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




 
                       THE IMPLEMENTATION OF THE
                      HOPE FOR HOMEOWNERS PROGRAM
                      AND A REVIEW OF FORECLOSURE
                           MITIGATION EFFORTS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 17, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-139

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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

                              ----------                              
                                                                   Page
Hearing held on:
    September 17, 2008...........................................     1
Appendix:
    September 17, 2008...........................................    71

                               WITNESSES
                     Wednesday, September 17, 2008

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................     9
Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage    43
Gross, Michael, Managing Director for Loss Mitigation, Mortgage, 
  Home Equity and Insurance Services, Bank of America............    41
Hacobian, Mossik, President, Urban Edge Housing Corporation......    53
Hemperly, Steven D., Senior Vice President, Mortgage Default 
  Servicing, CitiMortgage........................................    37
Montgomery, Hon. Brian D., Assistant Secretary for Housing-
  Federal Housing Commissioner, U.S. Department of Housing and 
  Urban Development; together with Hon. Elizabeth A. Duke, 
  Governor, Federal Reserve Board; Hon. Phillip L. Swagel, 
  Assistant Secretary for Economic Policy, U.S. Department of the 
  Treasury; and Hon. Thomas J. Curry, Director, Federal Deposit 
  Insurance Corporation..........................................    28
Phipps, Ron, First Vice President, National Association of 
  Realtors.......................................................    57
Sheehan, Marguerite, Senior Vice President, Chase Home Lending, 
  JPMorgan Chase & Co............................................    39
Twomey, Tara, Of Counsel, National Consumer Law Center...........    55
White, Alan, Assistant Professor, Valparaiso University School of 
  Law............................................................    59

                                APPENDIX

Prepared statements:
    Bair, Hon. Sheila C..........................................    72
    Coffin, Mary.................................................    84
    Gross, Michael...............................................    87
    Hacobian, Mossik.............................................    95
    Hemperly, Steven D...........................................    99
    Montgomery, Hon. Brian D., et al.............................   105
    Phipps, Ron..................................................   111
    Sheehan, Marguerite..........................................   118
    Twomey, Tara.................................................   124
    White, Alan..................................................   142

              Additional Material Submitted for the Record

    Letter from the American Bankers Association, dated August 
      27, 2008...................................................   146
    Letter from the American Securitization Forum, dated August 
      31, 2008...................................................   148
    Letter from Bank of America, dated September 3, 2008.........   151
    Letter from JPMorgan Chase, dated September 5, 2008..........   154
    Letter from Citigroup, Inc., dated August 29, 2008...........   156
    Written statement of Massachusetts Attorney General Martha 
      Coakley....................................................   157
    Letter from the Consumer Bankers Association, dated August 
      29, 2008...................................................   170
    Written statement of the East Los Angeles Community 
      Corporation................................................   172
    Letter from Fannie Mae, dated August 29, 2008................   176
    Letter from the Housing Policy Council, The Financial 
      Services Roundtable, dated August 27, 2008.................   179
    Written statement of the Housing Policy Council, The 
      Financial Services Roundtable..............................   183
    Letter from Freddie Mac, dated August 28, 2008...............   187
    Written statement of the HOPE NOW Alliance...................   191
    Letter from HSBC Finance Corporation, dated August 25, 2008..   199
    Letter from the Independent Community Bankers of America, 
      dated August 29, 2008......................................   201
    Letter from Litton Loan Servicing, dated August 29, 2008.....   204
    Letter from the Mortgage Bankers Association, dated August 
      29, 2008...................................................   207
    Written statement of the Mortgage Bankers Association........   210
    Letter from the Ocwen Financial Corporation, dated August 29, 
      2008.......................................................   217
    Letter from WaMu, dated August 27, 2008......................   219
    Letter from Wells Fargo, dated August 27, 2008...............   221
    Responses by Hon. Sheila Bair to questions submitted by Hon. 
      Michael Castle.............................................   223
    Responses by Hon. Sheila Bair to questions submitted by Hon. 
      Carolyn McCarthy...........................................   224
    Responses by Hon. Sheila Bair to questions submitted by Hon. 
      Melvin Watt................................................   227


                       THE IMPLEMENTATION OF THE
                      HOPE FOR HOMEOWNERS PROGRAM
                      AND A REVIEW OF FORECLOSURE
                           MITIGATION EFFORTS

                              ----------                              


                     Wednesday, September 17, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Maloney, 
Watt, Capuano, Baca, Lynch, Miller of North Carolina, Scott, 
Green, Cleaver, Ellison, Wilson, Perlmutter, Murphy, Foster, 
Carson, Speier; Bachus, Castle, Manzullo, Biggert, Shays, 
Capito, and Hensarling.
    The Chairman. The hearing will come to order. I apologize 
for the delay. This is a hearing called pursuant to the 
legislation we adopted, in which we sought to provide a 
framework which would facilitate voluntary decisions by the 
holders of loans to modify them in a way that would reduce 
foreclosure. This is a hearing to get progress reports, and to 
listen to whether or not there are some glitches with it. I 
would say one of the issues that I continue to think important 
is whether or not we need to revisit next year or visit this 
servicers model. And one of the questions we keep asking--we 
get somewhat varied answers--is do the servicers who might be 
convinced that a certain modification would be in everybody's 
interest have the power to make it?
    It is clearly not good public policy to have important 
decisions so split in terms of the power to make them that the 
decisions can't get made. And one of the things we will be 
looking at next year is whether we should be amending the law 
not to ban servicing or to require it, but simply to say that 
if you are, in fact, going to have a servicer, there must be a 
certain minimum amount of discretion the servicer has so that 
we don't get into this paralysis.
    It is certainly good legal theory not to allow certain 
rights to be so split up that they cannot effectively be 
exercised. It is important also to stress that when we talk 
about trying to diminish foreclosures, it is not simply a 
matter of compassion for those whose homes will be foreclosed. 
Clearly, that is a factor. But we also acknowledge there are 
people who made unwise decisions to buy homes.
    There are people who bought homes that they cannot sustain. 
And no one should think they are doing anybody any favors by 
keeping them in homes that they should not have borrowed for in 
the first place. There are some people who committed fraud, we 
hope not a very large number. And we have been encouraging, the 
gentlewoman from Illinois, Ms. Biggert and others, we want to 
give the Justice Department as much money as it can to 
prosecute them. But there are also a large number of people who 
made a mistake in part of not guessing that house prices were 
going to drop. They have a lot of company in that. And it is 
also the case that the level of foreclosures we have been 
seeing cause problems far beyond the individual.
    I think the best way to look at the damage caused by 
foreclosure is as a series of concentric circles. At the center 
of the circle is the individual who loses his or her home, 
causing great stress to that individual and that individual's 
family. And as I said, we would like to alleviate that, and I 
think most people believe it is legitimate to try to alleviate 
it. But even if you don't have a lot of concern about them, the 
neighborhood in which the foreclosures happen suffers, 
particularly if, as is the case--foreclosures are not 
distributed randomly geographically. So you get a concentration 
in a neighborhood. You get that municipality hurt, because 
property that used to pay taxes now eats taxes when you have to 
send the police and you have to send the fire department and 
the water department to restore water power and the sanitation 
people because of garbage. And then the whole economy gets 
hurt.
    It is clear that the subprime crisis and its reverberations 
have contributed to where we are, so there is a national 
interest in diminishing foreclosures over and above the concern 
for individuals. That is the perspective that we have taken 
here. We have, in this committee, understood that contract law 
being what it is, we can't order anybody to abrogate contracts. 
There was an effort to do that through bankruptcy that came out 
of another committee. I supported it, but it didn't have the 
votes.
    We, therefore, set up what we thought was the best possible 
voluntary structure in which we gave people inducements to go 
forward. We do call on here what has been previously an 
underutilized public asset, the Federal Housing Administration. 
We gave them a greater role. We did it in a way that segregated 
any possible negative financial effects here from the FHA in 
general, but I think one of the problems recently was too 
little use of the FHA. Both in this regard and looking forward, 
we expect a big increase. One of the encouraging things--
Secretary Preston was in to see us and showed us very proudly, 
and he was entitled to be proud of it--the chart that shows, I 
think, a quadrupling of FHA activity. That is something that we 
think is good. I cite that because we have been asked when we 
have talked about restricting some of the subprime mortgages 
that were made, ``Well, are you going to keep people in those 
economic categories from getting homes?''
    The answer is some we should yet, because they shouldn't 
have bought homes, but beyond that we are offering the FHA as a 
better alternative. And to the extent that people go to the 
FHA, and as we have been able to, collaboratively with the 
Administration, improve the ability of the FHA, we are better 
off.
    Now let me make one comment, which may be one of the less 
useful things I say in practice, but I think it is fair to say. 
We have invited a number of people here, including, and we are 
glad to welcome--I don't imagine she would have chosen this as 
the circumstances in which to come--the new Governor of the 
Federal Reserve, Governor Elizabeth Duke, who has been a 
community banker. We welcome that perspective on the Federal 
Reserve, and Governor, we are glad to have you.
    We have others who have been invited to talk, and this 
hearing is about what response we can expect from efforts by us 
and others to reduce the number of foreclosures. Clearly, there 
are other issues on people's minds as well. We will have a 
hearing tomorrow on auction rate securities. We will have a 
hearing next week on the Federal Government intervention on 
Fannie Mae and Freddie Mac. And we will also have a hearing 
that we have scheduled for next Wednesday as to whether or not 
there ought to be a systemic Federal mechanism for the kind of 
intervention that was done on an ad hoc basis yesterday. In 
fact, I will tell you that I am going to introduce a resolution 
to declare September 15th Free Market Day, because the national 
commitment to the free market lasted 1 day. It was Monday. On 
Sunday, Lehman Brothers was allowed to fail and everybody was 
for the free market, and we had a lot of celebration of it on 
Monday, and it died yesterday. But I think we ought to at least 
commemorate September 15th as that brief moment of glory for 
the let-it-go-belly-up faction.
    But in any case, we do have two hearings next week where we 
will talk about some of the broader issues. In fairness to the 
witnesses, we asked for witnesses who were prepared to talk 
about this specific issue. Some of the witnesses will neither 
be prepared, or in some cases authorized, to speak for their 
institution on this. That does not apply to the Chairwoman for 
all seasons, so you can ask Sheila anything you want. She can 
handle it. But it would be better I think if we could focus on 
this question of foreclosure. There will be two further hearing 
opportunities to talk about the broader issues. The gentleman 
from Alabama.
    Mr. Bachus. Thank you, Chairman Frank, for holding this 
important hearing. This actually, I guess, started out as a 
hearing on the implementation of the HOPE for Homeowners 
Program, and ways to assist homeowners trying to avoid 
foreclosure. I think we all know the problems in the housing 
market continue to exert a powerful drag on our financial 
markets and the economy as a whole. And I think yesterday's 
events brought that home to us in a very strong way. The 
overall mortgage delinquency rate is at 10 percent, which is an 
historic high. It is the highest level in 29 years. And when we 
say, that includes both mortgages in delinquency and 
foreclosure.
    Chairman Frank, you should be commended for using this 
committee's oversight authority to focus on foreclosure 
mitigation efforts, whether that is loan modification or 
avoiding unnecessary foreclosures, and the effect it is having 
on not only the individual homeowners, but the communities as a 
whole. And I know Chairman Bair, you have, in the past, 
stressed that this is not just a problem of the homeowners, it 
is a problem for the community. And I think we are all seeing 
that. While we don't always agree on legislative solutions to 
the problem, I don't think there is any disagreement on this 
committee that it is very important for us all to promote 
sustainable loan modifications that keep Americans in their 
homes and help stabilize the housing market.
    Until recently, the Federal Government's role in preventing 
avoidable foreclosures has been largely to facilitate private 
sector initiatives like HOPE NOW that rely on mortgage 
servicers, lenders, and housing counselors to identify and 
assist homeowners at risk of foreclosure. But with the 
government takeover of Fannie Mae and Freddie Mac, and the 
failure of IndyMac, the Federal Government now finds itself 
directly on the front lines responsible for administrating 
mortgage portfolios valued at hundreds of billions of dollars.
    The government's success in managing these portfolios will 
determine the ultimate cost to the taxpayers from the GSE 
takeover, and to the banking industry from the IndyMac failure, 
as well as, and probably most importantly, the fate of hundreds 
of thousands of homeowners struggling to make payments on 
mortgages that are worth more now than the properties they 
secure. We are fortunate to have with us FDIC Chairman Bair, as 
Chairman Frank said, who will update us on the FDIC's efforts 
to carry out systematic loan modifications at IndyMac that help 
at-risk borrowers, while at the same time minimizing losses to 
the deposit insurance fund from the bank's failure. Let me 
close by saying all of us on the committee have heard from our 
constituents frustrated by the loan modification process that 
often takes too long and involves too much red tape.
    Also, I am hearing on occasion from bankers who are saying 
that bank regulators and auditors are actually at times 
encouraging them to declare mortgages in default. And I think 
that is something that we ought to try to minimize, if 
possible, particularly if you have a bank that would not like 
to foreclose and a bank auditor is asking them to go ahead and 
declare that--or to go ahead and get that off their book. One 
of the goals of today's hearing should be to identify those 
obstacles that stand in the way of loan workouts that keep 
worthy borrowers in their homes and help stabilize communities 
struggling with record high foreclosures and housing 
inventories. Thank you, Mr. Chairman, for holding this hearing. 
And I thank all of our witnesses on all the panels for their 
participation.
    The Chairman. We are going to try to limit opening 
statements if we can. Obviously, all things can be sent in. We 
have time for a couple more. I would hope we could limit it. 
But the gentlewoman from California has been, of course on our 
side, and I think in the whole Congress, one of the leading 
advocates for addressing this servicing issue in a much more 
systematic way. So the gentlewoman is now recognized.
    Ms. Waters. Thank you very much, Mr. Chairman. I certainly 
thank you for convening this hearing, an important follow-up to 
the committee's July 25th hearing. I am particularly interested 
in a couple of topics today. I have been clear from the 
beginning of this crisis that the mortgage servicing industry, 
unknown to much of the public and even to us in Congress prior 
to the current crisis, is underregulated, indeed almost 
unregulated. I have also felt strongly that voluntary industry 
initiatives to speed up loan workouts, particularly loan 
modifications, have been insufficient to the scale and urgency 
of the present crisis, which has led me to introduce 
legislation, H.R. 5679, the Foreclosure Prevention and Sound 
Mortgage Servicing Act, that would impose a duty to engage in 
reasonable loss mitigation on mortgage servicers.
    In light of recent events in the financial markets which 
make it clear that the economy is far from finished feeling the 
effects of the subprime mess and resulting foreclosure wave, 
this hearing takes on added importance. It is absolutely 
critical that we find out whether things are changing, and the 
prospects for further progress when the HOPE for Homeowners 
program comes into operation in the coming weeks and months.
    There are a few things I am particularly interested in 
learning about today. First, I do look forward to Chairwoman 
Bair's testimony, because she has been a sensible and forceful 
voice throughout this crisis, and because the FDIC is now in 
the loss mitigation business as a result of the failure of 
IndyMac. I am interested to learn about the Agency's experience 
and any lessons that might be relevant to the rest of the 
industry. Second, I am interested in the experience of the 
regulators in trying to pin down reliable data on loan workouts 
and modifications. I am concerned that we have a near complete 
lack of transparency about what is going on with servicers now. 
In contrast to loan origination, where HMDA 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. And I would argue that at best, it is incomplete 
and somewhat opaque.
    I hope the regulators' representatives today have been 
having better luck than we have in determining exactly what is 
going on around loss mitigation. I am troubled that the few 
analyses that drill further down than the inch-deep statistics 
provided by the HOPE NOW Alliance, such as Professor White's 
study that we will hear about today, suggests that long-term 
and affordable loan workout solutions for stressed borrowers 
remain in short supply even as the crisis intensifies.
    On that score, I would note that auction sales in my home 
State of California now take place at the rate of 700 per day. 
Finally, 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 
trusts, may do better in terms of fees when it forecloses, or 
at least keeps the borrower in a state of prolonged 
delinquency, than it does in a sustainable loan workout, even 
where to do so would be in the best interests of the trust.
    In particular, I am concerned that much of the servicers' 
compensation is tied to outstanding principal, which may 
present an obstacle to the kind of principal write-downs at the 
heart of the HOPE for Homeowners program. I certainly look 
forward to hearing more from the witnesses today about how 
mortgage servicers are compensated so that we can look 
carefully at whether the incentives for servicers are really 
set up the way they ought to be to get us out of this crisis. I 
would close, Mr. Chairman, by asking unanimous consent to put 
the written statement of the East Los Angeles Community 
Corporation into the hearing record. I yield back the balance 
of my time.
    The Chairman. Without objection, leave is granted to all 
members to insert items into the record.
    The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. And thank you for 
calling this important hearing. I certainly agree with you, Mr. 
Chairman, that there are a number of legitimate issues that 
deserve this committee review, and the servicing model. We need 
to examine what type of legal impediments that there may be to 
loan modifications. However, I fear that perhaps the hearing is 
too narrow in scope. Certainly any true mitigation efforts 
would also focus upon what we can do to preserve and grow the 
paycheck of the homeowner so he can afford his mortgage, and 
what is it that we can do as policymakers to unleash capital 
into the markets to add more liquidity.
    I also still feel that for some members, we may be 
operating under a faulty premise that the unlucky folks who 
actually ended up with the mortgage somehow have an incentive 
to foreclose, when in actuality the incentives appear to be on 
the other side. I do note that at least the data that has come 
to me show that there have already been 2.1 million voluntary 
workouts. We have heard before that the average cost of 
foreclosure exceeds $50,000. And I have no idea who would want 
to be a seller of a home in this particular market.
    So I would note that the incentives appear to be on the 
other side. Clearly, if people have a financial pulse, most 
lenders will want to work with them. I do hope that as we go 
through this hearing, we use it as a time to reexamine a whole 
host of Federal policies that seemingly are designed to turn 
everyone into a homeowner.
    Everyone needs a home, but unfortunately, everyone may not 
be able to be a homeowner. Trying to help people stay in homes 
they could not afford when they bought them, and cannot afford 
today, I do not believe does them any good, does their 
neighborhood any good, and certainly doesn't do the economy any 
good.
    In addition, I think it is time for us to reexamine just 
how long the poor beleaguered taxpayer can be expected to bear 
all the losses and bear all the risk: $30 billion to Bear 
Stearns; $85 billion to AIG; up to $300 billion for FHA, Fannie 
and Freddie; CBO scores at $25 billion; the consensus appears 
to be closer to $100 to $200 billion. As for Lehman Brothers, 
all I can say is that they must have the worst lobbyist in town 
since they are the only ones who appear to have lost out on 
bailout mania. I continue to be concerned now at the level of 
the reserves that I see in the FDIC. I look forward to hearing 
from Chairman Bair. I am concerned about the level of the 
Federal reserves now, and what taxpayer exposure may be.
    In addition, I am somewhat loathe to let the Federal 
Government run our financial system, our auto makers, and who 
knows what is next, perhaps our airlines. Again, I think 
effective mitigation efforts would, number one, address the 
high rising energy costs that hampers people's ability to pay 
for their mortgage payments. True mitigation efforts would 
ensure that our current tax relief doesn't expire and impose a 
$3,000 tax increase on the average American family. And 
certainly, it would recognize that it is time to bail out the 
taxpayer from the bailout business, and certainly create a 
reduction in the capital gains tax to unleash capital and 
liquidity into these markets.
    And last but not least, provide some level of regulatory 
and legislative certainty so that those who do have capital 
know the environment in which they operate and that capital 
would come off the sidelines. Thank you, Mr. Chairman, again, 
for calling the hearing, and I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. And I thank you for 
being at the forefront of the movement to try to bring some 
sensibility back to a situation that has clearly gotten out of 
control. You have always been there as a voice of reason, and 
thank you for holding this hearing. I also thank the Chairwoman 
for being here. Mr. Chairman, we have moved from the originate 
and hold model with reference to loans in a portfolio to an 
originate and distribute model. The originate and hold model 
had certain benefits and certain liabilities as well, as is the 
case with the originate and distribute model. With originate 
and hold, the banker or lender knew the borrower, and when 
there was a time of crisis the holders of the loan in the 
portfolio, the originator, could make decisions on the spot. 
Literally, there was a great deal of latitude and opportunity 
to make decisions. In the originate and distribute model, the 
loans go into the secondary market by way of investors, and 
because they are in a secondary market we bring in this entity 
known as the servicer. The servicer does not have the same 
amount of leverage and latitude it seems in the distribute 
model as was the case in the hold model. There are people who 
are unknown to the servicer, investors who have bought into 
various tranches, and they have various amounts of security by 
virtue of the level of the tranche that they find themselves 
in.
    This model is what we really do have to examine. I agree 
with the chairman 1,000 percent that we have to look at this 
model. I agree with Chairwoman Waters. We have to do something 
to make sure that this model can be flexible enough to deal 
with the kinds of adversities that we find ourselves 
confronting currently. The model is rigid. It does not allow 
the flexibility, which is why we find so many loans instead of 
being restructured, they are simply having schedules changed. 
People are not having the opportunity to get loans that they 
can afford as much as they are to get a schedule that will 
eventually become a means by which they may lose the home that 
they have. I thank you for the time, Mr. Chairman, and I yield 
back.
    The Chairman. The gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman, and I welcome 
Chairwoman Bair, and thank her for her really extraordinary 
leadership through these troubled times. I particularly want to 
welcome the newest member of the Federal Reserve, Betsy Duke. 
Betsy is the only female on the Board, so we are thrilled in 
that respect. Also, Betsy was my father's banker for decades, 
and for decades I have heard about her leadership and hard work 
and really innovative ideas to promote safety and soundness and 
expand economic opportunities in Virginia. We are thrilled to 
accept her. And I have to say I represent a number of 
commercial bankers, and they are absolutely delighted that 
someone with on-line experiences is a member of the Board.
    Today is a very troubling time. I went to hear Barney Frank 
speak this weekend at an economic conference at Princeton, and 
we began the conference with four major investment banks in my 
district, and by Monday, only two were left standing. So this 
is really a challenging time. I want to mention that what I am 
hearing from my constituents is that even if they have the 
money to buy a home that is distressed, they can't buy it 
because 10 days go by, sometimes a month, sometimes 2 or 3 
months.
    As Chairman Bernanke has said, if we don't get this housing 
crisis under control, we are not going to handle our economic 
crisis. So we need to speed up this process. And I hope your 
testimony will lead us in that direction today, Chairwoman 
Bair. I would like to put my opening statement in the record in 
the interests of time. Thank you.
    The Chairman. Are there any further statements? The 
gentleman from California had a brief statement, and then we 
are going to have to go vote. Let me just apologize to the 
witnesses. I wish we didn't have to go vote. But to be honest, 
if I could get some wishes granted, that wouldn't be the first 
one. None of them are going to be granted, so we are going to 
have to ask you to stick with us. The gentleman from California 
will be the last statement. And then we will go vote, and we 
will be back with you as soon as we can.
    Mr. Baca. Thank you very much, Mr. Chairman. The economic 
crisis has gone from bad to worst, and this affects our country 
from the largest investment bank to the first-time homebuyers. 
While the government may respond by bailing out Bear Stearns, 
Fannie Mae, and Freddie Mac, it has failed to rescue the 
average homeowners caught in this crisis. About 7,500 
homeowners are foreclosed on each day, and 2 million homeowners 
are expected to lose their homes by the end of the year. The 
HOPE for Homeowners program that Congress created allows the 
FHA to insure up to $300 million in refinanced loans. I support 
the package. We are having a hearing today to discuss the 
impact of the program preventing foreclosures. However, the 
turn of events in our market from bad to worse requires much 
bigger response in moving forward.
    HOPE for Homeowners will help an estimated 400,000-some 
people stay in their homes, which is the American dream, but 
what about the 1.6 million people who are expected to foreclose 
this year? Hopefully, we will address that as well. What we 
going to do for them? Last year, I introduced a bill that would 
create a Federal entity, the Family Foreclosure Rescue 
Corporation, that would serve as a lender of the last resort to 
finance loans on the brink of foreclosure. This is not a new 
idea. It was actually a Federal response similar to the 
Homeowners Loan Corporation created during the Great 
Depression. If the Federal Government can bail out private 
firms, then why can't it do more to help the average 
homeowners? And we have to help out the average homeowners, not 
just big corporations and others. I think our witnesses will 
agree that while HOPE for Homeowners is a good start, we need a 
much bigger response to keep homeowners in their homes. I look 
forward to working with the committee in creating the best 
possible solution. Thank you very much, Mr. Chairman, for 
allowing me to say a few words. I yield back the balance of my 
time.
    The Chairman. That completes the opening statements. We 
will get back as soon as we can. I appreciate the forbearance. 
We will get back to forbearance in the other sense.
    [Recess]
    The Chairman. The hearing will resume.
    Madam Chairwoman, please proceed.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I appreciate the opportunity to 
testify on ways to reduce foreclosures and help stabilize the 
housing market.
    The persistent and rising trend of foreclosures imposes 
enormous costs on homeowners, lenders, and entire communities. 
Foreclosures can result in vacant homes that invite crime and 
create an appearance of distress, diminishing the value of 
nearby properties. Minimizing foreclosures could help put a 
floor on home prices and ease this distress. This, in turn, 
could help stabilize global financial markets and the U.S. 
economy.
    The FDIC has worked for the past 18 months with mortgage 
lenders, loan securitizers, servicers, consumer groups, other 
regulators, and Members of Congress to identify and correct 
barriers to solving current market problems. To be sure, there 
is no single solution or silver bullet that will bring an end 
to the market turmoil. Rather, a multiprong effort emphasizing 
different solutions for the different segments of the market is 
required.
    One approach, for which Congress should receive great 
credit, is the HOPE for Homeowners Act. The HOPE for Homeowners 
program will help many people avoid unnecessary foreclosure. 
The FDIC and the other Federal oversight board members are 
committed to fully implementing the program by the October 1st 
deadline.
    The new program incorporates many important principles. It 
converts troubled mortgages into loans that should be 
sustainable over the long term and convertible into securities. 
It also requires lenders and investors to accept significant 
discounts, and it prevents borrowers from being unfairly 
enriched if home prices appreciate. Other oversight board 
members will give you more details on our progress when you 
hear from them shortly.
    I would just note that as part of the HOPE program launch, 
we will be rolling out a national campaign to quickly make 
homeowners aware of the new program and how they can sign up.
    As you know, the FDIC inherited a significant number of 
distressed loans with the recent IndyMac failure. Our plan is 
to offer homeowners loan modifications whenever feasible. We 
are also actively reviewing IndyMac's portfolios to identify 
homeowners who might qualify for the HOPE program when it 
becomes operational.
    Because of the large number of troubled loans, we are 
systematically identifying loans in the IndyMac portfolio that 
are eligible for modification. We have also suspended most 
foreclosure actions for mortgages owned by IndyMac. This lets 
us evaluate the portfolio and identify the best ways to 
maximize values for the institution. When it improves the value 
of the loan, we will be offering loan modifications to eligible 
borrowers.
    To date, over 7,400 modification offers have been sent to 
borrowers since we announced the program in late August. In the 
first 2 weeks of the program, over 1,200 homeowners have 
accepted the offers, and that is well before the 30-day 
deadline they have to respond.
    This streamlined modification program will achieve the 
greatest recovery possible from problem loans. This is in 
keeping with our statutory mandate to minimize the impact on 
the Deposit Insurance Fund and to improve the return to 
uninsured depositors and creditors of the failed institution. 
But, at the same time, we are helping troubled borrowers stay 
in their homes.
    Let me underscore that this program is strictly for 
homeowners who are in trouble--no speculators allowed. We are 
documenting income to determine whether modified payments are 
truly affordable, and we are using a combination of interest 
rate reductions, extended amortization, and forbearance to 
arrive at an affordable payment. No fees are being charged and 
unpaid late charges are being waived.
    This program makes sense from an economic standpoint for 
IndyMac as well as for borrowers. A performing loan is worth 
far more than a nonperforming loan. Recent FDIC sales of 
nonperforming single-family home loans have come in at about 32 
percent above value. That compares with 87 percent of book 
value for sales of performing loans.
    My hope is that the program for IndyMac Federal Bank will 
be a catalyst for others across the country to modify loans 
more rapidly and systematically. I am pleased to announce that 
yesterday Jim Lockhart advised me that Fannie Mae and Freddie 
Mac will be participating in our loan modification effort at 
IndyMac. This will help us qualify several thousand more 
borrowers.
    I look forward to working with Congress on this and other 
programs that stabilize housing markets and bolster the 
economy.
    Thank you very much. I would be happy to take your 
questions.
    [The prepared statement of Chairman Bair can be found on 
page 72 of the appendix.]
    Mr. Watt. [presiding] Thank you, Chairman Bair.
    As you all can imagine, there are a number of different 
things going on, so the chairman apologizes to you for having 
to step out on your testimony.
    We will now recognize members for 5-minute questioning in 
order, and I will recognize myself for 5 minutes.
    This bill implements this new program effective October 
1st. I am interested in knowing about the transition to October 
1st. We kind of went out of our way to make sure that 
FHASecure, I guess, stayed in place for a period of time during 
this interim.
    Has that been sufficient to kind of bridge this gap, or are 
people just waiting around, waiting for the new program to go 
into effect? Is that one of the reasons that there is this 
feeling that not enough is happening. Or have you been able to 
assess that?
    Ms. Bair. I think the next panel may be able to speak about 
that more broadly, particularly Mr. Montgomery.
    With regard to our IndyMac experience, no, I have not been 
advised that we are seeing that kind of dynamic. We wanted to 
move quickly. We will only have control of this institution for 
3 or 4 months--obviously, we need to sell it and move it back 
to the private sector. So we wanted to seize the opportunity to 
restructure as many loans as possible.
    We are doing that right now, primarily through loan 
modifications. We are qualifying some for FHASecure, but for 
the most part, we are doing loan modifications. As I said, once 
October 1st rolls around, to the extent we can also qualify 
borrowers for HOPE for Homeowners, we will do so. But I am 
unaware that any borrowers have indicated to us that they want 
to wait for this new program. I think the response pretty much 
has been very positive to the modification efforts we are 
making currently.
    Mr. Watt. Can I take that to mean that lenders and 
servicers have as much flexibility now, before the new program 
comes into effect October 1st, as they will then if they go 
ahead and get on with it?
    Ms. Bair. I think it will be an important additional tool 
as of October 1st. There may be some borrowers for whom HOPE 
for Homeowners refinancing will be a better product than the 
restructured loan.
    We need to do a net present value analysis for each loan. 
That is part of our fiduciary obligation, to value the modified 
loan against what the foreclosure value would be. Generally, 
that is going to be in favor of modification because 
foreclosure values are so low right now.
    But, again, having this additional tool of a write-down and 
a refinancing can give us another option to try to qualify 
borrowers for a long-term, sustainable mortgage if they 
currently have an unaffordable one.
    Mr. Watt. The other thing I am hearing a lot is that there 
is just no credit out there. Nobody is making new loans. They 
are slowing down.
    Can you just talk about that, why that is, or whether that 
is in fact the case? Are people overstating that?
    Ms. Bair. Well, I don't know if that is the case. 
Certainly, credit standards have tightened. Frankly, they 
needed to. We obviously had a serious deterioration in 
underwriting standards that helped get us into the problems 
that we are facing now.
    But I think for loans that are underwritten at the fully 
indexed rate, where you document income, comply with the 
subprime guidance, and the nontraditional mortgage guidance, 
that is the old-fashioned, traditional kind of lending that is 
long term and sustainable for borrowers, and I think that is 
out there.
    The community banks in particular have had to try to step 
up to the plate and provide more refinancing for those in these 
unaffordable loans. They sometimes hold those in portfolio; 
more typically, they sell them off to the GSEs. I think having 
Fannie and Freddie now under government conservatorship will 
help stabilize that secondary market source of funding.
    We are certainly telling our banks we want them to lend. We 
want responsibly underwritten loans, we want loans made to 
people that they can afford to repay. But we want them to lend. 
It is important that they do not overreact, that they keep 
lending to support vital economic activity, including 
homeownership.
    Mr. Watt. Let me get one final question in because my time 
is about to expire--what you may or may not have information 
on. It is kind of outside your jurisdiction, I guess. Are we 
seeing a significant spike in credit card debt as a result of 
what is happening on the other side of the market? Or if you 
don't have that information, is there somebody on one of the 
panels who might?
    Ms. Bair. There has been some uptick, yes, and I don't have 
the precise numbers. They were part of our quarterly banking 
profile. I will be happy to give you the precise numbers after 
the hearing.
    Mr. Watt. Thank you very much. My time has expired.
    The gentleman from Alabama, the ranking member, is 
recognized for 5 minutes.
    Mr. Bachus. Thank you.
    Chairman Bair--or Chairwoman, whichever you prefer--helping 
people avoid avoidable foreclosure is wonderful, and I commend 
you for trying to intercede and prevent them if they are 
avoidable. I think Mr. Hensarling mentioned that some are 
unavoidable. They just don't have the income to support the 
loan. If you put them in another loan, you just incur greater 
cost.
    How do you verify? How is the FDIC--in these loans, how are 
they verifying the income?
    Ms. Bair. We are verifying income through tax returns, pay 
stubs, bank deposit receipts, the traditional methods that 
banks use. We think it is important, just as it is when the 
loan is originated, to verify income when a loan is modified. A 
lot of the loans we have with this portfolio were stated 
income, so we need to take extra special care.
    But, yes, again, as we have learned, nobody is doing anyone 
any favors if you give them the mortgage and they just don't 
have the income to support the payment. So we want to make sure 
it is an affordable payment. If their income is so low that 
they simply can't afford the house, we will need to work with 
that situation. We are finding a fairly good number that we are 
able to qualify and keep in their homes.
    Mr. Bachus. IndyMac reportedly had a lot of ``liar loans.'' 
What do you find in there?
    Ms. Bair. Well, it varies. There was a lot of stated 
income, and so that is one of the things that is taking us 
time, frankly, to go through and redocument income.
    We are using a 38 percent debt-to-income ratio metric to 
systematically modify these loans. There is a subcategory of 
borrowers who can't make the payment, even with the reduced 38 
percent DTI, so we have a special workout facility that tries 
to work with these borrowers to see if we can get them to an 
affordable payment.
    The foreclosure value puts the bottom on how far down you 
can modify the loan and modify the payment. Again, it is just a 
simple mathematical comparison.
    Again, with the foreclosure values as low as they are, and 
the administrative costs of going to foreclosure, you can 
modify a loan fairly significantly and still be maximizing 
value for the institution.
    Mr. Bachus. I mentioned in my opening statement that I am 
hearing from time to time from bankers that the bank examiners 
are saying to them you need to get this loan off the books when 
the bankers say they would give people more time. This might 
not even be a mortgage; it may be a situation where it is a 
loan and they say, ``You ought to take care of that.''
    Can you comment on that? I know that is a tough spot to be 
in.
    Ms. Bair. Right.
    I think we are certainly encouraging loss mitigation 
efforts, but again, where there is a realistic prospect with a 
workout arrangement that the loan can continue to perform, or 
re-perform, at some point the loss needs to be recognized. But 
at least with regard to the housing markets, with restructuring 
these mortgages, again, with home prices continuing to go down 
and such severe losses in the foreclosure market, in terms of 
your loss mitigation, restructuring the loan is frequently 
going to be the best choice for you to maximize value.
    That is what we are encouraging our examiners to do. We put 
multiple financial institutional letters out to both the 
institutions, as well as examiner guidance, including loss 
mitigation efforts. At some point--I mean, some of these houses 
are abandoned, some are investor loans, some are speculators. 
Obviously, those need to go to foreclosure and those losses 
need to be realized very quickly. But where they are owner-
occupied, with a family motivated to stay there with some 
income to support a reasonable payment, we very vigorously 
support and suggest loss mitigation efforts.
    Again, we think that helps borrowers, but it also mitigates 
losses for banks.
    Mr. Bachus. If a banker is saying, I'd rather give these 
people more time; I know them, I know their history; they are 
in trouble, but I think they will come out of it: I almost feel 
the examiners should give bankers the benefit of the doubt. It 
is their loan.
    Ms. Bair. There is certainly some personal judgment, and 
certainly if it is a longstanding customer relationship, a 
customer who has been reliable in the past.
    It is a difficult balancing act for our examiners. At 
times, though--it is hard sometimes for people to accept 
reality that maybe the loan just isn't going to perform. So it 
is a balance that the examiners have to weigh. But we certainly 
encourage realistic loss mitigation first.
    Mr. Bachus. Are you hearing from some of the bankers the 
same thing I am hearing?
    Ms. Bair. Actually, I am not, Congressman. I have not. As 
you know, we have four different bank regulators. I have not 
personally heard that from the banks, no.
    Mr. Bachus. I would just encourage you, if anything, to 
urge the examiners to give the bankers, as it is their loan, it 
is their business, their opinion great weight.
    Ms. Bair. Point taken.
    The Chairman. I apologize for my delay.
    I will now recognize the gentlewoman from California who, 
as I said, has been the Member of the Congress most active in 
this issue of services.
    I just want to say that the results that we are going to 
see from servicers in terms of this legislation are going to 
have a lot to do with this committee's agenda next year, 
because there is legislation Ms. Waters introduced that would, 
to a considerable degree, change the law. Whether or not the 
support is there for that is going to be determined, in 
substantial part, by what the returns are this year.
    The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I thank you, Chairwoman Bair, for being here today. We are 
all pleased about the fact that you have achieved significant 
average monthly payment reductions across IndyMac loan 
modifications. We don't think that this reflects the standard 
industry practice.
    What do you think and what can we do to encourage it? Since 
long-term affordability is a key to stabilizing these 
distressed buyers, what recommendations do you have to help us 
to get others to do what you are doing?
    Ms. Bair. It is a good question.
    I think there are a number of servicers that are trying 
very hard to restructure loans in a way that is long term, is 
sustainable. As you mentioned in your opening remarks, there 
are cross currents of economic interests at play here. Now that 
we have a servicing portfolio, we can feel their pain a little 
more, as well.
    I think, again, investors continue to provide some 
pushback. I think, depending on where they are in the risk 
profile of the securitization trust, they may or may not view 
it as in their interest to modify the loan. These pooling and 
servicing agreements typically do not provide economic 
incentives for loss mitigation activity.
    I think, to Chairman Frank's point, going forward, if and 
when the securitization market comes back--and I hope that it 
does, because I think it plays a very important role, creating 
more flexibilities and incentives for servicers to do loan 
workouts--some type of independent marketing capability, I 
think, would be very, very wise to look at.
    Another skewed economic incentive is that a number of these 
pooling and servicing agreements require servicers to advance a 
certain amount of principal, interest, taxes, and insurance 
when a loan becomes delinquent. This puts a liquidity strain, a 
cash flow strain, on the servicer, and frequently the fastest 
way to recoup that is to go to foreclosure quickly because they 
repay it off the top when a loan does go to foreclosure.
    So this is not a criticism of anybody, just a description 
of how, in some of these PSAs, the economic incentives work. 
What would ordinarily be stepping back and looking at what 
maximizes economic value--is a modified mortgage worth more 
than a foreclosed home--doesn't yield the economic result 
because of the different incentives that currently are 
reflected in the securitization structure.
    I do think the servicing industry is making efforts. I 
think the HOPE NOW Alliance has been good. I think Secretary 
Paulson's initiatives have been good. I know he is going to be 
meeting with servicers again, I believe today. And I think 
developing systematic protocols--hopefully, we, as a government 
agency, especially now that Freddie and Fannie are going to be 
working with us on this loan modification effort, if we can 
provide a model that we can get other investors to acquiesce in 
here, perhaps that provides some cover, if you will, to private 
servicers to do more of the long-term, sustainable loan 
modifications.
    Ms. Waters. I appreciate that. While I want you to know 
that we appreciate what you are doing, I don't want you to feel 
like you have to come in here and kind of help protect all 
these servicers now.
    Ms. Bair. Oh, no.
    Ms. Waters. As a matter of fact, I don't think the HOPE NOW 
Alliance is doing what you are doing. They had an opportunity 
to be out front of everybody because they organized this 
voluntary organization, the President did, early on. But I 
still don't feel that they are getting the numbers.
    As we go forward with this bill, I think you probably can 
be helpful to us, based on what you have learned. As you said, 
you have inherited this servicing operation, and so I am going 
to look forward to talking with you some more.
    I have one more thing I want to ask you: Can you talk a 
little bit more about your 38 percent debt-to-income ratio 
standard for judging the affordability of potential loan 
workouts? Specifically, how did you arrive at that standard? We 
have heard some differences once used by effective loss 
mitigation programs in FHA, VA, and USDA, for example.
    Also, can you address the issue of what debt and monthly 
household expenses you took into account in calculating the DTI 
for a given bar?
    Ms. Bair. We were using a front-end DTI ratio. It includes 
principal, interest, taxes, and insurance. Using that 38 
percent DTI ratio, our average payment reduction is about $400 
a month. A 38 percent DTI is typically what many State laws use 
as an affordability standard.
    I believe also the next panel will talk about this, but it 
is the upper range of what HOPE for Homeowners will be using in 
terms of their qualifying DTI. If the borrower cannot make a 38 
percent DTI, which, for most of these loans, will lower the 
payment significantly--an average of $400 a month--we do have a 
separate workout unit that will work with them on an individual 
basis to try to get at a payment that is affordable.
    Lower- and middle-income folks may tend to have a higher 
percentage of income devoted to their mortgage payment. Again, 
the lower the DTI, the more severe a write-down on the loan we 
have to take, which, again, when we have to compare that to the 
foreclosure value, can lead to more loans being disqualified.
    So it was a balancing act, but I think it is working pretty 
successfully. Again, for those who can't make the 38 percent 
DTI, we still work with them to see if we can come up with a 
more customized solution.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    The Chairman. I'm sorry. I forgot Mr. Shays was here. The 
gentleman from Connecticut is next.
    Mr. Shays. Thank you.
    The Chairman. I go by a list, and I looked up and didn't 
see him. So it is my fault. I get you guys confused.
    Mr. Shays. One thing you never do is yield Mr. Frank time 
and ask him a question.
    The bottom line to this is that our system is caving in, 
and yet I still think the fundamentals of our country and our 
economy are strong. I am particularly interested in how we 
determine whether someone is a risk or not.
    I had a young lady, who is on welfare, who ended up with 
her sister, buying a home. Her sister left, and she was stuck 
for 2 months not able to pay the mortgage. And then for the 
next 2 years she paid every month, but never caught up on those 
2 months. She never understood, candidly, that she was always 
being viewed as being behind.
    When interest rates went down, I was able to drop my 
interest rate from 6.5 to 4.5 percent, and she was stuck at 
like 7 or 8 percent. So the irony is, she needed to drop her 
interest rate more than I did. She would have been able to pay, 
and she still held on to her house, paying this exorbitant 
amount, but she never was able to take advantage of the lower 
interest rates.
    So what I am asking is, should we be reappraising how we 
determine someone's ability to pay or not? If they paid for 2 
years straight, but were behind and never caught up, should 
that be held against them, since they showed that they were 
paying? That is the kind of question I am wrestling with.
    Ms. Bair. I think it is a good question. It is unfortunate 
that with financial education as well--
    Mr. Shays. Had I known about it, we would have done 
something to help her.
    Ms. Bair. These types of things happen. We had a conference 
a few months ago on responsible mortgage lending to low- and 
moderate-income families, and one of the suggestions--and we 
had a lot of great suggestions; we just issued a financial 
institution letter to our institutions so they could look at 
this menu of ideas--was to give borrowers a credit so if they 
were regular over a certain period of time, and had an income 
disruption for a couple of months, they could basically build 
up a credit that would allow them to defer those payments for a 
couple of months without adverse consequences to their credit 
report.
    So I think that is the kind of innovative thinking we need 
to encourage mortgage lenders and our FDIC-insured institutions 
to do.
    I would also say in terms of our own modification efforts 
that we are pretty much giving everybody a prime rate, the 
highest rate they can pay. Our modification starts basically at 
the 30-year fixed prime rate, the Freddie Mac prime rate. If we 
can't get them to an affordable payment, we will lower it from 
there. As part of loss mitigation efforts, we are being neutral 
in terms of what your credit score or whatever is.
    I think this is an example of trying to systemize this, to 
speed it up and recognize that trying to individually re-
underwrite every single loan and go back to past credit 
histories ultimately may not be productive in terms of getting 
these loans restructured so they are affordable.
    Mr. Shays. The brand of the rating agencies is pretty 
pathetic right now. I am not quite sure; is there the danger 
that the rating agencies will go almost too far the other way 
to build back credibility, and if so, is there anything you can 
do about that?
    Ms. Bair. Well, we don't regulate rating agencies. We do 
not. We do not endorse any particular rating agency.
    Mr. Shays. Who regulates them?
    Ms. Bair. The FTC, primarily from a consumer standpoint, 
from an unfair and deceptive acts and practices standpoint. We 
do not regulate them. They are not banks.
    Mr. Shays. But you have to pay attention to their ultimate 
conclusions?
    Ms. Bair. Well, what we do pay attention to is how banks 
use them on underwriting loans. We can address it from that 
perspective.
    Again, we encourage banks to use reliable underwriting 
criteria, but to be flexible in terms of the types of past 
payment histories that can be considered. I think some of the 
rating agencies are, hopefully, going along that line, for 
instance, taking regular rent payments into account if someone 
has never owned a home before so they can't establish regular 
mortgage payments. Have they made regular rent payments? Have 
they made regular utility bill payments? Have they made regular 
telephone bill payments?
    Lots of those types of factors can just as well show 
responsibility as a potential borrower, even though someone may 
not have an extensive credit file.
    Mr. Shays. Now you are dealing with this issue nationwide?
    Ms. Bair. Yes.
    Mr. Shays. Where do you find you have the most difficult 
problems and where do you have the least, what parts of the 
country?
    Ms. Bair. I think the coastal areas of Florida, southern 
California, Nevada, parts of the industrial Midwest, those are 
certainly--well, with the exception of the industrial Midwest, 
which has been having some stress for some time--the previous 
boom markets that are now the bust markets--where we are seeing 
the most accelerating home prices decline.
    There is definitely a correlation between mortgage credit 
distress and declining home prices.
    Mr. Shays. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank the 
witnesses as well, not only this panel, but the ones to come.
    A couple of questions: I noticed that, Madam Chairwoman, in 
your memo you assert that you are committed to have the HOPE 
NOW program, in your role, operational by October 1st. I also 
know that Mr. Montgomery, in his memo, states he is committed 
to having this program up and running by October 1st.
    We are not that far away right now in terms of time. Am I 
to believe this may not happen by October 1st?
    Ms. Bair. I think Mr. Montgomery, on the second panel, will 
be better qualified to answer that question in detail. But, 
yes, I understand--we have all worked very hard to make it 
operational.
    Mr. Lynch. I am not critical. You have been asked to do a 
lot in a very short period of time, especially starting August 
1st, not the best month to get things done around here. But I 
am just curious about our ability to meet that deadline.
    I also notice that when we first pushed out this program, 
the Alliance thought there was a universe of folks out there 
who might be helped. This was a while ago, back in July. A lot 
has happened since then. While there has been an aggressive 
effort on the part of a lot of lenders--not all, but a lot of 
lenders--we have also had a lot of people washed into the 
foreclosure picture. A lot of people have gone into 
foreclosure. And also I notice that in some circumstances, the 
terms have tightened in terms of the number of people we can 
help.
    Where are we now as opposed to where we were back in July 
with that universe of people? We were talking about 1.5 million 
people back in July.
    Ms. Bair. Right.
    Mr. Lynch. Given the new people coming into the program in 
terms of eligibility and our limitation on what you have to do 
to qualify, where are we now?
    Ms. Bair. Well, I think we have some good academic research 
on that. Our economists estimate there were 1.5 million 
foreclosures last year, and already 1.2 in the first 6 months 
of this year, so that is a lot of foreclosures. Yes, it is 
unfortunate, and it saddens me.
    I think some of that was probably investor-owned and 
perhaps not owner-occupied property. But I know a lot were 
families losing their homes. That saddens me. We can't do 
anything about that now. All I can do is keep persevering 
forward to help the folks still on the line.
    And we have a lot of subprime out there resetting, and then 
we have these option ARMs entering their reset phase. So there 
are still a lot of mortgages out there that are going to need 
to be restructured and families who can still be helped.
    Again, I think, having multiple tools--the refinancing 
option is a nice one. I think with the safeguards built into 
the HOPE for Homeowners program, you mitigate risk to the 
government, and it is a nice tool to have in addition to the 
loan modification where you are actually not refinancing the 
loan, just restructuring the current loan. But having that 
additional option with some safeguards to protect government 
exposure, I think is still very much needed and will be a big 
help going forward.
    Mr. Lynch. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Madam Chairwoman, as I understand it, the 
insurance fund is at a 5-year low; the number of culpable 
banks, it is at 5-year high; the insurance fund has slipped 
below the minimum target level that Congress has set.
    Do I have my facts correct?
    Ms. Bair. That is correct.
    Mr. Hensarling. Is it my understanding that you are looking 
at a system of perhaps raising premiums on the banks that may 
have riskier portfolios, and if so, can you go into some 
details on what your thinking is?
    Ms. Bair. Well, first of all, we are required by statute to 
implement a restoration plan once the reserve ratio drops below 
1.1 percent. It is slightly above 1 percent, as you indicated.
    The IndyMac failure, where our losses are very high, took 
us below the 1.1 percent minimum that Congress has specified in 
the statute, so we are required to institute a restoration 
plan. We will be proposing new premiums in early October. Yes, 
we will be proposing raising premiums.
    Congress also provided us with the authority in the 
recently enacted deposit insurance reform law that was 
finalized in early 2006 to do risk-based pricing for our 
premiums. It is common in the private sector. You charge higher 
premiums to people who have greater risk, institutions that 
have greater risk.
    Mr. Hensarling. You might be surprised to know how uncommon 
it is in the government.
    Ms. Bair. So we are focusing on risk factors that became 
apparent to us with the recent closings that we have had. We 
are going to be providing positive incentives for high levels 
of Tier 1 capital and subdebt of unsecured debt, which tends to 
lower our resolution costs.
    But those banks that rely excessively on secured lending or 
excessively on brokered deposits to fuel rapid growth, those 
are higher-risk-profile institutions that, in our experience, 
produce higher losses to us if we have to close those banks. So 
we are proposing higher premiums on those institutions--we 
think, as a matter of equity, that they, with that profile, 
should pay higher premiums--and also trying to provide positive 
economic incentives for them to change their profile so if they 
develop more core funding and are less reliant on brokered 
deposits, for instance, they can lower their risk profile. That 
makes them safer and sounder from our perspective, and also, if 
we did have to close them, it would reduce our resolution 
costs.
    Mr. Hensarling. You mentioned that the IndyMac failure 
brought you below your reserve requirement.
    Hindsight being 20-20, and understanding we do not live in 
a risk-free society, but were there tools that you did not have 
that you should have that might have prevented that collapse? 
Was IndyMac a well-regulated institution?
    Ms. Bair. Well, we were not the primary regulator of 
IndyMac. It was a thrift, a nationally chartered thrift.
    I will be testifying on this tomorrow because there is a 
hearing on this subject over at the Senate Banking Committee.
    We have backup supervisory authority and we do offsite 
monitoring of all banks that we insure. We are the primary 
regulator of nonmember State chartered banks. We have about 
5,200 of our own banks that we have to worry about as primary 
Federal regulator, but we do offsite monitoring of all banks 
that we insure, especially those large institutions.
    IndyMac was flagged in mid-2007. We initiated with the OTS 
and started having joint meetings with them; and then in 
January of 2008, we requested a joint presence in the 
examination, and had been working with OTS on that institution.
    So we were well aware of some of the problems and issues, 
and I think the losses, frankly, were embedded at that point 
and, as OTS indicated, it did not have strong underwriting--did 
a lot of stated income loans, did a lot of loans that were only 
underwritten at the introductory rate as opposed to the reset 
rate. It previously relied on the originate-to-distribute 
model, and when the secondary market froze up, they started 
taking those loans on their balance sheet, but didn't do much 
to improve their underwriting.
    So I think, if anything, it underscores why we really 
needed the nontraditional guidance and the subprime guidance 
that was issued. I wish it had kicked in earlier; I wish it had 
an impact on this institution earlier.
    But it is what it is. And I will have to say all the 
regulators have institutions that we would rather not have. 
This is a volatile situation; and we all have institutions that 
have not pursued as strong underwriting as they should have, 
and we try to deal with it.
    Mr. Hensarling. Speaking of the capital requirements of 
your banks, a two-part question. Number one, concerns about 
Fannie and Freddie stockholdings in the bank, how are you 
treating that? I have heard from some investment banks that 
they would be willing to add additional capital into banks, but 
they are concerned about triggering the bank holding company 
regime, and they don't care to do that.
    If you can comment on those.
    Ms. Bair. On the latter issues, that is really a call for 
the Federal Reserve. They administer the Bank Holding Company 
Act and how limitations on nonfinancial entities or nonbank 
entities can or cannot have ownership interests in banks.
    With regard to the equity securities, GSEs, they were not 
wiped out, but their value was hit significantly because of the 
priority status the Treasury now has in terms of future income 
streams. So this did create some hits to capital for a small 
number of institutions.
    We identified them in advance and we reached out to them in 
advance and are working with them very closely on an 
individualized basis, as are the other regulators. We think we 
can deal with the problems that were raised by this.
    Again, it is a small number of institutions. I don't want 
to discount the importance to them that it is. But we will 
exercise some flexibility in terms of helping them get a 
capital restoration plan in place, consistent with prompt 
corrective action. But recognizing the suddenness of this, we 
will be providing sufficient additional flexibility to them to 
get their balance sheet back in shape, given the write-down 
that they have had to take.
    The Chairman. I am just going to ask quickly, and I 
apologize, but obviously it has been a busy day. I noticed when 
you talked about this--you talked earlier and you just covered 
this. We will go back over it.
    But there was a differentiation in your ability to deal 
with these potential foreclosures between those that IndyMac 
owned outright and those where you were the servicer.
    Ms. Bair. Right.
    The Chairman. Now, does that mean that you have great 
discretion; is it that, as the outright owner, you have more 
public policy input into what you can do and you are more 
concerned about economic analysis? How constrained are you as a 
servicer? I guess that is the question.
    Ms. Bair. I think for the loans we own, our only constraint 
is maximizing value for the Deposit Insurance Fund. But there 
are no strictures on how we do that, so we have very wide 
latitude to restructure the loans to facilitate refinancing.
    For the serviced loans, our flexibilities are governed by 
the pooling and servicing agreements. We have gotten investor 
support for that servicing portfolio.
    One issue we are trying to work through is our ability to 
modify, where default is reasonably foreseeable versus where 
delinquency has already occurred. We clearly have the 
flexibility to do it in advance of the reset for the owned 
portfolio, but--
    The Chairman. That reinforces my view. I got the general 
answer, well, no problem with servicers, but--I have a great 
deal of confidence in the way you have been administering the 
Agency. I am strongly inclined to believe that what you are 
doing with the loans you own is the right thing to do.
    The fact that you as servicer are not able as fluidly to do 
that as you do with the stuff you own reinforces my view that 
we have to reexamine the servicer model. It does seem to me, as 
a matter of public policy, that, as servicer, somebody ought to 
have the same flexibility you have as the owner.
    Ms. Bair. I think that absolutely needs to be looked at 
going forward.
    I think the good news--Fannie and Freddie had some 
restrictions on their PSAs, which now that they are in 
conservatorship, an advantage is, again, they are now working 
with us on loan modification.
    The Chairman. We often lament in the social sciences that 
we don't get to do experiments. But you are both the control 
and the other. Here you are, you are the same person with 
similar--identical kinds of paper, and the one difference is in 
the legal status with which you address them. I think that 
makes you ideally situated to work with us next year when we 
talk about what changes.
    I have confidence that you are doing the best you can, and 
we will be urging others to follow your model. We will be 
talking to some of the private servicers today. So I think you 
are setting a very good example here. You will be helpful to us 
as we decide what needs to be done.
    Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    It was recently brought to my attention that Fannie Mae and 
Freddie Mac have a preferred list of attorneys who work with 
the securitizers to work out the foreclosures. My concern is 
that in Illinois there are two providers, and I think a few 
were added, not on a competitive bidding process, but to add to 
that.
    I have also heard that there really is no loan mitigation 
at all, that these lawyers are told to fast-forward as fast as 
they can through the foreclosure process and that there is no 
capability of reaching anyone, a live person, by any means to 
address the loan mitigation or to address anything.
    I don't know if you have heard that. You say you are going 
to be working with Fannie and Freddie.
    Ms. Bair. We have not.
    Again, their restrictions did not permit them to work with 
us before, but now that they are in conservatorship, they are 
providing more flexibility. So they did have their own loss 
mitigation program in place.
    I have not heard that, at least not with IndyMac.
    Mrs. Biggert. I think if you look and see how very few 
loans have had any mitigation at all, which has been all of our 
policy, that it is very important to do that if it is at all 
possible.
    Ms. Bair. I will mention this. Jim Lockhart and Secretary 
Paulson are actively looking at the ability to expand loan 
modifications with Fannie's and Freddie's portfolios. It is 
something they should be aware of as well.
    Mrs. Biggert. Given the unusual number of FDIC-insured 
banks in FDIC receivership, or potentially entering that, what 
are your procedures for lawyers or law firms to bid on the 
opportunity to contract with the FDIC, specifically to the 
FDIC-insured banks?
    Ms. Bair. To buy assets of troubled banks?
    Mrs. Biggert. No, to carry out--looking at the 
foreclosures.
    Ms. Bair. We are using IndyMac's own servicing. We have 
FDIC staff onsite at IndyMac working with management, and we 
are using--they have a fairly sophisticated servicing platform, 
so we have not contracted it out. We are using IndyMac's 
community servicing staff.
    Mrs. Biggert. So you have no outside lawyers?
    Ms. Bair. Definitely, for receivership activity.
    If you are asking about our contracting procedures more 
generally, there are longstanding procedures in place. We have 
long used contractors for various parts of our asset marketing 
process.
    I would be happy to arrange a briefing for you with the 
staff who do that. It does not involve the Chairman's office, 
but I would be happy to arrange it.
    Mrs. Biggert. Is there a competitive bidding process?
    Ms. Bair. Absolutely, yes. Yes, I believe we follow 
government procurement procedures. So whatever those rules are, 
yes, we follow those.
    Mrs. Biggert. What are some examples of the items that 
would prevent a lawyer or a law firm from being selected by the 
FDIC to do this type of work?
    Ms. Bair. I think the servicers performed and the value 
that we would get.
    We have conflict rules. Obviously, they can't have an 
interest--if they are helping to sell a bank, they can't have 
an interest in the bank.
    I think it is just general government contracting rules; I 
am not aware that we have any type of special procedures unique 
to the FDIC. Obviously, conflicts are a key issue. And they 
must not have a conflict at the bank they would be working on.
    Mrs. Biggert. About how many outside firms have you 
engaged?
    Ms. Bair. It depends on various parts. We have lawyers, we 
have investment bankers, we have due diligence firms. I would 
be happy to get you a list of our contractors.
    Mrs. Biggert. That would be great.
    A briefing would be good. Thank you.
    I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    I thank you for your comments earlier. I would like to do 
some follow-up. Thank you, again, Madam Chairwoman.
    You used a term just a moment ago that I found quite 
interesting, ``a cross current of interest,'' or something 
similar. I would like to explore this because within the class 
of investors you have different tranches. There is a term that 
has been used to explain to some extent what is happening 
between the various classes. It is called ``tranche warfare.''
    Can you kindly, if you would, give me your rendition of 
what ``tranche warfare'' is?
    Ms. Bair. Well, a securitization pool will be broken up 
into various tranches, and the investors that take the first 
loss are generally called the equity and the mezzanine 
tranches. Typically, they will take the first loss. So if there 
is a foreclosure, generally these pools are over-collateralized 
to some significant degree, and that protects the AAA-rated 
tranche, the least riskiest part of the securitization 
structure. So you can have a fair number of loans go into 
foreclosure with attendant credit losses that will be absorbed 
by those lower-rated tranches before they would impact the 
lower-risk, higher-rated AAA tranches.
    What can happen, though, with loan modifications is that 
the rate is reduced, with no foreclose, so there is no credit 
default to be absorbed by the lower tranche. However, reducing 
the interest rate on the loan as part of the restructuring will 
impact the income streams going to every segment of the 
investor pool.
    So some in the highest-rated, lowest-risk tranche may not 
view it in their interest necessarily to have the loan modified 
to reduce the revenue streams generated by interest rate 
reductions. It might be better for them to have the credit 
loss, which the lower tranches would have to absorb.
    Mr. Green. May I say that differently, and if you would, 
help me with my diction. Sometimes it is not superb.
    Are you indicating that those in the AAA tranche may have 
reason to see foreclosure as a better way out for them than 
those who are in the lower tranches?
    Ms. Bair. That is right. It will depend on the degree of 
over-collateralization and the quality of the mortgages.
    I think some of the AAA rated investors are now starting to 
realize that foreclosure rates are getting to the point where 
even these investors might be impacted. But there will be some 
level of foreclosure before they would have any impact at all 
on that.
    Mr. Green. That is as a result of this preferred position--
by the way, they pay for this?
    Ms. Bair. They do.
    Mr. Green. It is not as though they are asking for 
something they are not entitled to. But by virtue of having 
this preferred position in a AAA tranche, that creates this 
crosscurrent of interest that you mentioned earlier.
    If you are a typical servicer, you don't always know who 
holds these various positions, but you do know that the 
positions exist and they have been codified, and that you have 
to respect them to some extent, do you not?
    Ms. Bair. The American Securitization Forum, which 
represents the securitization industry, a year ago in June came 
out with best practices that said very clearly that a 
servicer's obligation is to the pool as a whole, so that the 
servicer is not required to look at each individual investor 
group's interest. They are to maximize value to the pool as a 
whole.
    That said though, as a practical matter, sometimes these 
investors give the servicers a lot of pushback, a lot of 
scrutiny, even though that is clearly what best practice is. So 
it does complicate the servicer's ability, I believe, to modify 
these loans.
    Mr. Green. Now, to go to one other term, sometimes it is, 
for the servicer, cheaper to foreclose expeditiously, as 
opposed to allowing it to linger, because of the cost 
associated with carrying it to foreclosure.
    Is that something that is a major factor as you have looked 
at this process, because we want servicers to act posthaste? 
But if there is not necessarily an incentive, but there is 
reason, if you will, to move quickly, as opposed to giving the 
workout, the restructuring, an opportunity, then that is 
something that we need to look at?
    Ms. Bair. Right. I do think it varies by securitization 
trust, but generally once a loan becomes delinquent, servicers 
are required to advance for a certain number of months payments 
on that mortgage to the securitization trust; and they won't 
get paid back in full unless they go to foreclosure, and then 
they are repaid off the top. In some circumstances, this can 
create incentives for servicers if they have liquidity 
problems, if they are subject to these requirements.
    Mr. Green. Can you kindly give some example of this advance 
that you are talking about, wherein they are required to 
advance? Give us a little example.
    Ms. Bair. The servicer collects mortgage payments from the 
mortgage borrowers and passes those payments on to the 
investors, the securitization trust, from where, in turn, they 
are disbursed to the securitization investors.
    If the loan becomes delinquent, frequently the pooling and 
servicing agreement will require the servicer to continue--out 
of the servicer's own pocket--to advance payments for a certain 
period of time, and then one way to get that paid back is 
through a foreclosure. Once the loan goes into foreclosure, 
those advances can typically be repaid off the top.
    But we have been told by some that this can also create 
skewed incentives for foreclosure.
    Mr. Green. So the servicer continues the process of paying 
the loan, notwithstanding default by the borrower, and in so 
doing, is obligated to go into a coffer that the servicer has 
to pay the investors?
    Ms. Bair. That is right.
    Mr. Green. And in paying the investors, this coffer starts 
to diminish, and at some point the servicer starts to feel the 
added pressure of, I am now putting my coffer at risk; I need 
to try to get out of this as quickly as possible.
    That is the kind of enlightened self-interest that is 
experienced by the servicer, which would then promote pushing 
forward to foreclosure, as opposed to taking the time to 
restructure, because time becomes money?
    Ms. Bair. That can be a dynamic at play.
    Again, I think servicers, for the most part, are 
increasingly seeing that it is in everyone's interest to get 
these loans restructured. But, yes, we do think that at times 
the need to restore liquidity will pressure servicers by 
requiring them to make these advanced payments and get those 
funds back through foreclosure, and that can create another 
crosscurrent of economic incentive.
    Mr. Green. Madam Chairwoman, thank you so much. I greatly 
appreciate the time. While I have many other questions, I think 
I have been completely edified with reference to the ones I did 
ask.
    Mrs. Maloney. [presiding] Congressman Castle.
    Mr. Castle. Thank you, Madam Chairwoman.
    Chairman Bair, this has been touched on, but I am sort of 
curious about it. I had a long conversation with a significant 
officer of ING, which is located in Wilmington, Delaware, where 
I am from, and he indicated that they are in fact doing quite 
well.
    And they are a big mortgage issuer. My impression--and I 
think he said this--is that they hold their own mortgages and, 
I assume, servicer-owned mortgages. We talked about servicing 
here a little bit before.
    I know from my own personal experience, I had a mortgage 
once which was assigned and I had all kinds of problems getting 
ahold of people, straightening out an escrow account. It was a 
mess.
    I am interested in dealing locally. It seems to me if you 
have that local connection, you are more inclined to pay 
attention to people and, perhaps, pay your mortgage or whatever 
it may be.
    Are there any statistics in this foreclosure world about 
serviced or assigned-in-service mortgages versus mortgages 
which are held, or is that just beyond anything anybody has 
looked at?
    Ms. Bair. I can check with our economists to see if we can 
quantify the loans that are held with unbroken service by the 
lending institution versus those moved off the balance sheet 
and contracted.
    Editorially, I am with you. My mortgage is at a community 
bank that holds and services its loans. That was a factor when 
I got my mortgage because I like that high touch, too.
    I don't know, Congressman. I will see if I can get those 
numbers for you.
    Mr. Castle. Apparently, you talked about this earlier and I 
wasn't here; I apologize.
    Do you, in your own mind, believe that some of the problems 
that we have now lie in the fact that the servicers are not 
providing the same availability, or even ability to make 
necessary modifications or to give people advice in terms of 
what they have to do, other than just pay their mortgage, to 
protect themselves?
    Ms. Bair. Again, I think this gets back to Chairman Frank's 
observation. We have a lot more flexibility to modify loans for 
the IndyMac portfolio, which IndyMac and, now, we own, as 
opposed to those that are serviced for others.
    Yes, there is more flexibility if the lender still owns the 
mortgage and is doing the servicing. And that was the old model 
that provided a wide latitude to get these loans restructured. 
The ability to restructure has been enormously complicated 
through these securitization trusts, absolutely.
    Mr. Castle. It just seems to me that the whole business of 
liquidity and assigning mortgages and quick returns on your 
dollar or whatever, it may be may be good when things are going 
well, but in the long-term interests of financial institutions 
and thrifts, it may be counterproductive.
    Are we in any way looking more deeply at that in terms of 
restrictions or other ways of determining who is actually going 
to hold and service mortgages in the future?
    Ms. Bair. I think now, with the private securitization 
market, there is not a functioning market at this point. So I 
think it is somewhat moot.
    I think in terms of the GSE secondary market, an advantage 
of conservatorship is--again, I think the government can now 
take a look at some of the restrictions that apply to loan 
workouts and see if we can provide more flexibility going 
forward.
    I think it is frustrating that what we all know may be the 
optimal economic result, that the modified mortgage will have 
greater economic value, that is the economically efficient 
result we want. When the modified loan has a greater economic 
value than the foreclosed loan, we want the modified loan.
    But, yes, I agree that the current system has not been 
conducive to making sure that always happens. I think there 
have been unnecessary foreclosures because of that, and I think 
that has contributed to our larger economic problems by putting 
further downward pressure on home prices.
    Refinancing these loans out of these securitization trusts 
is one way to deal with it. Also, we have worked with you in 
your leadership role on the issue of litigation protection for 
servicers who make long-term, sustainable loan modifications. 
Those are measures that have helped.
    But, again, it is frustrating; there is just no silver 
bullet here. We can't wipe the slate clear and say, you know, 
all of this has to go away. The contracts are there. They can't 
be abrogated. And we have to work within those confines at this 
point.
    Mr. Castle. It just occurs to me, maybe with all the focus 
and all the press focus on all those institutions which either 
have failed or have not done particularly well, if we look at 
the INGs of the world and others that have had a successful 
track record and talk about that a little bit and perhaps let 
that be a guideline for others, it could be tremendously 
helpful.
    Ms. Bair. I think that is happening. We are getting back to 
basics in mortgage lending, and a lot of it is consumer driven. 
I think consumers are starting to realize the advantages of 
working with a local bank, the person you know that is going to 
maintain the servicing, that you can pick up the phone and call 
and know who you are talking to when you have a problem with 
your mortgage payment. I think we are getting back to those 
basics, and that might be a long-term benefit from the current 
problems we are facing.
    Mr. Castle. Thank you, Chairman Bair.
    Mrs. Maloney. [presiding] Congressman Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Madam Chairwoman, I just have one question, which may spur 
others; but I have become somewhat concerned, and I am 
interested in your concern about what happened with the London 
Interbank Offered Rate (LIBOR). I am not sure whether they 
skyrocketed the lending rate because of what they saw happening 
here with Lehman Brothers and others, but what alarmed me was 
the fact that over 6 million U.S. mortgages, almost all of the 
subprime mortgages are connected to LIBOR. And my concern is--
unless you tell me otherwise--we have no influence over or 
connection with LIBOR. So we can't impact those mortgages; am I 
correct?
    Ms. Bair. Well, you are right that the subprime resets are 
tied to LIBOR. I have asked our staff this morning to do an 
analysis and see what kind of impact that might have on 
subprime resets.
    I would say that one loan modification technique we have 
long advocated and that is reflected in the Treasury 
Department's HOPE NOW protocols is to just--if the borrower 
cannot make the reset, just extend the starter rate on the 
subprime loan. Those starter rates are very high on subprime, 
and I think more and more servicers are doing that.
    So I think to the extent the reset problem becomes more 
severe because of LIBOR going up, there is an accepted loan 
modification protocol of extending the starter rate for a 
minimum of 5 years. It is already in place and can help deal 
with that.
    Mr. Cleaver. Thank you. Thank you, Madam Chairwoman.
    Mrs. Maloney. Thank you very much. I regret that I had to 
attend a meeting with Speaker Pelosi and missed some of your 
questions and answers. If you have already answered this 
question, then I can just read it in the transcript.
    What I am hearing from the street, from my constituents and 
others, even if they have good credit, they have money in the 
bank, and they want to buy one of these foreclosed homes, they 
are finding that the wait time is 1, 2, or 3 months. This is 
just slowing down the market, and many times people will just 
give up and go someplace else and not persist with the red 
tape.
    What can we do to just get this moving? This is a critical 
part of our economy.
    Ms. Bair. Right. Well, I did comment earlier, and I think 
this would be an excellent question for the next panel as well.
    All I can tell you is that we are telling our banks to 
lend. We want them to lend. We want well-underwritten loans. We 
want loans that people can afford to repay over the long term. 
But we want them to lend; that is the message we are sending to 
our examiners.
    I have not personally gotten complaints regarding the 
institutions that we regulate that there have been undue 
delays. All I can tell you is that for the institutions we 
regulate, our message to them and our examiners is lend. Again, 
we want good loans that can be repaid, but we want them to 
lend.
    Mrs. Maloney. Well, thank you for your time. We have three 
additional panels. I know that many people have many more 
questions, but we thank you for your leadership and your time 
here today, always. Thank you so much, Chairwoman Bair.
    The next panel is called up: Governor Betsy Duke; Mr. 
Phillip Swagel, who is the Assistant Secretary for Economic 
Policy for the United States Department of the Treasury; the 
Honorable Brian Montgomery, the Assistant Secretary for 
Housing, Federal Housing Commissioner, U.S. Department of 
Housing and Urban Development; and the Honorable Thomas J. 
Curry, Director of the Federal Deposit Insurance Corporation.
    It is my understanding that this panel will be giving one 
joint testimony, and the person speaking for the panel will be 
Mr. Montgomery. We welcome all of you and thank you for your 
service.
    Mr. Montgomery. I take it that is my cue to begin.
    Mrs. Maloney. That is your cue, and you have 5 minutes to 
summarize.

JOINT STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, ASSISTANT 
   SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER, U.S. 
  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; THE HONORABLE 
    ELIZABETH A. DUKE, GOVERNOR, FEDERAL RESERVE BOARD; THE 
 HONORABLE PHILLIP L. SWAGEL, ASSISTANT SECRETARY FOR ECONOMIC 
  POLICY, U.S. DEPARTMENT OF THE TREASURY; AND THE HONORABLE 
     THOMAS J. CURRY, DIRECTOR, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Mr. Montgomery. Thank you very much, Madam Chairwoman, 
Ranking Member Bachus, and members of the committee. I am Brian 
Montgomery; and yes, I drew the short straw, so I will be speak 
on behalf of--my colleagues actually voted unanimously for me 
do this. But it is my honor to join Betsy Duke, Phillip Swagel, 
and Tom Curry on this panel this morning.
    Our written testimony is also provided on behalf of the 
entire board. And I want to say, it is an example of the 
remarkable cooperation that has been the hallmark of the 
board's efforts so far.
    To keep my remarks within the time allotted, I would like 
to simply update you on what we have been doing to implement 
the HOPE for Homeowners program, and of course, we will be 
happy to answer any questions.
    First and foremost, I want to assure you that we are firmly 
committed to having the program up and running by October 1st 
of this year; and we still believe that goal is achievable. 
While getting a new government program operational in less than 
2 months is no easy task, the board and respective staff are 
committed to meeting this challenge.
    In fact, our initial planning session was held only 3 hours 
after the President signed the act into law on July 31st. In 
fact, since that time, we have been working diligently and 
cooperatively to develop and implement the program in a manner 
consistent with the terms and purposes of the HOPE for 
Homeowners Act, which, by the way, we refer to as H4H.
    We have assembled a team of exceptional staff from all four 
agencies, and I have to say from my personal involvement, they 
bring a wealth of market knowledge and program expertise to the 
job. With this team working literally around the clock, we have 
been able to take all the steps necessary to get the board 
fully operational and to move forward into a program design 
without--hopefully, no further delay.
    For example, we adopted bylaws and rules that set out the 
necessary administrative infrastructure for important things 
such as financial oversight, record keeping, and preparation of 
the board's mandated monthly reports that will go to Congress. 
We established and appointed personnel to several key officer 
positions to ensure that a team of professionals are charged 
with the day-to-day responsibility of keeping the program on 
track. And we have approved a $29.5 million budget--this is an 
initial funding, I should say--to ensure that we have the 
resources to pay for the program's start-up costs. And the 
Treasury Department immediately issued HOPE bonds--as provided 
under the Act, by the way--to generate those funds.
    More importantly, we created policy teams that have spent 
hundreds, and I mean hundreds, of hours discussing and debating 
the program parameters to develop and present policy options 
and recommendations to the full board. We engaged in extensive 
outreach to solicit the views of potential stakeholders, 
including lenders, counselors, and consumer advocacy 
organizations to improve our understanding of obstacles to 
successful and sustainable loan modifications, as well as the 
appropriate eligibility and underwriting standards for the 
program.
    We have also conducted outreach with the financial market 
participants. In fact, also, in just 5 weeks, we have held five 
official board meetings, including a half-day, we called it a 
``roll-up-your-sleeves working session,'' where we discussed 
many aspects, including of course the program design.
    We are also keenly focused on the program operations, 
including several key elements that are necessary to assure the 
program's success: Consumer protections; program monitoring; 
and obviously, outreach and education. As a board, we feel very 
strongly that we must incorporate protections within this 
program to help ensure that borrowers are placed in appropriate 
and sustainable mortgages.
    And to quickly sum up our efforts on these fronts, we will 
require lenders to provide a simple and clear consumer 
disclosure that explains the features of the program and what 
is expected of the borrower. We will engage in extensive 
outreach and education to reach lenders, counselors, and most 
importantly, consumers. And we are developing a multitude of 
informational materials for distribution as well as Web 
posting.
    We are designing a training curriculum which will be geared 
towards servicers who view the program as another loss 
mitigation tool, originators who are trying to serve borrowers 
in need, and counselors who are working with distressed 
homeowners.
    We will be performing additional monitoring activities for 
this program to prevent any predatory practices that could push 
unsuspecting and unprepared borrowers into another loan that 
they cannot afford. And we will use state-of-the-art fraud 
detection tools recommended by HUD's own Inspector General to 
screen out potential problem loans.
    In summary, I want to assure you that we, the board, are 
doing all that we can to design and implement a successful HOPE 
for Homeowners program. Thank you for the opportunity to update 
the committee. Again, we will be happy to answer your 
questions.
    [The joint prepared statement of Assistant Secretary 
Montgomery, Governor Duke, Assistant Secretary Swagel, and 
Director Curry can be found on page 105 of the appendix.]
    Mrs. Maloney. Thank you very much.
    The Chair will first recognize the gentlewoman who has had 
a great deal to do with creating this program, Congresswoman 
Waters.
    They are saying they want to hear from all the witnesses, 
but it was my understanding there would be one joint statement.
    Ms. Waters. Well, thank you very much for being here. I 
appreciate the work that you have been doing to try and get FHA 
all strengthened in order to do the tremendous refinancing that 
you are going to have to do.
    I want to know whether or not you have developed the 
technology that you need in order to manage all of the new and 
expanded responsibilities of FHA.
    Mr. Montgomery. I will answer that question on two fronts. 
On the H4H--again, the HOPE for Homeowners side--luckily there 
was a funding mechanism in there for us to do some needed 
upgrades to our systems; and we approved that budget quickly. 
Those systems upgrades are being made as I speak.
    But on the other side of the equation for FHA 
modernization, there were no funds for additional staff or for 
additional IT upgrades; and as you may be aware, we are working 
desperately to try to find the funds to meet those needs.
    Ms. Waters. Have you requested assistance with those?
    Mr. Montgomery. Yes, we have. We have spoken to key staff 
in the appropriate committees. I think they are very well aware 
of our concerns in that area. But again, that is on the FHA 
modernization side.
    Ms. Waters. I see.
    I really would like to talk a little about the discussions 
that we had about the kind of risk that you thought would be 
involved in complying with some of the mandates of the 
legislation.
    How are you feeling about your ability to be able to extend 
opportunities to low- and moderate-income borrowers and be able 
to have loans that will not default?
    Mr. Montgomery. Well, speaking for the group, what is first 
and foremost on our mind is, at what point do we begin the 
program, you know, recognizing that we have, hopefully, the 
ability to pay for the positive credit subsidy that this 
program may generate, but recognizing, by its nature, FHA 
reaches higher-risk borrowers.
    In the prime conventional space the ratios, front and back 
end, are 28-36. As you know, for FHA it is 31 and 43. So, 
again, by our design, we take on riskier borrowers.
    By the way, hearing some of the discussion about 
foreclosures and all of that, as you know our foreclosure rate 
is very low, something we take much pride in. But going forward 
it is, where do we put that mark down saying what will be the 
underwriting criteria. And we have been working around a 
framework: Is 31-43 the starting point? Should we go to maybe 
38 and 50, but with some trial modifications to see if the 
borrower can in fact make those payments? Because the last 
thing we want now is to have the borrower go through the 
expense of a closing and all that just to be foreclosed on 
again.
    So, first and foremost, that has been our primary concern 
is just where to set those underwriting criteria.
    Ms. Waters. Thank you very much.
    And you have mentioned that your foreclosure rate has been 
very low. And even at the point where the other initiators of 
loans in the private sector were offering all of these exotic 
products and FHA was not being utilized as much, I want to take 
you back to downpayment assistance programs that were very 
actively involved with FHA.
    I did not hear any complaints about the fact that their 
loans were defaulting at any higher rate than any other loans. 
Did something new happen that we don't know about?
    Mr. Montgomery. Madam Chairwoman, I have testified 
previously about the foreclosure rates, the default rates of 
borrowers who used seller-funded down payment assistance. As 
you know, those rates are 3 times what--on loans that don't 
have that type of assistance.
    I would say that if this committee wants to address a true 
zero down product, then I would say we go back and look at the 
original FHA bill that we passed in June of 2005 that had a 
true zero down product that this committee passed, that the 
full House passed; and let's go back and revisit that product.
    I would also say that I think history has proven to us that 
a zero down product proved hazardous for many families. But we 
did find a responsible way to do that. So, in effect, we don't 
necessarily need the seller-funded, if that is the desire of 
the committee to go back and look at a zero down product.
    Ms. Waters. Well, as you know, seller-funded down payment 
assistance does have a lot of support still. And I still have 
not seen the data or the information that would lead me to 
believe otherwise. So I suppose we will continue to try and 
move forward with this.
    I thank the chairwoman, and I yield back the balance of my 
time.
    Mrs. Maloney. Thank you.
    The Chair recognizes Congressman Shays.
    Mr. Shays. I thank the gentlelady.
    I am a strong supporter of what I thought was going to be a 
pretty positive program. Banks agreed to take 85 percent of the 
present-day market value, and if there is appreciation in the 
future, it is shared. And it struck me that at least in theory 
this benefited both the homeowner and those who had outstanding 
mortgages.
    First off, I want to ask each of you, do you conceptually 
believe in that program? I would like to hear from each one of 
you.
    Ms. Duke. I would be happy to start. Yes--
    Mr. Shays. You need a microphone.
    Ms. Duke. Yes, I would be happy to start. And, yes, I do 
believe in the program.
    While this is a difficult time to come to the Federal 
Reserve, I am fortunate that this is my first appearance before 
this committee, because the level of engagement and enthusiasm 
amongst all the work groups, as well as the oversight board, 
has been just tremendous. And our goal has been to put out a 
program that is as good as we can make it.
    Mr. Shays. Okay. Let me just ask, does anyone not agree 
with the program then?
    Okay, so we will make an assumption that all four of you 
are on board.
    Now we have a problem. I think we have a problem. And the 
problem is, where do we get the $300 billion? So, first, I am 
curious where we got the $29 million, and then tell me where we 
get the $300 billion. And we are not taking it from Fannie and 
Freddie.
    Mr. Swagel. Sir, the $29.5 million was funded--million 
dollars with an ``M''--was funded by the Treasury by the sale 
of the HOPE bonds that were specified in the Act.
    Mr. Shays. Right.
    Mr. Swagel. And then these were sold by the Treasury to the 
Federal Financing Bank. So within 1 day the money was in the 
account. Now, as you said, the Act does specify for the GSEs 
to, in a sense, be assessed a fee and have that fund, in part, 
the $300 billion. What happens with that going forward is up to 
the regulator, is up to the FHFA. It is going to be some time, 
in our understanding, before the regulator gets around to 
making a decision about those assessments. In the meantime--
    Mr. Shays. And that is basically because Fannie and Freddie 
are basically under the control of the Federal Government?
    Mr. Swagel. That is right. The FHFA is acting as 
conservator. In the meantime, the HOPE bond mechanism is in 
place and we can continue to fund the needed appropriations.
    Mr. Shays. Does that imply that we are just going to go 
more slowly?
    Mr. Swagel. No, absolutely not. The funding mechanism is in 
place. So all the resources needed to fund the program are 
available and will be made available by the Treasury. The issue 
is, how eventually will it be paid back; and that is something 
to be determined.
    Mr. Shays. Can I infer that--do we have a sense yet of how 
the banking community is going to respond to this program?
    Mr. Montgomery. Well, there is certainly a desire to have 
product out on the street. As you know, we currently have the 
FHASecure product, which reached its 350,000th refinance 
borrower yesterday. And as we stand up this product, many 
lenders have told me--and I suspect they will tell you after 
this panel--that they think it is a nice complement to have 
both of those products in the H4H, sir.
    Mr. Shays. Okay. So the answer is you are finding that the 
community is eager to see what the product ultimately will be 
and when it will be in place, and you have a sense that it will 
be attractive to a number within the banking community, the 
lenders?
    Mr. Montgomery. Well, I think they see it as an attractive 
loss mitigation tool.
    Mr. Shays. Right.
    Mr. Montgomery. They have other things they want to do 
before they do a principal write-down, as you know, but 
ultimately, if it gets down to their doing a principal write-
down, assuming they work through some of the issues on the 
pooling--
    Mr. Shays. When will we have a sense that this program is 
working? When will we be out in the marketplace and having a 
sense that the lending community is responding favorably?
    Mr. Montgomery. Sir, my honest opinion is that will 
probably be later this calendar year or on into early 2009.
    Mr. Shays. It really has to take that long?
    Mr. Montgomery. Sir, just as a basis of comparison, on 
FHASecure, we announced that program on August 31st of 2007. It 
was really a month and almost 45 days before we saw a lot of 
activity. There is a good reason for that. Lenders need to 
retool their systems, in addition to FHA retooling their 
systems. Now, there are some cases where they can do manual 
underwriting and things of that nature.
    So just inherently standing up the program this fast, 
recognizing that we can only work as quickly--or rather the 
lenders can only work as quickly as we can, there just are some 
inherent hurdles in that process that everybody is working very 
hard to overcome, sir.
    Mr. Shays. Mr. Curry, do you want to jump in on any point 
before I give up my time?
    Mr. Curry. No, I just wanted to add that the board is very 
mindful of--
    Mr. Shays. I am sorry, what is mindful?
    Mr. Curry. The board, the oversight board, is very mindful 
of what the industry reaction will be, what the reaction will 
be from borrowers. And we have expressed a willingness to 
revisit the design of the program to make whatever necessary 
changes we see appropriate after it is in effect.
    Mr. Shays. Thank you. I am happy to know that all four of 
you were favorably inclined toward the program.
    Thank you, Madam Chairwoman.
    Mrs. Maloney. The gentleman's time has expired.
    The Chair recognizes Congresswoman Speier for 5 minutes.
    Ms. Speier. Thank you, Madam Chairwoman. And I apologize if 
this question has already been asked, since I had to leave and 
then come back.
    Part of the criticism has been around the fact that, to 
date, the kinds of activities that HOPE NOW has engaged in have 
been more around payment rescheduling rather than loan 
modification.
    Could any of you respond to that?
    Mr. Swagel. As you know, Secretary Paulson has been working 
very hard with HOPE NOW and, you know, in a sense pushing them 
toward the longer-term modifications that we all want to see. 
We all want to see these sustainable situations.
    They have been moving in that direction. They are on track 
for 2 million total loan changes this year. That is a 
combination of the short-term, the longer-term, the 5-year and 
beyond. Those are up now to about 40 percent of the total 
changes from 10 or 15 percent. So it is progress, but we are 
still moving, you know, trying to move them further.
    If I can say one more word, which is, you know, part of the 
way we see this, the HOPE for Homeowners program is one more 
tool. So we have the HOPE for Homeowners program and the HOPE 
NOW Alliance, we have the GSEs' covered bonds, and this is one 
more tool to make sure that people have affordable access to 
mortgage financing.
    Ms. Speier. So if I understand you correctly, of the 
interventions that you have engaged in to date, 40 percent of 
them have been loan modifications, and 60 percent of them have 
been rescheduling.
    Mr. Swagel. Some combination of reschedulings, in some 
cases forbearance--you know, you don't have to make your 
payment for a few months. So shorter-term modifications are 
about 60 percent.
    Ms. Speier. I think certainly the interest of many of us on 
this committee is they be loan modifications, not rescheduling, 
because what you are doing then is just postponing the 
inevitable, and that is not going to right the system over the 
long term.
    Let me ask you this question. The Chairman of the FDIC 
spoke about how they have engaged in dealing with the IndyMac 
situation of the foreclosures there and the kinds of loan 
modifications that they have offered up and the model that they 
have created. Is that something that, within the jurisdiction 
of HOPE NOW, they could be offering at some point as well?
    Mr. Curry. The FDIC--and I am a board member of the FDIC--
is operating under a different structure. Specifically, we are 
acting as the receiver for the institution. So there is more 
inherent flexibility.
    The terms of the HOPE for Homeowners program are laid out 
by statute; other than some of the underwriting flexibility 
that we have, we are constrained by the statute itself.
    Ms. Speier. All right. Let me ask you probably the biggest 
elephant question in the room.
    When do we flip the switch from this being voluntary to 
this being mandatory if there is not enough take-up by the 
banks holding the loans?
    Mr. Montgomery. Well, the Act requires us, once the program 
is up and running, to make monthly reports to Congress on the 
volume. And that certainly is an issue I think we are going to 
have to continue to monitor.
    The key thing--and I want to put an exclamation point on 
what Phill said and Chairwoman Bair earlier said--a lot of the 
key to that are these pooling and servicing agreements. And the 
servicers are bound contractually to represent the best 
interests of that trust.
    It could be difficult for us, as they view this as just 
another tool in the loss mitigation, that they want to try 
other things before they get to writing down principal--and 
that is probably what most of us would do if we were in their 
shoes. So ultimately it will get to a point, I think, where 
they are saying, all right, let's go to the HOPE for 
Homeowners. And for some, you know, that could come sooner, it 
could perhaps come later.
    Ms. Speier. I guess my concern is that we are not going to 
act swiftly enough. And if we have a model with the FDIC where, 
by modifying these loans, they are seeing great response by the 
actual homeowners--and in fact, based on Ms. Bair's testimony, 
it makes more sense to modify than to foreclose in a cost-
benefit ratio--at some point we are going to have to make the 
case for that and move everyone in that direction if we don't 
have voluntary participation. And I, for one, think you as our 
agents need to assess that on a regular basis because voluntary 
may just not be good enough.
    I yield back my time.
    Mrs. Maloney. Thank you.
    Congressman Castle.
    Mr. Castle. Thank you, Madam Chairwoman.
    I could be wrong about this, but my sense is that we have 
gone through some transformations in this country in the belief 
about homeownership and mortgages. There was a time not that 
long ago in which people would sacrifice practically anything 
to make sure they paid their mortgage and they kept their home.
    Then we went through a period in more recent years in which 
you invested in a home with the idea it would go up greatly in 
value and you would perhaps get wealthy doing this.
    And then, of late, with a shift in bankruptcy laws in terms 
of how housing is handled and with respect to the credit crunch 
and other problems in this country, there seems to be a greater 
feeling that it is not the end of the world to let your house 
go--sort of a greater acceptance of that, if you will.
    In the work that you are trying to do in the HOPE for 
Homeowners program, I am worried that we are dealing with 
perhaps a different mindset than we had before. I don't know 
this, but I assume you have been reaching out to the various 
players in this field and getting ready for all this, including 
lenders and housing trade groups or whatever it may be.
    My question is, and it is not dissimilar from other 
questions that have been asked, but I am curious as to whether 
you truly think that this new program will be effective in 
reducing the number of foreclosures and effective perhaps in a 
significant way. Or are we beyond that at this point, and no 
matter what we do, it is going to be very limited in terms of 
its effect?
    Anybody?
    Mr. Swagel. Sure. You know, one way to look at it is that 
the people who get into the program, they are going to benefit 
in a number of different ways. They are going to have a lower 
principal, the second lien will be extinguished. And that is--
one of the things we are working on is, is essentially 
providing an enticement, a financial enticement to the second 
lienholder to give up that claim, so they will have lower 
payments and sustainable payments. And that is really what we 
are working on.
    Now, we have a problem that you mentioned. We want to make 
sure that the benefits of that go to people who have the desire 
to stay in their home, who have paid payments, who have tried 
to make payments. And that is one of the balancing acts that we 
face.
    Mr. Castle. What is your or any of your gut reactions to 
this, though, that you are going to be able to identify those 
people and bring them into the program? Or are you going to be 
dealing with people who have sort of let it go and don't care 
that much?
    Maybe you don't have a feel for that. And I know there are 
no statistical criteria for it, but I am curious to see your 
beliefs as to where it is all going.
    Mr. Montgomery. I will say the lenders have told me--and I 
have met with them; they view this as another loss mitigation 
tool for them and, I think, a good loss mitigation tool.
    But the key point is the government, and certainly speaking 
for FHA, there are other things that we can do with a family--
that are probably in the best interests of the family, I should 
add--before it gets to the point of a principal write-down, 
recasting the loan, extinguishing soft seconds, whatever, that 
have been working equally well.
    They all tell me it is a welcome tool, and there are other 
ones they are going to use before that, but it is good to know 
that there will still be H4H, there will be FHASecure.
    So I think the tools are there. Again, it is just the devil 
is in the details of unwinding those current agreements on 
those mortgages with a reservicer.
    Ms. Duke. If I could answer more from my other life as a 
community banker and having gone through a lot of workout 
lending, one of the things that you get to--and I think these 
loans are going to be most helpful in the situations that are 
the most difficult, situations where the credit is seriously 
impaired, where the values have dropped and maybe are 
considered to continue to drop.
    And so, again, working one-on-one with the borrower, there 
are a lot of cases where you really thought there was a chance 
this could work, you wanted to work with it; and this will give 
us some way to work with those more difficult credits to be 
able to--once you have written down the value to 90 percent, 
you have protected the credit a little bit. And then from the 
standpoint of the lender or the servicer, with the guarantee 
from FHA, then you have protected yourself a little bit from 
having to go through yet another modification on it.
    Also the flexibility that we have to work with the junior 
liens, to work with those who have other interests in the 
property, and perhaps to clear some of those up I think will 
maybe allow some loans that otherwise couldn't be restructured 
to be restructured.
    So I don't think this is the end-all answer, but it is 
another tool, and I think it is a tool that we have been 
missing.
    Mr. Castle. Good. Well, I thank you for what you are doing. 
I wish you luck with it. I hope that eventually we can overcome 
the foreclosure circumstances we have in our country. And, 
hopefully, you are going to be a part of that.
    I yield back, Madam Chairwoman.
    Mrs. Maloney. Thank you very much.
    Is there anything that the government can do to help you 
get your job done quicker and faster? That is what people are 
asking us. Is there anything impeding your ability to get it 
done and to get this program out there helping people?
    Mr. Montgomery. Well, I don't want to sound like Johnny One 
Note here, but you know, COBOL was introduced in 1959, and it 
is the basis for our IT systems, the oldest of which is late 
1970's, early 1980's.
    For many generations, HUD staff have gone back to this 
committee, have gone back to the appropriators asking for funds 
to modernize their systems. And a good example here, Madam 
Chairwoman, is just to make these adjustments, we have to go to 
17 different systems, all probably built by different 
contractors, and make very expensive improvements--or 
modifications, rather.
    And at some point going forward we have to modernize FHA's 
systems. Especially now, where our market share--when I first 
came to this committee in 2005 was about 1.8 percent; our 
market share now is 12 to 14 percent--and growing, I might add.
    Mrs. Maloney. Well, thank you. I thank all the panelists, 
and I would like to call up the next panel. Thank you.
    I want to thank the third panel for being here: Mr. Steven 
D. Hemperly, senior vice president, mortgage default servicing, 
CitMortgage; Ms. Molly Sheehan, senior vice president, Chase 
Home Lending; Mr. Michael Gross, managing director for loss 
mitigation, mortgage, home equity and insurance services, Bank 
of America; and Ms. Mary Coffin, executive vice president, 
Wells Fargo Home Mortgage.
    Thank you very, very much. We will start with you, Mr. 
Steven Hemperly. You are recognized for 5 minutes, thank you.

    STATEMENT OF STEVEN D. HEMPERLY, SENIOR VICE PRESIDENT, 
            MORTGAGE DEFAULT SERVICING, CitiMORTGAGE

    Mr. Hemperly. Thank you.
    Mrs. Maloney. Turn your microphone on and pull it closer to 
you, please.
    Thank you.
    Mr. Hemperly. Chairman Frank, Ranking Member Bachus, and 
members of the Financial Services Committee, thank you for the 
opportunity to appear before you today to discuss Citi's loss 
mitigation efforts and the implementation of the HOPE for 
Homeowners program. My name is Steve Hemperly, and I am the 
senior vice president of CitiMortgage Real Estate Default 
Servicing.
    As a Top 5 servicer with more than $800 billion in our loan 
servicing portfolio, Citi services approximately 7 percent of 
the loans in the United States. We believe this gives us a 
unique understanding of the scope and dynamics related to the 
foreclosure challenges confronting the Nation, and the work 
that needs to be done to keep borrowers in their homes.
    In this enormously difficult housing market, Citi has moved 
aggressively to help distressed borrowers. In support of our 
specific focus on finding long-term solutions for borrowers in 
need, our primary loss mitigation tool is loan modification. We 
have found modifications to be effective in helping certain 
borrowers manage through difficult times and avoid foreclosure.
    Citi has a specially trained servicing unit that works with 
homeowners to find solutions short of foreclosure, and tries to 
ensure that, wherever possible, no borrower loses his or her 
home. Citi continuously evaluates each of its portfolios to 
identify those customers who can save money and reduce monthly 
payments, and offers them timely and tailored loss mitigation 
solutions. Among other things, we provide free credit 
counseling, workout arrangements, and other options so, 
wherever possible, we can help borrowers stay in their homes.
    We have adopted various strategies to reach out to 
borrowers with resetting ARM loans. Qualified borrowers receive 
customized monthly communications and are eligible for 
streamlined refinance processing. Communications to customers 
with resetting loans start prior to reset and consist of direct 
mail, statement messaging, telephone contacts, and e-mail.
    Citi's foreclosure prevention activities have an excellent 
resolution rate for distressed borrowers with whom we are able 
to make contact. However, we are not able to reach everyone, 
and in those circumstances, there are limits to what we can do.
    To better meet the increased needs of struggling borrowers 
and reach as many of these borrowers as possible, we have 
dedicated significant resources to our loss mitigation area. We 
have doubled our loss mitigation staff this year, with plans 
for an additional 50 percent by year end.
    In order for policymakers, regulators, consumers, and 
market participants to better understand the extent of the 
current situation and our efforts to improve it, we think it is 
important to share what we know. To assist in this effort, for 
the past three quarters we have produced and publicly released 
the Citi U.S. Mortgage Lending Data and Foreclosure Prevention 
Efforts Report. The report goes into specific detail on our 
originations, delinquency trends, ARM resets, loss mitigation 
efforts, foreclosures in process, and new foreclosures 
initiated.
    Our most recent report shows that distressed borrowers 
serviced by Citi who received modifications, reinstatements, or 
repayment plans outnumbered those who were foreclosed on by 
more than four to one. The data demonstrate that our commitment 
to long-term solutions is yielding results. The number of 
borrowers serviced by Citi who received long-term solutions in 
the form of loan modifications in the second quarter of 2008 
increased by 27 percent as compared with the first quarter. Our 
loss mitigation efforts are keeping more struggling borrowers 
in their homes.
    Nevertheless, as we are all aware, current market 
conditions continue to be challenging, and we have seen 
foreclosures in process increase over the past year. Although 
foreclosures in process often do not result in a foreclosure 
completed, we actively pursue alternative loss mitigation for 
every borrower.
    Citi recognizes that access to credit and housing 
affordability are critical issues for at-risk borrowers trying 
to keep their homes. In 2007, to address these concerns, we 
founded the Citi Office of Homeownership Preservation, or OHP. 
The mission of the OHP is to increase contact with distressed 
borrowers and keep those borrowers in their homes.
    In addition to our own efforts, we reach out to borrowers 
by supporting and partnering with community organizations 
across the country. We are a founding member of HOPE NOW and 
partner extensively with a number of community-based 
organizations that are also committed to helping our borrowers. 
Much has been accomplished in partnership with these 
organizations, yet we realize there is a great deal more to be 
done.
    Mr. Chairman and members of the committee, in keeping with 
the actions I have described and our desire to do more, I want 
to assure you that Citi shares your interest in implementing 
the benefits of the HOPE for Homeowners refinance program, and 
we strongly support this committee's leadership in promulgating 
the House and Economic Recovery Act of 2008.
    CitiMortgage is a long-standing FHA lender and servicer. In 
preparation for implementation, Citi has reengineered our FHA 
originations process to improve efficiency and quality. To 
accommodate the changing housing market and in preparation for 
the realization of the HOPE for Homeowners program, we have 
substantially increased our FHA staff.
    While Citi's risk, technology, and servicing personnel are 
all engaged in review of the HOPE for Homeowners program, some 
important details have yet to be determined, and we are eagerly 
awaiting the specifics of the regulations so that we can get 
our systems in place. We look forward to the initiation of the 
HOPE for Homeowners program, and view it as a useful lending 
and servicing tool for struggling borrowers.
    In closing, I want to again emphasize Citi's commitment to 
keeping borrowers out of foreclosure and in their homes.
    Thank you, and I will be happy to answer any questions.
    [The prepared statement of Mr. Hemperly can be found on 
page 99 of the appendix.]
    The Chairman. Thank you.
    I apologize again for having to be in and out. It is that 
kind of day.
    Ms. Sheehan.

 STATEMENT OF MARGUERITE SHEEHAN, SENIOR VICE PRESIDENT, CHASE 
               HOME LENDING, JPMORGAN CHASE & CO.

    Ms. Sheehan. Chairman Frank, Ranking Member Bachus, and 
members of the House Financial Services Committee, my name is 
Molly Sheehan. I work for the Home Lending Division of JPMorgan 
Chase as a senior housing policy advisor. We appreciate this 
opportunity to appear before you today on this most important 
topic of helping homeowners.
    We recognize that no one benefits in a foreclosure. Chase's 
simple goal is shared by homeowners and community groups alike: 
Keep homeowners in their homes whenever possible.
    In total, Chase has assisted more than 110,000 customers 
from January 2007 through July of 2008 with loan modifications, 
repayment plans, reinstatements, and forbearance, and is 
working today with an additional 30,000 customers. In total, we 
have modified or refinanced over $6.3 billion of subprime 
mortgages, primarily ARMs.
    For example, we modified 3.5 billion in loans through our 
proactive outreach program. We have proactively locked in the 
initial interest rate for the life of the mortgage on $345 
million of subprime ARMs that we own, and for an additional 
$1.57 billion of subprime ARMs that are serviced for third 
parties. We have refinanced over $976 million of subprime ARMs, 
and we are in the process of modifying an additional $995 
million of subprime mortgages. So there is a lot of activity 
that is going on on a consistent basis at Chase around 
modification.
    In addition to our efforts in the subprime world, we have 
modified more than $2.2 billion of loans, both ARM loans and 
fixed loans, for prime borrowers because we are seeing 
additional stress in that market. We believe that the 
performance of our modified loans is very solid. After 12 
months, 5 out of 6 customers are making their payments on time.
    Currently, we are piloting a program to offer an FHA 
refinance product to our borrowers on the mortgage loans that 
we own, and that would include the recently enhanced FHASecure 
product. We plan to expand the offer that we currently have 
ongoing to include borrowers eligible for HOPE for Homeowners 
once the final parameters become available.
    In preparation to launch the H4H program, we have reviewed 
our service portfolio, conducted a preliminary analysis of 
loans that might be eligible based upon the criteria we know 
today. For this preliminary population targeted for H4H, we are 
currently in the process of calculating the best financial 
choice for the loan's owner and the borrower so that the 
borrower receives an affordable payment.
    We have convened a project team to define the strategy and 
procedures we would need to develop and execute on the H4H 
program as soon as the final program parameters become 
available. This will include extensive training of our 
personnel, preparing consumer outreach efforts, updating 
underwriting systems, programming new documents, and developing 
scripts for our call centers and loan specialists.
    We are pleased to have the H4H program as an additional 
tool to help homeowners. We do believe, however, based on our 
experience, that there are going to be some issues that will 
arise in the context of widespread use of the program.
    This is going to require a lot of effort on the part of the 
borrower, compared to a loan modification. What we have found 
is even using relatively simple documentation, it still 
requires multiple follow-up calls.
    The H4H program does have novel features that are not in 
most mortgages, such as the shared appreciation and shared 
equity, so there is going to need to be a lot of consumer 
education in order to make the program very successful. 
Additionally, I think, as has been mentioned by earlier 
speakers, the investor community still disfavors principal 
reductions. The preference is more to have a principal 
forbearance used to make the loan payment affordable; and that 
is similar to what, frankly, is in the IndyMac program that the 
FDIC has recently announced. So we do see that as an issue.
    We continue to work with our investors. And so it is not 
that they disfavor modifications per se; it is really how the 
sort of principal piece of the modification is handled. So if 
you can make that payment affordable through a forbearance 
rather than a reduction, that is going to be a more attractive 
alternative to an investor.
    The other thing we would just mention is that in the 
context of the incentives that are being provided to the second 
lienholders to extinguish their liens, which we understand--and 
that is sort of a very sensible approach--there is not a 
similar incentive that is being provided to the lender or the 
holder of the loan to recoup the principal loss they would take 
when they make use of the program. And we think that would be 
an incentive that would make the program more successful.
    In conclusion, we are committed to addressing the needs of 
customers who encounter financial difficulties as we continue 
to reexamine and improve our practices to respond to changing 
market conditions and their impact on our customers. We believe 
our programs truly are helping our customers through this 
challenging environment.
    Thank you. I will be happy to take any questions.
    [The prepared statement of Ms. Sheehan can be found on page 
118 of the appendix.]
    The Chairman. Thank you very much. I appreciate the focus 
on exactly the question.
    Mr. Gross, welcome back. We had you here once before, and 
we appreciated that, so please go ahead.

    STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR FOR LOSS 
MITIGATION, MORTGAGE, HOME EQUITY AND INSURANCE SERVICES, BANK 
                           OF AMERICA

    Mr. Gross. Thank you, Mr. Chairman. It is our privilege.
    Mr. Chairman and committee members, thank you for the 
opportunity to appear again to update you on Bank of America's 
efforts to help families prevent avoidable foreclosures.
    As the Nation's leading mortgage lender and servicer, we 
fully understand our role in helping homeowners in these 
difficult times. We are committed to being a responsible lender 
and servicer, facilitating both new homeownership and 
retention.
    Bank of America is leading the industry in today's 
challenging environment. We know that consumers who are 
experiencing financial challenges, but who ultimately have the 
ability to repay their loans, need our help. We are ready to 
help them, because everyone loses from a foreclosed home. Our 
continued goal is to modify and work out at least $40 billion 
in mortgages by the end of 2009, helping to keep over a quarter 
of a million families in their homes.
    Before providing a further update on our home retention 
efforts, I want to update the committee on our efforts to help 
individuals and families who are suffering from the devastation 
of Hurricane Ike. For mortgage customers whose homes have 
suffered hurricane-related damage, or who have temporarily been 
unable to return to work, we will offer payment forbearance, 
waive late fees, and decline to report overdue payments to 
credit bureaus during the forbearance period.
    We are also suspending foreclosure sales for properties 
with confirmed damage, subject to investor requirements. We are 
continuing to assess the situation, working with Members of 
Congress and in the impacted communities to develop other 
relief solutions.
    Regarding our current home retention efforts, I want to 
reaffirm to the committee our support for the recently enacted 
HOPE for Homeowners program and assure you that we are engaged 
in efforts to utilize the new tools that it provides. We expect 
the program will contribute to efforts to bring stability to 
the housing market, and we believe that it can help both 
homeowners and investors alike.
    To that end, we are actively refining preliminary 
assessments as to which customers whose mortgages currently are 
in foreclosure may qualify for the program. We are in the 
process of contacting these customers to confirm their 
eligibility for and interest in program participation. Subject 
to investor contracts and State procedural considerations, we 
will avoid completing foreclosure sales for customers 
identified while the implementing regulations are being 
drafted.
    In response to the needs of our customers, we have added 
more staff and improved the experience and training of the 
professionals dedicated to home retention. Over the past 18 
months, the home retention staff has doubled to over 5,000. We 
will continue to maintain sufficient staffing levels to ensure 
we are responsive to our customers.
    The Countrywide acquisition closed on July 1st. Legacy 
Countrywide data reflects that in the months of July and August 
2008, we successfully completed over 52,000 home retention 
workouts, a 326 percent increase over the same period in 2007.
    At the core of our combined operations are the commitments 
we made to engage in aggressive home retention efforts. Bank of 
America currently uses a range of home retention options to 
assist customers who are struggling to make their monthly 
payments, including loan modifications that may significantly 
reduce interest rates, extend maturities or, otherwise, loan 
terms; targeted strategies for customers facing interest rate 
resets that include automatic interest rate reductions for at 
least 5 years; formal and informal workout arrangements that 
allow customers additional time to bring their loans current; 
and partial claims that involve unsecured, no-interest, or low-
interest loans to customers to cure payment defaults. Early 
communication with customers is the most critical step in 
helping prevent foreclosures.
    So far in 2008, we have participated in more than 200 home 
retention outreach events across the Nation. We are proactively 
reaching out to customers by seeking to contact customers 
through outbound calls, including 18 million outbound calls in 
August, averaging over 17 attempts per month per loan. These 
outbound calls resulted in approximately 1 million 
conversations in the month of August with at-risk homeowners. 
We also mailed over 800,000 personalized letters and cards that 
offered customers the choice to contact Bank of America or a 
HUD-approved counseling agency. Furthermore, company home 
retention counselors attend events across the Nation and in our 
branches to meet directly with homeowners who need assistance.
    Both the pace of workouts, as well as the types of workout 
plans, have increased in the past year. In the first 8 months 
of 2008, we closed over 169,000 retention workouts, a 407 
percent increase over the same period in 2007. Since we 
announced a series of home retention initiatives last autumn, 
loan modifications have become the predominant form of workout 
assistance. Year-to-date, through August of 2008, loan 
modifications have accounted for more than 74 percent of all 
home retention plans, while the short-term repayment plans 
accounted for just 12 percent.
    I will close by reiterating Bank of America's commitment to 
helping our customers avoid foreclosure whenever they have a 
desire to remain in the property and a reasonable ability and 
willingness to make payments. Foreclosure is always a last 
resort. Today's market conditions demand that we expand our 
home retention efforts and develop new approaches which 
mitigate losses to investors. We are up to the task of meeting 
these demands.
    Thank you, and I would be happy to answer any questions you 
may have.
    [The prepared statement of Mr. Gross can be found on page 
87 of the appendix.]
    The Chairman. Next, Ms. Coffin.

STATEMENT OF MARY COFFIN, EXECUTIVE VICE PRESIDENT, WELLS FARGO 
                         HOME MORTGAGE

    Ms. Coffin. Mr. Chairman, Ranking Member Bachus, and 
members of the Financial Services Committee, I am Mary Coffin, 
head of Wells Fargo's Mortgage Servicing Division.
    In July, we testified, and we are here to show you our 
progress with the people we are helping to keep their homes. We 
thank you for inviting us back so that we can report further 
advancements, including our intended use of the HOPE for 
Homeowners program.
    Wells Fargo has been, is, and will continue to be focused 
on finding ways to keep our customers in their homes. We can 
accomplish this only when we are diligent at reaching out to 
those who need us and to work with them to understand their 
personal situations.
    At Wells Fargo, we are successful in contacting 9 out of 
every 10 of our at-risk customers. When we reach these 
customers, 7 of the 10 engage with us and work with us to 
develop a solution, while 2 customers tell us they do not need 
or want our help or assistance. And of every 10, 5 customers 
are able to avert foreclosure by improving or holding their 
delinquency status.
    We monitor our process to ensure we provide answers to 
customers as quickly as possible. Once we receive the required 
documents, on average, we complete a loan workout decision in 
less than 30 days.
    To accomplish all of this, we have extended our hours, we 
have participated in more than 150 face-to-face forums, and we 
have increased our loan workout team from 200 to 1,000. At 
Wells Fargo, however, staffing is about much more than simply 
adding employees; it is about ensuring our customers get the 
guidance and service they need. For this reason, we prioritize 
our staffing based on customer needs.
    Short sales, for instance, are complex and require 
specialized knowledge. We have consolidated this operation into 
a separate unit so as not to take away from customers who ask 
us for help in helping them to retain their homes.
    As always, in working with our customers to find home 
retention solutions, our goal remains to seek lasting 
affordability. Affordability can best be achieved by using the 
tools that most appropriately fit each customer's unique 
financial needs. Some of our at-risk borrowers are not upside 
down on their mortgages; they simply cannot afford their 
monthly payments. In these cases, an interest rate reduction 
provides the greatest lift. For borrowers who have too much 
housing debt and already have a low interest rate, a principal 
reduction could be the only solution. Yet others need us to 
employ several of our tools to reach a sustainable payment.
    Our responsibility as a servicer is to use the right tool 
in the right circumstance. For example, we have found that the 
same affordability can be reached through a 2 to 3 percent 
interest rate reduction and term extension as can be reached 
through a 25 to 30 percent principal reduction.
    And now before us is yet another solution, the HOPE for 
Homeowners program. To prepare for the program's launch, we 
have already established both a team of experts who understand 
what we believe the criteria will be and a dedicated toll-free 
customer hotline.
    In response to your requests for a moratorium for those who 
could potentially benefit from this program, we mailed letters 
to our customers we believed could be eligible and who were 
scheduled to enter foreclosure this month. We told them their 
foreclosure sale would be stopped until at least October the 
15th. By then, we intend to reconnect with them to confirm 
their qualifications and see if they have an interest in this 
program.
    Based on assumptions about the final criteria, we estimate 
as many as 30- to 40,000 of our customers who might not reach 
affordability from other solutions may qualify for HOPE for 
Homeowners. You have our commitment that we will work with our 
borrowers to find the optimal solution for sustainable 
affordability, and we will use this program where it is needed.
    We believe our participation in HOPE for Homeowners 
reflects the nature of our portfolio. Our company has not and 
does not make or service negative amortizing or option ARM 
loans. These borrowers are the most likely to benefit from the 
program, because their loans have higher interest rates and 
their principal balances are likely to be higher than the 
current value of their home.
    In closing, while making progress in avoiding many 
foreclosures has already been achieved, as servicers, we must 
continue to adapt to the ever-changing market before us. With 
the volume of foreclosures, we see the need to help investors 
understand the unique circumstances of customers and work with 
us to challenge contractual obligations. Our work with the 
government, HUD, the GSEs, and the American Securitization 
Forum has yielded success. However, further infusing 
flexibility into solutions is critical to our continued success 
in helping at-risk borrowers.
    Mr. Chairman and members of the committee, thank you for 
your time today, and I would be happy to answer any questions 
you have on our processes.
    [The prepared statement of Ms. Coffin can be found on page 
84 of the appendix.]
    The Chairman. Thank you.
    Because I have to leave, and because of his interest, I am 
going to switch questioning slots with Mr. Ellison. He is 
recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman, and thank you for 
having this very important hearing.
    Just a few demographic questions in the beginning, and this 
is for everybody on the panel: What percentage of late 
mortgagors are aware of the HOPE for Homeowners program? I 
guess my question is, as good as this program is, is it meeting 
the needs that are out there, given that we may see a million 
foreclosures?
    Mr. Gross. I guess for Bank of America what I would state 
is that we have an active program; since the program was indeed 
authorized, that we have been sending letters and making 
outbound call campaigns to all of the at-risk homeowners who 
are at risk of foreclosure to ensure their awareness.
    Mr. Ellison. So I think that--well, Ms. Coffin shared some 
statistics that they have at Wells.
    Do you all have any in terms of what percentage of 
homeowners that you contact about--
    Mr. Gross. I don't have those statistics. What I can share 
with the committee is that for foreclosure sales that were 
scheduled between September 8th and September 22nd, where we 
felt that the homeowner would be or could be eligible for this 
program, we have postponed over 1,650 foreclosure sales.
    Mr. Ellison. That is a lot.
    And also, I am curious to know about how the write-downs 
that you have been doing are impacting your companies. Is it 
impacting stock price? How is it impacting your company? How 
are your investors reacting to this?
    Ms. Coffin, do you want to start?
    Ms. Coffin. Sure. Well, I will say straight up there is 
nothing affecting our stock price, as you can tell, on a day-
to-day basis.
    And, two, my spirit of this is, we work with many of our 
investors. We don't take for granted what is in the contracts. 
We are reaching out to them on almost a day-to-day basis. We 
are making sure that we receive, where we can, especially on 
the coasts, delegated authority to make sure that we are able 
to quickly and swiftly make decisions, and where principal 
reductions are necessary.
    And we make sure that we are doing--as was spoken to this 
morning, our net present value analysis, that we are making the 
best decision in the interests of the entire trust--those 
decisions are being made.
    Mr. Ellison. So, in other words, engagement in aggressive 
action is not just helping the homeowners, it is actually not 
hurting the company.
    Ms. Coffin. That is exactly right.
    Mr. Ellison. Mr. Gross, do you want to add anything to 
that?
    Mr. Gross. I would completely concur with those remarks. I 
would also add in terms of investor reaction, I think, at least 
in your original question, I believe that you sort of mixed 
between the investors who own the mortgages versus the 
investors who hold shares in the banks, which are two different 
groups, generally.
    I would say as far as the investors who hold the mortgages 
and the relationship, what we heard earlier called tranche 
warfare, I can assure you that in no case has Bank of America 
or any other servicer that I am aware of made any decisions 
based upon a specific level of risk within a security or a 
position that a specific investor may hold. Our contractual 
obligations are to the trust in total, not to any specific 
party who has a unique position.
    Mr. Ellison. Do you think other servicers in the industry 
are doing what you are doing as aggressively as you are doing 
it? Are you leading the industry? How would you describe it?
    Ms. Coffin. I will state that as our size and the 
reputation that Wells Fargo has had, we are doing everything we 
can to lead, to set best practices, to show the technology that 
can be available, to show we are streamlined, the analytical 
departments we have, to look at the unique aspects of certain 
customer situations, and have brought that to bear across the 
entire industry, and also this group at this table has worked 
extensively together to find solutions collectively.
    Mr. Ellison. Ms. Sheehan, did you want to add something?
    Ms. Sheehan. I just wanted to add to really what Mary said, 
is that there is a core group of the larger servicers who have 
really been working last spring very actively together to try 
to set the tone for the industry as a whole. We are all 
obviously part of that group.
    Mr. Ellison. Well, let me just say as I wrap up that 
although there is no magic bullet to solve this foreclosure 
crisis, I think this is one of the important ways to solve it. 
I am happy to hear some of the reports that you have shared 
with us today.
    Thank you.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you very much, Mr. Chairman. I don't need 
to really point this out, but obviously you represent as many 
mortgages as any four people we probably could put together at 
a table, and we appreciate the attitude of trying to help 
resolve this problem. You are leaders for everybody else. I 
think we need to keep that in mind.
    Sometimes it is very confusing for me to follow the 
bouncing ball of just how you hold owner serviced mortgages. I 
assume, based on the testimony of some of you, and this is just 
an assumption, that in some cases, you have mortgages which you 
issued, which you own, and which you serviced, and I assume in 
some cases you have acquired mortgages which you have serviced, 
and in some cases, perhaps you just serviced mortgages. You can 
distinguish if I didn't categorize all that correctly.
    My question is: Has anyone tried to distinguish 
statistically in that category of where the greatest problems 
are? Do you have many problems with mortgages you just service? 
And I ask that on the basis that you are all very responsible 
entities, but you may have acquired mortgages that perhaps came 
from somebody who is not quite as conscientious as you were, 
and perhaps you are depending upon credit rating agencies for 
that institution as opposed to knowledge about the particular 
mortgages, and therefore there are greater problems with those 
service-type mortgages as opposed to something you issued 
yourself. Is that beyond your knowledge? Or don't you 
understand the question? Any of the above.
    Ms. Sheehan. I understand the question. That is not 
information I have in front of me today. I would just observe 
that many times it has more to do with the actual nature of the 
mortgage itself. And we see, at least I have observed, greater 
differences in those performance statistics. For example, prime 
versus subprime versus all day; I think we probably have all 
observed similar types of things.
    Mr. Castle. Anybody else?
    Ms. Coffin. I will comment. First of all, you did an 
excellent job of describing the different components. At Wells, 
we do keep separately those loans for which we acquired only 
the servicing and we did not set the underwriting standards. I 
can tell you that they are more difficult to service, they are 
more difficult to find solutions for, and we believe it is a 
part of the responsible lending that we are advocating as to 
some of the brokers who were not regulated and what they did 
and what is in those portfolio loans. We do keep them separate, 
and we do have higher delinquency and higher foreclosure rates 
on those portfolios.
    Mr. Castle. Interesting. Thank you.
    Mr. Gross. We would concur with that evaluation. It has 
been historically the case and remains the case that loans 
originated by third parties tend to have higher delinquency 
ratios than those of retail originations.
    Mr. Hemperly. On behalf of Citi, we concur as well. From a 
servicing standpoint, the approach that we take relative to the 
customers is, in my view, somewhat blind to the path that the 
customers loan traveled to get into our servicing shop. I think 
it is important to note that because the efforts that go into 
trying to help the customers and keep them in their home, to 
make contact, and try to solve for affordability are largely 
very consistent on the loans we hold on portfolio, as well as 
the loans we service for others. Occasionally we may need 
approvals or whatever. But I don't think that there are 
material obstacles in helping the people who need help.
    Mr. Castle. Thank you. Let me jump on to a different 
subject. When we did the big bill earlier on this, I was 
involved in writing legislation to try to help with some 
liability issues with respect to modification of loans. It was 
a general statement saying, basically, if you stayed in 
compliance with regular terms, you could not be sued, etc.
    But my question is, as you are doing your loan 
modifications or your workouts and servicing these mortgages, 
are you having liability concerns at any point in any aspect of 
it that is reducing your ability or will to go to these workout 
situations, or do you feel comfortable that that is not an 
issue in terms of dealing with the various borrowers that you 
are dealing with on the workouts and modifications?
    Mr. Gross. We are comfortable that the liability issues are 
not significant factors that would enter into our 
consideration. Generally speaking, as long as we are 
comfortable that we are in conformance with the pooling and 
servicing agreements and other documents that may regard the 
sale and servicing of loans, then we should have no liability 
issues whatsoever.
    Mr. Castle. Does anybody else wish to respond to that? If 
not, I will just take credit for writing good legislation to 
help with all of that.
    I appreciate that answer. As I said at the beginning, I 
appreciate what you are doing. I just think we are all, I mean 
society, and America in general, is in this together, and I 
think you are leaders in this. You keep demonstrating the steps 
that can be taken to deal with the individual mortgage issues 
which collectively are major structural issues to the economy 
of our country. We appreciate it.
    I yield back, Mr. Chairman.
    The Chairman. Thank you. I really appreciate the focus we 
are getting. You talked about some of the specifics that might 
help. When you talked about recoupment, and I apologize, there 
have been messages coming in and out, I know we have in here 
that if you are the beneficiary as the borrowers of this write-
down etc., and you made a sale for profit within 5 years, you 
share that with the Federal Government. Was it your suggestion 
that the holder of the loan also share in those proceeds? You 
were talking about some recoupment for the one who wrote it 
down. I apologize for not focusing. Would you elaborate?
    Ms. Sheehan. Yes, that is what I was referring to. Not only 
the way the legislation is currently being interpreted by the 
regulators who are writing the rules, is the potential for a 
second lienholder to share in appreciation, and there is a 
potential for the borrower to share and the government to 
share, but not for the first lienholder.
    The Chairman. What we were driven there by was obviously 
the imperative of trying to hold down the tax liability. We are 
unlikely to modify it right away, but that is something to keep 
in mind.
    Mr. Gross, one of the things you talked about last year in 
August was the integration of Countrywide into Bank of America. 
For these purposes, is that now complete?
    Mr. Gross. No, it is not, sir. They are operating as two 
entities within the Bank of America, and the full integration 
of the two servicing operations is probably about 18 months 
out. I would say that both operations are under the leadership 
of Steve Bailey, who is now the servicing executive for Bank of 
America.
    The Chairman. An obvious question; are there policy 
differences between the two, or are they making the same 
decisions?
    Mr. Gross. We are essentially making the same decisions, 
sir.
    The Chairman. So that if you are a former Countrywide 
borrower, you will not be treated substantively differently 
than if you had been a Bank of America borrower?
    Mr. Gross. That is correct.
    The Chairman. In that case, the integration is less 
important, and of course--and we obviously want to have people 
reassured that the acquisition of Merrill Lynch won't disturb 
this.
    Mr. Gross. I assume that those same rules that I have just 
outlined that govern Countrywide--they would be the same. There 
is no discrimination that would take place.
    The Chairman. There are people who are worried that Bank of 
America will soon be the only bank in America.
    I am reassured. We had different things on the servicer 
issue. We will want to work with all of you to see whether 
there are things we can do, even the transaction costs.
    But let me say that we will have had, by the time we are 
finished next week, Chairwoman Bair, IndyMac, and Fannie Mae 
and Freddie Mac, with their vast portfolios. We have the four 
largest banks here. We are very appreciative. I am pretty sure 
that by the time we finish here, well over 90 percent of the 
holdings will have been before us.
    We are pleased with what we hear. I think it is, frankly, 
very important. This is a time when a lot of people in this 
country have already lost confidence in our system, are feeling 
put upon, are feeling unfairly treated. We are dealing here not 
just with the question of individuals being treated fairly, and 
that is very important, and even the near-term macroeconomic 
situation.
    In the hands of the people here, to a very great extent, 
rests the question about whether a lot of average Americans are 
going to continue to believe that they live in a fair country. 
You can't translate that to the bottom line, but I think we all 
have an interest in that being firmed up.
    You are major pillars of our financial system. I have to 
talk about Sheila Bair. Sheila Bair has ownership of servicers 
that are regulated, unrelated. One of the things that strikes 
me is the extent to which you, the commercial banks, the more 
highly regulated entities, are being asked to come to the 
rescue of the more lightly regulated entities. I do think this 
is a sign that regulation, properly done, can be done well.
    We all have that vested interest. I appreciate what you are 
doing. Obviously, you are private corporations with shareholder 
obligations. But I think, in this case, your shareholders need, 
all of us need a restoration of a sense of fair play that has 
ebbed among a lot of our fellow citizens. And your four 
institutions collectively can do a great deal about that. So I 
appreciate your being here and your acknowledgement, and I hope 
things go well.
    I am going to have to temporarily step out again. Ms. 
Speier will take over.
    Ms. Speier. [presiding] This is a unique situation for a 
freshman, I might add.
    Mr. Shays.
    Mr. Shays. Let me just thank my colleague for her presence 
here. I was such a good friend with Congressman Lantos. So you 
represent an important district, in my mind, and represent it 
well.
    I don't know if I have a conflict. I have a mortgage with 
Wells Fargo, my credit card is with Bank of America, and my 
second loan was with Chase. I appreciate all you do to try to 
provide goods and services for Americans.
    What I am really interested in knowing is the likelihood 
that the whole program will be successful. My general logic is 
that 85 percent of present market value could result in 
$100,000 worth of loss, or more, for some loans, particularly 
in my area. But my sense is that if you have to go into 
foreclosure, you would be looking at much higher losses.
    So, one, I just want to know from each of you if 
conceptually you believe in the program. I would like to start 
with you, Mr. Hemperly.
    Mr. Hemperly. Conceptually, we absolutely support the 
program. I believe that it is a good tool that we can use, in 
conjunction with some of other of our other tools.
    Mr. Shays. If anyone disagrees with that, speak up.
    Let me ask the second point: Why does it have to take so 
long? Would you be ready to go right away if this program were 
out there, all set to go? Would you be ready to take advantage 
of it?
    Mr. Hemperly. We have significant resources decked against 
getting ready for this program. The October 1st deadline is a 
very vast deadline for us. As soon as we can get the additional 
guidance, we will know more about our readiness timelines.
    Mr. Shays. Let me hear from others.
    Mr. Gross. If I could, I think sort of putting aside the 
October 1st date, the fundamental objective of the HOPE for 
Homeowners Program is to stop foreclosures. To the extent that 
Bank of America and other servicers are evaluating at-risk 
homeowners presently, and postponing foreclosures--
    Mr. Shays. That is amazing.
    Mr. Gross. So to the extent that we are aware that this 
homeowner might be eligible for it, and we have stopped the 
foreclosures process.
    Mr. Shays. The bottom line is had this program not been in 
place, you might be more inclined to move more quickly.
    Mr. Gross. There may well have been foreclosures that 
occurred had this program not be in place.
    Mr. Shays. Would you agree, Ms. Coffin?
    Ms. Coffin. I do.
    Mr. Shays. Ms. Sheehan.
    Ms. Sheehan. I do.
    Mr. Shays. That is encouraging. Do you all need to hire a 
lot more people to make this system work properly? Let me start 
with you, Ms. Coffin, and go down the panel.
    Ms. Coffin. As I stated in my testimony, we already have a 
dedicated team beginning to learn what we believe will be the 
criteria and setting up--
    Mr. Shays. Besides a dedicated team, are you having to hire 
more people to do this?
    Ms. Coffin. Well, in general, we are hiring more people 
just because the nature of the time of the year and the 
seasonality. We are coming into the fourth quarter of the year, 
which is usually a higher time for delinquencies. So, yes, we 
are hiring more people, but not specifically just for this 
program.
    Mr. Shays. Mr. Gross.
    Mr. Gross. Yes, we are adding staff.
    Ms. Sheehan. We have already added a specialized staff 
around FHASecure, and this third FHA program will become part 
of that. So we have sort of completed that process.
    Mr. Hemperly. We have also made very extensive additions to 
our FHA staffing.
    Mr. Shays. What would be your biggest concern that this 
program could be screwed up? In other words, if it was going to 
be screwed up, what would be the likely concern? Do you get the 
gist of my question?
    The bottom line is they could incorporate the rules in a 
regulation that is workable and they could go in the opposite 
direction. Is there a debate on the books right now that you 
are having with them, trying to move them in a direction that 
makes the program work?
    Mr. Gross. I don't think that there is necessarily a debate 
about that as yet. We haven't seen the final rules from the 
oversight board. Probably my biggest concern is that 
expectations for the HOPE for Homeowners refinance program at 
times might be too high, just from the standpoint that in the 
hierarchy of workout options that you have heard about this 
morning and on a few different occasions, that regardless of 
who owns the loan, we are going to present the homeowner with 
the option that gives them a sustainable monthly payment and 
presents the owner of that loan with the least loss. If that is 
an interest rate or a term modification that would arrive at 
that sustainable payment, then we would choose that option for 
the homeowner.
    Mr. Shays. The bottom line is that if they can afford to 
pay, you would probably go with FHASecure, if they have the 
capability, before you would go into the HOPE for Homeowners, 
correct?
    Ms. Coffin. That is correct.
    Mr. Shays. Thank you, Madam Chairwoman.
    Ms. Speier. Thank you. To follow up on the gentleman from 
Connecticut's question, let me ask you this: A number of you in 
your testimony suggested that your preference is to reduce the 
interest rate and extend the length of the loan. Those are your 
first priorities in terms of modification. That being the case, 
HOPE NOW is all about reducing the actual value of the home to 
90 percent.
    So I am trying to understand if, in fact, what you are 
saying is that HOPE NOW will be the last resort. Is that a fair 
statement? You can each answer that.
    Mr. Hemperly. The HOPE for Homeowners program does call for 
principal reductions. We currently do offer principal 
reductions. We believe though that there are several ways that 
we can solve for affordability when we are dealing with our 
distressed customers. The way that we have done most often is 
we have made a shift in rate to solve for their affordability. 
That seems to work, in our view, very frequently. When it 
doesn't work, we will look at term extensions and we will look 
at principal reductions. So they absolutely have their place in 
the tool box.
    That being said, currently we take fewer principal 
reductions in our modifications than we do because we can solve 
for rate more times than that.
    Ms. Speier. In terms of your principal reductions, what 
percentage then are principal reductions?
    Mr. Hemperly. I do not have that data.
    Ms. Speier. Could you provide that to the committee?
    Mr. Hemperly. Absolutely.
    Ms. Speier. Ms. Sheehan.
    Ms. Sheehan. I agree with what Steve is saying, but I would 
note also that sort of between the option of reducing rate and 
extending term to get to the affordable payment, if that is not 
adequate, you can actually do a principal forbearance. That was 
the reference I made earlier to the IndyMac program.
    Principal forbearance is where you calculate now the 
monthly payment, take off that certain amount of principal. 
Let's just say it is 10 percent. It becomes a silent balloon at 
the end. There is no payment obligation attached to it at that 
point. But it does give the holder of the loan the ability, 
should the home be sold, to share in that future appreciation.
    That was the comment that I was making earlier, that the 
one distinction between doing a principal forbearance and HOPE 
for Homeowners is that the first lienholder doesn't get that 
ability to recoup through the appreciation.
    Ms. Speier. I understand that. It was your testimony that 
first triggered my question because it does appear that your 
interest in reducing the actual value of the home is the least 
attractive of the choices that you have.
    Mr. Gross.
    Mr. Gross. As previously stated, the reduction of 
principal, which presents generally the greatest loss to the 
investor, would be our last resort.
    Ms. Coffin. As my testimony has stated, we have actually 
analyzed that. Our number one goal is to get affordability, and 
sustainable affordability, and we can actually get there 
quicker with a rate and a term extension than we can with going 
very deep on a principal reduction.
    But, as stated, as we have analyzed our portfolio to 
prepare for HOPE for Homeowners, we have to look at what is the 
outstanding debt for the borrower. I will tell you that a vast 
majority of our borrowers who are at risk do not have high 
LTVs. They have either had a loss of income in their home. So 
it isn't always just about all the foreclosures because people 
are upside down in their homes. We have many people who have an 
80 percent LTV who cannot afford their mortgages today.
    Ms. Speier. I am going to quote some testimony from Mr. 
Hacobian, who is about to testify. He gives an example of a 
homeowner who was told the investor would not approve this 
family for a loan modification. They tried 3 times to have 
their loan modified. They were scheduled for foreclosure 
auction in July 2008.
    On June 10th, the servicer was changed from Option One to 
American Home Mortgage. On July 1st, the new servicer sent this 
family a loan modification proposal reducing the interest rate 
from 11 percent to 6.5 for the life of the loan. The amount 
they were in arrears was capitalized into the loan. This came 
as a complete surprise to the homeowners and the counselor.
    Option One had explained to our counselor that they had 
proposed a loan modification, and it had been denied by the 
trustee. Our counselor contacted the trustee, who explained 
that they rely on the recommendations of the servicer in 
considering a loan modification.
    Once American Home Mortgage took over the operation of 
Option One, one of the three loan modification proposals that 
had been previously denied was approved. The trustee, as it 
turns out, was Wells Fargo. So there is a lot of finger 
pointing in this particular example, and it seems like it 
certainly meets all of your preferences, which is to reduce the 
interest rate, extend the loan, and yet this home almost went 
to auction, but for the change of the servicer.
    So, Ms. Coffin, could you respond to that, please?
    Ms. Coffin. Yes, I can. Let me be clear. The responsibility 
of a modification and a decision on a modification for a 
program is held by the servicer. It is our contractual 
obligation to understand that contract and to make that 
modification decision. And in your example, that was Option 
One's responsibility.
    The responsibilities of a trustee; the trustee is 
established by the securitization, and the trustee oversees the 
administration actually of the contract itself, the 
disbursement of funds to the end investors, because ultimately 
there are many investors involved in a securitization. They are 
more of an administrative role.
    Now, in between a trustee and the actual servicer is yet 
another, and that is called a master servicer, if you have 
heard of that. A master servicer can work with a servicer to 
provide interpretation of the contract, but it is not the 
trustee or the master servicer's fiduciary responsibility to 
say yes, that looks like a good modification. Do it. That is 
not their job. That is our responsibility as a servicer.
    Ms. Speier. All right. One last question for Mr. Gross. The 
last time you were here, we talked about the waiver section 
that appeared in the Countrywide contract. You said you--
    Mr. Gross. Bank of America and Countrywide do not use the 
waiver language in their loan workout and modification 
documents.
    Ms. Speier. Thank you for that clarification. Thank you all 
for your participation.
    We will now have panel four. I would like to welcome, as we 
are changing seats here, let me welcome to the committee: Mr. 
Mossik Hacobian, the president of Urban Edge Housing 
Corporation; Ms. Tara Twomey, of counsel for the National 
Consumer Law Center; Mr. Ron Phipps, first vice president of 
the National Association of Realtors; and Mr. Alan White, 
assistant professor, Valparaiso University School of Law.
    Mr. Hacobian, would you like to begin?

  STATEMENT OF MOSSIK HACOBIAN, PRESIDENT, URBAN EDGE HOUSING 
                          CORPORATION

    Mr. Hacobian. Thank you, Madam Chairwoman. Thank you for 
the opportunity to testify on this very important issue 
affecting our communities.
    Urban Edge is a community development corporation in its 
35th year of operation. We have developed and preserved over 
1,300 units of rental and ownership housing affordable to very-
low-, low-, and moderate-income households. We also offer 
classes in first-time home buyers training, credit counseling, 
and post-purchase counseling. For the past 2 years, however, we 
have had to focus a lot of our attention on foreclosure 
prevention, under contracts with the City of Boston, 
MassHousing, NeighborWorks America, and a variety of other 
programs.
    We analyzed in preparation for today 254 cases that we have 
in our organization involving 51 different servicers. A summary 
of that analysis was included in my written testimony to you.
    Our counselors have been able to secure loan modifications 
for 62 homeowners out of the 254 cases. That is a 24 percent 
success rate. More than three-quarters of those 254 cases, or 
196, are being handled by 24 of the 51 servicers with whom we 
are in contact. Our success rate with these 24 servicers is a 
little bit better than an average rate of 32 percent.
    Loan modifications this year represent 83 percent of our 
successful outcomes. In 2007, they represented only about 10 
percent, or 3 out of 30. The increase in loan modifications in 
2007 to 2008 has basically been tenfold. It has become, as was 
testified earlier, the preferred method of homeownership 
retention.
    About 80 percent of these modifications are permanent. 
About 20 percent are short-term, meaning 2 to 5 years. In the 
past, meaning 2 years ago, the servicers' posture was to find 
ways to disqualify homeowners for loan modifications. At 
present, more servicers are cooperating to modify loans for 
homeowners whose incomes will allow them to make the payments. 
This is pretty consistent with what you just heard.
    For example, of the 115 City of Boston intakes in 2007, we 
resolved 30 cases successfully, only 10 percent of which were 
modifications. In the first 7 months of 2008, with 65 
additional intakes, we successfully resolved 82 cases, 30 of 
which, or 37 percent, were loan modifications.
    So, as I said before, in the first 7 months we have done 10 
times as many modifications as in all of 2007.
    What more can be done? The loan modification process should 
be more standardized. Too often, the successful loan 
modification is dependent on the personality of the servicer, 
and the skill, imagination, and tenacity of the counselor. Some 
servicers are helpful, others are obstructionist. There is too 
much art and not enough science in obtaining a successful 
modification.
    It will also be helpful to hold the senior executives or 
presidents of servicer organizations accountable for outcomes. 
As you were kind enough to read from my testimony, we have had 
situations where we talked to a servicer who refuses a 
modification. We then called the president of the company and 
the same servicer who denied the modification all of a sudden 
is able to do it.
    When you call, you don't always get the same person. So 
sometimes it is a question of getting the right person, having 
them understand what you are requesting, and staying with them 
until it is resolved.
    We have had a manager of a company responsible for investor 
and community relations express frustration with their 
inability to make changes to the pooling agreements that was 
explained before. Because these are parts of trusts, they feel 
they don't have the authority to make those recommendations, 
despite what you just heard. Well, not despite what you just 
heard.
    At the level of the trustee, who would like to make--and in 
this example, we are talking about somebody at Wells Fargo--
they wanted to make a change, but were not able to make a 
change without the recommendation because of the constraint of 
the pooling agreements.
    In this example, the change in the servicer apparently 
resulted in the new servicer making a recommendation that the 
trustees were willing to entertain, whereas the previous 
servicer didn't feel they were able to exercise that judgment.
    So to the extent, and this was testified to earlier, to the 
extent there could be greater flexibility for both the investor 
and the servicers to negotiate a case-by-case merit-based 
solution, we think that would be helpful for both the 
investors, the servicers, and the homeowners.
    You already gave one of the examples that I was going to 
cite, so I won't repeat it, where Wells Fargo was very 
interested in a solution, and what is important to note is that 
the previous principal, which was $275,000 at 11.13 percent, 
cost the homeowner $500 or $600 a month more than the new 
higher principal which included all the arrearages that were 
capitalized at 6\1/2\ percent, was $500 less on a monthly basis 
and resulted in a reduction of the share of the household 
income that went to the mortgage payment from 62 percent to 49 
percent.
    We were puzzled at how such a change could happen so 
quickly from one servicer to the other. So clearly it can be 
done.
    In another example that is included in my testimony, we 
have a situation where a homeowner has an adjustable rate 
mortgage that started at 9.45 percent. We are attempting to 
secure a loan modification for a fixed rate mortgage. The 
homeowner can afford to make the payments if the interest rate 
is reduced to 6 percent.
    We were initially negotiating with Litton Loan Servicing. 
Litton sold the loan to Select Portfolio. We are told the 
investor is Magnitar Financial.
    While some of the testimony you just heard is from major 
organizations, we have many, many loans that are held by 
servicers that have one or two loans that we are dealing with. 
It is very labor intensive. The servicers have told us because 
of the pooling agreement, the interest rate cannot be reduced 
to a rate lower than the starting rate of 9.45 percent. If that 
is not reduced, this home, unlike the previous example, will go 
into foreclosure.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Mr. Hacobian can be found on 
page 95 of the appendix.]
    Ms. Speier. Thank you.
    Ms. Twomey.

  STATEMENT OF TARA TWOMEY, OF COUNSEL, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Twomey. Congresswoman Speier, Chairman Frank, and 
members of the committee, thank you for inviting me to testify.
    My name is Tara Twomey, and I am an attorney of counsel 
with the National Consumer Law Center. Prior to joining NCLC, I 
was a clinical instructor at Harvard, where my practice 
included foreclosures prevention in the low-income communities 
of Boston.
    We are facing the worst foreclosure crisis since the Great 
Depression. As you know, the statistics are grim. Bank-owned 
properties now make up 16 percent of the inventory of existing 
homes for sale nationwide, and in some communities, that number 
tops 40 percent.
    The housing market is hemorrhaging, and for a majority of 
residential loans the only entities that can stop the bleeding 
are the mortgage servicers. Mortgage servicers provide the 
critical link between mortgage borrowers and the mortgage 
owners, but their financial interests are sometimes adverse to 
both. The oft-quoted phrase, ``everybody loses with 
foreclosures,'' does not necessarily apply to the servicer.
    Because of systemic problems in the mortgage servicing 
industry, voluntary, large-scale loan modifications are an 
aspiration rather than a reality. The recently passed HOPE for 
Homeowners Act addresses important barriers to creating 
affordable, sustainable loan modifications. We applaud the call 
by the chairman and members of the committee for a halt to 
foreclosures until the program is up and running.
    While the promise for HOPE for Homeowners is great, 
substantial hurdles remain. The most significant of these is 
that the program remains entirely voluntary. Since May of 2007, 
the government has been calling on the financial services 
industry to engage in meaningful, voluntary loan modifications, 
and we would suggest to you that the reason voluntary measures 
have fallen short is because the mortgage service industry is 
fundamentally broken when it comes to servicing the needs of 
borrowers.
    Instead of responding to borrowers' needs, servicers answer 
to their own bottom lines. Pushing the distressed into a maze 
of automated voice response systems saves them money. Failing 
to respond to borrowers' disputes or answer borrowers' requests 
for information reduces costs. And forcing the financially 
distressed to waive important rights in order to save their 
homes improves the servicers' bottom lines. This practice of 
requiring borrowers to sign broad waivers and loan modification 
agreements, which was highlighted in the last hearing before 
the committee, is still widespread.
    Charging unreasonable and unauthorized fees also improves 
the servicers' bottom lines. Despite what the industry may tell 
you, a lengthy default culminating in foreclosure can also 
improve the servicers' profitability.
    Indeed, the servicers generally seem unconcerned that high 
defaults and foreclosures will negatively impact their bottom 
line. For example, this is what we heard from David Sambol, 
then chief operating officer for Countrywide almost a year ago. 
And I quote, ``Increased operating expenses in times like this 
tend to be fully offset by increases in ancillary income in our 
servicing operation, greater fee income from items like late 
charges and, importantly, from insourced vendor functions that 
represent part of our diversification strategy.''
    As a result of this diversification strategy, servicers are 
burying our borrowers in fees and costs. Once a property is 
foreclosed, those fees will be paid to servicers first and 
taken out of the fund remitted to the investor. Investors lose, 
borrowers lose, and the servicer adds to their bottom line.
    Based on the industry structure, it is no wonder we have 
one of the Nation's largest servicers charging an elderly 
borrower for property inspections on other peoples' property 
and for inspections that never took place. In a recent court 
decision, a bankruptcy judge found that the servicer was 
charging for inspections that allegedly took place when 
Jefferson Parish, where the home is located, was under 
evacuation orders as a result of Hurricane Katrina and, 
nevertheless, the borrower was being charged for property 
inspections that took place during that time.
    Chairman Frank, members of the committee, we commend you 
for enacting HOPE for Homeowners, a bill that addresses some of 
the barriers to loan modification. However, we believe that so 
long as compliance remains voluntary, we will not see the 
number of affordable, sustainable loan modifications necessary 
to stem the tide of foreclosures.
    We believe that Congress must still do more. The now 
government-controlled GSEs must freeze foreclosures and 
aggressively pursue loan modifications, including principal 
write-downs.
    Congress should enact Congresswoman Waters' bill, H.R. 
5679, which aligns mortgage servicers' interests with those of 
homeowners by mandating borrower access to a decisionmaker, by 
requiring information and dispute resolution prior to 
foreclosure, and by creating a duty to consider reasonable loss 
mitigation alternatives prior to foreclosure.
    H.R. 5679 would also prohibit the waiver of claims 
provisions in loan modifications that are still standard 
operating procedure for many mortgage servicers.
    Lastly, Congress should allow bankruptcy courts to modify 
home mortgages, just as they can do for virtually every other 
kind of secured and unsecured debt. The family home does not 
deserve less protection in bankruptcy than a car, a boat, or a 
vacation home.
    Thank you for the opportunity to testify before the 
committee. We look forward to working with you to address the 
challenge of our Nation's foreclosure crisis.
    [The prepared statement of Ms. Twomey can be found on page 
124 of the appendix.]
    The Chairman. Mr. Phipps.

    STATEMENT OF RON PHIPPS, FIRST VICE PRESIDENT, NATIONAL 
                    ASSOCIATION OF REALTORS

    Mr. Phipps. Good afternoon, Chairman Frank, and members of 
the committee. Thank you for inviting me today to testify on 
behalf of the National Association of Realtors' (NAR) more than 
1.2 million members.
    My name is Ron Phipps, and I am a broker with Phipps Realty 
in Warwick, Rhode Island. I have been a broker for 30 years and 
a realtor for 30 years. I currently serve on NAR's executive 
committee and have been elected the 2009 first vice president.
    NAR commends the committee for holding this hearing. The 
hundreds of thousands of families who are facing foreclosure 
are not just statistics, these are people who need help now: 
6,000 people will lose their homes from foreclosure today, and 
3 months from now, many others will be out of their homes. For 
some, this is inevitable. But there is much that can be done to 
mitigate the long-term pain of this loss. My written comments 
go into more detail.
    But I would like to take this moment to focus on one tool 
that can lessen the pain; the short sale process. A short sale 
occurs when the sales price of a home is not sufficient to 
cover all of the liens and associated costs of a sale and the 
seller can't cover the deficiencies.
    There are benefits to successful short sales. First, unlike 
foreclosures, short sales allow the homeowner to maintain some 
level of good credit. Second, lenders avoid the liability and 
expense of owning properties for extended periods of time and 
the costs associated with the foreclosure and sale. Third, a 
quick sale at a higher price helps support home values and the 
tax base in the community, in the neighborhood.
    Although short sales can be very effective foreclosure and 
loss mitigation tools, consumers have encountered significant 
roadblocks in the process. For example, when contacting 
lenders, consumers, and Realtors find it difficult to find the 
right person to talk to, and when they do, calls are often left 
unanswered. If we manage to reach a human being, they are 
overwhelmed and often lack the experience to handle the short 
sale. The resulting delays often force potential buyers to walk 
away from a transaction and the homeowner is one step closer to 
foreclosure.
    Another problem we encountered is the rejection of offers. 
Bank appraisals often don't reflect local market values, the 
distressed nature of the sale, or the condition of the 
property.
    One of my clients, a Rhode Island senior citizen, owed just 
over $300,000 on a house. We obtained a cash offer of $285,000. 
The lenders' Massachusetts-based appraiser said the house was 
worth $340,000, and the offer was rejected. Incidentally, we 
had it listed for $300,000.
    The house went through foreclosure, was relisted at 
$259,000, and 6 months later sold for $279,000, with additional 
significant seller or lender concessions.
    Finally, in the case of homes with more than one mortgage, 
that is very commonplace. Lenders holding a second or a third 
mortgage often will not accept a short sale effort. Frankly, 
why would they, when there is little or no repayment of their 
mortgage?
    As an example, a Warwick house has a first and second 
mortgage and has had multiple offers pending for months. The 
inability to get an approval from the subordinate lender meant 
that four families were on hold. If the response by each of the 
lenders had been timely, then the unsuccessful bidders, three 
of them, would have moved on and bought other homes. Their 
purchases would have boosted sales that are necessary for 
housing market recovery.
    NAR has been working on several fronts to solve the 
problem. We have developed educational materials to help our 
members understand the short sale process and how to work with 
clients in these situations. We are working with Fannie Mae and 
Freddie Mac and more closely with our multiple listing 
servicers to provide them with real-time housing market 
information to expedite the short sale decisions.
    We are obviously working with industry partners to educate 
them of the problems and the need for improvements to the 
process. We are proposing first that all lenders and their 
servicers make it easier for sellers and agents to contact the 
department and individual who handles the short sale 
application. Second, the development of a single industrywide 
short sale application and list of supporting documents. Third, 
a commitment from lenders and servicers to update the seller 
and the listing agents on the status of short sale application. 
And an online, password-protected report would help immensely.
    Finally, we believe lenders and their servicers should 
deliver a clear answer, yes or no, to all offers in a timely 
fashion, not 2 months or 6 months later.
    In closing, there is no question that America faces a 
significant challenge in restoring confidence in housing and 
financial markets. We look forward to working with you to make 
that happen. We believe that we can help more families avoid 
the financial and emotional disaster of foreclosure and 
preserve the American dream of homeownership for the next 
generation of home buyers. Thank you.
    [The prepared statement of Mr. Phipps can be found on page 
111 of the appendix.]
    The Chairman. Mr. White.

   STATEMENT OF ALAN WHITE, ASSISTANT PROFESSOR, VALPARAISO 
                    UNIVERSITY SCHOOL OF LAW

    Mr. White. Thank you. Thank you, Chairman Frank, and 
members of the committee, for this opportunity to testify about 
the research I have been doing on mortgage modifications and 
the activities of mortgage servicers.
    I would like to try and comment a little bit on three 
questions, based on my research: What is it that mortgage 
servicers are doing now specifically with respect to mortgage 
modifications? What more could they be doing? And what are the 
obstacles to doing more meaningful loan restructuring? It is, 
after all, the monthly payments of principal and interest by 
American homeowners that are the base of the debt pyramid that 
is currently collapsing all around us.
    To respond to one of the questions that was asked earlier 
about how many loan modifications are actually resulting in 
principal reduction, what I found so far is that it is an 
extremely small percentage. In the survey that I recently 
completed, about 1\1/2\ percent, that is about 65 out of 4,000 
loan modifications I looked at, involved any significant 
reduction of principal. I think you heard some of the reasons 
for that earlier. It is probably the last choice that most 
servicers look at when they consider their options.
    I looked at 26 pools of subprime loans that were originated 
in 2005 and 2006. They are all subprime loans, which account 
for most foreclosures, but not all. Those pools started out 
with about 105,000 mortgages. In the 12-month period from July 
of last year to June of this year, out of those 100,000 
mortgages, at the beginning of the period, 20,000 of them were 
delinquent or in foreclosure or REO, so about one 1 out of 5. 
At the end of the period, 27,000 were delinquent, and about 
8,300 foreclosure sales had been completed. So about 30 percent 
of them were delinquent and about 8 percent had been foreclosed 
and sold during that 12-month period. As I say, during that 
same 12-month period, 4,300 loans had been modified.
    Now the category of loan modification encompasses a lot of 
different things. I think when we have been talking about 
modifying and restructuring loans, we have been talking about 
reducing principal and reducing payments. What I found, as I 
said, is that in almost no cases were principal balances 
reduced, and in only about half of the cases, about 57 percent 
of the cases, was the monthly payment reduced.
    So we are actually in these reports of loan modifications 
lumping together several different concepts. I think you can 
really put them in three categories. There is a type of 
modification which is really just a recasting of arrears and a 
capitalizing of unpaid payments. That type of modification 
seems to be very popular and it results in the principal 
balance increasing, not decreasing, and if the interest rate is 
left unchanged, the monthly payment will also increase. Those 
modifications occur quite regularly.
    A second type is the teaser-freezer modification. This is 
one where the principal and the payment are unchanged, but we 
avert a potential or a real increase in the payment as a result 
of the interest adjustment. Unfortunately, the reports don't 
tell me whether those changes are temporary or permanent so I 
know that in 20 or 25 percent of the modifications, that seems 
to be what is happening. But whether the payment has been 
frozen for 5 years or for the life of the loan, that we don't 
know.
    And then probably the most popular type of modification, 
accounting for about 55 percent of the cases, is a modification 
that reduces the interest rate. That is basically all that is 
happening. That does, in fact, have sometimes a very 
significant impact on reducing the monthly payment, but it 
doesn't solve the overhang problem or deal with people who are 
underwater on their houses. That is a very common indicator of 
future foreclosure. So if you solve the payment problem, but 
not the debt overhang problem, you are really only dealing with 
part of the difficulties that the homeowner faces.
    Even on those interest rate reductions, these are not 
bailout by any means. The average interest rate after 
modification in the sample I looked at was about 7\1/2\ 
percent. Considerably above the current prime rate. Even just 
looking at modifications where the rate has been reduced, it is 
about 6.7 percent.
    Now why is it that we don't see more principal write-downs? 
It is particularly striking since in the same sample that I 
looked at, the loss severities went from 30 percent a year ago 
to about 40 percent last July. In other words, when the lenders 
are foreclosing, they are losing 40 cents on the dollar on 
every one of those loans, on the principal, and of course they 
are not recovering any interest. It is hard to understand why 
exactly it is. I think it has to do, in part, with the simple 
fact that losses on foreclosures are not being realized now 
today. So when modifications are done that involve principal 
write-downs, those principal reductions have to be reported 
that month to the investors, whereas doing foreclosures results 
in losses that will occur later, and a lot of the losses that 
are inherent in these pools haven't been realized yet.
    So that is kind of the good news and bad news, is that we 
have a large inventory of people who are delinquent or in 
foreclosure but haven't actually lost their homes yet.
    I see my time is up, and I would be happy to answer any 
questions about the research or share it with any members of 
the committee. Thank you.
    [The prepared statement of Mr. White can be found on page 
142 of the appendix.]
    The Chairman. Thank you. It has been useful. Let me say 
first we have been hearing promising things from a lot of the 
servicers. We then are told sometimes whether or not they are 
living up to it. Generalized complaints don't tell us much, so 
send us your specifics if you have them. You have heard these 
promises. If you can show us where these promises are not being 
met, that is where we need to work. That has worked in some 
cases because generality doesn't get us there.
    Mr. White, I am fascinated by your last point. I am 
wondering now, as you said this, whether there was something we 
could do certainly for regulated entities to require an earlier 
recognition of the loss so as to neutralize that. We will look 
at the accounting effect you are just talking about.
    The other question, is there any reason to believe that 
under the new law and the pressures to take some advantage of 
it, because the new law does call for principal foreclosures, 
is there any reason to think that might increase significantly 
the number of principal reductions?
    Mr. White. I think that is very difficult to say. I think 
the reasons the servicers are very reluctant to write down 
principal are still going to be there. I think the testimony 
earlier from all the members of the industry was that is their 
major reservation, and they are very reluctant to do that.
    The Chairman. They will be inviting the kind of rewrite of 
servicing laws that may be necessary, and that frankly, Ms. 
Waters has been pushing for.
    I will say this: Votes in this Congress for stricter 
regulatory action have increased in the past couple of months. 
Non-regulation, leave the market alone, doesn't look quite as 
attractive to a lot of my colleagues as it used to. So as we 
are pushing for maximum advantage of this, we will also be 
looking at what should be done in terms of restructuring the 
servicing law.
    Beyond that, I am going to have to move on, and Ms. Waters 
will take over to finish this up. But you have heard what they 
have said. I don't think any of the people who testified were 
being insincere, but they have a lot of people working for 
them, and there are old habits, etc. Please do not hesitate to 
send to us, any of us on this committee, and committee staff, 
examples of where they are not living up to what they say, and 
we will press that.
    Before I go, we received a number of letters we want to put 
in the record, from the Mortgage Bankers; from the Attorney 
General of Massachusetts; from the Director of HOPE NOW; from 
the Housing Policy Council Financial Services Roundtable; and 
then we wrote to many of the servicers with questions about how 
they plan to respond, and we have the answers. There are a lot 
of them. We will be putting them in the record as well. People 
can examine them.
    Once again, if you find disparities between what we are 
being told and what is happening out in the field, you will 
help us by telling that. Because being told in general that 
people aren't living up to something doesn't get us anywhere; 
specifics do. Thank you.
    Ms. Waters will proceed from here.
    Ms. Waters. [presiding] Thank you very much for your 
patience. I know it has been a long day, but I want you to know 
that the information that you are sharing with us is very 
important. As we have decided to learn more about servicers, 
what they do, and how they are able to be of assistance, and 
what impediments they have to do what we would want them to do, 
it is very important that you are here to help us learn all of 
this.
    Let me just start with my first curiosity question. I 
learned that many of the loans that Fannie and Freddie picked 
up on the secondary market were loans that they supported from 
Countrywide, for example. And then I learned that Fannie and 
Freddie also purchased services from Countrywide, that 
Countrywide not only originated loans, but they also had a big 
servicing operation.
    Can anybody help me to understand that if Countrywide was 
the originator of the loan, and if Fannie picked it up on the 
secondary market, and if Fannie then purchased the servicing 
services from Countrywide, is there some kind of conflict 
there? Is there something there that makes you a little uneasy? 
Why am I feeling that I need to know more about this?
    Ms. Twomey, can you help me?
    Ms. Twomey. Congresswoman, I think what you described there 
is not just unique to Countrywide, it actually happens 
throughout the industry, which is many of the loan originators 
sell their loans off, they are picked up by Fannie or Freddie, 
or private securitization, but they retain the servicing 
rights. That is actually a very valuable asset for them. And so 
it is not uncommon, and it happens industrywide.
    It is not just Countrywide. Wells Fargo, that testified 
earlier, probably sells many of their own loans off, and 
retains the servicing rights. I would expect many of the loan 
originators do that. A very small proportion are held in 
portfolio, as you know. It is not an uncommon practice to see 
that.
    Ms. Waters. Because it is a practice, and maybe it is their 
right, maybe there is no need to wonder whether or not the 
contractual relationships between the originator and the 
secondary mortgage purchaser could in some way be in conflict, 
work against the borrower in ways that would not make it easy 
for them to get loan modifications, etc. Is that something that 
we can explore?
    Ms. Twomey. There is one significant disadvantage to the 
borrowers from this process, which is while the borrower for 
the most part probably doesn't know that the loan is ever sold, 
that is, Countrywide remains the entity to whom they took their 
loan out and to whom they make their payments, they probably 
don't realize that their loan has been sold into the secondary 
market. They probably also don't realize that the new holder of 
the loan in many cases has no liability for the bad conduct of 
the originator due to a legal doctrine called the holder in due 
course doctrine.
    So essentially, those loans get scrubbed as they go through 
into the secondary market, and it becomes very difficult, for 
example, for a borrower to defend a foreclosure as a result of 
bad conduct on the part of the originator because you have a 
different holder who doesn't have liability because of the way 
the whole industry structure is set up. So there is some real 
disadvantage to the structure to the borrower in the way this 
is set up. The loan originator retains that important asset of 
the servicing rights, but the liability is kind of moved away.
    Ms. Waters. I would like to ask, have any of you seen a 
contract, a services contract that has been worked out with a 
loan originator or a secondary market purchaser? Have you seen 
what it is they enter into, the agreements that they enter into 
to service these contracts?
    Ms. Twomey. Pooling and servicing agreements?
    Ms. Waters. Yes.
    Ms. Twomey. I think both Professor White and I have looked 
at them.
    Ms. Waters. Are we talking about loan services agreements 
that pretty much are standard throughout the industry? Or are 
these all different kind of things? Mr. White?
    Mr. White. Unfortunately, they are not standard. And 
particularly as far as how much latitude the servicer has to 
work out loans and modify them varies a lot from one contract 
to another. The FDIC, I think, is discovering this now even 
with their IndyMac loans that they are servicing, where IndyMac 
was the servicer and the FDIC would like to do the right thing. 
Some of these contracts allow them to write down principal, for 
example, change interest rates, other contracts do not. So 
certainly trying to set some standards going forward for 
pooling and servicing agreements would be a very valuable thing 
to do, although it is not going to help the millions of people 
who are in foreclosure, serviced under the old contracts now. I 
do want to mention, though--
    Ms. Waters. In the future, do you think that any efforts we 
could make to set some standards may be helpful?
    Mr. White. Yes, I think that is true. I think we also have 
a unique opportunity even now not only with the FDIC running 
the IndyMac servicing portfolio, but the largest investors in 
subprime securities are now basically managed by the Federal 
Government, Fannie Mae and Freddie Mac. And they are in a 
position as the investors to tell the servicers what they would 
like the servicers to do.
    Ms. Waters. You are absolutely correct. I forgot that as of 
today, the Federal Government has nationalized a number of our 
big financial services industry's operations or organizations. 
And I use the word ``nationalized'' because I hear it being 
used rather frequently in the last few days when people realize 
that all of a sudden, the government may be more and more in 
the business of managing these businesses. And of course, it 
makes some cringe when you say that. Thank you very much. Let 
me just ask a few other questions before I go to my colleague.
    Professor White, should servicers be able to provide us 
with real-time analysis like you did, or is there some 
tremendous obstacle to carrying out the work you did for a 
select pool of securities across the board in a comprehensive 
way?
    Mr. White. No, there is no obstacle to mortgage servicers 
aggregating their information on loaned modifications and 
reporting it to any Federal agency that wants to collect it. I 
think right now that some of the banking regulators are asking 
some banks to report that information, but it is not being done 
industry-wide and comprehensively. That would be a very 
valuable thing for not only for policymakers in the government, 
but for investors to have an idea what is really going on.
    Ms. Waters. Ms. Twomey, can you tell me what a well-aligned 
service compensation system would look like and how quickly can 
we get toward that from where we are today? Are there specific 
next steps that the servicers, the regulators, and we in 
Congress need to take to move the system in the right 
direction?
    Ms. Twomey. Congresswoman Waters, as I mentioned in my 
testimony, I think one of the next steps that Congress should 
take is to move forward on H.R. 5679. I think that bill 
encompasses a number of important corrections to the industry, 
including getting somebody on the phone who can make a 
decision, not just about borrowers. You have heard from 
different industry players how that is problematic. I think 
other things to look at in the future, not necessarily covered 
by H.R. 5679, is how servicers are compensated, the fact that 
they make up, particularly for loans in default, any losses are 
made up in these ancillary fees or in source vendor functions.
    And so there is a real incentive for them to charge 
borrowers fees that may not need to be charged to the borrower. 
Property inspection fees automatically get generated and 
charged to the borrower's account every 30 days even if there 
is no change in circumstance. And that is because that goes 
right back to the servicer. It contributes to their bottom 
line. That is an issue that we haven't really looked at in 
depth. And the fact that a borrower doesn't get to pick their 
servicer really puts them at a disadvantage. They don't have a 
choice. There is no market incentive from the borrower's 
perspective that allows them to say, ``Hey, you are charging me 
for stuff that you shouldn't charge me for, so I am going to go 
to somebody else.'' Borrowers don't have that option, and so 
the borrowers continue to be in a really difficult position.
    Ms. Waters. Thank you very much. Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman. And I thank you for 
your insightful questions, because you have caused me to 
rethink my line of questioning. Let's talk for just a moment. 
Ms. Twomey, am I pronouncing--
    Ms. Twomey. Twomey.
    Mr. Green. Twomey? Ms. Twomey, it appears to me here is a 
situation we have, we have an originator who after the loan is 
originated passes this loan on to maybe a GSE. The GSE bundles 
and passes it to the investors. The originator maintains 
servicing rights. The originator loses all liability with 
reference to the loan once the loan is passed to the GSE, 
saving fraud or some criminal act, once the loan is passed to 
the GSE or it gets into the secondary market.
    Ms. Twomey. Let me just correct you there, because the 
originator will retain liability. The liability doesn't go with 
the loan, though. So for example, the borrower could always go 
back and sue the originator.
    Mr. Green. Excuse me, I meant liability in the sense of the 
loan itself--
    Ms. Twomey. Oh, sorry, yes.
    Mr. Green. --having to--the cost of the loan, the dollars 
that were lent--
    Ms. Twomey. That is right.
    Mr. Green. --that all moves away from the originator.
    Ms. Twomey. That is right.
    Mr. Green. The originator does maintain liability in terms 
of fraud, some criminal acts, those kinds of things.
    Ms. Twomey. That is correct.
    Mr. Green. Okay. The reason I am painting this picture is 
because here is what we have, an originator that really does 
not have an incentive to make sure the borrower can pay the 
loan because the originator can sell it, and once it is sold 
the originator has no, no liability in terms of losing money on 
the loan itself. But the originator is clever enough to keep 
the servicing rights so that the loan that the originator no 
longer has to worry about being repaid, the originator collects 
funds on for someone else who bought it and gets paid to do it.
    Ms. Twomey. That is right.
    Mr. Green. I just wanted somebody who may have missed that 
to see it. Maybe somebody did. So what we have when the Chair 
said isn't there something about this, it hit me that there is 
really something about it, and it is this: The originator is in 
the business now of getting as many loans originated as 
possible. No money down, buy one get one free, you know, 
Tuesday specials, whatever we need to do to get the loan made 
because we know we can get that loan in another person's 
bailiwick, if you will, and we will continue to service it. And 
we make a fee on the servicing.
    Now, tell me how valuable is maintaining the right to 
service? You said it is valuable. In terms of dollars, can you 
give some indication?
    Ms. Twomey. Typically, servicers are paid 25 to 50 basis 
points based upon the outstanding principal balance of the loan 
pool. So I don't have a calculator with me, I would have to 
calculate that out for you. But so let's see, my colleague here 
says--
    Mr. Phipps. .25 would be--
    Ms. Waters. Mr. Phipps, you can speak up.
    Ms. Twomey. Someone can do the math better than I can.
    Mr. Phipps. I think it is $250 per 10,000 of mortgage 
amount.
    Mr. Green. $250 per $10,000 principal balance?
    Mr. Phipps. That is a service fee in the course of a year, 
if I recall correctly. Yes, I believe that is accurate.
    Mr. Green. $250 per $10,000 principal balance.
    Mr. Phipps. $2,500 a year per $100,000.
    Mr. Green. $2,500 a year for a $100,000 loan?
    Mr. Phipps. And that is assuming there is someone to 
service it. I mean, the situation parenthetically right now, I 
have a Naval officer who is transferred from Texas who is going 
back to Texas. He bought a house in Rhode Island 3 years ago. 
He unfortunately is upside down. He owes more than the house is 
worth. Unfortunately, his mortgage was sold several times. GMAC 
now has it. He contacted GMAC last week saying, ``I need to 
discuss loss mitigation and short sale.'' The person there 
said, ``Well, we have no one doing originations anymore. We 
don't know what we are doing, because we are no longer in that 
business. So we don't even know where to go with the servicer 
to get relief.''
    Mr. Green. But the servicer--I want to stay focused on what 
the value of this is.
    Ms. Twomey. So Congressman, I actually have numbers here 
for you.
    Mr. Green. Thank you.
    Ms. Twomey. So a loan pool with a balance of $2 billion 
would result in a servicing fee of just over $9.5 million a 
year.
    Mr. Green. A $2 billion loan pool--
    Ms. Twomey. --would be $9.5 million per year.
    Mr. Green. $9.5 million per year. Now if the servicer, 
originator, one and the same had not gone through this process, 
that $9.5 million, which is an asset now, would not be received 
if they kept the loan in their portfolio. If they maintained 
it, they don't get any tangible benefit from servicing it, or 
would they still make that $9.5 million by virtue of the way 
the contract is structured?
    Ms. Twomey. Well, if they are retaining the loan in 
portfolio, then there is not going to be a pooling and 
servicing agreement. And if they have retained both servicing 
and the rights to the loan itself, then what happens now is 
that fee is taken out of the remittance that goes to the 
investor. Right? So this $9.5 million comes out of what would 
otherwise go to the investor. What would happen if the entity 
was both the servicer and the holder of the loan is they would 
just keep that $9 million.
    Mr. Green. So the $9.5 million is still accorded--
    Ms. Twomey. It is still there.
    Mr. Green. It is still there for the servicer originator 
who holds a $2 billion loan portfolio?
    Ms. Twomey. That is right.
    Mr. Green. They would still have it?
    Ms. Twomey. That is right.
    Mr. Green. Okay. The difference is they have it now and 
they don't have the concern of whether the borrower is going to 
repay in terms of a loss being charged to them.
    Ms. Twomey. That is right.
    Mr. Green. Okay. That is good. Now, Madam Chairwoman?
    Ms. Waters. Please.
    Mr. Green. Thank you. Earlier, you heard Chairwoman Bair 
speak of servicers having to pay out of a coffer a certain 
amount of money when a loan is in default or not being paid and 
that money has to go to the investors. So at some point, that 
coffer starts to diminish, and it can put pressure on the 
servicer to try to close quickly so as not to have to make 
these payments. Can you comment on this, please?
    Ms. Twomey. I completely agree with the statement of 
Chairwoman Bair. The servicers do have to--in most pooling and 
servicing agreements do have to advance those principal and 
interest payments at least until--there is usually some trigger 
point in that pooling and servicing agreement that tells the 
servicer when they no longer have to make those advances. So in 
some pooling and servicing agreements, once the loan goes into 
foreclosure they don't have to make those advances any more. 
Not completed foreclosure, but once the foreclosure, for 
example, in a judicial foreclosure state, once that foreclosure 
complaint has been filed, the servicers no longer have to make 
that advance.
    Now they are still out that money, that coffer still 
remains low until the foreclosure actually takes place. And 
then under most pooling and servicing agreements, the servicer 
gets reimbursed first. You know, their funds get replenished 
before funds get passed onto the investor.
    Mr. Green. Now, isn't that a strong inducement to foreclose 
as quickly as possible so you don't end up spending money out 
of your coffer to cover?
    Ms. Twomey. Yes, I think it is certainly an incentive to at 
least get to the point where you are filing the foreclosure so 
you are no longer having to make the advances. I will tell you 
that one of the consequences of that is once that foreclosure 
gets filed, you have just heaped a lot of fees and costs onto 
the borrower. Because now instead of just having to make up 
their missing principal and interest payments and maybe some 
late fees, now there is also costs associated with this loan. 
So they are going to have to pay--and sometimes the costs that 
we see can double the amount that the borrowers owe. So you go 
from owing $4,000--
    Mr. Green. Excuse me, numbers are easier to work with.
    Ms. Twomey. I will give you an example. I am working on a 
large empirical study in bankruptcy, and a servicer has filed a 
proof of claim that says the borrower is behind about $4,000. 
But the total amount of the proof of claim, the total amount 
that the servicer says they are owed is over $10,000. And the 
difference represents fees and costs associated with the 
foreclosure, or possibly--it could have been more than one. But 
the gist or the point here is that the guy owes $4,000 in 
principal and interest and he owes more than $10,000 in order 
to bring the loan current. And that is a real barrier to loan 
modifications, to being able to bring loans out of default. If 
the servicer is not writing off the late fees and the costs of 
default, then the borrower still has a large sum of money they 
may have to come up with in order to get to a loan 
modification.
    So I think one of the important things to realize is that 
the servicers have a financial incentive here. They are making 
money when that loan is in default.
    Ms. Waters. Would the gentleman yield for one moment on 
this point?
    Mr. Green. Yes. Absolutely.
    Ms. Waters. The kinds of fees and the number of fees that 
the servicer can charge associated with servicing this account 
are not dictated anywhere in statute. Some contracts may have 
five or six different kinds of fees that they use. Another 
contract could have different kinds of fees. And they could 
number six or seven or two or three. It is just all over the 
place. Is that right?
    Ms. Twomey. Typically, this is governed by the mortgage 
contract, and most mortgage contracts will say that the lender 
or servicer is entitled to recover any reasonable fees 
necessary to protect their interests in the property. I think 
one of the problems we are seeing in the example that I 
provided in my testimony, where a borrower is charged for 
property inspections while the property is under an evacuation 
order, is because we have moved from, you know, a human system 
to a computerized system. And the computerized system doesn't 
know that the property is under an evacuation order as a result 
of Hurricane Katrina.
    So it just keeps generating these property inspection 
orders. Something is coming back saying, yes, it is done, and 
the borrower gets charged the fee for it. And I think one of 
the things that we see that is very problematic is we see a lot 
of these in bankruptcy court because we have good information 
about what the servicers are charging. The concern is if that 
is what is happening when you have a Federal judge overseeing 
the proceeding and you have these kind of charges being tacked 
on, what is happening for the millions of homeowners who aren't 
entering bankruptcy? What kind of fees are getting charged to 
their accounts? And oftentimes, it is not $10,000. I mean, you 
could be charged $300 for an appraisal 4 times, which would be 
$1,200. Most borrowers aren't going to fight over that. They 
want to save their home. Who is going to fight over $500 or 
$600 or $700 other than you?
    Ms. Waters. Okay. That is very interesting. Thank you, and 
I yield back.
    Mr. Green. Thank you, Madam Chairwoman, for the clarity. I 
am going to propose a solution, and I would like to hear your 
thoughts on the solution. Given that we, meaning the people of 
the United States of America, the taxpayers, we now own at 
least two financial services institutions and maybe three, 
could be four if you count IndyMac and you count the GSEs and 
you count the latest one that we just purchased yesterday, or 
today, maybe we have purchased one since I started this, I am 
not sure, but if we require the mortgage loans that we purchase 
to have specific fees associated with them and guidelines, we 
can't make the originators draft their contracts that way. But 
if they want to sell them to us, meaning the government now, if 
they want to sell them to the government they have to contain 
certain language. We don't need to go into what the language 
is. My question is, is that a good vehicle to create a standard 
in the marketplace?
    Ms. Twomey. Absolutely. I think it has always been a good 
vehicle. And as an example, several years ago many of the 
subprime loans had arbitration agreements in them. And at some 
point, Freddie and Fannie said they would no longer take loans 
with arbitration agreements. You saw a real shift in terms of 
what the loans looked like, and now we don't see as many 
arbitration agreements after Freddie and Fannie made that 
decision.
    So it is not that it could happen now. It could even happen 
then; it just didn't. And so I think now you are in the 
driver's seat, and you can make that happen, and I think it 
would make a difference in the industry as a whole.
    Mr. Green. And finally, Mr.--is it Phipps?
    Mr. Phipps. Yes, sir.
    Mr. Green. With reference to the short sales, I can see how 
they can be beneficial, but my suspicion is that they are 
somewhat difficult to close right now notwithstanding the write 
down, notwithstanding the willingness on a seller to take a 
loss and the borrower to do whatever is necessary to get out of 
it. I can see that it might be difficult to close.
    Mr. Phipps. We are seeing a significant number in fact 
close, but we need to have cooperation from the lender to have 
the closing take place. When there are multiple mortgages, it 
is very problematic because the second and third lienholders 
don't want to give up everything. They want to have a stake. 
And for them, the foreclosure process is of more value. There 
is a perception among many homeowners and within the real 
estate community that the lenders themselves want that to be 
the common sense or the general perception, that short sales 
are just not worth doing, foreclosure is the better, more 
desirable outcome.
    But in terms of costs, short sales will cost significantly 
less, and to keep people in houses and not have empty houses. 
In Rhode Island, in August, 23.6 percent of all of the houses, 
single family houses sold were REOs. That is too many. And it 
really impacts average value. One other footnote, my correction 
on my .25 basis points, it would be $250 per $100,000.
    Mr. Green. Per $100,000. One quick point. You heard me talk 
about tranche warfare earlier. Could we now coin a term called 
``lienholder warfare'' as well?
    Mr. Phipps. Very much so, and that is a much more 
substantive problem. At the end of the day, that is a critical 
element that prevents short sales. Short sales make so much 
sense. And frankly, even in refinancing, I have another one 
that is an IndyMac first, that IndyMac bought, and we can't 
seem to resolve the second and third lienholder to have the 
people stay in the house. They are making an income, they would 
like to stay in the house, but the second and third 
lienholders--
    Mr. Green. I am going to have to thank you and yield back. 
The Chair has been more than generous. Thank you very much.
    Mr. Phipps. Thank you.
    Ms. Waters. Well, thank you very much. I would like to 
thank Mr. Hacobian, Ms. Twomey, Mr. Phipps, and Mr. White for 
your patience today, for sharing with us your tremendous 
knowledge, and for helping us to understand what is happening, 
particularly with the subprime meltdown and the attempts that 
we are making to keep homeowners in their homes and work out 
something that is fair and just, and to understand whether or 
not there are real modifications going on, short sales, why 
not, who is doing what. You have been so very helpful today. I 
thank you very much. And this committee is adjourned. Thank 
you.
    [Whereupon, at 2:40 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           September 17, 2008


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