[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PRIVATE SECTOR COOPERATION WITH
MORTGAGE MODIFICATIONS--ENSURING
THAT INVESTORS, SERVICERS, AND
LENDERS PROVIDE REAL HELP
FOR TROUBLED HOMEOWNERS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 12, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-144
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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:
November 12, 2008............................................ 1
Appendix:
November 12, 2008............................................ 55
WITNESSES
Wednesday, November 12, 2008
Allensworth, Benjamin, Senior Legal Counsel, Managed Funds
Association (MFA).............................................. 15
Deutsch, Thomas, Deputy Executive Director, American
Securitization Forum (ASF)..................................... 21
Gross, Michael, Managing Director, Loan Administration Loss
Mitigation, Bank of America.................................... 19
Sheehan, Molly, Senior Vice President, Home Lending Division,
JPMorgan Chase................................................. 17
APPENDIX
Prepared statements:
Brown-Waite, Hon. Ginny...................................... 56
Kanjorski, Hon. Paul E....................................... 58
Allensworth, Benjamin........................................ 59
Deutsch, Thomas.............................................. 63
Gross, Michael............................................... 75
Sheehan, Molly............................................... 85
Additional Material Submitted for the Record
Frank, Hon. Barney:
Written statement of Harvey B. Allon, President, Braddock
Financial Corporation...................................... 92
Report by Credit Suisse entitled, ``Subprime Loan
Modifications Update,'' dated October 1, 2008.............. 96
Letter from William Frey, Principal and CEO, Greenwich
Financial Services, dated November 12, 2008................ 105
Bachus, Hon. Spencer:
Follow-up letter from Benjamin Allensworth containing
additional information for the record, dated November 25,
2008....................................................... 113
LaTourette, Hon. Steven C.:
New York Times article by Joe Nocera, dated November 11,
2008, entitled, ``Can Anyone Solve the Securitization
Problem?''................................................. 115
PRIVATE SECTOR COOPERATION WITH
MORTGAGE MODIFICATIONS--ENSURING
THAT INVESTORS, SERVICERS, AND
LENDERS PROVIDE REAL HELP
FOR TROUBLED HOMEOWNERS
----------
Wednesday, November 12, 2008
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:11 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Maloney,
Watt, Sherman, Meeks, Capuano, Lynch, Green, Cleaver, Donnelly,
Foster, Speier; Bachus, LaTourette, Biggert, Neugebauer, and
Price.
Also present: Representative Marshall.
The Chairman. I apologize for the lateness of this hearing.
The period of repose that I had looked forward to for this
committee has been one of the less important victims of the
current economic turmoil, and I therefore had to cram more
things into a shorter period of time than I had hoped. I
apologize for keeping people waiting.
This hearing has evolved in some extent in its orientation.
It was originally concerned about what was reported in the
newspaper as two hedge funds saying that they were going to
instruct their servicers not to take advantage of legislation
that could reduce mortgages. We have since gotten letters and
statements from the funds that--and I would ask unanimous
consent to put into the record the statement from Harvey Allon,
president of Braddock Corporation, and then also a letter from
William Frey, who is the principal and CEO of Greenwich
Financial Services. Mr. Frey notes he is not a hedge fund. Mr.
Allon mentions that he is. But the letter from Mr. Allon--let
me just read some excerpts in fairness--``Braddock urges all
services to fully acquaint themselves with the text and guiding
principles of the act, the HOPE for Homeowners bill that we
passed, and are actively undertaking efforts to ensure that
qualifying homeowners participate in this program and that the
homeowner loans are modified in a timely fashion pursuant to
the letter and intent of the act.''
We believe this letter is constructive and sets forward
what we believe to be the appropriate policy. That is not an
issue that is before us. We had never intended the legislation
for modifications to be imprudently granted to entities--to
individuals who couldn't sustain it. And whatever there was in
terms of a misunderstanding in the communication, that has now
been resolved, and we acknowledge that the Braddock Corporation
is urging servicers to take full advantage in an appropriate
way of the legislation on the books.
Mr. Frey notes for the record: ``I would like to clarify
that I do not manage a hedge fund as erroneously assumed in a
letter. I add there is nothing wrong with hedge funds.'' We
agree obviously with both cases. He was inappropriately
included in the article, and because he was inappropriately
included in the article, he was inappropriately the recipient
of the letter. So in one case, there was mistaken information
on which we acted, and in the second case--or the first case
that I mentioned, the situation has been resolved and the
Braddock Fund is instructing its servicers to go forward.
Now I will begin with the opening statements.
The problem of servicers has become clearer and clearer. We
have had some encouraging steps taken recently with regard to
reducing foreclosures. And again we stress that reducing
foreclosures is one of three things that I believe has to
happen if we are to get out of the economic mire in which we
find ourselves: One, the reduction of foreclosures; two, having
the rescue plan that this Congress voted used efficiently,
specifically to get the maximum amount of funds out into the
economy that can be lent; and, three, an economic recovery
program that would include funding to the States and others to
do job creation. This committee has jurisdiction over the first
two, but not over the third.
As to foreclosures, the argument needs to reemphasized that
foreclosures damage the whole economy. Diminishing foreclosures
is not entirely--maybe not for many people even a matter of
examination for those who may be foreclosed. As long as you
have the foreclosure cascade, as long as you have mortgage-
based securities decreasing in value so rapidly, you do not get
out of the problem we are in. So diminishing foreclosures--and
clearly some people who took loans are beyond any assistance
that could reasonably be extended, but diminishing foreclosures
is an important part of helping us get out of this problem.
Now there have been assertions that the way to do that is--
and there have been some plans floated to have taxpayer money
go in, buy up the loans, and then reduce the amount paid. I
think it should be very clear. No matter what people have
argued, there is in my judgment zero likelihood that Federal
taxpayer dollars will go to those who hold loans that never
should have been made in the first place. People who have
advocated this as a solution which involves Federal assumption
of the risks of 100 percent of loans that should not have been
made do not understand the mood of this country, and do not
understand what rules will apply. Similarly, I do not think you
are going to see taxpayer funds, nor should you, go to people
to help them pay their mortgages. We have had some proposals;
the FDIC has been very constructive in this regard,
particularly Chairwoman Sheila Bair. The role of the Federal
Government is appropriate, it seems to us, to do this in
various forms. To induce those who hold the loans to recognize
that they are holding loans that are not going to be repaid in
full, to calculate that in many cases this would be a worse
economic problem if they foreclosed, and to write down the
terms of the loan, either by interest or principal or some
combination, to a point where that borrower could repay, doing
so because it would be in their economic interest to get
something rather than to go through foreclosure.
The role of the Federal Government in the bill we passed
and, as I understand it, what Sheila Bair is talking about,
although it is muffled by intra-administration concerns, is
similar to saying to the lender, if you recognize that you are
holding loans that cannot be realized and take a loss, we will
then, through Federal instruments, the FHA and our bill in
appropriate cases, guarantee the new level of loan. There will
be a refinancing to a lower level. What it says to the lender
is you take your loss, the Federal Government is not going to
make you whole for loans that shouldn't have been made in the
first place. The inducement is once you have recognized the
loss, that will be the extent of your loss. You will then have
some stability and some ability to tell people what you owe and
don't owe. There will be some risk for the Federal Government
in that because we will be guaranteeing these loans for people
who had some problems before. And in the bill we passed, that
is accompanied by a requirement that any profit that is made on
those loans be returned to the Federal Government in varying
percentages for the first 5 years and even more by the fact
that the Federal Government takes the house. This is not a free
ride for that new borrower. There will be some losses, we were
told by OMB, in a fairly small amount. I am hoping that Sheila
Bair will be able to come up with a further approach.
We have also seen some encouraging efforts by the Bank of
America and by JPMorgan Chase. I would say I feel vindicated. I
am going to take a little extra time and, if there is no
objection, we will allocate it equally. I will say I feel
vindicated. When the Bank of America announced it was buying
Countrywide, a number of my friends were concerned this would
be a problem, that Bank of America was too big, and I was asked
with some consternation by one person with whom I have worked
on some issues how I could justify supporting the Bank of
America buying Countrywide. My answer is at that point I would
have supported Syria buying Countrywide. The disaster that was
inflicted on the country by Countrywide was deep-seated. I
think Bank of America did a useful thing. Obviously, they are
trying to make money, but I think society will benefit. And so
Bank of America, JPMorgan Chase, and now I am told Citicorp, as
well, are taking constructive steps. We got an announcement
yesterday that Fannie Mae and Freddie Mac will be doing more to
improve the situation by reducing foreclosures, again from the
standpoint of helping us deal with the economic problem.
But here is the problem that remains and will be on our
agenda when we reconvene. So far all of the advances in losses
being recognized by those who imprudently either made or bought
loans that shouldn't have been made, they have all been by the
owners. That is of course how we got into this. We have not
seen servicers participating in any significant way. And I
believe we now have a situation that requires legislation. We
have been told by a number of people that the servicers do not
have the legal authority and we have asked this question in
general. We said to the servicers and to the owners, is there
enough legal authority to act on modifications--again, if it is
in the economic interest of the holder of the loan? I don't
want to see us throwing more money to the side. If you would be
better off reducing the loan than foreclosing, you have the
authority to do that. We were told yes in general, but we are
now being told no in particular. We have a serious obstacle
apparently and it is true with Fannie Mae and Freddie Mac and
others. We are getting some progress where the loans are owned
in a definable way. All the more reason why it is a good thing
to some extent that Fannie and Freddie had a portfolio and went
ahead and securitized everything. But where we have servicers
administering these securities, we apparently cannot get much
done and it is a problem.
There should not be a public policy which allows important
decisions that should be made in the economic interest of
society to be unmakeable. You should not have a legal form in
which the authority to make important decisions is so spread
out and split up that no one can make them. I think what we
have is the equivalent of what all of us have seen from time to
time, a very nice home in a neighborhood which is left by a
deceased to several siblings who hate each other. And you get a
situation where the quarrel among the siblings means that the
house cannot be disposed of and you come by what used to be a
very nice home in the neighborhood that is now crumbling and in
disrepair and you say, what is that all about, and the answer
is, well, there are four sisters and brothers, and they can't
agree, so the whole neighborhood suffers, I think.
The gentlewoman from California, Ms. Waters, has been very
active in arguing this. I think this committee has to now act
and hopefully the whole Congress on restructuring that
servicing mechanism. Someone has to have the authority to make
a decision and we face a situation now as we said in the case.
So it is bifurcated. We are getting some progress where the
legal authority to modify is clear. It took a while, but it is
coming. We have not had that with our servicers.
The last point is this: When this Congress passed the
Economic Stabilization Act and created the troubled assets
program, we explicitly put in that big authority to the
Secretary of the Treasury to buy whole loans or mortgage-backed
securities to make us the owner so we could do these kind of
reductions. Again, the distinction seems to be obviously owners
and servicers. To date, the Secretary hasn't used that
authority. A large amount of the first $350 billion that was
available is being used up for other purposes; $290 billion is
now accounted for by the grants to banks and advances to AIG,
the loan to AIG. That is a question now that we will have to
address, and it will involve using the second $350 billion. But
I believe that we still have a need for that funding to be used
to put the Federal Government in the position of being the
owner so we can do the kind of sensible writedown of mortgage
payments to avoid foreclosure. That is in the interest of the
economy as a whole, and we will be talking further about that
as well because we will have a hearing next week on the 18th on
the administration of that program.
And with that, I will now recognize the gentleman from
Alabama.
Mr. Bachus. I thank the chairman. Mr. Chairman, how much
time are we going to have on both sides? Are we going to extend
that time?
The Chairman. Yes. What is the maximum we can get--20 and
20 because we have a fairly small panel? Is that acceptable?
Mr. Bachus. That is fine.
The Chairman. Yes, we will do 20 minutes on each side. We
only have the one panel and hopefully we won't have that much
to do later.
Mr. Bachus. Thank you, Mr. Chairman. I yield myself 7
minutes.
Mr. Chairman, first let me respond to the subject matter of
this hearing. I have prepared a written statement which I have
released and that goes into some detail. I would like to
respond to some of the things that the chairman has said. It is
in everyone's best interest as a general rule to prevent
foreclosures. Foreclosures are a negative impact on not only
the family in that home, but also their neighbors, their
property values, the community, and the local government. A
number of foreclosures as well as homeownership are relatively
good predictors of criminal activity and economic development.
Having said that, I think we should be very careful in saying
that we need to prevent all foreclosures.
Number one, if the homeowner is underwater, if the house is
worth less than the mortgage, I don't believe it is in the best
interest of the homeowner in most cases to continue to pay the
note. In fact, what we are seeing all over the country and
most--I don't know whether it is most or a good number or a
good percentage of foreclosures--are homeowners who are
underwater and they are walking away, and that is why they are
walking away, not so much that they can't pay it or they
couldn't come up with the money. It is that they simply are not
going to do that. And I don't see any practical way of
preventing that.
Second, when you have a bank and a borrower, the
traditional arrangement, it is easy to work out deals and it is
normally in people's interest. Where we are running into a
problem is with securitizations, and that is really the great
majority of the mortgages that are in foreclosure or
threatening foreclosure, is where you have multiple parties.
Now that is, I think, what we are dealing with as much as
anything in this hearing. Obviously we are talking about hedge
funds, so you are talking about securitized mortgages. In those
cases, I am all for encouraging the parties to work together,
if they are willing. Often, they are not willing, and in those
cases I am very hesitant to do two things. One, I am very
hesitant to try to force the parties to an agreement. One
reason--and let us say a willing buyer but an unwilling lender
or hedge fund or whomever is holding the securitized mortgage,
it affects future funding of future mortgages. I mean, if you
are going to start interfering with contracts, you may get away
with it with these, but how about mortgages in the future? Are
people going to be willing to buy securitized mortgages? And
the answer is, no, they are not, because if they think that the
Congress or the government can come in there and change that
contract, they are just not going to be willing to put their
money at risk. So we have to be very careful in that case.
The only other thing I would say is that I am also
skeptical of any proposal which requires the borrower to be 90
or 120 days late on their payment. That to me is going to
almost encourage people who may be current and struggling,
since they don't qualify unless they are 90 days later--I
actually had a constituent who called us and said we are not
going to qualify for this program because we are current, what
should we do, should we miss three payments?
Having said that, let me say that I commend the chairman
for holding this hearing.
Now, let me change the subject to what we are dealing with
overall and that is government intervention into the private
sector through either we call it intervention, a bailout, a
rescue plan, etc., etc. We have all as members had 3 weeks to
go home. And if you are like me, I basically will boil down the
questions my constituents ask me to two question. The first
question is basically--I can boil it down to how do you justify
giving my money to somebody else as a taxpayer? How do you
justify that? How--in a case of mortgages, hey, I went out, I
negotiated a good price for a house, I bought it, I put 20
percent down, I put 10 percent down. I was very careful on the
terms, I got a good interest rate. I am paying my mortgage, I
am paying it on time. I don't think it is fair that you are
going to take my tax dollars and subsidize or change a loan for
someone else who wasn't as careful as I was or wasn't as
responsible. Not that I--my constituents don't think they are
necessarily bad people. They just don't want their money going
to them.
Now, we are now talking about a bailout to the automobile
companies. I know the questions we are going to have because of
the questions we had with financial services. I have automobile
plants in my district. Those automobile plants pay $25 to $35
per employee per hour. I am sure that I am going to be asked,
Congressman, I work at Honda or I work at Mercedes, I get $40
an hour, why are you going to take my tax dollars and pay it to
a company that is paying their employees $75 an hour? And these
are questions we need to anticipate and need to be prepared to
answer.
Even, I think, people who are going to be more hostile are
that sawmill worker in my district who is making $15 an hour
and he is working hard every day and he gets very dirty every
day and it is a risky, hot job. Or it is very cold. It is
usually very cold or very hot. He is making $15 an hour, and we
are taking his money and we are paying it to a company that is
paying $75 an hour. We are going to get those questions, and we
need to be prepared to answer them.
How do I know we are going to get those questions? Because
with the financial services companies, the Wall Street
companies, we have already gotten those questions. If you
didn't get those questions, you are not listening to your
constituents. They are already beginning to ask--my
constituents usually get about a $250 bonus at Christmas. They
are already asking me, Congressman, did you take my money and
give it to a company that is paying some of their employees
$250,000 at Christmas, or year-end bonus or incentive or
whatever you want to call it, and I get $250? It is a fairness
issue and it is something that we are going to have to answer.
The second question is very simple, where does this stop,
how do we get out of this mess, when are we going to quit, when
are we going to end it? Well, we started with financial
services. We went from banks to insurance companies and I will
tell you this, I for one realize--and I think we all did--we
could not let our financial structure of this country, our
financial infrastructure, our banking system, we could not let
it collapse. That was something that we could not allow. But
now we are talking about manufacturing companies, automobiles.
You start there. Does it end there? It didn't with financial
services. We kept expanding that. And does it end with
manufacturing? What about retail? What about Circuit City? I
have read now that a lot of Circuit City employees are even
more angry this week than they were last week that they are
losing their jobs and they are seeing what is going on, on
Capitol Hill, where we have intervened or bailed out on behalf
of a lot of financial services companies and manufacturing
companies. And I am afraid if we don't answer the question very
soon, when does this stop, that it is going to stop when we run
out of money, when we are unable to print more money, when
foreign countries are unable to lend to us at a reasonable
interest rate and quite frankly we need to stop before then. If
we don't, I think the American people will simply rise up and
stop us. And I, for one, hope that we are rational and
reasonable enough to in going forward, being very, very
careful.
I want to conclude on a positive note. We did something
that I think was very good. In the last intervention, it was
originally proposed that we buy $750 billion of the very worst
assets in the financial system, and the proposal was that we
actually buy those assets and that we manage them. Now, we
would have had to have hired thousands of people to do that.
Thank goodness, I believe we have almost dodged that bullet.
Instead, what we did was a much more reasonable and rational
approach, something that protects the taxpayers to a greater
extent, not to a total extent, and that was we took preferred
shares. We did the same thing Warren Buffett did; we made a
deal. And we don't have to manage those assets, we don't have
to set a price, we don't have to buy them, we don't have to
sell them. We simply took preferred shares and that was a much
better approach. We are still talking about buying some of
these--call them worthless assets, call them impaired assets--
and that is not going to be as good a deal. But so far we have
made a terrible situation better.
But let us not--let us have an exit strategy, let us now
agree that it has to stop and it has to stop soon.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Pennsylvania is recognized
for 4 minutes.
Mr. Kanjorski. Good morning, Mr. Chairman.
While the mortgage loan modifications theory remains sound,
the practice has fallen short of expectations that many of us
have. Keeping Americans in their homes should be a priority.
Unfortunately, this view does not appear to be shared by all.
Today we will hear from several parties in the private
sector to better understand the ever-widening gap between what
ought to happen and what is happening. We will also discuss
some of the proactive steps taken to date to address this
important issue. This issue is not a partisan one. Back in
March, Mr. Castle and I introduced the Emergency Loan
Modification Act of 2008, H.R. 5579. The bill aimed to clarify
the responsibilities of and provide a safe harbor from legal
liability for mortgage servicers who helped troubled borrowers
remain in their homes by engaging in loan modifications and
workouts according to specific criteria. While pieces of that
legislation did become law through the enactment of the larger
housing package, the safe harbor provision fell by the wayside.
At the hearing, Mr. Castle stated, ``I believe Congress can
take specific steps to ensure loan servicers work with
homeowners to keep mortgages solvent wherever practical.'' I
shared that sentiment then and I believe it today. Congress
last spoke to the issue when passing the Emergency Economic
Stabilization Act which provided guidance and authority for the
Treasury Department to increase the number of loan
modifications. Despite our actions, certain industry players
and, in fairness, the current Administration and government
housing agencies simply have not pursued modifications with the
urgency our Nation's financial crisis demands.
This reality must change quickly. As homeowners continue to
find themselves underwater, we must all work to keep them
afloat. More and more foreclosures have led to ever-declining
home values and spiking foreclosure rates have also decimated
some communities. Pointing fingers about which borrowers
irresponsibly took out loans they could not afford or which
lenders recklessly doled out money to unqualified borrowers
does absolutely nothing to solve the problem. Instead of
placing blame, we must work together toward a solution.
In this regard, I am pleased that entities like the Bank of
America and JPMorgan Chase have stepped forward with their own
initiatives for expediting mortgage modifications. Our lenders
and servicers can learn from these actions and model their
mortgage modification programs on these efforts.
In sum, our witnesses will help us all understand why loan
modifications have not already increased and what can be done
to ensure that a greater number of loan modifications occur in
the days ahead. I look forward to their testimony and thank
them for being here.
The Chairman. The gentleman from Texas is recognized for 4
minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. First of all, I
want to associate myself with the ranking member's remarks on a
number of fronts, but certainly on the direction that we are
headed in this country as far as this major intervention into
our markets by the Federal Government.
Interesting, before the first vote over the weekend before
that, I was sitting in my office and I decided to take some
calls from people in my district, but we have never had as many
calls on one specific issue as we did on that one. And
interestingly enough, at 5:00 on a Sunday afternoon, a young
man who attends Texas Tech University called me from his dorm
room, and he and three or four of his buddies were sitting
around the dorm watching the news and they said, ``Congressman,
we are not quite sure we understand all the things that are
going on in these markets, but we do understand that you are
about to mortgage our future even more than it has already been
mortgaged.'' And, in fact, we did do that. We had to increase
the debt ceiling to $11.3 trillion.
I think what Ranking Member Bachus was saying is that
Members of Congress all have these voting cards. Right now we
are using them as credit cards and what we are doing is we are
subsidizing the living and the lifestyle that we have today and
we are asking the next generation to pay that back. I am not
sure that is good for them. I am not sure that is good for us.
In relation to this hearing today, I have had a number of
conversations with people who are involved in mortgage workouts
and mortgage servicing over the last few months, and one of the
first things that they tell me is foreclosure is the last
resort for both the borrower and the lender because what
happens at that particular point in time is somebody loses
their house and the lender loses a lot of money. And what I
have also heard from them is that many mortgage servicers and
banks and institutions are working aggressively with borrowers
who will work with them. Interestingly, the statistic that I am
hearing is that if you take, say, 10 people who are behind on
their mortgage, that you send a letter and the first 4 get
current. The next four get current after a couple of letters
have been sent, and of the last two, one of those people will
most likely not return a phone call, answer a letter, or work
with the lender in any way, leaving the lender with very little
opportunities. But one of the things that most of those folks
told me, and I am sure we are going to hear from the witnesses
today, is that if somebody will enter into a dialogue with the
lender, there will be some effort to try to keep those people
in the home because, again, the lender does not want that
property back, particularly in this real estate environment.
I think the second point is--and I think the ranking member
was alluding to that--overall our mortgage finance structure in
this country has worked relatively well for a number of years.
Yes, we had some people who abused it and for that the market
has been punished. But one of the things I think we have to be
very careful of moving forward is that in looking at the short
term, what are we doing to the long term? The best thing we can
do for America and people who own homes today is to get the
housing market back functioning again. And the way you get the
housing market back functioning again is you get the housing
finance market back functioning again. We have to be very
careful that we do not do things here that impact the ability
of the mortgage finance market to get back up and running
again. For example, creating some doubt in the minds of people
who are insuring mortgages, the PMI companies, that somehow the
contractual relationship causes them to lose more money than
the risk that they realized they are taking; also, making sure
that we get securitization back up and going again.
Securitization has become a nasty word, but quite honestly has
provided an opportunity for us to provide a lot of housing
finance in the future. And also we don't want to encourage
borrower behavior that is not appropriate and, like the ranking
member, constituents calling in saying the plan is we get 90
days behind and then we get a piece of the pie. That is an
entitlement mentality that is permeating our country today, and
I think we have to be very careful as we move in that
direction.
So while I think these discussions will be productive, we
should be very careful in moving in a direction where we are
going to mandate that mortgage companies have certain behavior.
I think we want to encourage good behavior. Quite honestly, I
believe that behavior is probably already taking place in the
market today.
Thank you.
The Chairman. The gentlewoman from New York is recognized
for 2 minutes.
Mrs. Maloney. Thank you, Mr. Chairman, for holding this
important hearing. In my view, this Congress has been pushing
and dragging a reluctant Administration to help homeowners in
the same way and on the same scale that the Treasury rushed to
help Wall Street. Yesterday, the Administration announced that
Fannie and Freddie would help several hundred thousand
homeowners restructure their loans using a systemic loan
modification that was developed by the FDIC at IndyMac.
Systemic loan modification is a good step in the right
direction, but this program is only a tiny one. We need to be
thinking in an order of magnitude that is much bigger, not
hundreds of thousands, but millions. Some economists estimate
that 2 to 5 million Americans may lose their homes. It is said
that new protocol will be a standard for the industry to
quickly move homeowners into long-term sustainable mortgages,
and I hope to hear of their efforts today.
I do want to say that I am encouraged by the steps that
were reported recently from JPMorgan Chase, Bank of America and
Citibank on efforts that they are doing to help people stay in
their homes. All economists say that we will not solve this
problem until we stabilize home prices and housing in America.
It is very vital for stabilizing our economy.
I look forward to hearing your testimony today on ways we
can expand the program, not to hundreds of thousands, but to
literally millions of Americans. Thank you.
The Chairman. The gentlewoman from Illinois is recognized
for 4 minutes.
Mrs. Biggert. Thank you, Mr. Chairman. I thank you for
holding today's hearing, and I will offer a few quick thoughts
so that we can proceed.
First, I am pleased that the private sector continues to
work independently and with government entities to keep
qualified homeowners in their homes, and I am particularly
pleased that these initiatives don't involve taxpayer dollars.
However, I do remain concerned about the issue of fairness when
it comes to homeowners who may have lived beyond their means or
not saved for a rainy day who are getting a deal versus prudent
homeowners, and that is most homeowners, who are making their
mortgage payments and not getting a deal on a mortgage
modification.
That aside, I think it has become increasingly clear that
with a little lender and servicer flexibility as well as one-
on-one counseling, many American homeowners in trouble can make
their mortgage payment, can live within their means, and can
stay in their homes. To many of my constituents, they see
mortgages and other financial counselors as a critical lifeline
and I would like today's witnesses to comment and offer ideas
on how we can increase troubled borrowers' access to HUD
certified counselors and increase financial literacy.
Second, FDIC Chairwoman Sheila Bair offered an idea to use
the $50 billion of TARP money to guarantee mortgages, and I
would like today's witnesses to comment on that.
In addition, I would be interested in any reaction to
Chairwoman Bair's statement ``that there are questions that
remain about implementation'' of the new GSA mortgage
modification plan which was announced yesterday.
And finally, I think it is no secret that industry
participants represented today by ASF and in part by MFA are
purportedly stuck between a rock and a hard place. We will hear
testimony that clearly indicates the willingness of the members
of ASF and MFA to do whatever is possible to keep homeowners in
their homes, and the problem that has been mentioned is that
some industry participants with this willingness also hold
contractual obligations to investors, which include our seniors
with retirement funds and workers with pensions, so they will
be able to maximize the value of troubled mortgage loans.
Well, as the saying goes, where there is a will, there is a
way, and I would like to hear from today's witnesses exactly
and specifically about how, and how quickly, the industry can
collaborate, put together new guidelines to establish a floor
for a net present value, and ultimately improve the process of
mortgage modifications. It is important that sooner rather than
later, the right balance is struck so that: One, qualified
homeowners can stay in their homes; two, investors clearly
understand and accept a mortgage modification process; three,
servicers can obligate sufficient resources to modify the
mortgages; four, fraudulent actors are exposed and prosecuted;
and five, underwriting standards are strengthened so that a
similar boom and bust cycle is not repeated.
I look forward to hearing from today's witnesses and I
thank you, Chairman Frank. I yield back.
The Chairman. The gentleman from New York, Mr. Meeks, for 2
minutes.
Mr. Meeks. Thank you, Mr. Chairman. I just want to thank
you for the great job that you are doing in conducting this
hearing this morning and just dealing with this whole crisis
that we have. We are very proud of you and what you have been
doing. I will be very brief. We all know about the economic
crisis that we are going through. And the one way that when we
talked about TARP and the $700 billion that we will often talk
about is this is where Wall Street meets Main Street. And the
way that we can show our constituents that Wall Street is
meeting Main Street, and how we are not only just trying to fix
the situation in regards to our financial institution, is to
show that we are also trying to keep Americans in their homes.
Reworking these mortgages, etc., becomes extremely important in
doing that because absent that, then, of course, we have this
problem and I could go on with a litany of statistics in my
district for example, in Queens, which is leading the City of
New York in foreclosure rates, in the price of homes that are
going down, in how long it takes to sell a house now and on and
on and on. But the key is trying to make sure that we keep
people in their homes.
I have assembled in my office now on a weekly basis
counselors, financial advisors, and attorneys every week on a
Wednesday from 1:00 to 5:00. I have these counselors in my
office and we set up appointments and they have been jampacked,
and we are packed up now for the next, I think it is 6 weeks,
with people. I will ask some questions when we get to the
question period. But I just want to say that the key to this--
in getting out of this crisis that we are in is keeping people
in their homes and I want to compliment those individuals in
the programs that I recently heard in regards to Citi, and I
think Chase and a few others and I want to get into that. You
know, as we ask questions. But--and that is why hearing from
you and what your testimony and how we can make sure this is
working is extremely important. So I thank you for being here
today and I await your testimony.
The Chairman. The gentleman from Ohio, Mr. LaTourette, for
3 minutes.
Mr. LaTourette. Thank you, Mr. Chairman. And thank you for
having this hearing, and I especially look forward to the next
hearing that you are going to have on the 18th and thanks also
for chatting with me over the break about National City Bank in
Cleveland. All I can say is what a mess this is. And, Mr.
Chairman, I have the highest respect for you and I think my
plea is, after this morning and these hearings are over, you
use all of the wisdom that you have to help us think outside of
the box. And the reason I say that, if you go to the bill that
we passed in July which Chairman Frank really did Yeoman-like
work on, and I fully supported that piece of legislation, I
have been told that only 42 mortgages have been submitted to
date for modification and none have been granted because it
takes 60 days, and that the regulators are saying that by next
fall, it will only be 20,000, far short of the 400,000 that we
envisioned when we passed that legislation.
I would ask unanimous consent to include into the record an
article written by--and I never read this fellow before--Joe
Nocera from the New York Times of November the 11th.
The Chairman. Without objection, it is so ordered.
Mr. LaTourette. Mr. Nocera makes the argument that is the
subject of the hearing and that is everybody sees the wisdom of
mortgage modifications, except nobody talked to Wall Street.
And he makes the point that I think is good, that Fannie and
Freddie have jumped up and they are going to come up to 38
percent of the gross income modification, Citigroup is good,
JPMorgan is good. But if we don't do something on the liability
that the fiduciaries have, we are not going to be able to
refinance or modify anything. And so I would hope that the
witnesses today, the title of Mr. Nocera's article yesterday
is, ``Can anyone solve the securitization problem?''
So I would hope that maybe the witnesses can chat about
that with us and we can solve the securitization problem to
actually have modification of mortgages.
And then lastly, the hearing next week is going to talk
about TARP and I have to tell you, Mr. Chairman, that we have
to get to the bottom of this and think outside the box because
this TARP business, again, Mr. Nocera and others have pointed
to the fact that rather than buying troubled assets, rather
than buying preferred stock, now banks are hoarding the money,
maybe they don't want to lend it.
In the case of PNC and National City Bank, they have used
TARP money from one bank to buy another bank. And being from
Cleveland, a PIS bank buying a Cleveland bank is a bad, bad,
bad thing. And that is not what I thought the bill was supposed
to be about. But that is where we are headed. So again, I
appreciate your leadership, Chairman Frank and Ranking Member
Bachus, but I really urge us to get this right and get this
done so that we can move this forward and keep people in their
homes.
The Chairman. The gentleman from Texas, Mr. Green, is
recognized for 2 minutes.
Mr. Green. Thank you, Mr. Chairman, and Ranking Member
Bachus. I find myself in accord with the previous speaker. The
situation seems to be such that the home buyers are indicating
that they would like to avoid foreclosure. The lenders and
servicers are indicating that foreclosure avoidance is a good
thing. In fact, information that I have indicates that it costs
about $40- to $50,000 in attorneys fees and fees for property
management when a foreclosure takes place. And that is per
unit. It seems that we all are in agreement that foreclosure is
not a good thing and that it should be avoided. But it is not
happening.
And the question becomes, how do we connect the disconnect
between the servicer and the borrower such that the foreclosure
avoidance can actually take place? I have not, to date, heard
of any legislation that would be mandatory, requiring write-
downs of principle, requiring interest rates to be reduced. I
have just not heard of such legislation; it may exist, but it
has not been presented in a forum such that it can be debated
and discussed, especially here at this committee level. And my
fear is that if we continue to fight that which does not exist,
it would make it difficult to deal with that which does exist,
which is the necessity to connect this disconnect and try to
avoid foreclosure without a mandatory requirement of a write-
down or a reduction of interest rates. I am absolutely
convinced that this is a solvable problem. It is one that
requires careful thought, but it is something that can be
resolved. I thank you for the time, Mr. Chairman, and I yield
back.
The Chairman. The gentleman from Georgia is granted 3
minutes.
Mr. Price. I want to thank the chairman for holding this
hearing as well and I had to step out for a moment. I don't
know that anybody has mentioned what happened last Tuesday, but
it seems like it would be inappropriate not to at least
congratulate the chairman and his party on the election last
Tuesday and just say that I think that the American people are
now ready for us to move on on this issue and others and work
together and solve these challenges and I for one look forward
to that as well. We are all very concerned with the critical
situation of homeownership and foreclosures. I think it is
imperative, though, that we also recognize that over 90 percent
of Americans either own their home or are current on their
current payment schedule. There is a major problem without a
doubt and it needs to be addressed. Of those that are
challenged, it is my understanding as has been mentioned that
over 50 percent of them--the borrower hasn't contacted the
lender to determine how they might be able to work on
voluntarily changing the parameters of the agreement and see if
they could remain in their home.
So I am hopeful that we concentrate on those voluntary
activities as some on the other side have mentioned. I want to
commend--there is so much that has been done and can be done. I
want to commend Mr. Meeks for what he is doing in his
community. Obviously, there are a lot of folks who are working
trying to get borrowers and lenders together to talk when there
are concerns that are occurring. Some have said that we should
not have, however, a public policy where decisions that are in
the best interest of society are not makeable and I would
suggest that the concern about that statement is that the best
interest of society is movable or is changeable or is maybe
different depending on where one sits. The squabbling siblings
who were mentioned before and not able to find out what the
disposition of the home ought to be unless it is a condemnation
situation and there are laws that are in place to, especially
in that area, but unless it is a condemnation situation, there
are other laws in the courts of law to determine what ought to
occur, to have the notion or the sense that it is the Federal
Government's responsibility to step in in that situation and be
the owner of the home, I think, is a step that frankly the
American people are not interested in taking.
I would ask the witnesses specifically to talk about the
moral hazard argument or the moral hazard situation that we
find ourselves in. I want to thank the chairman for correcting
the record regarding Greenwich Financial and I look forward to
the testimony.
The Chairman. The gentleman from Massachusetts is
recognized for 2 minutes.
Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I want
to make it clear as to what my understanding of why this
hearing is today because it I believe it is the best way for us
to get our message out and to hear from some people in the
industry that some of us think the industry hasn't gotten the
message yet, that we want individual homeowners helped. Now, I
don't think the people here today didn't get that message, but
I think some people in the financial services industry didn't
get it. I don't think anybody believes that every single
homeowner can or should be helped. That is not the point. But
something more than 42, maybe a few hundred thousand, pick a
number, but something. And there are many of us who feel that
the industry hasn't gotten the message and this is one way to
do it, and also for us to find out if there are technical ways
for us to assist the industry in implementing the message. But
I also want to make it very clear that I hope, and I am looking
forward and I am sure there will be other hearings.
I am actually, frankly, getting a little tired of having
the chairman have to get on TV and tell the industry we don't
want them to use money for mergers, we don't want them to use
taxpayer monies for vacation, we don't want them to use
taxpayer moneies for outrageous bonuses. I am not saying they
can't do those things, but use their own money. And if they
don't get it, I think we are going to have to have some further
discussions with both the Treasury Department and I actually
take last Tuesday's result as a comment by the American people
that they want a more activist government to be involved in
these things. Actually, we don't want to tell anyone what they
have to do. That not the desire that may be necessary.
Now, my hope is that between now and then, the industry
gets the message that we want more individual help, that we
don't want taxpayer money being used for these ludicrous
purposes, we want it used for one purpose and one purpose only,
which is to get the American economy back on its feet and
moving in the right direction. Again, I don't mean to address
my remarks to this particular panel. I think from what I know
you are all on the right page in trying to get in the same
direction at the same time and it is one of the few
opportunities that we get to allow the American people and more
importantly the financial services industry to hear us and hear
us as clearly as can and with that, thank you, Mr. Chairman,
for the opportunity.
The Chairman. The last allocation of time, 2 minutes for
the gentleman from Illinois, Mr. Foster.
Mr. Foster. I am most concerned in this thing that we
somehow don't get into this mess again. One of the things I
would be very interested in hearing about is whether or not
there is well-understood language that would be incorporated
into future securitization contracts and so on that would make
them easier to unwind in times of financial stress, so that we
really have an understanding that if--you know, as the
securitization industry re-emerges from the current crisis,
that when this happens again, that everyone understands the
rules on how we get out of this quickly and simply. I would be
very interested in hearing your comments on that. That is it.
The Chairman. We will now proceed with the panel.
We will begin with Mr. Benjamin Allensworth, who is the
senior legal counsel with the Managed Funds Association.
STATEMENT OF BENJAMIN ALLENSWORTH, SENIOR LEGAL COUNSEL,
MANAGED FUNDS ASSOCIATION (MFA)
Mr. Allensworth. Chairman Frank, Ranking Member Bachus, and
members of the committee, my name is Benjamin Allensworth, and
I am senior legal counsel for the Managed Funds Association
(MFA). MFA represents the management of the world's largest
hedge funds and is a primary advocate for sound business
practices and industry growth. MFA appreciates the opportunity
to testify today about efforts by private sector participants
to work with Federal, State, and local officials in seeking to
mitigate the current wave of foreclosures and defaults.
Our fundamental belief is that effective mortgage
modifications are preferable to foreclosures whenever possible.
As we have all learned over the past 12 to 18 months, our
Nation's housing market is critical to the social and financial
wellbeing of families and communities throughout our country
and essential to the health and vitality of our capital markets
and our economy. The wave of foreclosures has placed downward
pressure on home prices, eroded home equity, and shattered
confidence which, in turn, has led to a freezing-up of the
mortgage backed securities market, a major source of liquidity
and credit to our capital markets. That cascading effect has
led to the tightening of the broader credit markets as
financial institutions and market participants have been forced
to satisfy redemption requests of investors and hold more
capital.
To stem the effects of this crisis, bold proactive steps
need to be taken. MFA and our members are committed to working
with policymakers on effective remedies to address these
serious economic challenges. Over the past few months, Congress
has enacted a number of measures in response to the ongoing
crisis in our mortgage and credit markets, specifically the
Emergency Economic Stabilization Act and Housing and Economic
Recovery Act. The central element of HERA is HOPE for
Homeowners, a program that seeks to help those at risk of
default and foreclosure move into more affordable loans insured
by the FHA. MFA believes that with additional time and
continued collaboration, HOPE for Homeowners can serve as a
valuable tool to mitigate foreclosure and help inject much
needed liquidity back into the mortgage and credit markets.
While MFA does not have a formal association policy
regarding the terms and conditions for modifying MBS contracts,
our association and our members strongly support effective
mortgage modifications over foreclosure whenever possible. Loss
mitigation is a challenge for all MBS market participants and
investors. That includes hedge funds, which do invest in
mortgage backed securities, though comprise a relatively small
part of the MBS market as compared to other investors. There
are a number of legal, fiduciary, and practical issues that
must be taken into account when considering mortgage
modifications. Mortgage servicers and institutional investors
have fiduciary duties to their investors and clients
respectively. Fiduciaries must weigh the effect of mortgage
modifications on the earnings of their investors, which include
pension funds and retail mutual funds, among others. Other
factors, including the likelihood of a subsequent default, are
also considered when making these important determinations.
As market participants consider these obligations in the
context of loan modifications, one of the primary
determinations is whether the net present value of a modified
loan is greater than the NPV of a foreclosure. In preparation
for this hearing, MFA sought out the views of our members and
other stakeholders to help us better understand the impediments
to more robust loan modification efforts. Among the concerns
most commonly cited were: The process, technology, and accuracy
in calculating NPV for modifications to groups of mortgages as
opposed to the calculation of NPV when done on a mortgage-by-
mortgage basis; the higher rates of subsequent default and the
impact of that likelihood in the NPV calculation for non-HERA
modified loans; the capacity of servicers, some of whom may be
overwhelmed by having to make NPV determinations for so many
troubled mortgages; and also constraints on the parts of some
servicers who may be willing but unable to do loan
modifications under HERA because they lack the ability to
originate FHA-insured mortgages. While each of these challenges
has the potential to undermine loan modification efforts, none
are so daunting that they should deter us from our shared
interest in keeping more families in their homes and restoring
stability and confidence to our mortgage and credit markets.
In this regard, we believe there are some important
measures that can be considered to help accomplish this
important objective. These include: Developing a set of
standardized protocols that would enable servicers to more
efficiently calculate NPV. Yesterday's announcement by the
Administration that, as part of the HOPE NOW Initiative, it
will implement protocols to help streamline the loan
modification process is a hopeful sign, though more is needed.
Encouraging more owner servicers to do loan modifications and
finding ways to have mortgage backed securities held and
administered by a single entity, rather than a variety of
entities with competing interests, which should provide for a
more efficient loan modification process. And finally,
examining the implications of higher subsequent default rates
for non-HERA modified loans. We believe it is in the best
social and economic interest to find ways to reduce the risk of
future defaults on mortgage modifications of all types.
Mr. Chairman, as I stated at the outset, MFA and our
members appreciate the social and economic importance of
preventing mortgage foreclosures, and we are committed to
working collaboratively with policymakers and other market
participants on preserving the American dream of homeownership
for millions of at-risk families.
Thank you for the opportunity to testify before this
committee. I would be happy to answer any questions you may
have.
[The prepared statement of Mr. Allensworth can be found on
page 59 of the appendix.]
Mr. Kanjorski. [presiding] Thank you very much. And now we
will hear from Ms. Molly Sheehan, senior vice president of the
home lending division, JPMorgan Chase.
STATEMENT OF MOLLY SHEEHAN, SENIOR VICE PRESIDENT, HOME LENDING
DIVISION, JPMORGAN CHASE
Ms. Sheehan. Chairman Frank, Ranking Member Bachus, and
members of the Financial Services Committee, we appreciate the
opportunity to appear before you today on this most important
topic of helping homeowners. We recognize that no one benefits
in a foreclosure.
My name is Molly Sheehan, and I work for the home lending
division of JPMorgan Chase as a senior housing policy advisor.
Chase is one of the largest residential mortgage servicers in
the United States, serving over 10.5 million customers on the
platforms of Chase, and more recently WaMu and the EMC unit,
formerly affiliated with Bear Stearns, with mortgage and home
equity loans of approximately $1.5 trillion in every State of
the country.
We are proud to be part of one of this country's preeminent
financial institutions with a heritage of over 200 years. Chase
services about $332 billion in mortgages and home equity loans
it originated and owns. It also services or subservices an
additional $1.1 trillion of first lien mortgage loans for
investors.
As you know, we announced 2 weeks ago several significant
enhancements to our foreclosure prevention and loan
modification efforts. We would like to share those with you
today.
While we have helped many families already, we feel it is
our responsibility to provide additional help to homeowners
during these challenging times. We will work with families who
want to save their homes but are struggling to make their
payments. That is why we announced on October 31st that we are
undertaking multiple new initiatives designed to keep more
families in their homes.
We will open regional counseling centers, hire additional
loan counselors, introduce new financing alternatives,
proactively reach out to borrowers to offer prequalified
modifications, and commence a new process to independently
review each loan before it moves into the foreclosure process.
We expect to implement these changes within the next 90 days.
While implementing these enhancements, we will stop
additional portfolio loans from entering the foreclosure
process. This will give potentially eligible homeowners in
owner-occupied properties an opportunity to take advantage of
the new enhancements. Chase has worked diligently and will
continue to work diligently with investors to get their
approval to bring these enhancements to loans that we service
on behalf of others so our efforts can have the broadest
possible impact.
The enhanced program is expected to help an additional
400,000 families, with $70 billion in loans in the next 2
years. Since early 2007, Chase, WaMu and EMC have helped about
a quarter of a million families avoid foreclosure, primarily by
modifying their loans and payments.
So more specifically what we will do is systematically
review our entire portfolio to determine proactively which
homeowners are most likely to require help and try to provide
it before they are unable to make payments; proactively reach
out to homeowners to offer prequalified modifications, such as
interest rate reductions, term extensions and principal
forbearance where needed. The prequalified offers will
streamline the modification process and help homeowners
understand that Chase is offering a specific option to make
their monthly payments more affordable.
We will establish 24 new regional counseling centers across
the country to help provide face-to-face help in areas with
high delinquency and foreclosure rates, building on the success
of the 1- and 2-day HOPE NOW reach-out days, and we will
partner with community counselors to reach more borrowers.
We intend to add 300 more loan counselors, bringing the
total to more than 2,500, so that delinquent homeowners can
work with the same counselor throughout the process, improving
follow-through and success rates.
We will expand the range of financing alternatives offered
to modified pay-option ARMs, which we inherited when we
acquired the mortgage portfolios of WaMu and the EMC unit, to
an affordable monthly payment including 30-year fixed rate
loans, interest rate reductions, principal deferral, and
interest-only payments. All of these alternatives will
eliminate negative amortization.
We will also offer a substantial discount on or donate 500
homes to community groups, or through nonprofit or governmental
programs designed to stabilize communities to deal with the
growing inventory of REO. These enhancements reflect Chase's
commitment to continue to seek additional ways to help
homeowners.
Thank you for your attention, and I will be happy to answer
any questions you may have.
[The prepared statement of Ms. Sheehan can be found on page
85 of the appendix.]
Mr. Kanjorski. Thank you. Now we will hear from Mr. Gross,
managing director of loan administration loss mitigation, Bank
of America.
STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, LOAN
ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA
Mr. Gross. Good morning, Mr. Chairman and committee
members. Thank you for the opportunity to appear again to
update you on our efforts to help families stay in their homes.
Bank of America fully appreciates its role in helping
borrowers through these difficult economic times. We are
committed to being a responsible lender and servicer and
facilitating homeownership and retention.
First I want to provide you a brief update on our mortgage
business. We are open for business across America. From July
through September, we funded more than $50 billion in home
mortgage loans, financing over 250,000 homes. We are also
working hard to help customers who may be in trouble.
We have developed important programs that are projected to
provide relief for over $100 billion in loans, enough over 3
years to help keep up to 630,000 borrowers in their homes.
Included in the $100 billion is Bank of America's ambitious new
Homeownership Retention program announced on October 6th,
potentially impacting and assisting up to 400,000 homeowners.
It is designed to achieve affordable and sustainable mortgage
payments for customers who finance their homes with subprime or
pay-option adjustable rate mortgages serviced by Countrywide
and originated by Countrywide prior to December 31, 2007.
Our 5,600 home retention professionals will be equipped to
serve eligible borrowers with these new programs by December
1st of this year. Please know that the foreclosure process will
not be initiated or advanced for a customer likely to qualify
until we have made a decision on the customer's eligibility.
The centerpiece of the program is a proactive loan
modification process to provide relief to eligible customers
who are seriously delinquent or are likely to become seriously
delinquent as a result of loan features such as rate resets or
payment recasts. Various options will be considered for
eligible customers to ensure modifications are affordable and
sustainable. First-year payments of principal, interest, taxes,
and insurance will be targeted to equate to 34 percent of the
borrower's gross monthly income.
Modified loans feature limited step rate interest-rate
adjustments to ensure annual principal and interest payment
increases at levels with minimal risk of payment shock. The
program's foreclosure alternatives provide a win for homeowners
and investors and are intended to assist in the effort to
stabilize the country's deteriorating housing market. Loan
modifications will be made in accordance with servicing
contracts, and where servicing contracts limit or prohibit
modification, Countrywide will seek consent from investors and
the other associated third parties.
Finally, I would like to highlight a couple of continuing
impediments to loan modifications for the committee's
consideration.
Bank of America today services approximately 15 million
mortgage loans. Some of these loans are held for investment in
our own portfolio, but others are serviced on behalf of
investors, including GSEs, government entities, and private
investors. Our servicing is governed by the underlying pool and
servicing of contracts and related rules of these investors.
For loans that are held for investment, we have broad
flexibility to modify the loans. For other categories, however,
investor rules and underlying servicing contracts with respect
to modifications are not uniform and may prevent us from doing
modifications that would benefit both borrowers and investors.
Under some arrangements, for example, servicers have
express or implied authority to make loan modifications, while
under other arrangements loan modifications are expressly
disallowed. Even within categories of investors such as the
GSEs, there is a significant variation in the rules that apply.
Servicers are frequently unable to effect loan modifications
because of contractual prohibitions.
Another challenge is the lack of uniformity in approaches
to loan modifications. Servicers increasingly are accelerating
their and our loan modification practices. Examples include
voluntary loan modification programs like ours, as well as
government programs like the FDIC IndyMac program.
Servicers are employing usual and customary loan
modification techniques such as interest rate and principal
reductions and term extensions, and they are developing
underwriting and other guidelines to determine when and what
type of loan modification is appropriate that benefits both
homeowners and investors. Bank of America supports government
and industry efforts to develop greater consensus regarding
these elements of loan modification programs.
Yesterday's announcement by the Treasury Department, the
Federal Housing Finance Agency, and GSEs to adopt systematic
loan modification programs will help drive uniformity amongst
these entities in the approach to loan modifications. We
believe industry organizations, including those appearing
before you today, also should play a role by issuing additional
standards for loan modifications that will encourage servicers
to do more.
There are certainly other challenges, and we would be glad
to discuss those with the committee subsequent to the hearing.
Thank you again for this opportunity to discuss Bank of
America's efforts to keep our customers in their homes. Today's
market conditions demand expedient, affordable loan
modifications that help customers while protecting returns to
investors. This is a critically important undertaking that must
be done right if we as an industry are going to preserve the
flow of capital of mortgage credit to support housing and at
the same time protect communities and neighborhoods from
avoidable foreclosures.
Thank you for this opportunity to appear.
[The prepared statement of Mr. Gross can be found on page
75 of the appendix.]
The Chairman. Next, Mr. Thomas Deutsch, who is deputy
executive director of the American Securitization Forum.
STATEMENT OF THOMAS DEUTSCH, DEPUTY EXECUTIVE DIRECTOR,
AMERICAN SECURITIZATION FORUM (ASF)
Mr. Deutsch. Chairman Frank, Ranking Member Bachus, and
distinguished members of the House Financial Services
Committee, my name is Tom Deutsch and I am the deputy executive
director of the American Securitization Forum (ASF). I very
much appreciate the opportunity to testify before this
committee again on behalf of the more than 330 member
institutions of the ASF, including mortgage lenders, servicers,
and all institutional investors regarding loan modifications
and how our industry and the Federal Government can work
together to prevent avoidable foreclosures.
I testify here today with one simple overarching message:
Industry participants have been and will continue to deploy
aggressive and streamlined efforts to prevent as many avoidable
foreclosures as possible. But macroeconomic forces bearing down
on an already troubled housing market are simply too strong for
private sector loan modifications alone to counteract the
nationwide increase in mortgage defaults and foreclosures. In
my testimony here today, I look to outline a number of ways the
industry and the government can work together to target relief
to troubled homeowners while simultaneously helping to restore
credit to mortgage borrowers.
Economic and housing market conditions have clearly
deteriorated over the last 18 months, with that deterioration
intensifying as of late. Job losses, declining home values, and
borrowers' consumer debt have all put extreme strain on
homeowners' abilities to pay their mortgage debts.
Given these unprecedented challenges, servicers have
responded with unprecedented efforts as no securitization
market constituency--lenders, servicers, or institutional
investors--benefits from loan defaults or foreclosures.
As a result, the number of loan modifications, for example,
has increased by over 6 times the rate at which they were being
provided to borrowers at this time last year. One driving force
behind this exponential increase was the streamlined framework
the ASF put together and developed last year that all major
servicers have implemented to provide efficient loan
modification decisions to subprime ARM borrowers facing
interest rate resets.
Let me emphasize here, very clearly, servicers do have the
legal authority, right, and responsibility to modify loans in
appropriate circumstances, even if those loans are in mortgage-
backed security pools. But in light of the deterioration in the
broader economy and housing market, ASF has been working
aggressively to develop an expanded framework that will give
servicers even more latitude to modify loans in a streamlined
manner.
Modifications generally in this framework must also be in
line with the contractual rights and commercial expectations of
institutional investors such as pension funds and mutual funds
who depend on investments in mortgage-backed securities to help
workers and families achieve their savings and retirement
goals. As part of this effort, we are actively reviewing
criteria and other loan modification approaches that have
recently been announced, such as the plan implemented by the
FDIC on the IndyMac portfolio and the Federal Housing Finance
Agency protocol announced yesterday.
Ultimately though, we must recognize the seismic economic
challenges in the United States, the epicenter of which is in
the housing market, are too great for purely private sector
loan modification solutions. As such, evolving servicer loan
modification activities, though playing an important part of
the solution, have limits to their effectiveness in addressing
the extraordinary challenges in the housing market and should
not be seen as a panacea for housing market ills.
As such, we believe expanded voluntary government programs
will be very effective in helping bridge the gap to address the
potential foreclosures that commercial and contractual
arrangements cannot prevent.
We applaud you, Mr. Chairman, and the hardworking members
of this committee for being a driving force in developing and
enacting the voluntary HOPE for Homeowners program last summer.
The program has a number of innovative elements to help
homeowners refinance into a new FHA loan and it does provide
incentives for servicers and loan holders to allow those
homeowners to refinance. Unfortunately, the program has met
with limited market reaction, as only 42 loans have been put
through the program in its first month of operation.
We believe there are a number of impediments to HUD's
implementation of this program, including the limitations on
borrowers' total debt outstanding and the significant equity
writedown that loan holders are asked to take. We believe a
number of modifications to the program could allow many more
borrowers access to the program and ultimately prevent their
foreclosure.
In addition to refinancing opportunities, the newly enacted
TARP, or Troubled Asset Relief program, allows the Federal
Government to use guarantees to incentivize additional loan
modifications for distressed borrowers. We believe there have
been some positive proposals put forth, for example, by the
Chairman of the FDIC and that which you outlined at the outset,
Chairman Frank, that would allow the Federal Government,
through TARP, to provide credit guarantees for redefaults on
modified loans that we believe would substantially increase the
number of loan modifications granted and ultimately
foreclosures avoided.
Finally, we believe there are significant opportunities
also for TARP to purchase individual distressed loans out of
mortgage-backed security trusts, which could give the Treasury
Department unlimited discretion to modify loans in whatever way
the government feels fit.
The ASF has recently undertaken a review of the various
opportunities and obstacles for servicers to sell individual
distressed loans out at a discount to the Treasury Department.
We expect to report out some initial progress on this
initiative at the end of this week.
Let me just note one of the things that was mentioned in
the opening statement by the ranking member is that
securitization to some has become a dirty word; but let me
emphasize and provide a quote from the finance ministers of the
largest economies in the world that articulated last month that
one of their top five global priorities is to, ``take action,
where appropriate, to restart the secondary markets for
mortgages and other securitized assets.'' Simply, without
securitization, the credit markets in America have dried up,
and people don't have an ability to purchase new homes, to
purchase autos, or to use their credit cards.
I thank you for the opportunity to testify on this
important and timely issue today. ASF looks forward to
continuing to work with this committee and the new
Administration in our collective pursuit of avoiding
preventable foreclosures.
[The prepared statement of Mr. Deutsch can be found on page
63 of the appendix.]
The Chairman. Thank you.
I am going to have to, when this hearing is over, ask the
maintenance people to come up with some large rooms, because we
are awash in straw up here from the number of strawmen that
have been constructed and then demolished by my Republican
colleagues.
Let me start with securitization. I don't know anybody who
is trying to abolish securitization. I don't know anybody who
is trying to substantially limit it. What I have said in every
speech I have given on the subject is that securitization
reminds me of the formation of large enterprises called trusts
in the late 19th Century, and then of the broadening of the
stock market, an innovation that produces a great deal of good
for society but, because it is an innovation, is not always
accompanied at the outset by appropriate regulation. And
regulation helps enhance the innovation.
In fact, one of the problems we have now is that some
people who bought things they shouldn't have bought now won't
buy things they should buy. That is an obstacle to the
securitization market. And just as the establishment of the
Securities and Exchange Commission, over the objection of the
conservatives of the day, helped the stock market flourish, the
right rules here will encourage people to get in it.
The next one is retroactivity. No one has proposed--I take
that back--a couple of people have proposed it. We haven't come
close to enacting anything retroactive. We are talking, as Mr.
Deutsch correctly said, about voluntary inducements. So this
retroactivity scarecrow--I guess I just switched metaphors--is
just a shimmer.
Nor are we talking--when the gentleman from Georgia, in
talking about decisions being made, said well, but you don't
want the government to own the house. No, we don't. Nobody has
proposed it. That is why we didn't propose it, because no one
wants it.
We are saying this: We have heard from a number of people,
and he said correctly it isn't always clear what is the best
answer. There does appear to be a consensus that in many, many
cases--and, again, somebody said well, you can't protect
everybody against foreclosure. True. And again, I don't know of
a single human being who has said anything other than we are
trying to diminish the number of foreclosures. There are people
who are not going to be able to make their payments, and nobody
is trying to stop it.
What we are talking about is in those situations where we
are told there is agreement that foreclosure would be a worse
case than some modification, we have been told that there are
problems in getting there. So what we talk about is not the
government making the decision; but, yes, I do think it is
important and it has been an important matter of public policy
to have somebody make the decision.
The gentleman from Georgia said, well, they can go to
court. My conservative friend's preference for litigation ebbs
and flows. I think leaving something to the courts, without
adequate statutory guidance, is not an appropriate thing for us
to do.
Let me just ask, Mr. Deutsch, please submit to us
specifically those modifications on HOPE for Homeowners. But
here is the nub of it to me. On page 5 of your written
statement you say, ``Although there is variation among
individual transactions, most securitizations provide servicers
with significant flexibility to engage in loan modification and
other loss mitigation techniques subject to contractual
obligations if the particular loss mitigation alternative
selected maximizes the net present value or recovery.'' That is
clearly the case.
We are told that in principal, but we are also told by many
people that they can't get this worked out, that the servicer
in fact is deterred from doing it. We tried to pass legislation
to deal with that. We passed legislation--bipartisan--the
gentleman from Delaware and the gentleman from Pennsylvania.
Certainly it is the case statistically, I am told, and we
saw this again with Fannie and Freddie, that entities as
holders have been able to do more modifications than mortgages
where there is a servicer.
So if this is the case, I guess to some extent--and I want
to believe what you say and I acknowledge that may be what is
in the contract--but there still may be this fear.
You tell me that the securitizers, the servicers, have the
power to do this, but we get every indication anecdotally and
statistically that it is not being done as much. So I guess I
am in the position of posing the question that Groucho opposed
to Chico: ``Who am I going to believe, you or my own eyes?''
I want this to be the case, but are you aware that there is
this disparity in the actual number of modifications, that we
get more when there are owners, the holders servicers? And if
that is the case, are there further things we can do? What
would account for what seems to me the gap between what I
believe is an accurate statement by you of the legal situation
and the actual experience?
Mr. Deutsch. Well, hopefully my name won't be referred to
as Chico hereafter, but I think--
The Chairman. A side point, by the way. It was Chico,
because it was based on his predilection for female
companionship.
Mr. Deutsch. You are going to make me blush, Mr. Chairman.
Servicers have indicated that they believe and are very
concerned that if they do overmodifications of mortgage loans,
that they would be subject to lawsuits. Those same servicers
should also be scared if they are subject to lawsuits for
undermodification as well.
The Chairman. Is there anything we could do to alleviate
the first fear, other than what we have already done? I do know
this. The question of indemnification, you get taxpayer dollars
there. Is there anything we can do, short of 100 percent
indemnification, to alleviate the first fear?
Mr. Deutsch. I think the best thing we can do is what the
ASF is actively working on right now, and that is bringing
together all of the institutional investors, the pension funds,
the mutual funds, the hedge funds, the banks, the financial
guarantors, the insurance companies, all those that own
mortgage-backed securities, and creating a more streamlined
solution that ultimately gives a standard market practice for
servicers to be able to modify in accordance with that. There
is significant precedence for that. The ASF created last
December a streamlined framework that allows servicers even
before a borrower--
The Chairman. My time is up. I am glad to hear that. If it
helps you, tell them that to the extent they are worried that
we will intrude too much legislatively on this method that they
believe is now working well, they can make us go away, but they
can only make us go away if this effort you are talking about
is successful and leads to significant modifications.
The gentleman from Texas is next on the list I was given.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Deutsch, what would you say is the status of the
secondary or the securitization market for mortgages today? You
said nonexistent. Is it totally nonexistent, or is there some
activity going on?
Mr. Deutsch. I can provide you stats that were in my
written testimony, that in October of 2008, there was
approximately $500 million of securitized product that was put
out into the market. It sounds like a big number for those of
us. But last year at the same time, it was approximately $50
billion in October of 2007. In previous cycles, it was much,
much higher than that.
There is absolutely zero activity right now in the
securitization credit markets, which ultimately leads banks not
to have the available credit to lend to consumers.
Mr. Neugebauer. Mr. Gross, you indicated, though, that you
all had made a substantial number of mortgage loans in the last
quarter.
Mr. Gross. That is correct, sir.
Mr. Neugebauer. What did you do with those mortgages?
Mr. Gross. They are either portfolio product, or these
would have been product delivered through the GSEs. I believe
that the market Mr. Deutsch was referencing was the private
securitization market.
Mr. Neugebauer. So, Mr. Deutsch, the $500 million would be
delivery outside of Fannie or Freddie. This would have been in
the private markets.
Mr. Deutsch. Correct. And that encompasses consumer asset
securitization as well--credit cards, auto loans, consumer
loans, etc.
Mr. Neugebauer. The chairman talks about the servicers and
the portfolio managers and the trustees and all of the people
who are involved in the securitization family there. Moving
forward, in other words, we have some of these old contracts
that are in place. What is the industry doing as we are moving
forward to look at where some things in those documents could
have been made better and bring some uniformity? Has anything
taken place, or is the meeting that you are proposing where
that should take place?
Mr. Deutsch. We have had a separate effort from beyond the
existing--how to address existing contractual arrangements, an
existing modification policy, a separate effort throughout all
of 2008 called ASF Project RESTART, where we are examining all
areas of securitization and ways to enhance the process of
securitization.
I would point you to a request for comment that we put out
this summer, that we will shortly be updating, where we note a
number of different ways where we are trying to create a much
more strengthened securitization process which ultimately will
create market discipline.
One of the gentleman's comments over here was can we create
servicing provisions that will ultimately allow more
discretion, more flexibility into the future for servicers who
are experts at servicing to be able to do that on behalf of
investors who are experts in investing. Absolutely, we believe
we will get to new standards that will even further create
better securitization into the future.
But we all know it is going to be some months before
securitization returns, and obviously none of us want
securitization to return in the exact same form that it
occurred in previous years.
Mr. Neugebauer. One of the issues that I have about moving
down to some kind of modification road here, of Congress
stepping in the room again, is what that does to the private
mortgage insurance industry, because I think they are going to
have a much stronger role, probably already have been, as
people are looking to go back in to make sure that if you are
making above a 75 or 80 percent loan you are using, in many
cases, some private mortgage insurance to do that.
What are the implications to those entities if we start
going down a road where the potential loss could be made larger
if that modification in fact doesn't really turn out to be
appropriate? How do we address that?
Mr. Deutsch. Well, I think there are two ways we can
address it. I think it is an important comment to note it is
critical for people to have certainty of contracts moving
forward.
You don't want to put capital to work if you are afraid
somebody will change the rules after the fact. I do think there
is a very positive way that the Federal Government through TARP
can provide guarantees. And this will be a benefit to mortgage
insurers, to the institutional investors, to financial
guarantors, where this guarantee policy could apply if
servicers were today even more proactive steps on loan
modifications; that if those modifications would fail,
ultimately that credit risk would flow to the troubled asset
relief program rather than back to the ultimate holder or those
borrowers.
Mr. Neugebauer. Mr. Gross, over the last quarter, you
originated a number of loans. Are you seeing that in any
particular part of the country, or is the activity that you are
reporting pretty much nationwide?
Mr. Gross. That is a nationwide number, sir.
Mr. Neugebauer. I would say what the chairman said. I think
it would be in the best interests of the industry if you could
sit down and work this out among yourselves, without asking or
receiving any encouragement from this committee to do that. I
think a better solution comes from the industry working it out.
One, you know more about the transaction than anybody in
this room; and, two, I think it would be more of a market-
based, market-driven solution that would accomplish the
ultimate goal, and that is get these markets functioning again.
The Chairman. I am going to ask unanimous consent at this
point to put into the record a very good report by Credit
Suisse dated October 1st, ``Subprime Loan Modifications
Update.'' With your indulgence, I want to read just a couple of
their conclusions, because it is relevant to what we are
talking about.
First, it says that loan modification is a growing but
perhaps underutilized tool to reduce lawsuits and prevent
foreclosures; that redefault rates for some types of
modifications are better than expected. Not surprisingly,
principal reductions or interest rate reductions work better
than simply sort of putting off the day of reckoning.
But here is a very important point that is relevant maybe
to what Mr. Deutsch says. It probably gives some support to
what you are talking about: ``We show that there is a dramatic
difference between how intensively servicers are using mods.
Some servicers have already modified more than 10 percent of
all outstanding 2005-and-later vintage loans. Others have
modified less than 5 percent.'' Then it says servicers are
finding the sweet spot between too many and too few that will
improve bond values.
So the fact that there is this variation does argue for the
point there is this authority. And, again, I think the success
of that operation that you are talking about will have a major
impact on this committee's legislative agenda.
Without objection, I will put in this report, and I
recommend it to people. It does say they are increasing,
``Actually subprime loan modifications have increased
significantly since we published our first report on this
topic. No one program has done what we would like.'' There are
a whole bunch of them, including some individual things. So I
do recommend this report to people.
The gentleman from Pennsylvania is recognized for 5
minutes.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Deutsch, maybe you can straighten us out. Do you see
over the horizon any certainty that deflation in the real
estate market is going to stop and come to an end?
Mr. Deutsch. The deflation in the real estate market?
Mr. Kanjorski. The devaluation of real estate.
Mr. Deutsch. My personal view is that we will continue to
see price declines throughout 2009, particularly in the most
troubled markets: California; Nevada; Arizona; Michigan; Ohio;
and Florida.
Mr. Kanjorski. Well, if that is the case, how will
rewriting mortgages and making modifications really change that
reality? At some point, every week or every month, more
mortgages will be going underwater, not because they are
speculative, not because they were improperly made, but just
with the real estate evaluation.
Does that look like it will be a perpetual problem now for
the next year, year-and-a-half? And then I wonder of what value
mortgage modification is.
Mr. Deutsch. Well, as I indicated in my testimony, I do
think loan modifications for the targeted and appropriate
borrowers will be very helpful in helping stem the tide of
delinquencies and defaults. But as I also indicated, given that
dramatic decline and a lot of that being nationwide in home
prices, is that you will also need to see additional efforts by
the Federal Government to be able to help stabilize that
housing market, because ultimately declining home values are an
indication and cause of increasing foreclosures, delinquencies,
and defaults. Part of that is because credit is simply not
available today for either new mortgage borrowers to be able to
get into homes for the first time, and also for existing
borrowers to be able to refinance into different loans.
Mr. Kanjorski. I notice there is a tremendous difference in
the laws that apply to real estate and mortgages, say between
California and Pennsylvania. In California, you just hand in
the keys and you are out from under the obligation; in
Pennsylvania, there is actually no way that you can escape the
obligation that you made on the mortgage. So it would seem to
me less likely for Pennsylvanians to be able to escape relative
to Californians.
Now, the problem with that is whatever we do at the Federal
level at the present disjointure of the real estate laws across
the country, we advantage or disadvantage one State over
another. Would you think it may be wise at this point to adopt,
at least for temporary purposes, a uniform national standard of
handling mortgage foreclosures and mortgage rights?
Mr. Deutsch. A national standard for--
Mr. Kanjorski. A national standard so Pennsylvania and
California are the same.
Mr. Deutsch. If we are talking about the ability for
borrowers to walk away from their financial obligations,
whether you view that as an investment in a home or a mortgage
of sorts, I do think it would be very important to be able to
provide incentives for those borrowers to stay in their homes
or to reduce their ability to leave those homes and walk away
from those obligations.
Mr. Kanjorski. Wouldn't applying the laws of Pennsylvania
to the State of California decrease the likelihood that
Californians would walk when they are underwater?
Mr. Deutsch. Absolutely. From the way you have
characterized it, I think that would further disincent people
from walking away from their homes.
Mr. Kanjorski. Should we think of doing that?
Mr. Deutsch. I think it would be very helpful to prevent
those walk-away borrowers. If you have additional walk-away
borrowers, more foreclosures on the market, that would
certainly increase the number of homes available on market,
which ultimately drives home prices down.
Mr. Kanjorski. Very good.
Thank you, Mr. Chairman.
The Chairman. The gentlewoman from Illinois, in the absence
of the gentleman from Ohio, is recognized for 5 minutes.
Mrs. Biggert. Thank you, Mr. Chairman.
There seems to be a sense of urgency and seriousness of the
mortgage crisis to have creative thinking to address the
anticipated foreclosures. Is there a danger that by responding
to this crisis, regulators in Congress may damage investor
confidence, leading to longer-term problems?
Mr. Deutsch. I would say that investor confidence is
already damaged. There are significant concerns in the
investment community about different proposals that are more
mandatory in nature rather than voluntary, that has created
significant volatility in the market and has ultimately
depressed mortgage-backed security prices. By depressing those
prices, you continue to prolong the inability for issuers to
put new mortgage-backed securities out into the market, which
ultimately takes their ability from being able to originate the
same volumes in the past.
Mrs. Biggert. Do you think that there is also a lack of
investor scrutiny when it came to the mortgage-backed
securities?
Mr. Deutsch. Absolutely. There were investors who did not
do the full amount of due diligence they should have done
before purchasing a mortgage-backed security. I think there are
a lot of investors who have learned their lesson. Some of those
are no longer investing; they are selling shoes or doing
something else because of their poor performance.
I think what you are seeing now in the market is a lot of
reevaluation, and a lot of this is occurring through the ASF
Project RESTART, about how to create more market discipline for
those investors and ultimately provide them the information and
certainty of the products that they would be purchasing.
Mrs. Biggert. So we might need some financial literacy for
the investors as well as the borrowers?
Mr. Deutsch. I think it is not just financial literacy. We
also have to keep in mind that in 2005 and 2006, we had
enormous liquidity available in the market. There was capital
flowing in from all parts of the globe into purchasing
different assets, and mortgage-backed securities had very
strong performance up until 2006. So you had a lot of investors
putting money into securities where they were very hopeful
about very positive returns.
Mrs. Biggert. Could you talk a little bit about your
Project RESTART? Will that build investor confidence?
Mr. Deutsch. Yes. There are multiple prongs to Project
RESTART. The first and priority prong is providing additional
information to investors so that they understand all the
different characteristics of an underlying mortgage loan within
a security.
So if you are buying a conforming set of loans, say from
Fannie or Freddie, they are very fungible, if you will. If you
are buying nonconforming loans, those from Alt-A, subprime or
others, there are all kinds of differentiation or variation.
We are trying to be able to effectively put the
institutional investors as close to that closing table for all
of those mortgages as possible. Obviously, given thousands of
mortgage loans in a particular pool, we have to do that through
data-driven exercises, and that is extremely costly. But
ultimately, it is going to be necessary to increase the
investor confidence in securitization going forward.
Mrs. Biggert. Thank you. This is a general question. The
centerpiece of the HOPE for Homeowners program is a writedown
of mortgage principal. Are servicers and investors not able to
do this without government intervention?
Mr. Deutsch. Absolutely not. Servicers have historically
and continue to write down principal in appropriate
circumstances. What I have indicated in my testimony is that
the current requirement to write down to an 87 percent loan-to-
value ratio, effectively providing 13 percent equity into the
home, is in many cases simply too far of a writedown, where
servicers or investors don't find that to be an appropriate
use. If that loan-to-value ratio were increased, it would
provide substantially more refinances into the HOPE for
Homeowners program.
Mrs. Biggert. Thank you. Would anybody else like to comment
on that? Mr. Gross?
Mr. Gross. Yes. Just amplifying on what Mr. Deutsch just
said, with regard to HOPE for Homeowners, servicers are
contractually obligated to choose the home retention or loss
mitigation option which provides the best return to the
investors. That is a contractual obligation. To the extent that
we can do an interest rate reduction or term extension which
will provide the homeowner with that affordable and sustainable
payment, without doing the principal reduction, we are
obligated to choose that option.
In most cases when we are looking at the hierarchy of
options here, the HOPE for Homeowners program, with the
effectively 13 percent writedown, at least that amount, would
provide for a much greater immediate loss to the investor than
the interest rate reduction or term extension would allow.
Mrs. Biggert. Thank you. I yield back.
The Chairman. If the gentlewoman would yield, I would note
the distinction in Credit Suisse was a different one, and that
was between either principal modification or loan reduction and
the extension. Because what they reported was that there was a
significantly higher redefault rate with regard to simply an
extension of the term as opposed to either an interest or
principal writedown.
So, as I said, they drew the line in their argument about
the extension was in their experience there is a higher
redefault rate.
The gentlewoman from New York.
Mrs. Maloney. Thank you. I would like to follow up on my
colleague's questioning, Mrs. Biggert, on the mortgage-backed
securities, where she pointed out that we need more due
diligence on these products.
I would like to ask the panelists how much of the financial
crisis is caused by the fact that the mortgage-backed
securities were given to people who couldn't afford them under
terms that were very unfavorable; teaser rates of 3 percent,
that after 3 years jumped to 9 percent; that they were no-doc
loans, no documents needed. Actually, the word in New York was
that it was easier to buy a house than to rent an apartment,
because they didn't ask about your income, they didn't ask
anything. They just gave you a mortgage you couldn't afford.
How much of the problem we are confronting now was really
mismanagement, abuse, and horrible behavior in an economy that
has slowed down? How much of the problem that we are
confronting in the housing crisis that Chairman Bernanke and
others say are the prime goal, we have to stabilize the housing
before we can move forward with our economy?
We have to understand how this happened. How much of it was
caused because of mortgage-backed securities that people
couldn't afford, and were sold to them knowingly that they
couldn't afford them, and how much of it is an economic
downturn in our economy? Anyone or everyone, I would like to
hear your comments on it.
Mr. Deutsch. I guess I am being volunteered to go first.
I would say borrowers, lenders, and institutional investors
all had irrational exuberance about the direction of home
prices into 2004, 2005 and 2006 based on the significant uptick
in home prices in that period. I believe everybody became very
excited about the equity that was available through that.
Mrs. Maloney. If I could add, then, because you were
talking about the prices going up so they were very excited
about it. So they didn't care if they sold a house to someone
at a 3 percent interest rate, because they knew when they took
the house back from them after having collected all that money,
that they could then resell the house. Now, the problem is we
can no longer resell the house because of a financial problem
and the houses have fallen in price. So that, I think, is an
important point. So continue.
Mr. Deutsch. I think as we have been discussing all this
morning, no lender wants to take a home back in an appreciating
or depreciating home price market because the costs of
foreclosure are extremely high. The expectation of many
borrowers and many lenders was that home prices, by continuing
to increase, is that those borrowers would be able to either
refinance or be able to use the equity that was growing in that
appreciation.
Mrs. Maloney. And it is clear they cannot. To my question,
do you think this financial housing crisis is caused by the
faulty, deceptive mortgage-backed securities, or a general
downturn in our economy?
Mr. Deutsch. I believe there is a combination of both a
downturn in the economy, job loss, etc., as well as the
epicenter of which, of course, is being in the housing market
where you did have a lot of irrational exuberance on the
direction of home prices.
Mrs. Maloney. How much of the problem do you think was
caused because no one was held responsible? You could sell a
house, get your fee, and immediately securitize it and move to
Florida; unlike the old times, when the bank gave you a loan,
they held that loan, and they were responsible.
I used to work for a bank. I had a loan line of $10,000,
and let me make sure, I was absolutely positive I never gave a
loan to anyone who couldn't pay that back, that $10,000, or I
would have lost my job. But now you just securitize it, you
sell it to the next one, the next one and the next one, and no
one is responsible. So should we build some responsibility back
into this, some accountability? If so, how would you suggest we
do that?
I might ask, if I could add to that question, I want to
sincerely applaud everyone who has moved forward with Fannie
Mae and Freddie Mac. They say that is only 2 percent of the
defaulted loans. Most, 20 percent are the adjustable rate
subprime loans. So that is where the real problem is. We are
relying on voluntary actions, and by all accounts the problem
is millions, not hundreds of thousands.
So how can we encourage industry? Not that we are not very
appreciative of the efforts you have taken so far, but how can
we encourage you to adopt as a standard the systemic loan
modification protocol that was used by the FDIC at the IndyMac
takeover that was so successful?
The Chairman. We will get an answer. Does anyone want to
answer?
Mr. Gross. Well, I would like to say a couple of things.
Number one, I think everyone is in agreement that there were
loan programs available in prior years which in hindsight
should not have been available. I am happy to say that Bank of
America did not engage in those loan programs at that time.
With regard to the voluntary loan programs that are there
today, Bank of America has closed approximately 225,000 home
retention workouts thus far this year. So the voluntary aspects
of this for the major servicers engaged in the HOPE NOW
Alliance and other initiatives are working. Are they working
fast enough? No. We need to do more.
The announcement yesterday with the GSEs, with Fannie Mae
and Freddie Mac, will go a very long way in assisting in this,
because this was, quite frankly, one of the areas where all
servicers struggled.
The Chairman. The gentleman from Georgia.
Mr. Price. Thank you, Mr. Chairman. I want to thank all the
members of the panel for their testimony. I am impressed with
all that is being done. I know it is not fast enough for
anybody, but I think it is imperative that we appreciate all
that is being done.
It has been said that the goal that has been put on the
table is that we diminish the number of foreclosures, and we
all agree with that. I am heartened, Mr. Chairman, because I
believe that we may be closer than folks might think. A
commitment to a volunteer program and no retroactivity is a
positive place to start. So I am hopeful that as we move
forward, we will in fact be able to realize that significant
decrease in the number of foreclosures.
The falling home values has been mentioned as being at the
core of our current challenges, and I would agree, I think,
that nobody would discount that at all. There have been some
solutions offered by others out there that haven't been
discussed this morning. I wonder if, Mr. Gross and Ms. Sheehan,
if you might comment on solutions that are put on the table,
like mortgage rate buydown and expanded home buyer tax credit.
Would you care to comment on whether or not you believe
that those items can appropriately address the problem or would
be part of the solution?
Ms. Sheehan. I think we all recognize that there needs to
be a variety of different types of any initiatives in order to
be able to sort of promote homeownership in the future. Some of
it is looking at how we do our underwriting and lending. Some
of it is incentives.
I know there was an incentive that was put into the
stimulus package that was adopted over the course of the
summer, and I think, frankly, part of the issue we have right
now is sort of the balance in terms of credit underwriting.
We have been criticized for becoming too liberal. I think
we now have the issue where everybody has come back in the
other direction. So in order for our first-time home buyers to
really take advantage of these programs, whether it is a tax
credit or a State housing finance agency program, we need to
think about how the tightened credit impacts that transaction.
So one of the things we see a lot of potential for, and a
number of the major lenders have been working and talking to
the State housing finance agencies, using their funds that they
have gotten through the stimulus package to put together
programs for first-time home buyers, that would be able to sort
of bridge that gap between what is available realistically by
way of downpayment, because that is one of the issues we see.
So the market that exists today has moved toward a larger
downpayment. First-time home buyers generally don't have that
available.
Mr. Price. Would a tax credit help that?
Ms. Sheehan. A tax credit would help it to the extent it is
refundable and it becomes sort of part of the underwriting of
the package. But I do think that having the participation of
the States, with their ability to put some guarantees around,
if not all, a portion of the loan is really going to help.
Because what we have seen happen certainly in the last 6 months
at Chase is that there has been a lot more activity in the FHA
programs, both basic FHA and FHASecure. We are building a
pipeline for the FHA homeowner. So the market is still looking
to get that sort of government backing, if you will, until we
bring the private market back.
Mr. Price. Mr. Gross, a comment on the tax credit?
Mr. Gross. No.
Mr. Price. No comment? Getting a little too liberal has
become a disease around here, Ms. Sheehan, so I appreciate your
comment regarding that.
Many of my constituents believe that the capital flowing
into the market has stopped significantly, as has been
mentioned by you, Mr. Deutsch, and that until there is some
sense of certainty about the Federal Government stopping its
actions, that the capital sitting on the sidelines is going to
stay on the sidelines.
Is that an accurate assessment of what is going on?
Mr. Deutsch. I think it is very accurate that many
investors, until they see how a situation plays out--and part
of that is the home price market and the housing market, but
also it is the new response of a new Administration, of a new
Congress--if there are steps that would significantly
disadvantage them. They are quite concerned about that and are
effectively taking a wait-and-see approach.
So it is not just the act of doing something, it is the
threat or concern of doing something; and it is preventing many
investors to come back into the market.
Mr. Price. Do you have any thoughts about how we shorten
that timeline for that point when there is certitude in the
market, where money can get back in?
Mr. Deutsch. Part of it is the volatility in question as to
how the home price depreciation market will go down. And as
Representative Kanjorski was asking about, how many borrowers
will effectively walk away from their homes, how many Jose
Cansecos will we have who will just simply pick up and leave?
Mr. Price. Thank you, Mr. Chairman.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman.
One of the benefits of a hearing at this stage in the
process is to try to make an assessment of what else, if
anything, we need to be doing. It seems to me that there are
four options: We can just wait on what we have already done to
play itself out; we can aggressively push and jawbone for
industry action based on industry's own interest and based on
legislation that we have already passed; we can wait on
regulators to take action based on legislation that we have
already passed; or we can consider additional legislation. And
obviously, one of the things we need to consider is additional
legislation. That is within our prerogative.
And one of the things I guess is pointed to on page 9 of
Mr. Gross' testimony where he talks about changed circumstances
of borrowers being a real problem when people become
unemployed, can't find jobs, and the economy doesn't work like
it is supposed to. So I know our responsibility in the stimulus
area is one, but both Mr. Allensworth and Mr. Gross pointed to
some impediments that are still out there; and it wasn't clear
to me whether you are looking for us, as legislators, to solve
those impediments or whether you are looking to the regulators
to solve those impediments or you are looking to the industry
to solve those impediments.
Mr. Allensworth outlined three problems on page 4 of his
testimony; Mr. Gross outlined a series of problems and kind of
danced around the solutions to them on pages 8 and 9 of his
testimony. I guess what I am trying to figure out is the same
thing I was trying to figure out from the people who came to
talk to us about setting up the new regulatory framework: What
is it that you are proposing that we need to do, if anything,
as legislators, as this committee, at this point?
Or is this a function of waiting on this to play itself
out, waiting on the regulators to push you and give you a
framework to operate in? Waiting on, as Mr. Deutsch has
indicated, the industry to set some protocols and uniform
standards for services?
Who should be doing that and what should our role as this
committee be in it? I will start with Mr. Allensworth, since he
has been sitting down there during the questioning without much
participation. And then, I want to go over to Mr. Gross next,
and if I don't run out of time, the other two witnesses also.
Mr. Allensworth. I think, as I outlined and as Mr. Gross
outlined, there are a number of challenges that the market
faces. I think one of the first solutions is the collaboration
of market participants. I think you see with the panelists up
here a willingness and a desire to work constructively to solve
a lot of the issues that are outlined. And I think a lot of the
issues we discussed can be addressed through collaborative
efforts of the industry. That being said, there are a number of
market participants who are not on the panel today, and I think
the important thing is to bring everybody together, have
everybody discuss it.
I think we have a shared interest in--
Mr. Watt. Maybe I should revise my question, since I am
running out of time, and have you tell us what you think we
ought to be doing, if anything, to move this process forward
and stem the tide of foreclosures and get us out of this mess.
Mr. Allensworth. As the Hedge Fund Association, I don't
think we--
Mr. Watt. No, ``we'' as members of this committee.
Mr. Allensworth. Right. On behalf of the Hedge Fund
Association, we don't have any specific policy recommendations
that this committee or that Congress needs to undertake at this
point. Our primary recommendation is collaboration of industry
participants to solve a lot of these issues.
Mr. Watt. Mr. Gross.
Mr. Gross. I would suggest that there is a dramatic need
for modernization of HUD. I know that the HUD staff is working
feverishly to come up with new solutions, but because of their
own regulations, they were unable to fully participate in the
announcement that the GSEs came forward with yesterday. They
cannot modify their loans to a 40-year term. They cannot modify
loans that are less than 4 months delinquent.
Mr. Watt. Is that by statute or by their own ineptitude?
Mr. Gross. My understanding is, it is by statute. And
again, we, as an industry, would look forward to working with
you on HUD modernization because it is dramatically needed.
Mr. Watt. I think I am out of time, unless anybody has some
compelling answers to the question already asked.
I yield back, in that case.
Mr. Kanjorski. We will hear from the gentleman from
Alabama, Mr. Bachus.
Mr. Bachus. This may be out of your field of expertise to
the panel, but the vice chairman of the committee, Mr.
Neugebauer, is from Lubbock, Texas, where Texas Tech is. I
represent Tuscaloosa, Alabama, which is the University of
Alabama.
They are number one and number two in all the football
polls. And he has recommended that I wear this Texas Tech hat
and jersey when I go home. What do you think? Do you think that
would be advisable? Or do you think he is serious, this is a
serious proposal on his part?
Mr. Gross. I think that the ranking member is smarter than
that.
Mr. Deutsch. We might have a new ranking member in the next
Congress.
Mr. Bachus. Mr. Vice Chairman, I'm smarter than that. That
was very good advice. Let's try another one.
There has been a sharp rise in foreclosure. And President-
Elect Obama and many of my Democratic colleagues have proposed
giving bankruptcy judges the right to modify the terms of the
primary mortgages. And also, they have proposed a forbearance
or moratorium on mortgage foreclosures.
Mr. Deutsch, let me start with you and Mr. Allensworth,
since, Mr. Gross, I think you gave a very good answer you
couldn't improve on. So if you all would answer that question
for me.
Mr. Deutsch. In short, as I indicated earlier, finance
ministers from around the world have indicated the flow of
credit to the United States, to other countries, is one of the
top five priorities to address. By enacting something like a
foreclosure moratorium--which would effectively change the
rules after mortgages have been made--or to create a situation
where bankruptcy judges could cram down the principal values of
mortgages, both of those would have an extraordinary chilling
effect on institutional investors' bringing capital back into
the markets and ultimately would prolong the credit crisis that
we are in.
Mr. Bachus. And I guess it would obviously, if that
happened--and I agree with you--it would increase mortgage
costs for all other borrowers.
Mr. Deutsch. It would either increase the cost or simply
not make either refinancing or new credit available.
Mr. Bachus. Thank you.
Mr. Allensworth.
Mr. Allensworth. I would agree. I think that the challenges
that Mr. Deutsch outlined are some of the things that need to
be considered.
Certainly, we have seen that the foreclosures in the
housing market and the tying up of mortgage markets has had a
huge spillover effect into credit markets and to the economy
generally. So we are very supportive and want to be actively
engaged in addressing the foreclosure problem.
But I do think we need to consider whatever solutions we
undertake, what the effects will be not just on the current
foreclosure issue, but going forward, and the availability of
credit going forward.
Mr. Bachus. But I think it is your answer that either a
moratorium or allowing bankruptcy judges to change the terms of
the primary mortgages would restrict credit and drive up cost?
Mr. Allensworth. For both of those issues we have not
focused with our members on those issues up to this point. We
would need to go back to our members to see what kind of effect
they think that would have.
Mr. Bachus. Would you do that and let us know?
Mr. Allensworth. Yes.
Mr. Bachus. This question I will ask Mr. Gross and Ms.
Sheehan. One thing we keep hearing, and in your testimony, is
that you are trying to contact the borrowers and they are not
responding to you; you have been unable to establish contact.
We at least have heard that from institutions in some of the
programs that have already been deployed. Is that a problem?
Are you hearing from all of them?
Mr. Gross. I think I would agree with the assessment that
frequently contacting a borrower who is in default is often
challenging. It requires very dedicated efforts, and it is done
7 days a week.
I would, I guess, argue a little bit with some of the
statistics that have been used. In our own case, for loans that
have gone through the foreclosure process, and we have looked
back, we have had contact with over 90 percent of those
borrowers during that specific default cycle. And we have had
contact with, I believe, about 65 percent of those borrowers
within the immediate 45 days prior to the foreclosure event.
And going back to a question that you raised a moment ago
with regard to foreclosure moratoriums, one of the reasons why
I don't believe that a foreclosure moratorium is either
appropriate or needed is that any borrower who reaches out to
their lender and says, I need help, if that loan is in the
foreclosure process and we believe that they, number one, want
to retain ownership of the property, number two, have a
reasonable source of income or that it is reasonably
foreseeable that they are going to be back to work soon, then
we will work with those homeowners and we will stall the
foreclosure action.
We have absolutely no incentive, we have no wish to have
one more foreclosure than is absolutely required.
Mr. Bachus. Thank you.
Can I get Ms. Sheehan to respond?
The Chairman. Quickly. Sure.
Ms. Sheehan. I think our experience has been that,
depending on the method of contact, we get varying degrees of
feedback from our borrowers, though I do agree with Mr. Gross
that by the time you get through the foreclosure process, by
and large, you have had at least one or two active contacts.
But one thing we definitely have learned is that the more we
can interface with counselors, the more we can have people on
the ground to respond to borrowers, the much better outcomes we
get much earlier in the game before they get too far
underwater.
Mr. Bachus. And let me just make a comment, and I will wrap
it up.
I am concerned about in the delinquency stage before the
foreclosures. And I have noticed that when third parties are
hired, or counselors, sometimes it doesn't have Bank of America
or JPMorgan Chase on it. That might be more effective, and I
would just urge you to maybe look at that. There are studies
that show if it has that bank name on there, they may not even
open it, or certainly wouldn't respond.
The Chairman. The gentleman from California.
Mr. Sherman. I want to commend some of the lenders here for
having congressional liaisons because very often the people in
the most trouble who aren't opening your mail are calling our
offices; and it is good for our staff to have somebody to call.
I am particularly drawn to solutions to this problem that
don't involve risk or cost to the U.S. taxpayer or do not
unduly imperil future investments in mortgage instruments. And
so I hear Mr. Gross saying, well, we have loans in our
portfolio, we will work reasonably with the borrower.
And then I hear horror story after horror story where
people can't figure out who their servicer is. When they figure
out who their servicer is, the servicer says, I would like to
help you, but I might get sued. And so the question is whether
Congress should act to make sure that servicers have all the
legal rights to act on behalf of their various, in effect,
trust beneficiaries taken as a whole.
Or are we going to have this perverse game where people
say, well, we would like to help you, and it would be in the
interest of the investors that we help you, but we can't help
you because there is this risk of lawsuit? The way to deal with
that, of course, is for Congress to pass a law empowering
trustees and protecting them from lawsuits.
Mr. Deutsch, do you support that clarification?
Mr. Deutsch. We would not support Congress taking
legislative action that would--
Mr. Sherman. And so you want to continue to be in this
circumstance where you can come here and say you want to help
people, and then on the ground the servicer says, oh, I would
like to, but--
Mr. Deutsch. No. I disagree with the characterization that
servicers are saying, I would like to help you, but I am afraid
I might get sued.
Mr. Sherman. Are you saying that never happens? Do you want
to come to my district?
Mr. Deutsch. I am saying, under their contractual
obligation, they have a responsibility to modify those loans in
the appropriate circumstances. And if they don't modify those
loans in those appropriate circumstances, they will equally
find themselves at legal peril.
Mr. Sherman. Okay. So we have two legal perils and total
fear of lawsuits.
Why would you oppose a statute that would clarify that the
world is in fact as you describe it to be, that is to say that
servicers are free to provide workouts, etc.?
Mr. Deutsch. Because in those circumstances, you will take
the one effective way that investors have to control what
servicers do on their behalf.
Mr. Sherman. So you would have a circumstance where a
mortgage might be owned by 10 different investors, and you have
1 investor out of the 10 who wants to oppress the homeowner and
disadvantage their fellow investors, and you want them
empowered to be able to do so, and you don't want Congress to
take away that power?
Mr. Deutsch. They don't have the power to influence the
servicer by any contractual or legal means. If they would
choose to sue the servicer--anybody in America is free to sue
anybody--the question is, if the servicer takes a reasonable
loss mitigation action, that servicer will not be held liable
by--
Mr. Sherman. So why would you oppose a statute that said if
the servicer takes reasonable loss mitigation action, that
servicer will not be liable?
Mr. Deutsch. That has been approved already through EESA
and through the HOPE for Homeowners program this summer.
Mr. Sherman. So when the servicers say they can't take
reasonable action because they have a realistic risk of being
sued by one of the investors, they are not telling you the
truth?
Mr. Deutsch. I think the point is that that has already
been passed by Congress.
Mr. Sherman. That is what I am saying. So you are saying
the law is already as I describe it, and those servicers who
describe it to me as being different are not telling me the
truth?
Mr. Deutsch. I guess it was unclear as to whether you are
suggesting something additional should be passed on top of what
has already been passed.
Mr. Sherman. I am suggesting that Congress do whatever is
necessary so the next time I am talking to a servicer they are
not telling me they would like to and it would be in their
interest, but they fear being sued.
You are convinced that the existing statutes give the
servicers the power to do that, and the servicers who are
telling me they are not empowered are just hiding.
Mr. Deutsch. I can't speak for what servicers are telling
you in those private conversations.
The Chairman. Would the gentleman yield?
Mr. Sherman. I will yield.
The Chairman. The gentleman from California was very
diligent in this. If he got such a comment from a servicer,
would it be helpful if he gave you those specifics you talk
about, trying to bring people together? I mean, could we
report, frankly, to you and see if you can resolve this
conflict?
Mr. Deutsch. Absolutely.
The Chairman. Because it is one that he reports that almost
everybody has encountered, this gap, as I said, between your
statement and what happens.
I thank the gentleman.
Mr. Deutsch. I think we would very much appreciate that.
In particular, we would be happy to have those
institutional investors who own that security that that
servicer is choosing not to maximize the net present value by
not modifying in those appropriate circumstances. Those
institutional investors will certainly--
Mr. Sherman. Where you have 10 investors, and any one of
them can allege by a mere negligence standard that the value of
the portfolio has not been maximized, you provide the servicer
with safety through inaction. And I look forward to working
with the committee to try to provide servicers with as much
insulation as possible from lawsuits when they act in good
faith to try to maximize the situation for both homeowners and
for investors. And you can always make the allegation that a
servicer has not maximized the portfolio value, and perhaps we
need a higher legal standard, a gross negligence legal standard
in order to make them feel secure.
I yield back.
The Chairman. I am going to ask for unanimous consent just
for 1 minute to just say I am intrigued that they are also
liable to be sued if they are too tough.
Who has standing? I mean, if I had a mortgage, could I sue
them for not reducing it, or is it some other investor? I
understand the theoretical possibility. I know who the
plaintiffs are in the case of the people who think they are not
getting enough money; but seriously, who would be the plaintiff
in a case that said, you haven't been doing enough reduction?
Mr. Deutsch. The institutional investors who own the
mortgage-backed securities would--
The Chairman. We have heard threats on the one. Frankly, I
tell you this: It could be very helpful if you could talk to a
few of them and have them threaten to bring such lawsuits. That
might help with the problem we have all encountered.
Mr. Deutsch. I am not aware of any institutional investor
suing any servicer either for overmodifying or undermodifying
mortgage loans right now.
The Chairman. And I guess I just asked you to engage in
barratry, so I can't do that. I retract it.
The gentleman from New York.
Mr. Meeks. Thank you, Mr. Chairman. And let me thank those
of you who are here.
I think that some of the atmosphere--and maybe you are
leading it, or part of it--is going to change around here, the
elections that were just concluded. Change is on the way. And I
think that what President-Elect Obama is talking about is that
we are going to have some civility, but we are going to talk
and try to figure out how we can really make a difference for
the American people. And I still, for one, believe in the
statement that the American dream is alive, and I think that
homeownership is an integral part of that. I still believe that
we will get back to the point where, as I have always said, it
is better to own a house than rent a car because a house is an
appreciating asset--it is not today, but it has been and I
think we will get back to that--and a car is a depreciating
asset. And I think that will continue.
So I still think that one has pride when they own their
home, and the objective here is to keep those individuals who
have lived with the dream of owning a home, as my parents did.
And the key is, when you are in this situation that we are
currently in, and we talk about helping Wall Street, now it is
critical to show that we can help Main Street and these
homeowners.
And so, to that end, as I indicated in my opening
statement, I have gotten together with individuals in my
district--counselors, lawyers, etc., with people coming in--and
one of the problems that I observed is, when they are talking,
the homeowners and the advocates to individuals that call up
banks, some of the time what they receive are individuals where
the servicing has been outsourced. And the people that they are
talking to, their call centers, are in foreign countries; and
that seems to hamper responsiveness and ultimately the ability
to help the distressed homeowner. We have had one situation
where the person's home was ready to go on the auction block,
and as a result of trying to get somebody to do something
timely, there was just--you know, they couldn't navigate the
system.
So I was wondering whether or not you have seen the impact
of outsourcing call centers to foreign countries on the
responsiveness of lenders to the distressed homeowners, and is
there a system where you can provide immediate foreclosure
prevention and loan modification solutions on the ground with
the local banks that are there--you know, maybe the branch
managers that are in the districts?
I am calling a meeting with them tomorrow to see if we can
call them directly and put something together to help these
folks that are about to lose their homes.
I will start with Mr. Gross.
Mr. Gross. Yes. Bank of America has not outsourced any call
center activities to any third parties. We do have call centers
in India and Costa Rica. These call centers are focused on very
preliminary delinquency types of activity, but they are not
handling any of the home retention, more seriously delinquent
accounts. At no time are these accounts allowed to get through
to the India call centers.
Mr. Meeks. What about at Chase?
Ms. Sheehan. The answer is essentially the same. We do have
a call center in the Philippines, and that handles only what we
call ``early stage delinquency'' within the first 30 days. All
the loss mitigation specialists are at Chase.
Mr. Meeks. I am going to check, because I personally was
sitting there when we got the runaround. And some of the
homeowners that I know--I am not saying whether it was Chase or
Bank of America, I will verify, but I know that the homeowners
oftentimes had been frustrated themselves when they were trying
to rework some of the modifications, and that is why I got
these advocates in there that is making a difference.
Let me ask, was there any consideration, also further,
because what we are trying to do is to help provide to these
homeowners some financial literacy, some counseling with
reference to how to budget, budget classes and debt management,
so that if they do have the mortgages reset, then they can make
sure that they keep them and understand them. I was wondering
if there was any thought of the banks doing similar--and/or
contracting, working collaboratively with community-based
organizations to help provide further financial literacy and
others to some of these people who are about to lose their
homes?
Mr. Gross. Bank of America has a very active and large
neighborhood stabilization program that does go into homebuyer
and consumer financial education, as well as working with local
neighborhood groups on REO properties and dispositions. We are
very actively involved in those activities you outlined.
Mr. Meeks. And with Chase?
Ms. Sheehan. Yes. I would just say that we are in the same
position in the sense that we have a lot of prepurchase
counseling that is available, we have homebuyer seminars. We
have a lot of work that we do with our neighborhood groups and
community counselors.
I would agree with one statement that you made, and it is
something we have been actually looking at, which is, what is
the best way to sort of handle the total debt picture,
postmodification, to ensure that, you know, once that
modification is made sustainable, that we don't have additional
new debt coming into the picture, to sort of have the situation
recur. And that is a budgeting issue. I agree with that, and I
think we should focus more on that.
The Chairman. The gentleman from Massachusetts.
Mr. Lynch. Thank you, Mr. Chairman, and I want to thank the
ranking member and also the panelists; I appreciate you coming
here before the committee and trying to help us with our work.
I have somewhat of a confession to make. I also serve on
the Government Oversight Committee, which is looking backward
at this crisis, looking at AIG and Bear Stearns and some other
firms, Lehman, that have had problems, as well as being on this
important committee with Mr. Frank and looking forward.
But I have to confess to an irony. About 10 days ago, I was
in a hearing room just down the corridor here criticizing
roundly some lenders who were not careful enough in their
lending practices and thereby contributing greatly, I think, to
our current crisis. And here I am today about to press lenders
for not being aggressive enough in this modification process
and in their lending practices.
I know that someone once said that, ``consistency is the
last refuge of the unimaginative,'' and so I guess I cannot be
accused of that.
We have talked about the HOPE for Homeowners program, and
you are all familiar with that. And we had original hopes that
there might be 400,000 folks who might be helped by this
program. The most recent report--and I think the chairman has
submitted the Credit Suisse Report, and also HUD has reported--
that instead of 400,000, we have helped 20,000.
And what I would like to know from you, are there
characteristics within that 20,000 that we have been able to
help that would be instructive to us, going forward? Or are
those just all whole mortgages, individually owned? Is that the
profile of the person that we have been able to help?
Mr. Deutsch.
Mr. Deutsch. I would have to see exactly which loans are
going out. I haven't reviewed which loans have gone into the
HOPE for Homeowners program. I think what we have outlined are
three different ways that the HOPE for Homeowners program can
be expanded and modified to be able to increase the number of
loans that would be able to go into that. And it encompasses a
number of the things discussed today about being able to
acknowledge that consumers have a lot more consumer debt than I
think has been previously acknowledged, that widening that
debt-to-income ratio, widening that net would allow more
borrowers to go in.
There is also some hesitancy of the servicers from getting
sued by State and local governments based on consumer privacy
laws that we can all use some clarification on.
Mr. Lynch. Mr. Gross, I don't know if you can help us on
this, but there have been 20,000 people whom we have been able
to help. And perhaps it is the characteristics of those people
that are different from the group that we haven't been able to
help thus far that might be instructive for us to be more
productive.
Are there other people in the same category as the 20,000
that we have helped that we are not reaching out to? Is that
part of our problem?
Mr. Gross.
Mr. Gross. I apologize, sir, I am not familiar with the
characteristics of the 20,000 borrowers that you are
referencing.
Mr. Lynch. All right. Ms. Sheehan, take a shot.
Ms. Sheehan. I would say--and I think we talked about this
a little bit earlier--and I am not familiar necessarily with
the profile of the borrowers, but they will have certain
characteristics in common, meaning that they will probably be
more seriously delinquent. And the reason it is important to
mention that is that it plays into the debt-to-income ratios
which are a constraint on the program.
And so we have found that it is easier to put people into
modifications, frankly, than to put them into HOPE for
Homeowners, given some of the characteristics of the program
that those borrowers don't fit.
Mr. Lynch. Okay.
Mr. Allensworth.
Mr. Allensworth. I am not in a position to be able to talk
about the characteristics of any of the underlying loans that
are going into it or not going into it.
I think one of the things we have heard is consistent with
what Ms. Sheehan just stated, which is that alternative methods
of modification have seemed to be an easier path or more
successful path at this point than HOPE for Homeowners.
Mr. Lynch. Thank you. I yield back.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman.
Let me thank the witnesses for appearing today. And let me
start with Ms. Sheehan. Ma'am, what percentage of your workouts
wherein you have modifications are portfolio loans?
Ms. Sheehan. I don't have that exact data with me.
Mr. Green. Would you say the majority are?
Ms. Sheehan. I would not be prepared to say the majority. I
would actually want to get you good data, because the reality
is, we do modifications today both for our own portfolio as
well as for loans that are in securities.
Mr. Green. So the answer is, you don't know at this moment?
You can acquire the intelligence at a later time?
Ms. Sheehan. Yes.
Mr. Green. Mr. Gross and Ms. Sheehan, are servicers
compensated for costs incurred by the servicer when a mortgage
is foreclosed upon?
Mr. Gross. Servicers are reimbursed for third-party
expenses that are incurred in the foreclosure process, yes.
Mr. Green. And would you concur, Ms. Sheehan?
Ms. Sheehan. Yes, I do.
Mr. Green. Must servicers make payments from the servicer's
coffer to a mortgage holder pending a foreclosure?
Mr. Gross. As a general rule, yes. We must advance the
scheduled principal and interest payment to the investor
through the foreclosure process and generally through the
disposition of the REO property.
Mr. Green. Do you concur, Ms. Sheehan?
Ms. Sheehan. Yes.
Mr. Green. Now, the question becomes, finally--given that I
only have 5 minutes--what reward does a servicer receive for
restructuring a loan?
Mr. Gross. Well, number one, we now have a performing loan
on our books that hopefully will be sustained over a period of
months or years--
Mr. Green. Excuse me, Mr. Gross, I have to interrupt
because time is of the essence.
What reward does the servicer receive?
Mr. Gross. The servicing fee that we collect on performing
loans.
Mr. Green. So you will receive the same reward that you
would receive if the loan were not going into foreclosure,
correct?
Mr. Gross. That is correct.
Mr. Green. Okay.
Now, if this is true, if the servicer receives some benefit
in the sense that if a loan is going to foreclosure, the
servicer benefits by getting that done as quickly as possible
because you are paying money out of your coffer, you are
incurring expenses that have to be reimbursed, if that can be
seen as a benefit to move this to foreclosure and you don't
receive a reward for restructuring, it seems to me that we have
a circumstance where servicers will say, yes, I really do want
to restructure these loans for various and sundry reasons. But
the actual fact and the truth is that servicers have somewhat
of a burden in the process; they have their cost that they are
incurring, and then they have these out-of-coffer fees that
they have to pay pending foreclosure.
The question is this: Given that the yield spread premium--
now, this is a stretch and you are going to have to really
follow me here--given that the yield spread premium helped us
to get into this program--which means that the originator got a
fee for causing a person to take out a loan for a percentage
higher than the person actually qualified for--and I am sorry
if the people at home don't follow this, but you and I know
what I am talking about--why not reward the servicers for
restructuring the loans, a reward above and beyond what the
servicer will ordinarily get if the loan continues to be paid?
Why not simply reward the servicer?
Mr. Gross. In many cases, there is an incentive--
Mr. Green. I believe the ``many cases'' theory, but we are
talking about now a wholesale problem that I keep hearing
retail solutions to.
Let's talk about a wholesale solution. Why not, on a
wholesale basis, reward servicers--make it known, publish it
that they are rewarded, just as we do with yield spread
premium--they are rewarded for a solution that involves a
restructuring of the loan? This would cause them to have reason
to move to the table aggressively and try to restructure the
loan, meaning work with principal, work with interest. They
would have reason to do this.
Why not reward them for doing it?
Mr. Gross. The reward that you are referencing is not
contained within the pooling and servicing agreement--
Mr. Green. I understand it is not in the contract, and I
would not abrogate contracts. I think that there are some
constitutional problems whenever we start to talk about the
government imposing itself into contracts.
But if I may just say this, Mr. Chairman, it seems to me
that the system, as constructed, provides no incentive other
than the servicers making commentary, no incentive for the
servicers to do what the servicers say they would like to do.
I yield back the balance of my time.
Mr. Watt. [presiding] I thank the gentleman.
Just to make a point to the gentleman, I believe in the
thing that was adopted yesterday with Fannie and Freddie and
the government there is a move in this direction, where they
pay servicers to do the modification; isn't that right?
Mr. Gross. Yes.
Mr. Watt. Okay. I thought that was the case.
Mr. Cleaver is recognized.
Mr. Cleaver. I will yield 10 seconds to my colleague.
Mr. Green. I thank the chairman for the commentary.
My comment went more to the private institutions that are
currently working with the servicers as opposed to what the
government might do. That was why I tried to encourage
something that might be more suitable along having private
enterprise work out the problem.
Mr. Cleaver. I am going to have to move quickly.
First of all, have we been in this mode of workouts long
enough to have any kind of data on modified loan redefaults? Do
any of you have any information on that, please?
Mr. Deutsch. If you look at the Credit Suisse report that I
think was passed around, there is data on the redefault rates.
They run anywhere from 20 to 40 to 50 percent, depending on the
type of loan you are looking at, the type of modification, part
of the country, declining home prices, a whole set of
variations depending on those factors.
Mr. Cleaver. So would the 50 percent redefault rate--is
that a point of discouragement for servicers to spend time in
trying to do a workout?
Mr. Gross. No, it is not. We will continue to work with
those homeowners, and if they redefault, then we will work with
them again. We are dedicated to finding ways to keep them in
their homes.
Mr. Cleaver. Okay. That is where I want to move next
anyway.
We have the cost of the modification, as I understand it,
rolled into the loan, albeit at the end; am I correct?
Mr. Gross. I am sorry, I don't understand.
Mr. Cleaver. The cost of the modification, there is a cost.
Mr. Gross. There are no modification fees generally charged
to homeowners for these, with some small exceptions.
Mr. Cleaver. Do all of you agree with that?
Ms. Sheehan. Yes, I agree with that statement.
Mr. Cleaver. Now, if a person wants to have his or her home
loan modified, they are going to probably need an attorney?
Mr. Gross. No.
Ms. Sheehan. No.
Mr. Cleaver. So they can walk straight to the servicer and
get the workout?
Mr. Gross. Yes.
Ms. Sheehan. Yes.
Mr. Cleaver. Okay. But servicers don't always have the loan
documents. And if a servicer possesses the loan documents, how
do we know that the documents are not fraud ridden? Because
that has been one of the problems that created the current
turmoil in the financial markets.
Mr. Gross. If you are referring to fraudulent loans, those
are handled outside of our normal modification processes.
Mr. Cleaver. Yes, but how would a servicer know whether he
or she is involved in trying to do a workout on a loan that is
fraudulent? And considering the fact that the servicer does not
always have the loan documents--am I right?
Mr. Gross. Well, generally, I believe that the servicer
does have the loan documents. And I assure you that homeowners
that find themselves the victims of fraudulent loans are
usually pretty vocal about telling us what the fraudulent
aspects are that they believe.
Mr. Cleaver. Yes. Okay. I am sometimes inarticulate. I
don't know how to ask it any other way.
How will the servicer know that the mortgage is fraudulent
or not?
Ms. Sheehan. Is there a particular type of fraud that you
are concerned with? I mean, there are different types of fraud
in mortgage transactions.
Mr. Cleaver. Well, I am asking real, live questions that I
am running into whereby a person was able to get a mortgage and
his--in this case, his income was ratcheted up so that he would
qualify for a loan. So he goes in to get a workout, and 30 or
40 days later he gets a knock on the door from the FBI and now
they want to talk about how he had a fraudulent loan. He had no
knowledge that his income had been increased by $25,000 on the
loan documents.
Are you with me?
Mr. Deutsch. I think the answer is, the servicer does have
access to all of the loan documentation originally so that they
can go back and look at the paperwork to say, here it was, and
do the forensics on who signed it, whether it was the mortgage
broker or others.
Mr. Cleaver. Let me ask the question another way: How does
the servicer know whether or not the loan is fraudulent?
Mr. Gross. From direct communication from the homeowner.
Mr. Cleaver. I need somebody smarter to ask the question
because I know you are smart enough to answer it.
I have a real, live situation where somebody ended up
trying to get a workout and they find out, without their
knowledge, the loan documents--everything that has transpired
in the mortgage is fraudulent. And he is working out an
agreement with the servicer, trying to get--
Well, now he has a new problem that the FBI is involved in,
and the loan servicer didn't recognize it. They ended up--I
guess the subprime lender was under investigation--maybe in
another lifetime, he can get his house back or something.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Indiana.
Mr. Donnelly. When you are putting your foreclosure
information together to Bank of America or to Chase, do you
have a formula that you use when you look at these documents
and you say, can't make it, we are not going to be able to
help; can make it, let's put a program together on this one?
Mr. Gross. Generally, yes, there are formulas and
underwriting criteria that are used, as we have seen in recent
months and weeks--days in the case of the GSEs. Many of those
criterion standards are being greatly simplified from what they
have been in the past, and this is usually predicated upon
information that we receive from the homeowner as to their
present financial circumstances so that we can create this
affordable and sustainable payment for them.
Mr. Donnelly. Ms. Sheehan.
Ms. Sheehan. Yes. The process that we go through in working
with the homeowner is to get information from them on a stated
basis in terms of their income.
We do have a housing ratio. We set up targets in terms of
how much of their gross monthly income ought to be toward their
housing expense payment. And so the ratio moves based on
income, so it is lower for lower incomes.
Mr. Donnelly. And is that information available? For
instance, if we have a family sitting at home wondering, we
don't know if we can make this or not, and if it is even worth
trying, I wonder if Chase will work with me or Bank of America
or Citi will work with me, and before they make the call, is
there any way that they can know, here are the standards by
which you judge?
Mr. Gross. The standard that we have published in our
recently announced programs says that the first year's
principal, interest, taxes, and insurance should roughly equate
to 34 percent of the obligated borrower's gross monthly income.
Mr. Donnelly. And when that decision is made by your
organization, where along the chain does that call get made?
When they look at this family's particular situation, who makes
that call for you as to whether you are going to try to work
this out or whether it is beyond hope?
Mr. Gross. Generally, we, the servicer, would make that
call.
Ms. Sheehan. That would be the parties who are charged, the
counselors who are charged with working with the borrowers on
the loan workout.
So, in other words, they would gather the income
information, they would verify the income information, they
would test it against the housing ratio to see if it was
sustainable, and then they would work with the homeowner.
Mr. Donnelly. But I guess what I am saying is, when the
homeowner makes that first call and says can we put this
together, is it like the second or the third or the fourth
person that they talk to?
Is there a particular division charged with that?
Mr. Gross. I think we would all try to make that decision
and communicate the answer to the homeowner as early in the
process as possible--hopefully, with the first person that they
talk to, but it may require follow-up conversations.
Mr. Donnelly. And I know we are trying to make this as
simple as possible. For the homeowner who looks at this, many
of them will say, I don't know if I can handle putting this
together and getting the best possible situation, and they will
get legal counsel or other help.
Can one of the homeowners working with you receive the same
kind of deal, the same kind of workout that they could with
legal representation or other help?
Mr. Gross. Yes.
Ms. Sheehan. Absolutely. In fact, we encourage them to work
with our community credit counselors to make sure that they are
comfortable in dealing with the servicer to get the best
workout.
Mr. Donnelly. Thank you very much.
And, Mr. Deutsch, when you mentioned that 87 percent, that
range doesn't really get it done for the investors; and I was
reading--in your documentation, you talk about 97 percent, and
at that point, you know, it may not get it done for the other
side.
Is there a happy medium in this where you look at combining
a different number along with maybe changing the terms a little
bit? What are the other variables at play that can make this
work?
Mr. Deutsch. I think there are multiple variables. And by
``other side,'' do you mean the government or the borrower?
Mr. Donnelly. Probably both.
Mr. Deutsch. Because there is a happy medium there of
having some equity in the home for the borrower, some desire to
stay beyond its just being their home, which should be
sufficient on its face. But having some equity there is quite
helpful.
I think 87 percent--as we have indicated, I think there are
42 loans that have been put into the program so far; and we are
not talking just securitized loans here, but securitized as
well as portfolio-held loans, GSA loans, etc., that have been
put into the program. I think servicers have been reticent to
put anything in there because of that significant write-down,
so that number--maybe it is not 97, there is a range of
different numbers there, but clearly what we are seeing so far
is, the 87 is simply too low.
Mr. Donnelly. Thank you, Mr. Chairman.
The Chairman. The gentleman from Illinois.
Mr. Foster. The first question, I guess--both Mr. Deutsch
and Mr. Gross have mentioned the possible benefits of having
standardization in the mortgage modification language in these
things. Do you have at this point agreed-upon, well-understood
language that could be included in all future securitization
contracts that would make them easier to unwind in this and
future situations like this?
Mr. Deutsch. I will take the first shot.
We are working on that right now. Given our expectations
that securitization NBS volume won't really revive or restart
in the next couple of months or few months, we are focusing our
efforts more on the loan modifications, effectively getting
through the night before we start working into the dawn.
Mr. Gross. Bank of America is a very active participant in
working with the ASF and other industry parties to construct
that language.
Mr. Foster. And one of the issues in some of the written
testimony had to do with the different risk tranches and the
conflicts of interest between the riskier and the less riskier
tranches, and they may have different points of view on
mortgage modification and how early and aggressively you should
pursue it.
And I was wondering if there were institutions, in general,
that specialized in the highest or lowest tranches of these
that might have very different points of view and might make it
difficult to get an industry-wide consensus on this.
Mr. Allensworth. Well, I think that different market
participants tend to go into different tranches of the pools.
Hedge funds tend to be in the more junior classes of the
tranches, as a general statement. Mutual funds, pension plans,
and insurance companies tend to be in the more senior tranches.
There are differences in terms of the risk profiles there,
but I think there is a lot of common ground where all investors
working together with the servicers can come to a conclusion
that mortgage modifications are in the best interests of all of
the investors. Obviously, I can speak on behalf of hedge funds,
not on behalf of the other investors, but we do believe that
effective modifications are the preferable course of action and
strongly encourage that.
Mr. Foster. So you don't see it as an insurmountable object
to getting an industry-wide consensus?
Mr. Allensworth. Not an insurmountable object, no. It
requires discussion.
Mr. Foster. And my last question is, there has been a lot
of attention recently towards the concept of what is called
``dynamic provisioning,'' which in the case of banks would
automatically adjust the bank capitalization requirements
according to market conditions. My question is, is there
something analogous that could or should be applied to the
mortgage and securitization industries to automatically adjust
the origination and securitization standards according to
market conditions, to not have simply static requirements, but
make them have an eye towards whether we are in an asset bubble
or so on?
Anyone who wants to field that can.
Mr. Gross. I am sorry, that is outside my area of
expertise.
Mr. Foster. Fair enough. I yield back.
The Chairman. The gentlewoman from California.
Ms. Speier. Thank you, Mr. Chairman, and thank you to our
witnesses this afternoon.
I would like to say that, while the word ``securitization''
is not a dirty word, I don't think it is a clean word. And if
you were the recipient of as many letters as I have received
from constituents over the last 2 months, many of which I am
signing here this afternoon, they are hopping mad about what
has happened because they feel like they are holding the bag
and a lot of people were able to walk.
When you don't have any skin in the game, it is really easy
to conduct yourself in a risky and irresponsible manner; and I
think the securitization that went on in its heyday was very
much like that.
Now, one of the things that you said, Mr. Gross, that I
thought was worthy of us reviewing: It appears that many of the
servicers have a whole level of subjectivity in terms of making
the decision as to whether or not they are pursuing their
fiduciary duty in terms of making sure the investors are
maximizing their return and the determination that they must
modify because they can't be unreasonable in modifying, and
that we would be best served by having something that was
standardized for all servicers.
Did I understand you to say that?
Mr. Gross. If I understand your question correctly, I
believe that would be fair, yes.
Ms. Speier. Now, if what Mr. Lockhart proposed yesterday is
embraced, where the program that is being implemented now would
be initiated if there were three missed payments, where it was
a home that was a primary residence and where there had not
been bankruptcy filed yet, and this program is going to be
implemented in which they will be reducing the interest rates,
extending the life of the loan or deferring payments on the
principal, then it makes sense, does it not, that we must
mandate that for all servicers in this country?
Mr. Gross. Well, number one, that program is specific to,
at this point, Fannie Mae and Freddie Mac.
Ms. Speier. Correct.
Mr. Gross. Who have different servicing guidelines than
what is often contained in the mortgage securitization market.
And if I could give you an example, in a private security,
generally speaking, I can modify a loan that is either in
default or where I find that default is reasonably foreseeable
or imminent; which means, in theory, I can modify a loan that
is contractually current or that is delinquent only one
payment.
Yet the GSEs have dramatically different guidelines than
that and, as you just read, where it is owing three or more
payments; so it is much later in the default cycle that we are
allowed to give these modifications than what we could in the
private securitizations.
Ms. Speier. Okay, but we could in fact--I guess what I am
getting at, I want some servicer principles that are going to
be used throughout the marketplace so the consumers and
homeowners in this country can feel confident in talking to
their servicer and saying wait a minute, there is a law now
that says if I miss up to three payments and I live in my home
and I haven't filed bankruptcy, that you need to talk to me and
we need to try to work this out. And I think if we sent that
kind of a message out, you are going to have, you know,
defaulting homeowners more willing to come forward and to
negotiate. Because I don't necessarily think that they are in a
position to negotiate.
Mr. Gross. Okay. I believe that the American populace, the
homeowners, are aware of the fact that they have the right to
call their servicer and that the servicers are ready, willing,
and able. We are ready to talk to them and to try to reach
solutions to this. I also believe that there is a legal
obligation that is already there for the servicer to undertake
the actions that you are already referencing.
Ms. Speier. All right. One last question to all of you. I
read recently where homeowners who have been absolutely
current, they have a prime mortgage, are now looking at their
scenario and thinking, am I a fool to not walk away from this
loan because the house is now worth less than the loan that I
have? What do we say to those individuals who have been playing
by the rules but now are looking around them and saying, wait a
minute, am I a fool to be doing this?
Mr. Gross. For owner occupants, I do not believe that the
lack of equity or declining property values is the primary
reason for default. These homeowners who are defaulting that
are owner occupied are defaulting because of employment issues,
unemployment issues, medical issues, divorce, life events that
are occurring that made these homes unaffordable for the
properties that are being walked away from. It is my belief
that those are largely nonowner occupied properties where
someone bought them as an investment and they have simply said
I am not going to put any more good money into this deal.
Ms. Sheehan. I would agree with Mr. Gross. I think that has
been our experience also at Chase. I mean, people who live in
their homes are in the community, their children are in school,
they don't just walk. It is usually because there is some other
economic event that has happened to them.
Ms. Speier. My time has expired.
The Chairman. Thank you. I am glad you elicited that
answer. I ask unanimous consent that one of our most
distinguished, and I hope temporary alumni, the gentleman from
Georgia, be allowed to participate. Without objection, I
recognize the gentleman for 5 minutes.
Mr. Marshall. Thank you, Mr. Chairman. How many people do
you run into whom you simply can't work things out with because
they have other debt problems that can't get resolved?
Mr. Gross. That is a very real issue. And I think--as you
have noticed in most of the recent announcements, whether it be
from FDIC and IndyMac program that we have announced, they
generally deal with the payment for the first mortgage
principal, interest, taxes, and insurance. And we are now
hearing some people say, well, that doesn't take into
consideration the homeowners' other obligations, auto loan
payment, credit cards. And our belief is that it is unfair and
not contractually viable for us to say that we are going to
reduce interest rates or principal on first mortgage debt in
order to subsidize other homeowner obligations.
Mr. Marshall. Do you ever encourage individuals to consider
filing a Chapter 13 or a Chapter 7 bankruptcy to resolve the
other debt issues as part of the process of getting them to a
point where they are able to service a modified loan?
Mr. Gross. No, that would not be part of our discussions
with them.
Mr. Marshall. Do you work with people who have already
filed?
Mr. Gross. Yes, we do.
Mr. Marshall. So an individual could choose to file a 7 or
a 13, clean up their debt, and then come to you and say, hey
look, I want to keep my house, I can't keep it under the
current circumstances, will you modify?
Mr. Gross. We work with those homeowners every day.
Mr. Marshall. What percentage would you say?
Mr. Gross. Percentage of--
Mr. Marshall. Do you have an idea of what percentage of
individuals you are working with now to modify debt are
individuals who have filed a 7 or 13 and dealt with their other
debt that way?
Mr. Gross. Probably--and this is a guess on my part, but I
would say less than 2 percent.
Mr. Marshall. Less--
Mr. Gross. Yes, less than 2 percent. And I would also note
of homeowners who have filed bankruptcy, the last number I saw
somewhere, 60 to 70 percent of those homeowners are
contractually current on their mortgage obligations.
Mr. Marshall. At the time they filed bankruptcy?
Mr. Gross. That is correct.
Mr. Marshall. What is the overall percentage of folks that
you think you are going to be able to reach? The estimate that
we have had is there are literally millions. I don't know what
the current estimate is, and precisely, but millions of
individuals who are going to default if they haven't already
defaulted and who are going to go through a foreclosure process
unless some other remedy is available to them? They are simply
not going to be in a position to pay these loans. What
percentage do you think you are going to be able to address
using the programs that you currently have in place?
Mr. Gross. I believe the programs that we currently have in
place will handle the vast majority of homeowners. And I would
stress again that we have contact with over 90 percent of the
homeowners who do go through a foreclosure action. We will work
with every homeowner who wants to--
Mr. Marshall. Do you have any statistics, the percentage of
individuals that you just can't work with because they are just
not able to meet--
Mr. Gross. I don't have the statistics with me. We could
work with the committee afterwards.
Mr. Marshall. It would be helpful to have those statistics.
The impression I am left with is that there are an awful lot of
individuals who, because of other debt issues, are simply not
going to be able to take advantage of the programs that are
currently offered without some other form of help. And you
already identified a fairness issue yourself, saying why should
we be modifying first mortgage obligations and yet all these
other obligations are not being modified? There is no practical
mechanism, outside of a bankruptcy setting, to deal with the
multiple creditors that the typical consumer has. And simply
the fact that we see an awful lot of recidivism, you know,
follow-on defaults as a result of the report that I guess
Deutsch Bank has provided us, evidence is the fact that a lot
of people are struggling; they really want to keep their house,
they will do the deal with you, but practically speaking, that
deal is one they won't be able to live up to because of their
other problems. It would be very helpful to have some
statistical studies on this to see to what extent this program
can actually be expected to be effective or do we have to take
some other action.
The action I would suggest is not to have us step in and
try to prop up borrowers, prop up lenders, etc., the folks who
have gotten them into this mess. It is to force them to deal
with it perhaps by permitting a modification of a certain type
of mortgage for a certain period of time in a Chapter 13
setting. If you have evidence that is not necessary because you
are going to be able to deal with all of this, then I think
that would help all of here in Congress to get past this
question of whether or not we should be modifying bankruptcy
law in order to address this issue.
I have nothing further, Mr. Chairman.
The Chairman. With that, the hearing is adjourned with our
thanks. And there will be follow-up.
Mr. Deutsch, in particular we would like to be able to stay
in touch with you on this effort you have mentioned, because
that could have a great impact on what we do moving forward.
Members may have the appropriate time to extend their remarks
on the record.
[Whereupon, at 1:08 p.m., the hearing was adjourned.]
A P P E N D I X
November 12, 2008
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