[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
A REVIEW OF MORTGAGE SERVICING
PRACTICES AND FORECLOSURE MITIGATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 25, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-132
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44-905 PDF WASHINGTON DC: 2008
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES 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
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
July 25, 2008................................................ 1
Appendix:
July 25, 2008................................................ 49
WITNESSES
Friday, July 25, 2008
Barber, James B., Chairman and CEO, Acacia Federal Savings Bank,
on behalf of the American Bankers Association (ABA)............ 14
Bowdler, Janis, Associate Director, Wealth-Building Policy
Project, National Council of La Raza........................... 15
Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage
Servicing Division............................................. 19
Gordon, Julia, Policy Counsel, Center for Responsible Lending.... 23
Gross, Michael, Managing Director, Loan Administration/Loss
Mitigation, Bank of America.................................... 17
Kittle, David G., CMB, Chairman-Elect, Mortgage Bankers
Association (MBA).............................................. 12
Schwartz, Faith, Executive Director, HOPE NOW Alliance........... 21
Shelton, Hilary O., Director, NAACP Washington Bureau............ 9
APPENDIX
Prepared statements:
Barber, James B.............................................. 50
Bowdler, Janis............................................... 58
Coffin, Mary................................................. 65
Gordon, Julia................................................ 69
Gross, Michael............................................... 85
Kittle, David G.............................................. 93
Schwartz, Faith.............................................. 107
Shelton, Hilary O............................................ 136
Additional Material Submitted for the Record
Frank, Hon. Barney:
Written statement of Mary Harman, Chair, Community Services
Committee, California Association of Mortgage Brokers...... 140
Waters, Hon. Maxine:
New York Times article entitled, ``Dubious Fees Hit Borrowers
in Foreclosures,'' dated November 6, 2007.................. 145
New York Times article entitled, ``Struggling, but Staying in
a Home,'' dated July 20, 2008.............................. 149
A REVIEW OF MORTGAGE SERVICING
PRACTICES AND FORECLOSURE MITIGATION
----------
Friday, July 25, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Waters, Watt,
Sherman, Miller of North Carolina, Cleaver, and Speier.
The Chairman. This hearing of the Committee on Financial
Services will come to order.
I must tell you that I think this is as important a public
hearing as I have attended--much less presided over--in 28
years. We are in the midst--and, obviously, the time
constraints are going to be relaxed both for us and for
yourselves because we are talking very serious business here.
We are talking about something that is very important in
terms of social fairness and the impact on all Americans,
including predominantly lower-income Americans and the subset
of people in the minority communities, because of the way these
loans have gone forward. We are talking about the single most
important thing we can do to help deal with the economic
doldrums of this country.
I think if there were to be an announcement at some point
that the number of foreclosures on residential property was
going to substantially decline from what is going to be
expected, that would be about as good a piece of economic news
as the country could get, from the standpoint of both sides of
the aisle.
Sometimes, we are told you have a conflict between social
and economic equity and what is good for the overall economy.
Today, we have a total reinforcement. Reducing foreclosures is
an essential matter of justice, and it an essential matter of
trying to deal with the economic situation.
Now the House, as you know, has passed a bill which we know
that the Senate is going to pass promptly; and I believe that
by next week, you will see the picture that I think many people
had not expected to see in which--among the people standing
behind George Bush will be myself and my colleague from
California.
It is a very important issue for the country, and this
hearing has one central purpose. We have passed a bill in
consultation with people in the industry. Some seem to think
that was a bad idea.
I am going to take a little time.
We had, I think, four potential choices in dealing with
trying to reduce foreclosures.
The first choice was to do nothing. Some have advocated
that. Let the market do it.
A second choice would have been an effort legislatively to
say no. Some advocate that. I think it has constitutional
problems. I think it also has problems of how you discriminate
between which foreclosures should go forward and which don't.
A third choice would be substantial Federal funding to
defray the costs that people could make. That has serious
obstacles, given the deficit, and it couldn't get anywhere
politically.
That left us with one option that we have chosen: Providing
inducements to those who hold the loans, who have the ability
to say that we are going to restructure or not, to, in fact,
help diminish foreclosures by reducing the terms so that people
can pay them. And it is obviously voluntary.
We have passed legislation that does that, we think, as
well as we could. Actually, the House bill, I thought that it
was somewhat better than the Senate bill, but we needed to get
a bill passed.
I want to make two points:
First of all, because the Senate wanted to minimize the
budgetary cost, they adopted some measures, and we were very
happy that we finally got this done. But the Congressional
Budget Office anticipated that under our House version, 500,000
foreclosures would have been avoided, and under the Senate
version, 400,000 foreclosures would have been avoided. But we
are not required to live up to that. If you are eager to
participate, we can pump that up.
There is one particular thing I want to be very explicit
about. I even asked my staff, which has done a magnificent job
on this.
I think the legislation that was just passed was excellent
legislation, and it was unusual in one sense: It was written by
the staff of this committee and the subcommittees, and it was
written by the staff of the Ways and Means Committee.
While we had some cooperation from the Administration,
unlike most major pieces of legislation, it didn't come up from
them to us. It was drafted by the people you know and have
worked with, with your cooperation. And I am very proud of
that. But I asked them to make it very clear.
The Hope for Homeowners program in our version of the House
was going to be effective on enactment. For budgetary reasons,
the Senate insisted that it be effective October 1st.
Ironically, you heard Members of the Senate complaining of
tactics that were holding this up, so many foreclosures
happening every day, move quickly. But, in fact, given the way
the Senate structured this technically, that didn't make any
difference, because it doesn't take effect until October 1st.
But nobody requires those of you who are servicers to
foreclose. You know, we talk about how no one wants to be the
last person to die in a war, and no one wants to be the first
person to die in a war. But there is a particular tragic irony
if someone dies after the war has kind of formally ended. And I
want to urge those of you here and other servicers not to let
people be victims of a budgetary maneuver that we took here.
You know this is going to be the law. I would hope that no
one would be foreclosed upon between now and October 1st who
would have qualified for this program had the effective date
been immediate, and that is within your power to do. You can
show some forbearance.
October 1st is coming. Begin the planning. Begin talking
with people. But I think it would be a shame and an
embarrassment to all of us if people were to lose their homes
and the neighborhood deterioration were to be advanced and the
economy would suffer because, to satisfy CBO and other rules,
we delayed this a couple of months. I earnestly hope we can
have that kind of cooperation.
The other point is, and now we're here, we have done the
best we could think of, the best anyone told us, to induce the
holders of the loans, the servicers to take action to reduce
foreclosures. We need you to tell us if you are going to take
advantage of this. If you are not, why?
I do want to make this one point: I hope that there will be
efforts to take advantage of it. I believe there will be. I
know many institutions want to do this.
One of the things we have been told is look, there is this
problem because the people who service the loans are not the
people who own the loans. And there is this split between the
people who have, we are told, the authority to make the
decision to reduce, and the beneficial owners on whose behalf
they are acting, or you can't expect the beneficial owners to
do this, people who own pieces of pools.
I want to make something very clear, and this is something
Ms. Waters and I have talked about a great deal, and she has
addressed it in a separate piece of legislation that she has
pending.
If it turns out that our having done the best we could in
consultation with these servicers to provide a set of
incentives to reduce foreclosure, if it turns out that the
structure of the servicing industry, the split between the
decisionmakers and the ultimate beneficiaries is a significant
interference with our taking advantage of this, then I am
determined to change that structure. If we cannot get
significant participation here because the structure of the
industry is such that the servicers can't do what they tell us
they would like to do, then count on myself and other members
of this committee--and I believe we will have a responsive
Congress, we will change that situation.
If it is the case that the servicers cannot respond
appropriately, then that institution of a servicer acting on
behalf of ultimate investors but with the only one
decisionmaker, then that can't continue.
I am not looking to make that kind of disruption, but that
is one of the things that is at stake here. We could not, in
good conscience, in our responsibilities, allow that structure
to continue.
So we are going to proceed to the hearing after my two
colleagues make their statements.
We want you to tell us--we really want you to tell us,
those of you who represent servicers, that you are going to be
able to take full advantage of this. I am not saying we are
solving everything. There are no silver bullets. I am not the
Lone Ranger. But we have done the best we could, based on
conversations with you, to set this structure up.
If there are obstacles to your taking advantage of it, tell
us, and we will do what we can to remove the obstacles. If
people tell us that it is just inherent in the nature of this
industry that servicers simply cannot, not being the ultimate
owners, do what we ask them to do, then by next year we will
have to work on abolishing that form and putting something that
has an ability to respond to these important social and
economic problems in its place.
I now recognize the gentlewoman from California, who has
been a driving force in all this and who was one of the
earliest to notice the centrality of the question of the
servicers, the gentlewoman from California.
Ms. Waters. Thank you very much, Mr. Chairman, for this
hearing today. But I also want to thank you for paying so much
attention to this particular aspect of the subprime crisis in
which we are involved.
I cannot say enough, however, about the accomplishments
that you are responsible for as we pass the tremendous
legislation in this House that will go a long way toward
helping the many American families who find themselves in
foreclosure. It is absolutely amazing, when I think about it,
that in that legislation not only did you have the Housing
Trust Fund which you have worked so hard on that is going to go
a long way toward expanding both ownership and opportunities
for renters, but it is so timely in that it goes a long way
toward helping to solve the problem of stopping this
foreclosure meltdown.
In addition to that, all of the work that we had done
strengthening FHA and the work that we had begun on reforming
the GSEs, all of it came together in that legislation. And
aside from the fact that FHA is now in the position of
refinancing properties that families are holding onto and not
knowing how they were going to maintain them can now get some
help.
The other piece of legislation that had been just about
ruled out or thought to be impossible also was successful in
that we got not all that we wanted, but $4 billion that will
help the cities deal with the boarded-up, foreclosed properties
in their cities.
So I am very pleased and I continue to think about all of
the work that went into that comprehensive piece of
legislation; and I am very proud that, with your leadership, we
have been able to figure out some things.
One of the things that I noticed in all of this was the
servicing part of the industry. And I know I harangued a lot
and talked a lot about that which I didn't know, except I knew
enough to know that, as we talked about restructuring some of
these loans, that all of the counselors that we were funding
could talk all they want, but if, in fact, the servicers did
not cooperate in the modifications and the restructuring that
nothing was going to happen.
And the more I looked at the servicing part of the
industry, the better I began to understand that we knew very
little about them, about what their responsibilities are, who
they are responsible to, all that they do; and I am convinced
that not only must we learn more about them, we must be
involved in regulating them.
So, having said that, now, if you don't mind, I am going to
launch into this prepared part of this statement that I have
this morning.
Again, I want to thank you for convening this hearing.
I have been focused on the mortgage servicing industry
since this committee first began addressing the subprime
meltdown and foreclosure crisis. Like many, I had not
previously understood the critical role mortgage servicers play
in the modern mortgage market, where few loans remain with the
financial institution that made them.
Adding to the confusion is the fact that a number of large
mortgage servicing industry players, including the financial
institution formerly known as Countrywide, are both significant
loan originators and loan servicers but not necessarily of the
loans they originated.
After two subcommittee hearings in Los Angeles last
November, and here on April 16th, and a lot of additional
study, I am still finding out more that I don't yet know about
this industry, but there are a few key things we have learned.
First, this industry was woefully underregulated during the
boom years and woefully unprepared for the challenges it
confronted when the subprime meltdown hit. Depending on the
type of financial institution they are, banks, etc., mortgage
servicers are subject to regulation by the alphabet soup of
agencies and other entities like the Federal Reserve that
currently oversee our financial markets, but there is no
coherence, statutory and regulatory framework for them.
That is no surprise. The regulators failed to put together
a decent body of law on making loans during the boom years.
There is no reason to expect that they would think ahead to
regulating the sector of the mortgage industry responsible for
addressing those loans when things went south.
When the crisis hit, it rapidly became clear that the
mortgage servicing muscle of the industry had largely
atrophied. Nobody was sufficiently staffed-up or trained to do
the kind of workouts and modifications needed. I think this has
changed a bit but not as much as it should. And the capacity to
do loss mitigation at scale in a down market should never have
been allowed by regulators to wither or, perhaps more
accurately, not to be put in place at all.
Most troubling to me is that, because of the
underregulation, we have a near complete lack of transparency
about what is going on with the servicers now. In contrast to
loan origination, where data gives us a pretty clear and
comprehensive picture of what is going on with loan
origination, we are reliant in this crisis on industry provided
data that I would agree is at best incomplete and somewhat
opaque.
Second, I continue to be concerned that we have what is
known as an agency problem here. While the industry repeatedly
says that nobody wins in a foreclosure, there is some evidence
that a mortgage servicer, ostensibly the agent of the
investment trust, may do better in terms of fees when it
forecloses or at least keeps a borrower in a state of prolonged
delinquency than it does a sustainable loan workout, even where
to do so would be in the best interest of the trust.
I don't pretend to have fully grasped yet the complex fee
structure in mortgage servicing. I look forward to exploring
that today. But a study by researchers from the University of
Iowa and Stanford Law Schools which are described in a New York
Times article--I ask unanimous consent to put that in the
hearing record--showed that servicers generate sufficient
revenues from late fees, delivery and fax charges, and other
fees they can only charge if a borrower remains in distress and
at foreclosure's doorstep.
Just a few days ago, in another article I would also ask
unanimous consent to put into the record, New York Federal Home
Loan Bank chief executive Alfred DelliBovi, not exactly an
unsophisticated player in the market share market, was quoted
as saying that servicers make more money on a foreclosure than
when the loan is worked out.
The Chairman. Without objection, those articles will be
made a part of the record.
Ms. Waters. Let me just say that this is what I think we
have to at least look carefully at; we have to know whether or
not the incentives for servicers are really set up the way they
ought to be to get us out of this crisis.
I say this in part because, even after all of these months,
I continue to hear things that suggest servicers aren't acting
as if they really want to help borrowers, rather than give them
the runaround or squeeze them for late fees.
Witnesses at hearings and town hall attendees paint a
different picture of the mortgage servicers response to the
subprime crisis than industry press releases. Homeowners,
homeownership counselors, legal aid attorneys, and local
government officials all testified to the difficulties they
encountered in getting prompt, reasonable action by mortgage
servicers. Too often, individual borrowers and even their
trained advocates find it difficult to even find an actual
person to speak to about loss mitigation, much less one
authorized to offer the kind of loan modifications that the
borrowers need to remain in their home for the long term. I had
exactly this experience when I called the HOPE NOW Alliance
myself from a town hall meeting that I held in Los Angeles.
Finally, prior to the subprime crisis, the only Federal
Reserve Governor to call attention to the growing problem, Ed
Gramlich, asked why so many exotic loan products like the
notorious 2/28 and 3/27 subprime ARMs are being provided to the
households least likely to understand or to be able to handle
them financially.
At this moment, in the midst of the greatest foreclosure
crisis since the Great Depression, a variation of that question
can be asked about loss mitigation by mortgage servicers: Why
are the loans we know most likely to be worked out in a way
that is affordable to the borrower, but the loan term, the
safest loans in the market, while the most dangerous loans,
Alt-A and subprime portfolios of the major servicers are the
ones we know the least about when it comes to the affordability
of loss mitigation offers that servicers are making to
delinquent borrowers?
To explain why I say this, I want to turn to the 40 percent
or more of the servicing market that is subject to a Fannie
Mae, Freddie Mac, FHA, or VA loan guarantee. These entities
issued clear guidance and set up compensation schemes to
enforce affordability standards for their servicers' loss
mitigation activities.
In Fannie's case, the benchmark is $200 in monthly
residential income after all debt service and household
expenses, including emergency expenses, are taken into account.
In Freddie's case, there is a 20 percent residual income
cushion, using a similar approach to assessing the borrower's
income and expenses.
So we know what affordability standards govern the safest
part of Wells Fargo's, Bank of America's, and other mortgage
servicers' portfolios. After all, the strict underwriting
standards of VA, FHA, and the GSEs knew these loans are the
least likely to be no doc loans or subprime ARMs. Yet, as it
stands now, we have no idea what affordability standard has
been applied to the Alt-A and subprime components of these
servicers' portfolios. Actually, we do have some idea: Ones
that aren't working.
Moody's reports that 42 percent of loans that were modified
in the first half of 2007 were 90 or more days delinquent as of
March 31, 2008. This suggests that too many of the loan
workouts being offered are simply kicking the can down the
road, rather than making realistic assessments of what
borrowers can afford for the long term. This clearly calls for
Federal intervention.
I will conclude by saying that 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 when the borrower may have
been the victim of a predatory, unaffordable loan. 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.
The legislation I have introduced, H.R. 5679, the
Foreclosure Prevention and Sound Mortgage Servicing Act of
2008, creates this enforceable legal duty. Although it has been
mischaracterized in the industry press, I believe that H.R.
5679 is a prudent piece of legislation designed to balance the
needs of lenders, investor servicers, and borrowers in an
effort to reduce foreclosures. I also see it as an important
first step in regulating what has been to date a largely below-
the-radar-screen and underregulated sector of the mortgage
industry.
I look forward to the testimony today and especially the
question-and-answer period, Mr. Chairman.
And, Mr. Chairman, I may have kind of confused a little bit
the mortgage servicing and the loss mitigation operations of
these institutions. I am finding that they are two different
things; and most of these institutions and many of the loss
mitigation activities are offshore, not even within the United
States; and I would like to have some clarification on that.
The Chairman. If the gentlewoman would yield.
Given that she is so well-informed on this because she made
it as much a priority as anybody around, if there is any
confusion in her mind, we can be sure it is also a very
widespread confusion, and it is in our interest to clear it up.
Because, yes, that is exactly the problem that we have.
I am about to recognize the gentleman from North Carolina,
and I don't want to understate--I don't think I can understate
this. This is a challenge to our ability to govern and to our
economy. I mean, it cannot be that so many people say we want
to reduce foreclosures and we can't do that. So we just have a
collective obligation to do better, or else I think some
fundamental questions get raised.
And now the gentleman from North Carolina, who 4 years ago
was one of the ones trying to get this Congress to act in ways
that would have prevented this problem, and who has been very
deeply engaged in it, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. I will be brief because
I know the witnesses want to go and a lot of the members left
because we don't have votes today, and that is unfortunate
because this is an important hearing.
I want to just make two points. The first point is to
praise the yeoman efforts of the chairman of this full
committee and the chairwoman of the Subcommittee on Housing in
the passage, in all of the work they did to pull all of these
pieces together to pass this piece of legislation that we
passed the day before yesterday. I don't think anybody could
ever imagine the intricacies and the difficulty of the road
that the Chair played in this process, so I want to
congratulate him. That is the first point.
The second point is that those of us, particularly who came
out of the private sector or even those of us who came out of
State legislatures or out of pulpits or local elective bodies,
understand that passing a law doesn't mean a thing if it is not
applied in letter and spirit. And I think the Chair referred to
this as a challenge. I really think it is an opportunity,
particularly for servicers and lenders to take advantage of a
framework which has now been set and sanctioned and funded and
structured to take a lot of the uncertainties and difficulties
out of this process that probably--HOPE NOW Alliance probably
understands as much as anybody. I mean, they have a framework
now and everybody has a framework that, if we just apply the
letter and, more importantly, the spirit of what we have done,
will just say magnitudes about the industry, about servicers,
and it will pay tremendous dividends for our economy in getting
us back on the right track.
So it is important that all the work that the Chair did and
all of us did to pass the legislation, but what is more
important now is what you all do, what the market does, what
the players in this market do to apply this legislation both in
letter and, more importantly, in spirit to make it work and I
am just going to challenge you to do that.
I probably--once I hear the testimony, I may not even be
able to stay for questions. I am just going to take it on faith
that you all will use this important vehicle that has been
provided to you to help our country move forward.
And with that, Mr. Chairman, I yield back.
The Chairman. Finally--and I have to say it is a small
member panel today. But in terms of understanding of and
concern about the issue, it is about as solid as I think it
could be. Our final opening statement comes from the former
Mayor of Kansas City, who has been seeing this problem from all
ends. The gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I will be very brief.
I had dinner last evening with a constituent here in
Washington. He was here on business. And as the conversation
progressed, he eventually told me that he was on the verge of
losing his home. Of course, that made dinner go down with a
little more difficulty.
But the thing that concerned me more than anything about
the conversation was the unwillingness of the servicer to work
with him. The servicer becomes Superman in this whole sordid
mess. They are the ones who can leap tall buildings and are
more powerful than locomotives. They are the ones that make the
determination in here.
And in my State of Missouri, we had notification that
servicers had begun foreclosures on 4,500 homes in April and
May. Only one-half of them reported that the servicer was
actually working with them on a repayment plan. We have 8,000
foreclosures a day in the United States right now,--8,000 a
day. I want to make certain that something positive is
happening.
HOPE NOW, I think--you know, I don't want to question
anybody's motives. Maybe sometimes I do. But I do wonder, you
know, there was a great fanfare when they talked about what
they were going to do, and I am not quite sure that I see the
benefit. I don't know if that was a preemptive move in hopes
that we would not bring to the Floor some legislation that
would be regulatory in nature over them. So I am interested in
hearing what you have to say, more than I am interested in
expressing outrage at what is going on.
I yield back the balance of my time.
The Chairman. I thank the gentleman.
At this point, I want to ask unanimous consent to insert
into the record the testimony of Mary Harman, the Chair of the
Community Services Committee of the California Association of
Mortgage Brokers, in which they, among other things, express
their gratitude for the legislation of the gentlewoman from
California and focus on the problems they believe exist with
the servicers.
Without objection, that will be made a part of the record.
We will now begin our statements with Mr. Hilary Shelton,
who is the director of the Washington Bureau of the National
Association for the Advancement of Colored People.
STATEMENT OF HILARY O. SHELTON, DIRECTOR, NAACP WASHINGTON
BUREAU
Mr. Shelton. Thank you, Mr. Chairman.
As you mentioned, my name is Hilary Shelton, and I am the
director of the NAACP's Washington Bureau. The Washington
Bureau is the Federal legislative and national public policy
arm of our Nation's oldest and largest grassroots-based civil
rights organization.
I would like to begin by thanking you, Chairman Frank, as
well as Congresswoman Waters, Ranking Member Bachus,
Congressman Watt, and Congressman Cleaver for the wonderful
energy, time, and commitment to addressing these issues and
addressing what faces our country in light of all these
foreclosures.
I come before you today because the mortgage foreclosure
crisis has reached even more staggering proportions all across
the Nation. In the month of June, more than 250,000 homes were
at some stage in the foreclosure process. This number is up by
more than 53 percent over June of 2007.
Furthermore, African Americans and other racial and ethnic
minority Americans are being disproportionately affected.
Nobody disagrees that the foreclosure crisis is being driven by
the high number of predatory loans made within the last few
years; and according to the most recent study by the National
Community Reinvestment Coalition, in 2005, African Americans of
all income levels were more than twice as likely to receive a
high-cost loan.
Last year, in 2007, the NAACP held its 98th annual
convention in Detroit, Michigan, the City with our Nation's
highest foreclosure rate. Earlier this month, we held our 99th
annual convention in Cincinnati, Ohio, Ohio being the State
with the highest foreclosure rate. Needless to say, for the
last 2 years we have been hearing firsthand from people who are
in one stage of foreclosure or another. These are real,
hardworking people whose lives have been shattered; and the
worst part is that are sadly only the beginning.
For as long as I can remember, African Americans have been
viewed as the canary in the coal mine. This has certainly
proven to be true when it comes to the mortgage foreclosure
crisis.
For decades, predatory lenders targeted African Americans
and other racial and ethnic minority Americans with their
unscrupulous products. As study after study clearly
demonstrated, and as I have previously stated in testimony
before this committee, the African- American community in the
United States has been and continues to be disproportionately
devastated by predatory lenders. Thus, when the foreclosure
problems began, it was African Americans who were again at the
forefront of the crisis; and we continue to be
disproportionately affected by what has already become a
national catastrophe.
So we have come to Capitol Hill, to this very room, as a
matter of fact, many times in the past couple of years sharing
our concerns and working with you to aggressively help address
a problem which is so large in scope it is almost
inconceivable.
The purpose of today's hearing, to look at the role of
mortgage servicers, is laudable as they clearly play a
significant role in both the creation of a constructive and
sustainable loan modification as well as the foreclosure
process. Yet I hope that we will look at the bigger picture and
examine the relationship between servicers and the homeowner/
consumer who is facing foreclosure.
Currently, the servicer has most, if not all, of the power
and control. There are several proposals currently before
Congress to change that dynamic, proposals that the NAACP
supports and views as necessary if we are going to offer real
help to the millions of American families whose homes are at
risk.
First, there is the proposal by Congresswoman Waters, H.R.
5679, the Foreclosure Prevention and Sound Mortgage Servicing
Act of 2008. This legislation requires a homeowner or servicer
to pursue specified priority loss mitigation activities such as
waiving late fees and other charges, and establishing an
affordable repayment plan or loan modification, forbearance, or
a short refinancing before a home may become foreclosed upon.
The NAACP also supports H.R. 6076, the Home Retention and
Economic Stabilization Act of 2008 introduced by Congresswoman
Matsui of California. This legislation places a moratorium on
home foreclosures for 9 months to allow homeowners to find and
take remedial action. It also requires home mortgage servicers
to provide advance notice of any upcoming reset of the mortgage
interest rate. I would note that this moratorium or deference
is similar to the one that was called for by the NAACP and
other civil rights organizations more than a year ago, in April
of 2007.
Lastly, the NAACP strongly supports, as I know does the
chairman and several members of this committee, H.R. 3609, the
Emergency Home Ownership and Mortgage Equity Protection Act of
2007. This important, bipartisan legislation would allow courts
to supervise loan modifications, effectively mediating between
lenders and homeowners.
All three of these bills, taken together, will provide
homeowners facing foreclosure with some much-needed tools,
whether it be the requirement that mortgage servicers work with
them to try to avoid foreclosure, or a cooling-out period to
allow homeowners to try to modify their mortgages and stay in
their homes, or allowing the courts to try to mediate a
modification.
All three of these bills will require the financial
services industry to do more to help avoid foreclosures.
Heretofore, all successful attempts to address this crisis,
while laudable, have been based on the holders of the loan
acting on a purely voluntary basis to try to avoid
foreclosures.
Furthermore, all three of these pending measures that the
NAACP supports would not require a dime from the U.S. Treasury.
No taxpayer money would be spent. So we would be helping
homeowners facing foreclosure at no expense to the American
public.
Finally, a few words specifically about the mortgage
services industry. As I said earlier, mortgage services are an
integral part of both the process of developing constructive
and sustainable loan modification as well as the foreclosure
process. That is why, given the huge number of Americans whose
lives these people will touch, the NAACP would like to see more
regulation and monitoring of this industry. Specifically, we
would like to note that not only are they trying to save
Americans' homes, but they are trying to save all Americans'
homes, regardless of the borrowers' race or ethnic background
or age, with the same vigor.
Given the history of disparate treatment of African
Americans by the financial services industry in our Nation, one
cannot blame us for wanting more information on the number of
loans that are being modified, the race of the borrowers who
have received the loan modifications, and if those
modifications actually result in the homeowner staying in their
homes, or if a disproportionate number of African Americans and
other Americans of color receive loan modifications that last a
year or less and only serve to drain more equity from the
consumer.
In closing, I would like to again thank the chairman and
all of the members of the committee for all that you have done
to address the mortgage foreclosure crisis. I hope to continue
to work with you to aggressively address this problem facing a
growing number of Americans and, most importantly, to help keep
our people and our families in their homes.
Thank you very much.
[The prepared statement of Mr. Shelton can be found on page
136 of the appendix.]
The Chairman. Thank you.
I just want to note again that this is a day when we don't
have votes, and most members have left, so I do want to give a
special acknowledgement to those members who probably altered
their plans to be able to stay here.
We have been joined by one of our newer members, the
gentlewoman from California, who has a great interest in this
and comes from a State where it has been an issue. She has
recently been a leader in the State legislature.
The gentlewoman, Ms. Speier, has joined us as well.
Next, we have Mr. David Kittle, who is the chairman-elect
of the Mortgage Bankers Association. We very much appreciate
your being here--having worked with the Mortgage Bankers
Association as we passed the legislation--and we look forward
to working with you as we take full advantage of it.
Please go ahead, Mr. Kittle.
STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN-ELECT, MORTGAGE
BANKERS ASSOCIATION (MBA)
Mr. Kittle. Mr. Chairman, thank you for the opportunity to
appear before you again. I am pleased to discuss solutions to
the situation in the mortgage market and what servicers are
doing to help keep families in their homes.
None of us wants a family to lose its home, and MBA members
are devoting significant time and resources to finding ways to
help borrowers keep their homes. The tools used to avoid
foreclosure and retain a borrower's home include forbearance
and repayment plans, advance claims, loan modifications, and
refinances. Short sales and deeds in lieu of foreclosure are
also used to avoid foreclosure in certain circumstances.
It makes good economic sense for mortgage servicers to help
borrowers who are in trouble. The increase in mortgage
delinquencies and foreclosures has brought significant
attention to the cost of foreclosure to homeowners,
communities, and mortgage industry participants. While the
impact of foreclosure upon homeowners and communities is clear
to everyone, statements by some advocates and government
officials indicate that confusion still exists about the impact
of foreclosure upon industry participants, particularly
lenders, servicers, and investors.
Mortgage lenders and servicers do not profit from
foreclosures. Every party to a foreclosure loses--the borrower,
the community, the servicer, the mortgage insurer, and the
investor. It is important to understand that profitability for
the mortgage industry rests in keeping a loan current. As such,
the interest of the borrower and the lender are mostly aligned.
As a recent CRS paper notes, foreclosure is a lengthy and
extremely costly process for the industry and, generally, a
losing financial proposition. While losses can vary
significantly, several independent studies have found the
losses to be quite significant: Over $50,000 per foreclosed
home or as much as 30 to 60 percent of the outstanding loan
balance.
If a homeowner misses a payment and becomes delinquent, the
mortgage servicer will attempt multiple contacts with the
homeowner in order to help that borrower work out the
delinquency. Servicers have several foreclosure prevention
options that can get a borrower back on his or her feet.
Informal forbearance and repayment plans are the first tools
servicers use to help borrowers.
Loan modifications are the next level of loss mitigation
options. A loan modification is a change in the underlying loan
document. It might extend the term of a loan, change the
interest rate, change repayment terms, or make other
alterations. Often features are combined, including rate
reductions and term extensions.
Servicers also use refinancing to assist borrowers who are
current on their loan but are at risk of defaulting in the
future or borrowers who are in the early stages of delinquency.
FHASecure is one example of a program targeted to borrowers
with adjustable rate mortgages who are unable to make payments
due to an increase in rate.
The housing bill that just passed enhances FHA's products
by creating the Hope for Homeowners program for delinquent
borrowers who need to refinance their homes but find they owe
more than their homes are worth.
Servicers want to assist borrowers who are having
difficulty paying their mortgages. Servicers and investors have
an economic incentive to avoid foreclosure. As a result,
servicers are performing a growing number of workouts,
including modifications as evidenced by the HOPE NOW Alliance
data.
Servicers have increased staff, have funded new technology,
and are sponsoring home retention workshops. They are using
third parties to go to the borrower's home to facilitate the
workout and are funding advertising to educate borrowers about
foreclosure prevention options. They are paying for housing
counseling and are working with regulators and others to
resolve legal impediments to loss mitigation.
All of these efforts demonstrate the industry's dedication
to avoiding foreclosure and helping delinquent borrowers to get
back on their feet. The industry is working to keep pace with
changes and seeking new and financially responsible ways to
increase workouts. The incentives of the mortgage servicers are
generally in line with the family who is in trouble.
Thank you for the opportunity to share our thoughts with
the committee. I look forward to answering any questions that
you may have. Thank you, Mr. Chairman.
[The prepared statement of Mr. Kittle can be found on page
93 of the appendix.]
The Chairman. Next, we have Mr. James Barber, who is the
chairman and CEO of Acacia Federal Savings Bank. He is here on
behalf of the American Bankers Association, another
organization with whom we have worked closely in the
preparation of this bill and with whom we hope to be able to
continue cooperating.
Mr. Barber.
STATEMENT OF JAMES B. BARBER, CHAIRMAN AND CEO, ACACIA FEDERAL
SAVINGS BANK, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
(ABA)
Mr. Barber. Chairman Frank and members of the committee, my
name is James Barber, and I am the chairman and CEO of Acacia
Federal Savings Bank in Falls Church, Virginia.
Acacia Federal is a federally chartered savings bank with
$1.5 billion in assets. We service 3,700 residential single
family loans in the mid-Atlantic region that total about $1.1
billion. Most of these loans are owned by the bank.
We share your concern about rising foreclosures and the
need to limit them wherever possible. Everyone suffers when a
foreclosure occurs--borrowers, lenders, investors, and the
neighborhood where the property is located. Thus, it is no
surprise that banks are actively engaged in voluntary
modification programs on an individual basis and as part of an
industry-wide effort such as the HOPE NOW initiative.
Avoiding foreclosure is not a simple process. Many of the
loans that we make look the same on paper, but, in my
experience, each workout must be tailored to the borrower's
unique experience. This process is complicated by the fact that
phone calls or letters from lenders may not be warmly welcomed
by anxious borrowers who are having financial difficulties.
Often, there is a tendency to ignore the problem which,
unfortunately, limits borrowers' options for finding solutions.
It is no surprise then that 57 percent of the Nation's late-
paying borrowers still do not know their lenders may offer
alternatives to help avoid foreclosure.
Two other complications muddy the waters when considering
if and how foreclosure can be avoided.
First, not all borrowers have the desire or financial
wherewithal to keep their property. Some borrowers are
investors, others have hyperextended their credit, and still
others have lost jobs or seen dramatic changes in their
financial situation.
Second, although Acacia Federal retains most of the
mortgages we originate, often financial institutions choose
instead to sell mortgages into the secondary market. This
brings in other parties which adds time and complexity.
Fortunately, these complications are being sorted out.
We do, however, believe things could be improved.
Legislation crafted by you and this committee, Mr. Chairman,
contains a key component which ABA believes will provide
additional tools for assisting more troubled borrowers. That
legislation will create a voluntary program through which
troubled borrowers will be able to work with servicers to
reduce their indebtedness, gain some equity in their homes, and
stabilize their financial situation. Immediately after the bill
is enacted, ABA will send educational material to all of our
members followed by telephone briefings on the bill and how
this program can be implemented.
The vast majority of banks, large and small, have long
followed traditional, prudent underwriting models. Acacia
Federal is no different. Our underwriting has been sound, so we
have relatively few delinquencies and foreclosures. The few we
had were the result of the usual things that destabilize
borrowers, divorce and job loss, for example.
Since we declined to match the loose underwriting standards
of many nonbank institutions, we lost market share. In today's
environment, we are trying to build that market share back
without sacrificing the prudent lending underwriting standards
most banks have always employed.
Recent changes to regulations finalized by the Federal
Reserve to implement the Home Ownership and Equity Protection
Act emphasize the need for more prudent and traditional
underwriting. ABA supports many of these changes, including
regulations to strengthen the integrity of appraisals and
prohibit deceptive advertising, changes that in some ways
codify practices that most banks have employed.
The banking industry is working to avoid foreclosures and
prepare for the future. We appreciate the work of this
committee to provide additional tools and solutions to achieve
that end.
I would be pleased to answer any questions.
[The prepared statement of Mr. Barber can be found on page
50 of the appendix.]
The Chairman. Representing another organization that has
been an important resource for us is Janis Bowdler from the
National Council of La Raza.
STATEMENT OF JANIS BOWDLER, ASSOCIATE DIRECTOR, WEALTH-BUILDING
POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA
Ms. Bowdler. Good morning. Thank you, Chairman Frank. Good
morning, Congresswoman Waters, Mr. Watt.
As you said, my name is Janis Bowdler. I oversee NCLR's
policy, research and advocacy on issues related to helping
Latino families build and maintain wealth.
I would like to thank you for holding this hearing; and I
would like to thank you, Congresswoman Waters, specifically for
your work on the servicing issue and for your leadership,
because we really are convinced that this is one of the most
important issues facing us now. As you will hear me say time
and time again in my comments and in my written statement, it
is not just timely. This issue is urgent.
As you know, NCLR runs a network of 50 housing counseling
agencies across the country. Every day, we hear about their
struggles with mortgage servicers to keep the working families
in their homes. Their stories, along with our research and
partnerships, have informed NCLR's views on the mortgage
servicing industry.
I also want to offer my congratulations to all the members
of this committee for the passage of your foreclosure package.
I urge you to see servicing as the next step in addressing the
foreclosure crisis. Based on what we have seen on the ground,
it is clear that sound servicing practices are the linchpin in
a national foreclosure prevention strategy.
This morning, I would like to share with you four major
barriers built into the servicing system. These barriers
prevent servicers from fully meeting the needs of families
struggling to stay in their homes. Let me start by providing
some background.
The Latino community was hit hard by foreclosures. Of all
loans made to Hispanic borrowers in 2005 and 2006, 1 in 12 are
predicted to end in foreclosure, whereas market indicators
suggest that peak foreclosures amongst our community are still
to come in 2009 and 2010 when option ARMs reset.
As the foreclosure crisis has unfolded over the last year,
stakeholders across the country have stepped up efforts to work
with at-risk borrowers. Unfortunately, these voluntary efforts
are falling short. I am sure you know all the statistics by
now. Subprime loans are twice as likely to be more than 90 days
delinquent than a year ago, and 2 million loans are 60 days or
more delinquent this month, a 43 percent increase over July
2007.
After listening to community leaders, counselors, and other
stakeholders, NCLR has identified four characteristics of
servicers that leave them struggling to meet the needs of
delinquent borrowers.
First, servicers work for the investor. And this is where
the obligations and duties lie, not with the borrower. Higher
incentives exist to steer borrowers to short sale or
foreclosure than engage in complex loss mitigation. This can be
seen in the constant struggle between first and second lien
holders.
Second, mortgage holders routinely refuse to negotiate on
loan modifications, even when it means that the borrower is
more likely to default on the overall package. The business
model focuses on the short term. This is consistent with
traditional loss mitigation focused on borrowers with short-
term challenges such as job loss or an unexpected expense.
Despite the fact that today's delinquent borrowers have
much different problems, short-term solutions are still much
more common than permanent ones. In 2007, 3- to 6-month
workouts were the norm. For the majority of those families,
their loans will be just as unaffordable 6 months from now.
We have also seen that the mortgage servicing industry
lacks capacity. Many of our housing counselors continue to have
paperwork lost and wait for months to hear back on loan
modification requests. In fact, two-thirds of loan
modifications started are not completed inside the following
month.
These delays have consequences. One agency, for example,
worked for months to get a loan workout approved for their
client. Meanwhile, the loan continued on the path to
foreclosure. The approval for the modification came after the
home went to auction.
Finally, loss mitigation efforts are not transparent.
Servicers perform loss mitigation duties according to
guidelines set by the investor. However, this information and
the identity of the investor are often unavailable. The result
is confusion and lack of accountability.
Servicers and investors are pointing fingers at each other
when asked why modifications are not happening. A
misunderstanding around the term ``imminent default,'' for
example, caused some servicers to mistakenly advise borrowers
that they had to miss 2 months of payments before they would be
eligible for assistance.
As demand continues to rise, we are concerned that these
issues will become exacerbated. By one estimate, 7 out of 10
seriously delinquent borrowers haven't even started the loss
mitigation process yet. As the millions of homeowners with
option ARMs expect to reset over the next couple of years, it
is clear that the problem isn't going way.
This also raises serious concerns about the potential for
abuse. Forty-two percent of modifications--as Congresswoman
Waters mentioned--made last year are already 90 days behind.
These borrowers were not given an affordable, long-term
solution. Unless something changes, this statistic will get
worse. Frustrated borrowers will land in the hands of
foreclosure rescue scam artists, and foreclosure prevention
programs will suffer.
To address the problem, NAACP offers the following
recommendations: Create a duty for servicers to provide loss
mitigation services to struggling borrowers; and require that
loan modifications are sustainable over the long term. I want
to mention that both of those recommendations are already
included in H.R. 5679 authored by Congresswoman Waters. And we
would also recommend that servicers be required to disclose the
investor upon request and that servicers be prohibited from
moving forward with foreclosure if a case is still in the
process of loss mitigation within their own company.
In many ways, servicers are the gatekeepers to decisions
made on delinquent loans. Their ability to adequately serve
struggling families should be a concern to us all.
Thank you, and I would be happy to answer any questions.
[The prepared statement of Ms. Bowdler can be found on page
58 of the appendix.]
The Chairman. Thank you very much, Ms. Bowdler. That gets
right to the heart of what we are going to be dealing with.
Next, Mr. Michael Gross, who is the managing director for
loan administration/loss mitigation, at the Bank of America.
And I should note that earlier this year, I was approached
by one of the high officials of the Bank of America informing
me about the the intention to purchase Countrywide and,
frankly, he wanted to make sure that we thought this was a good
idea. I have been an advocate of that purchase and urged
Federal regulators, in fact, to be supportive because it did
seem to me that we would be in a better position. And I hope
now that Bank of America is going to prove me correct in my
confidence in having them instead of Countrywide, which is
going to yield the kind of benefits we were hoping for in terms
of diminution of foreclosure.
Mr. Gross.
STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, LOAN
ADMINISTRATION/LOSS MITIGATION, BANK OF AMERICA
Mr. Gross. Good morning, Mr. Chairman, and committee
members.
I am Michael Gross, Bank of America's managing director of
loan administration/loss mitigation. Thank you for the
opportunity to appear here today to discuss Bank of America's
efforts to help families prevent avoidable foreclosures.
I would also like to congratulate the chairman and this
committee for the vital Hope for Homeowners legislation that
the House approved on Wednesday. This legislation will be
important to the long-term viability of home financing and the
short-term stability of the housing market. We believe that it
will help both homeowners and potential homeowners alike. And
yes, we are eager to implement this program.
Let me start by saying that our goal is to modify or work
out at least $40 billion in mortgages by the end of 2009 and to
keep all those families in their homes. As America's largest
home loan provider, Bank of America will lead a new era of home
lending built on transparent, fair, and easily understood
practices. We are working to reduce the number of foreclosures,
to help families and communities impacted by foreclosure, and
to continue to make affordable mortgages available to low- and
moderate-income and minority households.
The Countywide acquisition officially closed 3 weeks ago.
Barbara Desoer, a 31-year veteran of Bank of America, has
assumed the position of president of the combined mortgage,
home equity, and insurance businesses. We understand that we
now have the opportunity to renew America's confidence in
homeownership with unmatched capabilities.
At the core of our combined operations are the substantial
commitments we made to use responsible lending practices and
home retention efforts. Bank of America is devoting substantial
resources to modifying or working out loans for customers who
are facing possible foreclosure. Many effective home retention
practices are being improved and supplemented. We will continue
to work with the investors, the GSEs, regulators, and community
partners to reach customers with affordable home retention
solutions.
We are tailoring our workout strategies to a customer's
particular circumstance. Once we have been able to make
contact, we work with distressed customers to match their
repayment ability with the appropriate option, using tools such
as loan modifications, lower rates, and repayment plans.
In response to the needs of our customers, we have added
more staff and improved the experience, quality, and training
of the professionals dedicated to home retention. Over the past
year, the home retention staff has more than doubled, to 4,700
staff members, and we will maintain this staff or increase it,
if necessary, to ensure that we meet our customers' needs.
Bank of America remains committed to helping our customers
avoid foreclosure whenever they have a desire to remain in the
property and have a reasonable source of income. A key
component of successful home retention initiatives includes
partnerships with financial counseling advocates and community-
based organizations. The data we are sharing today is from the
legacy Countywide portfolio. So far in 2008, we have
participated in nearly 200 home retention outreach events
around the Nation.
Early, open communication with customers is the most
critical step in helping prevent foreclosures. For example, we
reach out to customers who are delinquent an average of 17
times per month throughout the delinquency cycle to reach them
to find a solution. In the first half of 2008, our Home
Retention Division saved over 117,000 homeowners from
foreclosure, nearly double the pace from the last 6 months of
2007. I would emphasize that these are workouts in which the
borrower enters into a plan that allows the customers to keep
their homes.
Comparing June 2008, with June 2007, our Home Retention
Division workouts are up nearly 420 percent, with the primary
cause of that increase a 958 percent jump in loan modification
plans. Since we announced a series of home retention
initiatives last autumn, loan modifications have become the
predominant form of workout assistance.
Year to date, loan modifications have accounted for more
than 70 percent of all home retention plans. These loan
modifications generally result in reducing the loan's interest
rate and are consequently reducing the borrower's monthly
payment. These plans offer affordable solutions to the
financial challenges facing many homeowners.
Interest rate relief modifications were extremely rare
until late last year. Today, interest rate modifications
account for 71 percent of all of the loan modifications in the
second quarter of 2008.
We are committed to helping our customers avoid foreclosure
whenever they have a desire to remain in the property and the
ability to make a payment. Foreclosure is always the last
resort for lenders, servicers, and for the investors in the
mortgage securities we service. We will lead the industry in
meeting the challenge of today's housing market with leading-
edge foreclosure prevention technology, training programs, and
partnerships.
Thank you. I would be happy to answer any questions that
you may have.
[The prepared statement of Mr. Gross can be found on page
85 of the appendix.]
The Chairman. Next, we have Ms. Mary Coffin, who is the
executive vice president of the Wells Fargo Home Mortgage
Division.
Ms. Coffin.
STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, WELLS FARGO
HOME MORTGAGE SERVICING DIVISION
Ms. Coffin. Chairman Frank, Ranking Member Bachus, and
members of the Financial Services Committee, thank you for this
opportunity to share Wells Fargo's perspective on our loan
servicing practices in the current market conditions.
I am Mary Coffin, head of Wells Fargo's Mortgage Servicing
Division.
Wells Fargo services one of every eight mortgage loans in
America, or $1.5 trillion in loans that either we originated or
were originated by others. Our national presence and the makeup
of our portfolio provide a vantage point for critical insights
that guide our company's actions, as well as the industry
initiatives we have advocated.
Clearly, the foreclosure issue has expanded beyond its
genesis with the subprime ARM resets to the full credit
spectrum of customers, particularly in geographies facing the
greatest market corrections. Declines in housing prices,
rapidly rising costs of living, unemployment, and shifting
consumer spending habits are driving the need for continued
customized solutions.
Our work has included a high-level cooperation between
servicers, Fannie Mae and Freddie Mac, and other investors, to
produce streamlined processes for distressed consumers through
reduced documentation, simplified communication, and fast-track
loan modifications. Additionally, we have worked with not-for-
profit counselors to help at-risk borrowers manage all of their
debts. Working together on a comprehensive view of the
borrower's obligations enables us to reach affordability that
is lasting.
Because our company's vision has long been to help our
customers succeed financially and build lifelong relationships,
we hold ourselves accountable for working with customers
through various methods to reach affordability. Yet, as I am
sure you are aware, there are limits to what we can do. As a
responsible servicer, we must make certain each customized
decision is economically sound for customers and investors,
such as pension plans and employee 401(k) owners.
Foreclosures are a measure of absolute last resort. They
destabilize communities and are devastating for the families
involved. Servicers are not incented to foreclose. The lengthy
foreclosure process exposes servicers to potential risks
associated with unrecoverable advances, fees, and penalties.
To further avert foreclosures, we have responded to the
increased need to effectively help our customers manage their
delinquencies by increasing our staffing. In 2005, the team
dedicated to assisting at-risk borrowers consisted of 200
experts. Today, we have more than 1,000 and, I will add, in the
United States. We monitor our volume of calls daily and shift
experienced staff from one department to another in order to
assist.
Now, to ensure our overall effectiveness, we conducted a
study of our customers 60 or more days past due, not in
bankruptcy or foreclosure. The study showed that we connected
with 94 percent of our customers. Of every ten, seven worked
with us to find a solution, two declined our help, and the
remainder were either unreachable or a solution simply could
not be found. And we do have solutions that work: Refinances;
payment deductions; repayment plans; short sales; and others.
Most importantly, 60 percent of these customers improved their
delinquency status and averted foreclosure.
Mr. Chairman, and members of the committee, we want to
thank you for your help in encouraging constituents to contact
their servicers. Your efforts have played a critical role in
our ability to assist more consumers in trouble.
In addition, your leadership has resulted in the Housing
and Economic Recovery Act of 2008. This crucial legislation
will help return stability to the mortgage markets. This
measure, coupled with the Federal Reserve's new HOEPA rule,
will ensure the continued availability of responsible,
traditional mortgage products across the credit spectrum.
Since we cannot arbitrarily erase a debt for consumers that
they simply cannot afford, we also ask for your continued work
in developing policies that ensure the growth of responsible
homeownership versus speculative housing investments.
In closing, Wells Fargo is firmly committed to continuing
to lead the industry in advocating and conducting fair and
responsible lending and servicing.
Mr. Chairman, thank you again. It would be my pleasure to
answer questions.
[The prepared statement of Ms. Coffin can be found on page
65 of the appendix.]
The Chairman. Next, Faith Schwartz, who has been laboring
on this issue for some time as the executive director of the
HOPE NOW Alliance.
STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW
ALLIANCE
Ms. Schwartz. Chairman Frank, committee members, thank you
for the opportunity to testify today. HOPE NOW is an
unprecedented, broad-based, private-industry collaboration
among housing counselors, lenders, investors, and mortgage
participants that is achieving real results. We have 26
servicers representing over 90 percent of the subprime market
and over 70 percent of the prime market; and we have all HUD-
approved intermediary counselors also as members of the HOPE
NOW Alliance. Since last fall, we have been working
aggressively to address the housing issues, and the goal of
HOPE NOW is to keep more people in their homes.
The result of these efforts culminated in the recently
announced servicer guidelines. The first part of those
guidelines is around performance measures and accountability.
One of the most important components of the guidelines is
that HOPE NOW servicers are committing to timelines to respond
to homeowners and third-party housing counselors. These
timelines represent a powerful commitment from servicers, and I
will read them, as follows:
The servicers will respond to homeowners who have requested
loan workout requests within 5 days;
The servicers will send homeowners an outline of key
elements of the loss mitigation request to valuation process.
The foreclosure prevention timeline and sample letters are
submitted in my written testimony;
Servicers will status the homeowners every 30 days;
Servicers will make homeowners' affordability central to
loss mitigation; and
Servicers will communicate with homeowners an approval or
denial within 45 days.
HOPE NOW servicers have agreed to adopt these guidelines
within 60 days of release, which was June 17th.
Also, we address subordination of second liens. In
accordance with investor guidelines, HOPE NOW servicers
servicing second liens should resubordinate their loans with
respect to an existing first lien where the second lien-
holder's position is not worsened as a result of a refinance or
modification. This is to ensure that no homeowner loses the
opportunity to keep his or her home when they experience
hardship, when they submit information to stay in their home,
and then they can afford their home.
The third area of the guidelines is around solutions for
preventing foreclosures. HOPE NOW servicers are committing to
assist homeowners through various foreclosure prevention
options consistent with investor guidelines or approvals.
Details of all relevant and available foreclosure options are
included in these guidelines. This transparency around
foreclosure prevention options is critical for homeowners,
servicers, and third parties for understanding all options that
are available.
Fourth, there is a commitment to reporting. HOPE NOW
servicers agree to track and report performance to gauge
industry progress towards reducing foreclosure and increasing
options for distressed homeowners. From July 2007, through May
2008, nearly 1.7 million homeowners avoided foreclosure through
loan workouts. Mortgage servicers helped approximately 170,000
homeowners in May 2008 alone.
Subprime modification workouts have increased
significantly, as they now represent over half of all subprime
workouts. In July, that same statistic reported by the same
servicers was 18 percent. Reporting on our progress is
critical, and we will continue to keep you abreast of these
efforts, including more loan level reporting.
Fifth, the communication and outreach is an important
component of these guidelines. Reaching homeowners in distress,
servicers commit to early contact of subprime ARM borrowers at
a minimum of 120 days prior to the ARM reset. Servicers have
agreed to a comprehensive, nationwide outreach-letter campaign
for all noncontact borrowers who are 60 days or more
delinquent.
Servicers have a commitment to have 800 numbers, faxes, and
e-mails for all housing counselors so they have better
communications with the housing counselors, so there is better
response.
Sixth, they support the local homeownership preservation
workshops. These workshops put at-risk homeowners directly in
contact with a servicer and housing counselors. In 120 days, we
have partnered on 14 different events, reached over 5,700
borrowers.
This weekend, we are hosting events in New Jersey where
Senator Menendez will join HOPE NOW and NeighborWorks America.
In August, we are holding several events in Massachusetts and
Florida.
I do want to thank you, Chairman Frank, for agreeing to
participate in our event at the Gillette Stadium in Boston on
August 12th.
The Chairman. Excuse me. In Foxboro.
Ms. Schwartz. My apologizes. I wrote it down wrong.
The Federal Reserve Bank of Boston and NeighborWorks
America are working with us on that, and we are very thankful.
Due to servicers and counselors being present at these
events, many borrowers are offered solutions on the spot. The
reactions of homeowners who have attended these events are
overwhelmingly positive. We have hundreds and hundreds of
surveys that we have taken, and we look forward to reaching
even more homeowners.
Some survey results from the homeowners are as follows:
``It gave me hope that I will survive;'' ``Without your help,
we would have lost our home.''
Reaching noncontact borrowers remains a significant
challenge. For example, our nationwide HOPE NOW letter campaign
has mailed 1.5 million letters under the HOPE NOW letterhead,
since November, to borrowers who have not answered those 17
attempts to reach them from a servicer shop; and 20 percent of
those borrowers do respond to those letters. That does mean
hundreds of thousands of borrowers are still very much at risk
of foreclosure unless they talk to their servicers or a third-
party housing counselor.
We ask this committee and all policymakers to encourage
their constituents to respond to these letters by contacting
their servicer, calling the homeowner HOPE hotline, 888-995-
HOPE, or contacting any HUD-approved counseling agency. To
ensure the free, nonprofit counseling will be available for
homeowners in need, HOPE NOW is also committed to pay a fee for
foreclosure-prevention counseling.
In conclusion, this is a serious and a severely committed
effort, and it will continue until the problems in the housing
mortgage market abate. It is neither a silver bullet nor a
magic solution, but this effort will continue to complement the
efforts of legislators and regulators as they work through the
housing issues. We will also continue to be responsive to you
and to offer continuous improvement.
Thank you for inviting HOPE NOW to participate. I am happy
to answer your questions.
[The prepared statement of Ms. Schwartz can be found on
page 107 of the appendix.]
The Chairman. Next, we will hear from Julia Gordon.
Let me say that all of the entities are representatives of
entities that we have worked with closely and upon whose
judgment we have relied to a considerable extent; and
particularly through the work of our two colleagues from North
Carolina, Mr. Watt and Mr. Miller, the Center for Responsible
Lending has been a major source of information for us.
So Julia Gordon from the Center for Responsible Lending.
STATEMENT OF JULIA GORDON, POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Good morning, Chairman Frank, and members of
the committee, and thank you for the very kind introduction.
Please let me start by congratulating you and the other
members of the committee on the passage of H.R. 3221. You have
put in an extraordinary amount of work, and I believe that
homeowners and the economy will be the better for it. But by
calling today's hearing, you are recognizing that there is
still a lot more work to do done, and I thank you for that.
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, an organization which makes
responsible, fixed rate home mortgage loans available to people
with blemished or nontraditional credit.
My core message here today is that if we keep doing the
same thing, we can't expect a different result. Voluntary
efforts so far have not ramped up at a rate anywhere close to
catching up with, let alone getting ahead of the foreclosure
rate. So far, many of the voluntary efforts have consisted
either of temporary workouts or modifications that just tack
some arrearages and fees onto the end of the loan term.
It concerns me that so many of last year's modifications
have already redefaulted. That is not a very good sign.
I want to flag one other concern about the loan
modification process that hasn't been mentioned yet this
morning, which is the practice of many of the major servicers
to refuse to provide forbearances or loan modifications unless
homeowners sign waivers giving up their claims related to all
illegal acts by the creditor, including illegal acts that have
not yet been committed, but may be committed in the future.
Sometimes the homeowners are even forced to waive State law
claims that the State itself has deemed unwaivable.
In all cases, these waivers mean that if the loan
modification turns out to be unaffordable, the homeowners are
unable to pursue the legal defenses to foreclosure that they
otherwise would have had.
I welcome Ms. Schwartz's new initiatives discussed today,
and I hope that one of the things that the servicers
participating in HOPE NOW can agree to do is to stop these
waivers.
To help more families stay in their homes, we support
several pending legislative initiatives that have already been
discussed. First, of course, is H.R. 5679, the Foreclosure
Prevention and Sound Mortgage Servicing Act of 2008, introduced
by Chairwoman Waters, which requires servicers to pursue loss
mitigation strategies before initiating foreclosure, but
without dictating any particular result or outcome. Servicers
who handle FHA and VA loans already work under this
requirement. All we are asking is that it be extended to all
servicers.
Through our work at Self-Help, where we specifically focus
on a very vulnerable customer population with minimal
resources, we know that if given a fair, affordable solution,
homeowners will make every effort to hold on to their homes.
This bill also addresses the problems I have noted
regarding waivers. It also addresses the issue of data
reporting, and while again we very much welcome HOPE NOW's data
reporting, in order for it to be very useful, particularly to
an organization like ours that does very high-level data
analysis, we really need loan level data reporting, and we need
information on demographic characteristics. HMDA doesn't give
us all that information that we need, and to plan for
vulnerable populations, whether it is minority borrowers or one
population that particularly concerns me, that we have very
little information about, is the elderly. We really need better
data on that.
We also support the Home Retention and Economic
Stabilization Act of 2008, H.R. 6076, introduced by
Representative Matsui. This plan enables homeowners to defer
foreclosure sales as long as they continue to pay a reasonable
monthly mortgage payment. Essentially, it provides a time-out,
much like the time-out that Chairman Frank has suggested in the
past day to allow servicers to catch up with their backlogs and
allow the new FHA program to be implemented. Again, although
the new legislation is effective on August 1st, the estimate I
have heard from industry is that it will take at least 4 to 6
months to really ramp up that effort.
This legislation actually does something to help a problem
that some folks have mentioned here today, which is homeowners
who do not reply to inquiries from their servicers. Under this
legislation, if homeowners avail themselves of the deferment,
they are under an obligation to respond to reasonable inquiries
from their servicer. The homeowner is also under an obligation
to maintain the property, which is another problem we have seen
in homes where the homeowners are behind.
Finally, the Center for Responsible Lending strongly
supports H.R. 3609, the Emergency Home Ownership and Mortgage
Equity Protection Act. In our view, court-supervised loan
modifications are a necessary complement to any voluntary
efforts, and in many cases will provide the only available
solutions to some of the challenges faced.
Once again, I want to thank you for focusing on this
national crisis and for the corrective steps you have already
taken. It is ironic that it was so much easier for families to
get into loans they couldn't afford than it is for them to get
a modification that they can afford. But I believe it is within
our power to change that situation. We urge you to implement
these additional commonsense solutions to break the downward
spiral of losses, help put a floor under market declines, and
restore stability and liquidity to the housing and mortgage
markets.
I look forward to your questions.
[The prepared statement of Ms. Gordon can be found on page
69 of the appendix.]
The Chairman. I am going to do 10-minute rounds. I think we
will be able to do that.
Let me say, first, to the people who came, I appreciate
your coming, but there is this disconnect. As I listen to the
testimony from the financial institutions and HOPE NOW, if that
is all I knew, I would wonder what we are all doing here on a
Friday morning when we ordinarily wouldn't be, because it
sounds better than it is.
I don't think anybody is being deceptive, but here is the
problem. Inevitably, you are dealing with the successes. It is
kind of the flip side of what they say about police officers,
who have to resist having a negative view of humanity because
they only see people when they are at their worst.
You are dealing with the successes. There are a great deal
of problems out there. I understand you know the, but there
needs to be a sense of urgency. Yes, I am glad you are doing
what you are doing, but please don't take any comfort from it
because we have problems.
I will tell you particularly, Ms. Coffin, I have heard
specifically, as I told you, complaints about Wells Fargo. I
was in Boston about a month ago, in the City, in the south end
of Boston at Union Methodist Church, a center of activity for a
long time; and they say we are having problems with Wells
Fargo. Others have raised that. So I just want to begin with
that.
Secondly, I just want to say this with regard to further
legislation. I can pretty much guarantee you that if things
don't--if the legislation we pass doesn't have a good impact,
the bill that Ms. Waters has sponsored will be the bottom, and
we will go from there. We will be marking that up early next
year, and we will maybe be doing more because I have concerns
about the whole servicer industry.
Let me begin with this to those who are familiar with it:
Do the servicers have, under the existing arrangement they have
with the investors, the legal authority and the assurance that
they have legal authority to take full advantage of the bill we
passed?
In other words, there was a reference to the fact that 71
percent of the homeowners got interest rate modifications. It
is clear to many of us that interest rate modifications alone
aren't going to solve the problem. We need reductions in
principal. We have given inducements to reduce the principal.
And let me ask everybody, there were two suggestions, we
have heard two points that have been made where there are
obstacles where the loans have been securitized. The question
is whether or not the servicers, who are separate from the
beneficial owners, are constrained from reducing the principal
because of fear that they will get sued by the owners and don't
have the authority.
With regard to loans held in portfolios--and our colleague
from North Carolina, Mr. Miller, was mentioning this because of
an experience he had with a lawsuit--are there regulatory
constraints? That is, is it the case that if you are a
financial institution, a bank, and you hold these in your
portfolio and you write them down, are the consequences of that
then such, in terms of raising capital, etc., difficult? That
is what I want.
Let's begin with the question of the investors, the
servicers-investor relationship. Do servicers have sufficient
authority to take advantage of what we have given them in the
bill; that is, if I am the servicer, we all say, oh,
foreclosure is not a good idea, and if it can be avoided, it
can be avoided.
Do the servicers have enough legal authority to take full
advantage of the incentives we have given them rather than to
foreclose?
Ms. Coffin.
Ms. Coffin. Thank you, Chairman Frank. I will start with,
absolutely.
For the last 18 months that we have been working through
this crisis, we have not just stood by what we interpreted in
those contracts. We have been working daily, weekly, and
monthly with Fannie, Freddie--
The Chairman. Let me ask you specifically. Have you reduced
the principal?
Ms. Coffin. Yes, we have.
The Chairman. You are confident that if you do that on a
reasonable economic analysis and they would be better off in
foreclosure, there is no obstacle?
Ms. Coffin. Absolutely.
The Chairman. Let me ask Bank of America.
Mr. Gross. I am in agreement with that position, Chairman
Frank. We believe that the contracts that we have with
investors require that the option, the loss mitigation option
that we choose, would present the least loss to that investor.
The Chairman. You both would anticipate being able to do
more of this because of the bill and not be challenged by the
investors; is that correct?
Ms. Coffin. Correct, especially in those areas where we
have already been given delegated authority because of the
decline in the housing market.
The Chairman. Are there areas where you are the servicer
and don't have delegated authority?
Ms. Coffin. We work in some of those areas, yes.
But there are certainly ones--
The Chairman. I understand that.
From whom have you not gotten the delegated authority? From
the investors?
Ms. Coffin. It is not whom, it is where--the areas of the
United States. Obviously, everyone is aware of certain areas
where they have just taken a delegated authority down so that
we know where the declining housing market is, and we can react
faster.
The Chairman. Is this a legal concept, delegated authority?
Ms. Coffin. No. It is making sure we understand the
particulars of that--
The Chairman. So if it is within your power to do it, do
you think it should be done?
Mr. Watt. Would the chairman yield for clarification?
The Chairman. Yes.
Mr. Watt. Mr. Gross said that you have the authority to do
this if it is the least--if it is going to generate the least
amount of loss, or some variation of that.
Mr. Gross. That is correct, sir.
Mr. Watt. What kind of documentation is a servicer required
to provide? That seems to me to create a whole gray area there.
I mean, if you have to generate reams and reams of paper to
generate that kind of documentation, that could be a never-
ending battle.
Mr. Gross. Not really, sir.
The challenge that we have there and the question before us
with homeowners is generally to create a monthly payment that
is affordable for them. That is the basic premise, that
together we can create a monthly payment that will allow them
to sustain homeownership.
Mr. Watt. But does the servicer have to provide some kind
of documentation that this is the best available; I mean, that
this is going to generate for a lender or somebody on up the
line the least amount of loss?
To whom do you have to document that?
Mr. Gross. That would be to the trustee and to the security
holders.
Mr. Watt. What kind of documentation is that?
Mr. Gross. They are not going to come and ask for this, but
the fact that they aren't asking for it does not relieve us of
the contractual responsibility.
If I could elaborate on that, if we have a choice between
creating an affordable payment via reducing the interest rate
for the borrower or reducing the principal balance, reducing
the interest rate will generally result in a lower loss to the
investor than reducing the principal balance.
They may end up with the same monthly payment, but for the
investor who owns these mortgages, the reduced interest rate is
the preferred option, and it is the one under accounting
principles and regulatory guidelines that results in the least
loss; and that is the option that we are contractually bound to
offer.
The Chairman. Well, then, that is a serious problem because
what we have found is that interest rate reductions haven't
worked. And the bill, of course, was aimed--and we thought,
frankly, Bank of America was interested in the ability to do
principal reductions. So going forward, the bill having been
passed, your institution had some input into that.
Do you anticipate that there will be more principal
reductions?
Mr. Gross. I absolutely do believe that there will be more
principal reductions. This is a program--the bill that has been
recently passed by the House opens up more refinancing
abilities.
The Chairman. Let me follow up.
You are saying that you would be obligated--if you could
get it to the point where the borrower could continue to pay by
interest rate reduction, you are obligated to do that. But if
interest rate reduction doesn't keep that borrower in his or
her home, then you are fully free to go to principal reduction?
Mr. Gross. Absolutely, sir.
The Chairman. Let me ask Ms. Schwartz.
You say you represent, or in HOPE NOW you have--I know you
are not their formal representative--servicers amounting to
over 90 percent of the subprime. Are there any servicers who
disagree with what we have just heard from Ms. Coffin and Mr.
Gross? Are there any servicers who tell you, oh, I'm sorry, I
have investors to worry about, and I can't reduce the
principal?
Ms. Schwartz. I haven't spent a lot of time on the new
legislation that has passed, but I have gotten informal
feedback, such as from the people on the panel, that this will
be very helpful and a useful tool.
The Chairman. Let me ask you to survey all of the servicers
and ask them the kinds of questions we have just asked now. In
fact, my staff will be glad to work with you, because you will
be helpful in getting from all the servicers the answer to that
question.
Let me just ask the ABA: Are there problems with loans held
in portfolio, and are you constrained by regulatory
consequences from writing down principal?
Mr. Barber. No.
The Chairman. That is the best answer I have gotten in 28
years: ``No.''
I am serious. I like that. I am glad to hear that for this
reason, because as you know, some people use that as, oh, we
can't do it because of this and that.
So we appreciate that. That is very helpful, and we will
work to make sure that is the case.
Mr. Kittle, from your standpoint?
Mr. Kittle. I can't speak directly for all of our members
because we have many--2,500 of them. But we congratulate you,
first of all, for passing this bill. We were in support of
that. We think our members are going to use this.
The Chairman. And you are not aware of regulatory
constraints against writing down the principal if, in fact,
that is what is economically justified?
Mr. Kittle. I am not aware, but I am going to check.
The Chairman. I would appreciate that.
Let me turn to the gentlewoman from California.
Ms. Waters. Thank you very much. There is so much here that
we need to understand. I thank all of you for being here today.
I will start with Mr. Gross. You have been with us before,
and I appreciate very much your attendance here again today.
Bank of America has acquired Countywide. Did you also
acquire the servicing part of Countywide? Is Countywide still
in existence, somehow servicing perhaps Bank of America's loans
or its own loans? What is the business acquisition here? What
happened?
Mr. Gross. As of July 1st, Bank of America acquired
Countywide Financial Corporation in its entirety, which
includes the servicing portfolio and all roles and
responsibilities that go with that.
There are still--the loans that Countywide has serviced in
its own name are still being serviced under the name of
Countywide until the transition plan is complete, at which
point the majority of the portfolio would then be serviced
under the name of Bank of America.
Ms. Waters. In essence, Countywide is servicing its loans
with the same personnel that they used prior to the
acquisition, at this time; is that correct?
Mr. Gross. That is correct.
Ms. Waters. Who trains the servicers?
Mr. Gross. The Home Retention Division and Loan Servicing
Division for Countywide, now Bank of America, has an extensive
training department contained within it that works regularly
with insurance companies and all of the major investors to make
sure that our practices are at or exceeding industry standards.
Ms. Waters. Let me understand. With Bank of America, one of
your clients that is in trouble, who anticipates that he or she
will not be able to make their mortgage, would have an
opportunity to call Bank of America and tell them they have
problems, can they get some help, do they understand?
Mr. Gross. There is an established escalation process.
Ms. Waters. But you have a loss mitigation department that
this person would go to or call to be connected to talk about
the--that they are going to be late with their payment, they
have some problems, they don't have the income. That is the
first step; is that right?
Mr. Gross. That is correct.
Ms. Waters. To whom do they speak? Do they speak to the
same person who would be considered a servicer, who could do a
loan workout if they got into worse problems, or is this a
different department and person?
Mr. Gross. They would be talking with a home retention
expert who, if they say, this is a long-term problem and I need
help, that person is trained to help them with that problem.
Ms. Waters. Is this person the same person who could
eventually be in the position of doing a loan modification in
this loss mitigation department?
Mr. Gross. In most cases, it would not be.
Ms. Waters. Why don't you just tell us how it works. I
don't want to have to drag it out of you.
Mr. Gross. Once the customer calls into our home retention
area, they would speak with an initial staff member who would
then be able to tell them what options are available. We would
gather the financial information from the homeowner, and based
upon the particular needs that they have, that staff member is
authorized to make what we would call a ``contingent offer.''
Ms. Waters. What is that staff member called? What is their
title?
Mr. Gross. I am sorry; I don't know the exact title of that
person.
Ms. Waters. Okay.
Mr. Gross. But they are authorized to make what we would
call a ``contingent offer'' of a workout that, based upon,
again, the financial circumstances surrounding that homeowner's
issues and provided that the homeowner provides us with minimal
documentation that supports what they have told us, then that
loan would--that case would then be transferred to a
fulfillment area in our HOPE NOW department that would close
that workout for us.
Ms. Waters. Okay. That staff person who does not have a
title, who would be involved in helping to determine whether it
goes to your fulfillment area, could be offshore; is that
right?
Mr. Gross. No.
Ms. Waters. Do you have any loan mitigation operations
offshore?
Mr. Gross. Yes, we do.
Ms. Waters. Tell me what they do.
Mr. Gross. The people offshore, those who are telephone-
based, would handle more customer service-oriented calls on an
overflow basis when our stateside call centers need assistance,
to reduce hold times for the homeowner.
Ms. Waters. So this customer who calls, who anticipates
that they are going to get in trouble, but they are not yet at
the point of having a foreclosure, they could be talking to
someone in your loss mitigation department that is offshore.
Mr. Gross. They could be, and they would be. And once we
got to the point that you are describing--
Ms. Waters. Describe your offshore operation to me. Who may
we be talking to? Somebody in India?
Mr. Gross. Yes.
Ms. Waters. What do they do when Ms. Jones in America calls
about her house in Detroit to this person in India? What do
they do for them?
Mr. Gross. The vast majority of calls that they would
receive would be a homeowner who would be calling and saying,
my payment was due on July 1st and I will be sending it to you
on July 18th. We would record that information, and that would
be the end of the call.
For those people who have more complicated transactions
than what I just described, that call would be transferred back
to a stateside representative in the home retention area.
Ms. Waters. So this person that is offshore, could they
determine whether or not this person has to pay late fees?
Mr. Gross. Yes.
Ms. Waters. So the person offshore would say, okay, Ms.
Jones, your payment is going to be late, but that's going to
cost you a late fee.
Mr. Gross. They would make the homeowner aware of whatever
late fee was associated.
Ms. Waters. If Ms. Jones says, I can't pay it for 45 days,
is this person offshore authorized to say that is okay, or do
they have to transfer it to somebody else?
Mr. Gross. If you are saying the monthly payment can't be
paid for 45 days, that phone call would then be transferred to
a stateside representative.
Ms. Waters. Okay. This stateside representative then would
do what?
Mr. Gross. They would gather financial information from the
homeowner as far as income goes. We would get their
indebtedness and necessary information, and then we would be
looking at it very quickly to determine if this is a short-term
problem or a long-term issue. Is this a case of unemployment,
medical issues, divorce; what is the underlying cause for the
45-day delay?
Ms. Waters. If this is a person who works every day, they
have an income, but they are in a loan that is a little bit
more than they can afford, is this person now in a position
where they can talk about, or be offered, a workout or a
modification?
Mr. Gross. Yes, they are. That person who is working with
them would recognize the fact that the monthly payment that we
are talking about is not sustainable. That would be supported
by the income and expense information that we have now gathered
from the homeowner, and we could make, based upon that
information, a contingent offer of a modification to the
homeowner that would then be supported by the documentation.
Ms. Waters. Does the possibility of a modification include
more than one way by which this person could retain their home?
For example, you talked about reduction in interest rates.
Mr. Frank talked about reduction in principal. Could both
things happen?
Mr. Gross. We would first be looking at the modification of
the interest rate because, as I earlier stated, that results in
the least loss to the holders of these mortgages. If that does
not, in fact, solve the problem, then we would absolutely
consider the reduction in principal balance.
Ms. Waters. Okay. As I understand it, there are some
affordability standards that are used to judge whether a loan
workout, be it a repayment plan or loan modification, would be
affordable and sustainable for the bar--and I guess this
happens with VA and FHA loans.
Do you have an affordability standard that your servicers
work by?
Mr. Gross. Yes, and it does vary in some cases by investor.
You have just mentioned two. FHA and VA have their standards.
Fannie Mae and Freddie Mac have their standards.
You would find that the investors for whom we service, that
are not included in those groups, our affordability standards
are very close to, if not the same as, those others.
Ms. Waters. But investor standards could be different?
Mr. Gross. The Fannie Mae and Freddie Mac standards, along
with FHA and VA, are all looking to ensure that at the end of
the month, there is net unencumbered income available for the
household to take care of emergencies. That is the same thing
that we use on all of our loans because we want to ensure that
whatever workout plan we use, it is sustainable.
Ms. Waters. We need to take a look at that.
You took over Countywide. Countywide probably has the
largest number of foreclosures of any lender in this country.
Bank of America, you have your own foreclosures prior to
the takeover, having merged all of this. How much did you
expand your servicing divisions in order to accommodate this
huge foreclosure problem that you have?
Mr. Gross. I should clarify that the two servicing
divisions have not yet been combined. That is part of the
transition process. As I am sure you can imagine, when you are
combining two rather massive corporations that now total
approximately 250,000 employees, this is not a task that is
easily accomplished--
Ms. Waters. So they have not been combined, but certainly
Bank of America feels a real sense of responsibility--
Mr. Gross. We do.
Ms. Waters. --to deal with the Countywide problem?
Mr. Gross. Yes.
Ms. Waters. So if the servicers have not been expanded, how
are you doing all of this wonderful work in doing workouts and
modifications?
Mr. Gross. The staff within the Countywide servicing area
that is devoted to home retention continues to grow on a
monthly basis and will continue to grow on a monthly basis as
more staff is needed, which is anticipated to deal with these
issues and as I mentioned in my testimony.
Ms. Waters. How much has it grown in the last 3 months?
Mr. Gross. I believe it is in the neighborhood of 500 staff
members--from 4,200 to about 4,700.
Ms. Waters. Have you determined whether or not this is
sufficient to deal with this awesome problem that you have
acquired?
Mr. Gross. The staffing that we currently have, we believe
is sufficient to handle the volume of work that is before us
today.
I would also state that we have very sophisticated models
that we use in our staffing analysis to ensure that the
staffing that we will need in October, November, and December
will be in place at the time that their services are needed.
Ms. Waters. Let me read something to you from today's
paper:
``U.S. foreclosure filings more than doubled in the second
quarter from a year earlier as failing home prices left
borrowers owing more on mortgages than their properties were
worth. One in every 171 households was foreclosed on, received
a default notice, or was warned of a pending auction. That was
an increase of 121 percent from a year earlier, and 14 percent
from the first quarter.
``RealtyTrac, Inc., said today in a statement almost
740,000 properties were in some stage of foreclosure, the most
since the Irvine, California-based data company began reporting
in January, 2005.''
I won't continue. The chairman has been extremely generous.
I would have liked to explore with HOPE NOW--
The Chairman. Let me go to Mr. Watt, and then we can come
back.
Ms. Waters. Thank you very much, Mr. Chairman.
Mr. Watt. Thank you, Mr. Chairman. I had a whole series of
questions, but I got caught up in the question that the
chairman asked, and I am still not absolutely clear what
happens in this scenario, Mr. Gross and Ms. Coffin.
You are a servicer. You have one entity, the finance
people. Whomever, packagers, whomever owns the mortgage, they
would benefit more from not writing down the interest or
would--yes, would benefit more from writing down--not writing
down the interest--or not writing down the principal. I'm
sorry.
Mr. Gross. Thank you.
Mr. Watt. And you have somebody else who would benefit more
from writing down the principal. How do you resolve that
conflict, I guess. You have a contractual imperative to do what
is in the interest of both of those people, or just one of
them?
Mr. Gross. To start with, I think that the first obligation
that we have and try to support is to try to keep the homeowner
in their home. That will result in the best return and the
least loss to all parties who are involved in this mortgage
transaction.
Obviously, the homeowner is--
Mr. Watt. That actually poses my question even clearer
then.
Suppose the homeowner is most likely to be retained in
their home with a principal write-down, yet the investor is
most likely, they think, to get the best return if you don't
write down the principal; if you write down the interest.
How do you resolve that conflict? I thought I heard you say
you had a contractual obligation.
Mr. Gross. I do.
Mr. Watt. To the servicer?
Mr. Gross. To the investors.
Mr. Watt. I am sorry, servicer not investor.
How do you resolve that conflict? That is what I am trying
to figure out.
Mr. Gross. Generally speaking, the homeowner's primary
issue is how much is the monthly payment that I have to pay,
and is that monthly payment sustainable. If the monthly payment
is not sustainable, I can reduce that monthly payment in one of
two methods, or possibly a combination of the two.
One, I can reduce the interest rate, which would reduce the
monthly payment. If that does not resolve the issue and arrive
at a sustainable monthly payment, then the next option to be
considered would be extending the term of the loan possibly
from 30 to 40 years, which would further reduce the monthly
payment. Then the last option that I have is reducing the
principal balance on the mortgage.
So it could be a combination of those, but I would
generally approach those in that hierarchy.
Mr. Watt. That is fair. That is honest. Even if it might be
in the long-term interest of the borrower to have the mortgage
amount written down, that is not going to be your first driving
force.
Your first driving force is to create a sustainable
payment.
Mr. Gross. That is correct.
Mr. Watt. That is what I heard you say. That is fine.
That is the same thing you would say, Ms. Coffin?
Ms. Coffin. Thank you, Congressman. I was going to add a
little more color to this. I don't think we should see it as an
either/or.
Mr. Watt. But, you know, in a lot of cases it is an either/
or, and that is the case I postulated to you, the long-term
best interest of the borrower is to write down the principal
balance on the loan, but the long-term best interest of the
investor is to keep the interest rate. I don't know how you
reconcile those things.
It's okay. You are saying your first obligation is to the
people who put up the money.
Ms. Coffin. No. I apologize. I misspoke. I didn't mean
either/or, investor or customer, I mean either/or rate or
principal reduction, meaning that whether it is rate, term,
principal reduction, all three, we have all of these tools
available to us. And as we reach each borrower, I think what
might help here are some examples.
Where I believe the principal reduction, and especially the
new bill that has been passed will help us is, take someone who
has extenuating debt, a first and a second mortgage, because
what you are going to see is that no matter how far we take the
term or the rate reduction, we could not get to the
affordability.
Mr. Watt. I am not cutting you off because I am not
interested in what you are saying, I am cutting you off because
I am going to run out of time.
The Chairman. Since he picked up from me and finished a
question, he has more time. We are not in a rush here.
Mr. Watt. There are a lot of internal decisions being made
by the servicer here that could have some really interesting
implications for the people who put up the money and the
borrower; and it seems to me these are some tough areas.
Let me extend what you all have said because one of the
concerns some of my colleagues have posed about this bill that
we passed out of the House--and we hope the Senate is going to
pass at some point in the foreseeable future--is that we are
going to end up with the worst loans being put into that
program.
Talk to me about whether that is true. Because it sounds
like, based on what you all have said, that might be the case.
Ms. Coffin. I could not classify this as a worst loan. What
we have already been doing, prior to the bill being passed, is,
we have been analytically looking at our portfolio of those
borrowers who are most likely going to be eligible for this.
We have many borrowers who are already in a position of 90
percent, but they cannot refinance today, and they don't have
affordability. And so principal reduction, we have to look at
the borrowers who are overextended and they need this principal
reduction, they need the rate, they need the term, they need
all the pieces of it. What is important is that willingness to
remain in the home, the affordability, and the refinance should
make it a good loan.
Mr. Watt. I might have mischaracterized when I said
``worst.'' I mean the most distressed borrower, the people who
are most likely to end up in this principal write-down
situation.
Would that be an accurate characterization?
Mr. Gross. I think a couple of things here. Number one, we
also have been looking carefully at our portfolio on a
preliminary basis trying to assess what portions of our
portfolios might be eligible for this program. Until the
oversight board publishes final regulations surrounding this,
which will truly give us the detailed underlying guidelines
that must be used in granting these refinance mortgages, we
won't be able to do a final assessment.
Mr. Watt. But you have some preliminary estimates?
Mr. Gross. I don't have those with me.
Ms. Coffin. Congressman, there is another point I think
that is an important part of the bill that was passed, and that
is your debt-to-income ratio that you have put into the bill.
That is going to protect you to make sure that there is a
reasonableness that these borrowers will be able to sustain the
payment.
Mr. Watt. I am less concerned about that than some of my
conservative colleagues, to be honest with you. I just wanted
to make sure that we have a record on it here. It is a concern
obviously, because we don't want the absolute most distressed;
we want this thing to work.
The Chairman. If the gentleman would yield, nothing in this
bill requires the FHA to take it. In fact, that was one of the
reasons that we rejected the auction mechanism, because of the
fear they might be overwhelmed.
So the FHA, in any case, retains complete authority to say
``no.''
Mr. Watt. Now, the transition period you mentioned, Mr.
Gross, the writing of these rules, I think that is something we
wrote in some 60-day requirement on? Or is that what the
industry was jumping up and down about needing a 60-day, at
least, transition period during which FHASecure would remain?
Tell me about that. Am I just missing the point here?
Mr. Gross. Number one, I apologize. I am not familiar with
what industry positions might have been. In terms of the
transition period here prior to the first of October, once the
board has published their final regulations it is our intent to
immediately take those final regulations and analyze our at-
risk portfolios. And any borrower who is in the foreclosure
process that we believe will be eligible for this refinance
program, we will be in touch with them immediately so that we
can use this as a very effective tool to stop that foreclosure
from happening.
Mr. Watt. Are you using FHASecure?
Mr. Gross. Yes, we are.
Mr. Watt. Is there some transition period for it?
Mr. Gross. FHASecure and this particular bill really, I
think, are geared toward two different populations. I think
that the bill that you have just recently passed is far more
encompassing than what FHASecure might have been. And
especially it was just very recently in the May, effective
July, timeframe that FHASecure was expanded. So I think that
they will remain both effective tools.
Mr. Watt. Even after October 1st?
Mr. Gross. I believe so.
Mr. Watt. Let me just get a show of hands quickly on two
issues so as not to belabor the point. There is a lot of
controversy about whether--well, I shouldn't say a lot of
controversy. I suspect there will be differences on this panel,
depending on the various perspectives of the panel, about
whether there is still an ongoing need for predatory lending
legislation after passage of this bill and the regulations.
Just show me who thinks there is still an ongoing need for
predatory lending legislation.
Seven. That is not bad. Mr. Barber, you are the only one
who didn't spring to the fore on that.
Mr. Barber. I guess my experience is such that I am not
dealing with those type of loans. I am really not very familiar
with the issue.
Mr. Watt. So that is not an expression that it is not
needed; it is an expression that you would rather not express
an opinion about that?
Mr. Barber. I would concur with that.
Mr. Watt. Okay. Ongoing need for servicer legislation. All
who believe that there needs to be some legislation, whether
Ms. Waters' bill or some other bill, related to servicers and
their obligations, all in favor, raise your right hand.
Now, on the other side of that is the like of a right-hand
then expression that it maybe is too early to say, or you are
unalterably opposed to service legislation? Mr. Kittle first.
Mr. Kittle. Yes, sir. We would like to see the HOEPA rules
work at this point before we have any further legislation.
Mr. Watt. So your jury is still out?
Mr. Kittle. Yes, sir, it is.
Mr. Watt. Okay. Mr. Barber.
Mr. Barber. I guess I would just say that the devil is in
the details, and we are very interested in working with the
committee on this issue.
Mr. Watt. Who else didn't express an opinion? There were
two others. You all don't have an opinion? Okay. All right. I
thank you.
The Chairman. Let me go to Ms. Speier, and then to Mr.
Miller.
Ms. Speier. Thank you, Mr. Chairman.
Our distinguished chairman at the outset made, I think, a
very important point. What we heard today is very reassuring,
but it is not consistent with what many of us are hearing in
the field.
So this is a question to you, Mr. Barber, as the
representative from the American Bankers Association. I think
in the near term that the ABA would be well intended if it
created an office of consumer services which Members of
Congress could contact if we were having issues with particular
constituents and their particular bank. We have done something
very similar in California with the Department of Managed
Health Care, where there is an office to which we can call, and
they will negotiate with the health plans around particular
questions that we have relative to constituents. Is that
something that you would consider doing?
Mr. Barber. It is not an issue that I am familiar with. It
sounds very reasonable, and I am sure that staff would have no
problem getting back with you on the issue.
Ms. Speier. Thank you. This question is to you, Mr. Barber,
as well as to everyone else, but particularly to you because
you made the point of saying that you didn't get engaged in
these risky loans and you did what we would expect most prudent
bankers to do: Make sure that the customer has the appropriate
income to be able to make the loan payments. And you also said
that you had lost market share because of it, and you are
trying now to build up that market share. So you did the right
thing and you lost, at least in the short term.
My question is, what do we do, and how do we go after the
bad actors who for all intents and purposes are walking right
now? Do you have any suggestions to the committee in that
regard?
Mr. Barber. I think in many cyclical financial businesses
you have to walk away when price or risk does not make sense.
And there are institutions that are aggressive and take other
stances. Most of those entities are now out of business.
Fundamentally, the subprime market was funded for many
years by FHA-type products. There was a tremendous boom in FHA.
A series of events took place, probably the most important of
which was somebody, a young person on Wall Street, made a model
that didn't make any sense, many investors bought these things,
and it blew up. Today that market share is being regained by
the FHA product, and institutions like myself and people,
others in the ABA, are using the FHA product to refinance
people and use that product for low-income folks who have
rather challenged credit scores. That is a great product for
those people. It is a fixed-rate product, and it is much more
appropriate.
Ms. Speier. I guess my question is somewhat different. I
was at a counseling program that was hosted by the Speaker of
the House a couple of months ago, and I was able to listen in
on a couple of counseling sessions and I was astonished by what
I saw--a woman making $2,000 a month holding a $500,000 loan.
Now, there was fraud associated with that application. Someone
should be held accountable for that, and yet we are not holding
anybody accountable except maybe the taxpayers of this country
in trying to fix this scenario.
So I guess I am asking you and others, do you have any
ideas? It looks like Ms. Coffin does.
Ms. Coffin. Yes. Regulate brokers. Let me answer the
question first. Because we have loans in our portfolio that we
did not originate, I see exactly what you have seen. And we
know some of the practices that were out there. Those practices
need to be regulated.
And, number two, some of them haven't just walked, we are
thankful, they are gone. They are out of business. Their model
was not sustainable. And as was mentioned down here, you have
to begin with responsible lending practices. That is where this
all begins, making sure the borrower knows what product they
are getting into, making sure they understand about the
payment. That is what has to be regulated.
Ms. Bowdler. I would agree. NCLA has actually done a lot of
work looking at the role of mortgage brokers and where that
system broke down, and they definitely need more enforcement
and accountability there. But that is not the only place where
the system broke down. Those brokers originated loans for
banks, and banks then approved those loans and took them in
with the documentation that they had.
All up and down, across-the-board, we are seeing that not
only did the underwriting standards become weakened, but the
enforcement standards at the State and the Federal levels just
completely broke down. In cases like fraud that you are
mentioning, a lot of those cases are done at the State level,
and either their authority has been undercut by positions that
the national regulators have taken, or their enforcement
bureaus are too small to go after all those cases, or the
remedies are too insignificant to make it worth it for the
borrower to pursue.
So as far as those folks who have gone out of business for
this, there are many, but this doesn't mean that they are not
going to come back. When the market rebounds, there is going to
be another bad product out there, another company targeting our
community trying to figure out how to make a buck off of them.
Ms. Speier. Mr. Kittle.
Mr. Kittle. Yes, ma'am. Thank you. I am so happy that this
bill passed, because for 10 years the Mortgage Bankers
Association has wanted FHA reform. That is part of the issue.
We are going to get that. We have been up here for the last 5
years asking for one national standard, one bill to fight
predatory lending. That would include language to preempt the
States, not 50 individual laws, but one that we could all
follow and all have to adhere to. We want the brokers not only
to be licensed, but we would like higher net worth requirements
for brokers, educational requirements, and a national registry
for all loan officers. By the way, both Bank of America and
Wells agree to do that.
So you put all this together, along with RESPA reform. Last
year, MBA gave to HUD a new HUD-1 settlement statement and a
new good faith estimate where every single line on both of
those matched.
You cannot have predatory lending until you lend, so it is
at the closing where it takes place. And if all the lines match
up perfectly between what is given at application and at
closing, it is much more difficult for rates, closing costs,
and other fees to be changed for the elderly, for Hispanics,
for minorities, and for African Americans.
We believe all these things combined can help fight this.
Ms. Speier. Thank you.
Mr. Gross, in acquiring Countrywide, they had a requirement
that they would have to waive all rights to claims in State and
Federal provisions that exist. And I think Ms. Gordon had
referenced that earlier, maybe Ms. Schwartz, on the waiver
provision that many are imposing. So the question I have is,
are you continuing with that waiver provision in dealing with
these customers?
Mr. Gross. I am not familiar with any waiver of a
borrower's or homeowner's legal rights that has ever been
associated with any workout transaction. The only waivers that
I have seen that have been used have been in specific
settlement of legal actions, where someone has brought a
lawsuit, and as part of the settlement action that there could
be a waiver. But I am not aware of any contractual waivers that
are required as part of any workout processes.
Ms. Gordon. I have a Countrywide waiver right here. I will
read it to you.
The Chairman. Let me ask, Mr. Gross, were you speaking for
only the Bank of America, or are you commenting on
Countrywide's practices before this, too?
Mr. Gross. Countrywide's as well. I am not aware of the
document.
The Chairman. Then, Ms. Gordon, please go ahead.
Ms. Gordon. I will try to read quickly. It is a little
long:
``In consideration for Countrywide entering into this
agreement, you agree to release and discharge Countrywide and
all of its investors, employers, and related companies from any
and all claims you have or may have against them concerning the
loan. Although California law provides that `a general release
does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the
release which if known by him must have materially affected his
settlement with the debtor' you agree to waive that provision
or any similar provision under any other State or Federal law,
so that this release shall include all and any claim whatsoever
of every nature concerning the loan, regardless of whether you
know about or suspect such claims, including but not limited to
claims arising under the Mortgage Disclosure Act, Electronic
Fund Transfer Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Housing Act and
Fair Debt Collection Practices Act. This release shall remain
effective even if this agreement terminates for any reason.''
And I also want to read you another line from an Option One
agreement we have which forces the homeowner to admit, ``The
arrearage is the borrower's full responsibility and was
produced solely by the actions or inactions of the borrower.''
Mr. Gross. I apologize to the committee. I was not aware of
this release form. I can assure you that it will be under
review by Bank of America very quickly. And I would assume that
we will be adopting more industry standard practices such as
what Fannie Mae or Freddie Mac might be using.
Ms. Speier. Thank you.
The Chairman. Let me just say, I am very glad the
gentlewoman asked that question. I had made a note of it. And I
appreciate the fact that you say it will be under review. I
hope you will convey to Mr. Bulus and others that it is my
expectation that it will soon be deeply underground, at least 6
feet, and that we won't hear of it again.
I thank the gentlewoman for raising the issue.
Ms. Speier. I have two last questions. We have heard this
morning that modifications haven't worked, at least in a
significant number of cases. So my question to you is, what are
you going to be doing differently to make sure that these
modifications do work?
Ms. Coffin. One of the things we have already been doing in
the last several months, as a matter of fact probably close to
a year, is what we call a trial mod. This originally began
called a special forbearance mod that HUD introduced, but we
have actually expanded it to all of our borrowers. And in the
trial mod, we look for the qualifications that will bring
affordability. And then once we achieve it, we just tell the
borrower: If you can make this payment for 3 months, we will
automatically mod your loan. Because we want to see first that
they actually can make the payment. And if they can, the loan
will be modified.
This has been very successful, and it actually helps us in
the back end of not seeing that redefault. Now, what we will
see is more redefault in the actual trial period, but we will
not see it on the back end. So then we are still working with
the borrower. So we come right back in and we begin the work
all over again to say, okay, we were not able to achieve it
during that trial mod. What are we missing here? Let's look at
your income and expenses again, and we rework it with the
borrower once again.
Mr. Gross. I would concur. I think our practices are almost
identical. I would also add that for the borrowers that
redefault within the first year of the modification, in many
cases this is not due to the fact that the modification was not
affordable at the time; it is due to the fact that life events
continue to occur even after the modification. And if
subsequent life events happen and a new default occurs, we will
start the practice all over again to find a sustainable payment
to help them stay in their home.
Ms. Bowdler. Could I comment on that really quick? That
hasn't necessarily been our experience of what we have seen on
the ground. And I can't say it is the loans that we have heard
from our counselors come from either one of your organizations.
But the short-term loans that were defaulting were more like
repayment plans or forbearance, which is a temporary fix. So,
by nature, it was just sort of kicking the obligation down the
road a little bit, and so it was very predictable that a lot of
those were going to default because they were not actual
modifications where they changed the terms of the loan, they
were just temporary forbearance and repayment plans.
One problem with that that we have started to see in the
counseling network is that once that temporary fix does not
work, and one caution I have about the trial, I don't know if
this is the case. But when the borrower goes back and says,
whatever deal you gave me didn't work, the response that they
are getting from the agent on a routine basis is, well, we
already gave you one modification. There is nothing I can do
for you now. You are not eligible a second time around.
The Chairman. Time is going to expire here, but let me just
say this: We have gotten some very good answers. The question
is practice. But what we are going to do, and the staff of the
full committee and the subcommittee are here, we are going to
be following up. And we will work with Ms. Schwartz, because
she has these particular servicers, and we are going to say,
look, this is what we were told. If this isn't true, then you
had better tell us.
So I think everybody here--I don't doubt anybody's
integrity here, but you don't always know what is going on out
in the field. But we intend to follow up by taking all of these
good answers that we have gotten and write to people and say,
please reaffirm for us that this is your practice.
The gentleman from North Carolina, and then the gentleman
from California.
Mr. Miller of North Carolina. Thank you, Mr. Chairman. I
apologize for waltzing into this hearing 2 hours into it
without having heard any of the testimony and then asking
questions.
The Chairman. I would say to the gentleman, I did raise the
issue that you and I had discussed about regulatory
constraints. I got an answer that, if you want to go further,
but that question that you and I had discussed--
Mr. Miller of North Carolina. Obviously, if redundancy were
a sin in politics, we would all be going to hell.
Twenty years ago during the savings and loan debacle, I was
a lawyer in practice in Raleigh, and I took a very modest
commercial litigation case, Re: Savings and Loan, in Iowa, that
arose out of the foreclosure of a mortgage that the savings and
loan had not originated but had purchased. I sent them a copy
of the complaint that I filed. It was a question, internally it
was a modest claim, internally a question of law that was a 50/
50 proposition because there really was no deciding case
directly on point. I called up, I had a settlement to offer
basically splitting the difference of the actual damages with
another commercial entity, a bank, which was $15,000. And the
guy I dealt with at the savings and loan in Iowa said that they
were carrying the lawsuit that I had filed on their books as a
$90,000 asset. My view was that $15,000 was $15,000 more than
they had. Their view was that if they took $15,000 for the
lawsuit to settle it, it would appear on their books as a
$75,000 loss. That made absolutely no economic sense. Sure
enough, a few months after--and I ultimately lost. Despite
great advocacy on behalf of the savings and loan, the position
that I had argued for lost in the court of appeals. It won at
the trial level and lost at the court of appeals. A few months
later, sure enough I got something from the Resolution Trust
Corporation telling me the savings and loan was not in
receivership and wanting me to fill out a lot of forms about
the case I had represented them on.
We have heard wildly different things about how much
modification is going on. We have heard from industry that they
are modifying like crazy, left and right, modifying all over
the place. And we have heard from consumer advocates that they
are hardly modifying at all.
The Washington Post this morning said that it varies
dramatically bank to bank. And we have also heard after the
failure of IndyMac Bank that there may be 150 banks that are in
danger of becoming insolvent. That made me wonder if
foreclosure, if foreclosure avoidance modification appears to
be obviously economically logical conduct, but a lot of lenders
aren't doing it. It possibly has to do with how they are
showing the mortgages on their books.
Can you tell me how mortgages are being shown on the books?
The mortgages that every lender knows has a reset coming in 3
or 4 months or has already had a reset and is going to increase
the monthly payment by 30 to 50 percent, which is apparently
pretty typical of the subprime loans of 2005 and 2006, how are
they being shown if there is some delinquency, some default,
some slowness in payments? How are they being shown if they are
modified?
Anyone can take that. Obviously those who are here with
lenders might be the ones who could answer that first.
Ms. Coffin. I heard lots of questions in there. The one
question was on subprime loans. Correct?
Mr. Miller of North Carolina. No. For purposes of
regulation, for solvency and the appearance of solvency before
the OTS, the OCC, FDIC, or whomever, how are mortgages being
shown on the books of financial institutions?
Ms. Coffin. That is a big question.
The Chairman. Let me--particularly what we need to know is,
does the fear or the reality that the regulator will force you
to raise more capital or otherwise constrain you if you write
the loan down if it is in your portfolio, is that a constraint
against making the kind of deals we are talking about?
Ms. Coffin. I am going to say this upfront. There are a lot
of accounting laws when you are holding loans in portfolio,
which means you own the loan. So one thing about Wells Fargo is
there is a very small portion of our portfolio that we actually
own the loan. Most of ours are sold into the securitized
market, Fannie, Freddie, FHA. We are the largest FHA holder of
loans. So there is a very small portion. And I am not an expert
at all in all the accounting laws that come with nonperforming
laws when you actually own the loan. But I know this upfront;
that in a large portfolio such as ours where you are going to
get the impact in the Nation, where so much is securitized.
No--I am going to answer the question as we did earlier. No, we
are not incented to foreclose. As a matter of fact, as a
servicer--and I don't want to go too deep in this. But if you
actually move to the foreclosure, it costs the servicer more
because we are advancing all of the funds throughout that
foreclosure process and it lasts 12 to 18 months. To modify a
loan, you are getting to a solution and get back to a paying
and a performing loan very quickly.
So I just want to make sure, does that make sense?
Mr. Miller of North Carolina. I would welcome hearing from
others. I expected to hear different answers from different
witnesses on this question.
Mr. Gross. I am not aware of any regulatory or accounting
constraints that would in any way disincent a servicer from
modifying a loan.
Mr. Barber. I would first say that, regarding a lawsuit,
carrying lawsuits on the books as assets sounds imprudent to
me. Regarding a loan--
Mr. Miller of North Carolina. And I think it proved to be.
Mr. Barber. So regarding a loan that we would own, that my
institution would own that is delinquent, say 120 days, and
let's say that the market value of the house is significantly
below what the loan balance is. In general, what GAAP
accounting would do is you would make a fair assessment of the
asset, that being the house, and you would discount that
somewhat. So it should be shown on the books after it moves
through the loan loss allowance accounts at 90 or 80 percent of
fair market value of the asset. So that is essentially my
understanding of GAAP accounting if the loan was on the books
as a whole loan.
Ms. Coffin. I don't think any of us are aware of any
regulator or capital loan requirements that keep us from loan
modifying.
Mr. Miller of North Carolina. Thank you.
The Chairman. The gentleman from California, Mr. Sherman.
Mr. Sherman. I will pick up where Mr. Miller left off.
There may be some ``see no evil'' accounting, where you keep
some loans on your books at a high level because you haven't
yet modified them. But whatever the accounting rules are, if
the owners of the loans don't tell the servicers about it, in
some cases that may be another department of Wells Fargo or
Bank of America. If these accounting rules skew things the
wrong way but don't influence the behavior of servicers, then
they shouldn't be a problem. And has every servicer said that
as far as you know you have not been told by the owners of the
loans, which could again be another department of your own
bank, hey, don't work out a deal because that won't be so good
for our balance sheet?
Hopefully, I could just get some ``no's'' from all those
involved in servicing it.
Mr. Gross. No, we have not.
Ms. Coffin. No, we have not.
Mr. Sherman. Okay. Now, Congress has provided for $300
billion worth of FHA guaranteed loans. That is the goal, to use
that. I don't think anybody claims that is too big, far in
excess of what is needed to handle the problem. Without
additional pressure from Congress, are we on target to see
writedowns of an FHA guarantee of $300 billion worth of loans?
And I realize you guys work on the individual trees rather than
the whole forest, but can you give me some indication? Are we
going to use this whole program?
Ms. Coffin. Yes, we are going to use the program. And even
prior to it being approved yesterday, we have been analyzing,
working through our portfolio, trying to find the borrowers who
look like they would qualify for the program.
The one step in the process that yet has to happen is we
have to actually speak to the borrowers, because what is
required is a new debt-to-income ratio to understand all their
other debts to make sure they totally qualify for the program.
Mr. Sherman. Now, Wells Fargo services what percentage of
the mortgages in the country?
Ms. Coffin. One out of every eight.
Mr. Sherman. And do you think you will be using one out of
every eight of those $300 billion? Do you have any guess? I
know you are going to use the program. Any guess as to how
much?
Ms. Coffin. No, I do not have the number with me today. And
I don't know that you can compare that, because what you have
to see is the mix of your portfolio. Because if a portfolio is
100 percent prime, that is going to be different than a
portfolio that has subprime and FHA in it.
Mr. Sherman. In any case, do you expect this program to
help tens of thousands of borrowers that you service, or
hundreds of thousands?
Ms. Coffin. I don't know that I can give you a number
today.
Mr. Sherman. Let's see if Bank of America can be any more
specific.
Mr. Gross. As I stated earlier, until the oversight board
publishes its final rules, we will be unable to get you a
specific answer as to how many loans in our portfolio we
believe are eligible. But we do believe, my gut says that there
are going to be tens of thousands of loans in our portfolio
that should be eligible for refinance under this program.
Mr. Sherman. And do you plan to take full advantage of the
program?
Mr. Gross. Yes. We will be fully participating in the
program.
Mr. Sherman. Do we have any other servicers? I know we have
a representative of the Bankers Association, but I don't know
if Mr. Kittle can speak for his members.
Mr. Kittle. Congressman, I don't think I can speak
specifically. I only know that we supported the bill, and we
expect our members to look at it and to ramp it up as quickly
as possible.
Mr. Sherman. Next issue: The politically correct view is
that all of the fraud was done by mortgage brokers, some bad
banks or lenders, and that every homeowner is as pure as the
white driven snow. These are, however, people who paid a little
bit more in interest in order to have the honor of not having
to provide a W-2 form or a paycheck stub. And when somebody
agrees to pay hundreds of dollars a month more in order to not
provide you with a paycheck stub, it is probably because they
don't want to give you the paycheck stub.
What percentage of the loans made last year were low doc or
no doc? Do any of you have that kind of broad view?
Ms. Coffin. I can only speak to our own portfolio, and that
was none.
Mr. Sherman. You have no low doc or no doc loans?
Ms. Coffin. You said in the last year. We actually came out
of our subprime. We removed ourselves from the subprime
markets.
Mr. Sherman. And when you say subprime, you got out of the
Alt-A market as well?
Ms. Coffin. We have some Alt-A. But one thing we never did,
ever, not even just in the last year, was ever no doc or low
doc below a 620 FICO score.
Mr. Sherman. Okay. Bank of America, tell me to the extent
you can speak for the Countrywide portfolio. I realize you just
got your hands on it recently, and congratulations.
Mr. Gross. Thank you. I will have to qualify my answer a
little bit. I am here. My primary focus is on home retention
loan servicing issues. I do know that in the third quarter of
2007, that low doc, no doc underwriting standards and programs
were very severely curtailed, all but eliminated, because,
quite frankly, there was no investors who wanted to buy them.
But as far as the actual dollar volumes or units, I do not have
that information.
Mr. Sherman. Let me now ask a district question.
Countrywide has a lot of employees in the Calabasas area. Are
they going to keep--are they going to have a job? And are you
planning to move servicing and other office activities from the
Calabasas area?
Mr. Gross. There are currently no plans to move any of the
facilities or functions that are in California out of State.
Mr. Sherman. Are there any plans to move them from one part
of California, particularly the most important part, to some
other?
Mr. Gross. No. We have very substantial infrastructure in
Calabasas, West Lake, Thousand Oaks, Simi Valley, and those
facilities are there to stay.
Mr. Sherman. Now, this whole effort is going to
dramatically increase the amount of work to be done by
servicers. I mean, it is one thing to hire some people in the
good times to just cash the check; it is another thing to be
reanalyzing these loans. That is a tremendous amount of work to
deal with problem loans and then to implement this law that
Congress has just passed.
Are you planning to add employment in order--you are going
to need people to do all this. Will this work be done in the
Calabasas area, the greater Calabasas area?
Mr. Gross. Our staff has increased in the last year from
about 2,300 or 2,400 to about 4,700 people. And, yes, the staff
in Simi Valley, which is the location that is focused on
servicing activities, has increased as well.
Ms. Gordon. Can I get back to your question about low doc
loans?
Mr. Sherman. In just a second. Because the chairman didn't
realize it, but for me that bill was a jobs bill. Actually, not
the main reason. But let me get to the witness who just asked.
Ms. Gordon. First of all, I don't have the numbers right
here, but I have them right on my desk at home and can get them
to you.
In the second half of last year while subprime origination
volume is way down, percentage of no doc loans is still I think
somewhere in the 20s or 30s, and there may be staffers up there
who have it at their fingertips. But the other--
The Chairman. But you don't impute that to Wells Fargo.
Ms. Gordon. No. No. That is from inside B&C--
The Chairman. I didn't want that to be a contradiction.
That is our fault.
Ms. Gordon. Yes. And the other thing is something that
happened with no doc loans is that Wall Street was paying more
for them. And we can give you any number of instances, we can
give you--
Mr. Sherman. Or Alt-A was better than A?
Ms. Gordon. No doc loans were more valuable to Wall Street.
The riskier loans were more--that is what has driven this whole
thing.
The Chairman. But in fairness, remember that a
distinguished authority, the President of the United States,
has pointed out that Wall Street was drunk during that period.
I didn't want to quote the President.
Mr. Sherman. I think that is important. Also, when you say
Wall Street was paying more, they were paying more because the
yield was higher?
Ms. Gordon. Absolutely.
Mr. Sherman. They were paying more for a 6 percent loan
versus a 6 percent loan. They were paying more for a no doc 7
percent loan as opposed to a documented 6 percent loan.
Ms. Gordon. Right. So banks were telling their originators
to push no doc loans. And we can give you numerous instances
where the borrower proffered the W-2 statement, and they were
talked into putting that W-2 statement away, where people were
told to cross the salary information off of the loan
application, and that where the rate sheets of the banks say:
Be careful. Don't look at any documentation whatsoever.
Mr. Sherman. Because if they did, they would have to give
somebody a prime rate. What is the difference between a low doc
and a no doc?
Ms. Gordon. I think it is like it sounds. I don't really
know.
Mr. Sherman. Half a doc?
Ms. Gordon. We are basically talking about loans where you
didn't look at documents.
The Chairman. If the gentleman would yield, my inference
from this is that we had some irresponsible people, and that is
why we have talked about more regulation, that the advantage of
a no doc or a low doc loan was that you could report a fake
income; and if it was documented, you had to have the real
income. So to unaware investors, an undocumented higher income
looked better than a documented lower income.
Ms. Gordon. And as one of the more politically correct on
the panel here, while I am not going to subscribe to the fact
that all borrowers were as pure as the driven snow, this was
driven by the lenders and the originators. The Wall Street
Journal, again, not a bastion of political correctness, found
that 6 out of 10 borrowers who were steered into subprime loans
could have qualified for a prime loan. And if you can think of
a reason why an individual borrower would have preferred a
subprime loan--
Mr. Sherman. Now, could they have qualified for a prime
loan at the same? Take, we had the example of the woman who
makes $2,000 a month. She might have qualified for an
intelligent loan on a $100,000 house or a $150,000 house. I
haven't worked out the numbers.
The Chairman. I assume we have now left your district, Mr.
Sherman.
Mr. Sherman. We have left my State.
So, but if for some reason she is sold a $500,000 home or a
$500,000 mortgage, I guess that is at least a $550,000 home,
Wall Street is not going to lend the money to her. Wall Street
would rather lend the money to somebody who won't state their
income than lend $500,000 to somebody who states that their
income is $2,000 a month. So Wall Street was, what should we
say, like a blood alcohol blood level of 0.1 percent. But you
have to be at like 0.4 percent, which is near death, in order
to make a $500,000 loan to somebody whom you knew had a $2,000
income.
Ms. Gordon. Well, I am not sure what blood alcohol level
you would need for this, but the fact is that Wall Street was
buying loans where they just didn't want to know what was in
them. And I think what we have learned from the New York
Attorney General's investigation and what we have heard from
the due diligence firms is Wall Street just was--they were
doing ``don't ask, don't tell'' on these loans. And the fact is
that the liability that would accrue if we prosecuted one of
these originators for fraud or one of these lenders, that right
now, for the most part, is very hard to reach the assignees of
these loans. And in our view, any predatory lending legislation
is going to have to make the liability go up the chain. Because
Wall Street may be sobering up right now, but the folks who are
going to be working there 5 years from now are not watching
this right now. They are still at home playing Guitar Hero on
their Wiis.
Mr. Sherman. I know my time has expired. I do want to put
in a note for the bond rating agencies, because Wall Street was
acting somewhat reasonably when they could sell the loan to
some poor investor; and the investor was acting reasonably if
they thought they were getting a nice 6 percent yield on a
double A rated bond. The rating agencies looked at liars'
loans, looked at the second or third tranche of a package of
liars' loans and gave it a double A or a single A.
I will ask Mr. Kittle to wrap up, and then my time has
expired.
Mr. Kittle. Just one point of reference: I think we really
need to put some things into perspective here, and that is,
every subprime loan that was made was not a bad loan. The loan
instruments themselves were only bad when given inappropriately
to the wrong people; 85 percent of the subprime loans are still
paying on time. So if we line 100 people up here, are we going
to tell 85 of them they shouldn't have gotten their loan? I
don't think so.
I might go further to say that limited documentation loans
are still good products, again, when used appropriately. Small
business people. Okay? Small business owners like myself,
limited documentation loans, used appropriately, still help
people attain good quality loans.
Mr. Sherman. Are these people who don't have a copy of
their tax returns?
Mr. Kittle. No, I didn't say no doc; I said limited
documentation loans. There is a distinct difference. No doc
shows that you just put down an income. A limited doc means you
just bring in limited documentation, like maybe a pay stub
instead of sending out an employment verification, that type of
thing.
I want to make one more point, if I may. If I brought up
the term negative amortization today, everybody would shiver.
Yet, if it wasn't for the FHA 245 neg am loan program in 1978,
I would not have been able to buy my first house. A neg am loan
used appropriately to the right borrower is a good loan in a
certain situation. So to blanket say that all subprime loans
are always bad--
Mr. Sherman. I am not saying that all subprime loans are
bad; I said that people who could have qualified for a mortgage
of equal amount with a prime and were steered into a subprime.
And I am not condemning every loan that doesn't involve
four angels notarizing the income statement. But I am
condemning those that do not involve a paycheck stub, a W-2
form, or a copy of the tax return. And I think that most
people, if they saw one of those three documents, would call it
a documented loan rather than a low doc loan. I guess you could
always say it is not as documented as something else.
But when a small business owner says, I won't give you a
copy of my tax return. Here's what my income is. Either they
are lying to the IRS, they are lying to the mortgage company,
or both.
Mr. Kittle. Again, that is not what I said in my example.
Mr. Sherman. And that is why I am drawing the line. I am
drawing the line between insufficiently documented loans and
sufficiently documented loans.
I yield back.
The Chairman. I thank the gentleman. I am glad we didn't
get into whether or not the borrower is documented.
Three issues that I want to raise just in closing. One,
when we talk about the people who could have gotten regular
loans and they got subprime loans, to a great extent that is
racial and ethnic prejudice.
In the City of Boston, at the University of Massachusetts
at Boston, a very good study was done there that showed that
Black and to a lesser but still significant extent Hispanic
borrowers who were middle- to upper-middle-income were getting
subprime loans. So racism has not left America. That is why it
is good that we have the data and want to go beyond that. So,
yes, there were people put into subprime loans because of race
or discrimination.
Secondly, to Ms. Gordon, we very much agree in terms of
where the liability goes. Our view is that it goes best to the
securitizer, because the investors are kind of passive. And we
do in the bill that we passed, I would like to even increase
it, because the activation here in assembling these packages
obviously is the securitizer.
But we did agree that there should be some liability, and
we thought that was the best place to put it, because the
active agent in assembling these loans and selling them was the
securitizer.
Finally, I would say with regard to Mr. Kittle, we don't
want people who are entitled to own homes not to get them.
Although we should be very clear, we have had a policy in this
country of not building affordable rental housing and pushing
some people into homeownership who shouldn't have been there
for a variety of reasons. But to the extent they can be there,
one of the most important parts of the bill we just passed, we
agree with the Administration, is FHA modernization.
In 2002, the FHA issued something like 700,000 guarantees.
In 2006, it was down to 290,000. One of the things we need to
do is to put the FHA back as an alternative to subprime loans
for people with limited income. That is one part of the bill
that I think we all agreed to, and that will become law.
I want to thank you. We are going to follow up with some
questions. Let me say, I have no doubt about the integrity of
anyone here. We like the answers that we got, on the whole. We
are going to be working, and make sure we will enlist your
services. We just want to make sure that we hope we will get
other people giving us the same good answers.
Also, I have to tell you that it is important we trust
everybody, but this is such an important issue, both socially
and macro-economically, that maybe not in your individual
capacities but people, either yourselves or ones like you, we
will see you in September. We will have a follow-up hearing.
This hearing is adjourned.
[Whereupon, at 12:48 p.m., the hearing was adjourned.]
A P P E N D I X
July 25, 2008
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