[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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