree that in tranche warfare, we 
have some people who have positions that are superior to 
others.
    Mr. Deutsch. Correct.
    Mr. Green. And those people who have positions that are 
superior to others, there are some who literally don't take the 
same--to use some highly technical terminology, the same hit 
that others will take if foreclosure takes place.
    Mr. Deutsch. Correct.
    Mr. Green. And when this occurs, then you have the tranche 
warfare which means you have people in different tranches who 
are at odds with each other.
    Mr. Deutsch. Correct.
    Mr. Green. And some will say, I am really not eager to see 
you do anything to adjust the loan such that it impacts my 
position because I paid more money to have a superior position. 
And if it goes to foreclosure, I really don't want to see that 
happen. I love everybody. But I have already taken care of that 
by locating myself in a superior tranche. True?
    Mr. Deutsch. Is that a question?
    Mr. Green. Yes. Isn't that true? Because you are in a 
superior tranche, you may not be--you can withstand foreclosure 
to a greater extent than a person in an inferior tranche.
    Mr. Deutsch. I think the general characterization is 
accurate. I would say there are two things that are different 
from that characterization, though. I think one is that a 
servicer who is acting on behalf of all of the security holders 
is making that decision, and they are doing that in the best 
interest of all the security holders. I think secondly, most of 
the loss triggers have been breached at this point. So it is 
irrelevant as to whether you would foreclose or not. The people 
in the lower tranches effectively will have nothing.
    Mr. Green. Exactly. But the people in the superior tranches 
still have a vested interest.
    Mr. Deutsch. I would disagree.
    Mr. Green. You are saying people in the superior tranches 
don't have a vested interest?
    Mr. Deutsch. I would say the lower-rate tranches--
    Mr. Green. Vested interest is the operative phrase.
    Mr. Deutsch. The lowered rate of tranches at this point has 
been extinguished. So there is no tranche warfare between 
somebody whose interest has been extinguished--
    Mr. Green. You are saying that there is no tranche warfare 
because you don't have two--
    Mr. Deutsch. You don't have two people fighting. You have 
one person left.
    Mr. Green. I agree. Let me go on quickly. And in that 
sense, yes. But in the sense that the person who still remains 
has an interest. Do you agree with that?
    Mr. Deutsch. The person who remains has a very strong 
interest at avoiding foreclosure.
    Mr. Green. Strong interest at avoiding foreclosure. But if 
that foreclosure takes place, that person still has some 
benefit from the foreclosure, some benefit not 100 percent of 
what the person may have had invested.
    Mr. Deutsch. They will still receive some proceeds but they 
are a lot lower proceeds than the loan would perform.
    Mr. Green. Okay. Let me go quickly now to another point. 
With reference to ex post facto regulation, Mr.--is it Bailey?
    Mr. Bailey. Yes.
    Mr. Green. Mr. Bailey, you oppose ex post facto regulation, 
right? Ex post facto, meaning after the fact regulation.
    Mr. Bailey. Yes.
    Mr. Green. Okay. Just for edification purposes, would you 
oppose--you opposed it because you don't want to infringe on 
contracts that are already made, right?
    Mr. Bailey. It would make it difficult to enforce.
    Mr. Green. Well, just for edification purposes, what about 
regulation that is not ex post facto? Do you oppose that as 
well?
    Mr. Bailey. I don't mean to run on. I will say no, I don't. 
But I would back up. Regulation--
    Mr. Green. I only have a little bit of time. Ex post facto, 
you oppose. But if it is not ex post facto, you may be able to 
live with some kind of regulation if it is not ex post facto.
    Mr. Bailey. Yes, absolutely.
    Mr. Green. Mr. Deutsch, you would be able to live with some 
kind of regulation that is not ex post facto?
    Mr. Deutsch. I would agree if, on a going forward basis, 
you look at something and it makes sense.
    Mr. Green. Madam Chairwoman, may I ask one more question?
    Chairwoman Waters. Quickly.
    Mr. Green. To Countrywide, quickly, I want to ask you, in 
your servicing portfolio, what percentage of it emanates from 
GSEs?
    Mr. Bailey. If I combine GSEs, FHA, VA, and prime--
    Mr. Green. I want GSE segregated along with the FHA and put 
them in one lump in the VA and then the others.
    Mr. Bailey. Okay. Well, are you trying to get after what is 
subprime?
    Mr. Green. Yes.
    Mr. Bailey. Okay. Subprime makes up about 8 percent of our 
portfolio.
    Mr. Green. 8 percent. That 8 percent is not performing as 
well as the FHA and those that are through the GSEs, is that 
correct?
    Mr. Bailey. Correct.
    Mr. Green. Okay. And sometimes when we talk about these 
things, we tend to confuse these with our questions and our 
answers, which causes us to have a convoluted opinion as to 
what is really happening in your portfolio. True?
    Mr. Bailey. True.
    Mr. Green. Okay. Thank you.
    Chairwoman Waters. Thank you very much.
    Mr. Green. I yield back.
    Chairwoman Waters. Mr. Ellison.
    Mr. Ellison. We are under a time constraint, so I am just 
going to go quickly.
    Ms. Schwartz, a few questions about HOPE NOW. HOPE NOW data 
reveals that about 1.8 million loans were delinquent by about 
60 days or more during the first 2 months of 2008, and about 
346,000 went into foreclosure. However, only about 114,000 
received modifications. That means that more than 3 times as 
many borrowers entered foreclosure as received loan 
modifications. Further, HOPE NOW projects that more than 2 
million loans are estimated to enter foreclosure in 2008, up 37 
percent from 2007. Does this not suggest to you that the 
Administration's programs designed to address this crisis are 
just dwarfed by the sheer magnitude of it?
    Ms. Schwartz. We are clearly in a crisis, and there is a 
magnitude of housing issues to address. I would like to clarify 
two things. I think you are confusing foreclosure starts with 
actual foreclosures. Less than 50 percent of loans that go to 
foreclosure starts go into foreclosure and foreclosure sale, so 
actual workouts exceed foreclosures monthly. And certainly, 
year-to-date, that is the case.
    While the Administration, Secretary Paulson, and the 
Secretary of HUD strongly urged the industry to get together, I 
would like to comment that this is--there is no money from the 
government in this. This is everyone coming together. We do 
have industry trade groups coming together. We have disparate 
interests who seemingly didn't always talk, talking together. 
We have workshops with nonprofit counselors.
    Mr. Ellison. On that score, can you share data or provide 
data on who is paying for the services provided by HOPE NOW? Is 
that published data?
    Ms. Schwartz. No. The only collections for HOPE NOW is from 
the servicers, and it is a very lean overhead. There are only 
three of us on payroll. This is all a voluntary effort.
    Mr. Ellison. I know that. So who are the three servicers?
    Ms. Schwartz. No. All servicers pay a nominal fee really to 
make sure that we have someone who is helping coordinate the 
effort. All of the committee work, all of the heavy-duty 
resources comes from the industry, across the industry to chair 
the committees, et cetera, to keep us moving in the same 
direction. It is not a--
    Mr. Ellison. I guess my question is that, so--
    Ms. Schwartz. I would like to add, servicers also do pay 
for counseling sessions, and we are working with the investor 
market to also invent a new model to pay for servicing in the 
market in addition to the government funding that is coming.
    Mr. Ellison. I am just asking, do you have a list of which 
servicers and how much they contribute?
    Ms. Schwartz. I have a list of servicers, and the--
    Mr. Ellison. That is fine. Could you share that with us?
    Ms. Schwartz. 27 servicers.
    Mr. Ellison. We will get together and get that then.
    Ms. Schwartz. Okay.
    Mr. Ellison. And then my last question before we have to 
run is, in your recent press release, you indicated that 1.2 
million loan workouts have been completed by HOPE NOW servicers 
since July 2007.
    Ms. Schwartz. Right.
    Mr. Ellison. How many of these workouts were permanent loan 
modifications?
    Ms. Schwartz. You know, I don't have that data. But of a 
recent survey on the 2/28, 3/27 ARMs from February backwards, 
we requested that servicers tell us how many of those were 5 
years or greater, and we did get over 60 percent in that 
number. But just a point to make on that, whether it is 2 
years, 3 years, or 5 years, if that has taken a pause in 
foreclosure, has adjusted somewhere someone has been in 
foreclosure and now is in a modification, a servicer can go 
back and will go back if circumstances need to, to go and work 
with that borrower 2 years later if need be.
    Mr. Ellison. Are you willing to provide me with the 
information on how many were permanent loan modifications?
    Ms. Schwartz. As I said, the answer I have is 60 percent or 
greater of the survey I took where I have no loan level data on 
that.
    Mr. Ellison. Okay, well, we have 3 minutes to go vote, so I 
am going to submit some written questions to you. And Madam 
Chairwoman, can I count on some responses?
    Chairwoman Waters. Oh, yes. We have questions that 
certainly are going to submitted, and we will get those 
responses.
    Mr. Ellison. All right. I thank all the panelists. I had 
questions for everybody, but time ran short.
    Chairwoman Waters. Thank you very much. I have just one 
question: Is there a fee for modification or workout to the 
borrower? From anybody? Servicers?
    Mr. Bailey. No. Especially in subprime, there is no 
modification--
    Chairwoman Waters. No. Don't parse it. Is there a fee for 
modification to workout?
    Mr. Bailey. There can be a fee in some investors, yes.
    Chairwoman Waters. Thank you very much. Let me just thank 
all of you for your testimony. We are learning a lot. We have a 
lot more questions, so we will continue to have more hearings.
    The Chair notes that some Members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    I thank you. The panel is dismissed.
    But before we adjourn, without objection, the following 
written submissions will be made a part of the record of this 
hearing: A letter of support for H.R. 5679 from various 
consumer law, civil law, and other organizations; a statement 
from the American Bankers Association; a statement from 
Professor Kate Porter, University of Iowa; and a statement from 
the National Alliance of Community Economic Development 
Associations.
    We will have staff provide those submissions. Thank you 
very much. The hearing is adjourned.
    [Whereupon, at 2:28 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             April 16, 2008


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