[Senate Hearing 110-832]
[From the U.S. Government Publishing Office]
S. Hrg. 110-832
HELPING FAMILIES SAVE THEIR HOMES: IS TREASURY'S STRATEGY REALLY
WORKING?
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
DECEMBER 4, 2008--CHICAGO, ILLINOIS
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
__________
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COMMITTEE ON APPROPRIATIONS
ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont TED STEVENS, Alaska
TOM HARKIN, Iowa ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey WAYNE ALLARD, Colorado
BEN NELSON, Nebraska LAMAR ALEXANDER, Tennessee
Charles Kieffer, Staff Director
Bruce Evans, Minority Staff Director
------
Subcommittee on Financial Services and General Government
RICHARD J. DURBIN, Illinois, Chairman
PATTY MURRAY, Washington SAM BROWNBACK, Kansas
MARY L. LANDRIEU, Louisiana CHRISTOPHER S. BOND, Missouri
FRANK R. LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama
BEN NELSON, Nebraska WAYNE ALLARD, Colorado
ROBERT C. BYRD, West Virginia (ex THAD COCHRAN, Mississippi (ex
officio) officio)
Professional Staff
Marianne Upton
Melissa Z. Petersen
Diana Gourlay Hamilton
Mary Dietrich (Minority)
Rachel Jones (Minority)
Administrative Support
Michael Bain
LaShawnda Smith (Minority)
C O N T E N T S
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Page
Statement of Senator Richard J. Durbin........................... 1
Statement of Neel Kashkari, Interim Assistant Secretary for
Financial Stability, Department of the Treasury................ 4
Prepared Statement of........................................ 6
Recent Actions................................................... 6
Equity Program................................................... 7
Housing/Mortgage Finance......................................... 7
Term Asset-Backed Securities Loan Facility....................... 8
Priorities for TARP.............................................. 8
Oversight........................................................ 8
Statement of Michael Krimminger, Special Advisor to the Chairman,
Federal Deposit Insurance Corporation.......................... 9
Prepared Statement of........................................ 11
Recent Actions to Restore Confidence............................. 11
Efforts to Reduce Unnecessary Foreclosures....................... 14
Statement of Mathew Scire, Director, Financial Markets and
Community Investment, Government Accountability Office......... 27
Prepared Statement of........................................ 29
Troubled Asset Relief Program.................................... 29
Status of Efforts to Address Defaults and Foreclosures on Home
Mortgages...................................................... 29
Default and Foreclosure Rates have Reached Historical Highs and
are Expected to Increase Further............................... 34
Treasury is Examining Options for Homeownership Preservation in
Light of Recent Changes in the Use of TARP Funds............... 36
Statement of Bruce Gottschall, Executive Director, Neighborhood
Housing Services of Chicago.................................... 41
Prepared Statement of........................................ 43
Statement of Marguerite E. Sheehan, Senior Vice President and
Home Lending Senior Executive, JPMorgan Chase.................. 46
Prepared Statement of........................................ 48
Expanded Foreclosure Prevention Initiatives...................... 48
Expanded Offers for ARM Customers................................ 49
New Offers for Option ARM Customers.............................. 50
Statement of Lisa Madigan, Attorney General, State of Illinois... 51
Prepared Statement of........................................ 52
The Illinois Attorney General's Protection of Consumers From
Predatory Mortgage Lending Practices........................... 52
HELPING FAMILIES SAVE THEIR HOMES: IS TREASURY'S STRATEGY REALLY
WORKING?
----------
THURSDAY, DECEMBER 4, 2008
U.S. Senate,
Subcommittee on Financial Services
and General Government,
Committee on Appropriations,
Chicago, IL.
The subcommittee met at 10 a.m., in Courtroom 2525, E.M.
Dirksen United States Courthouse, Chicago, IL, Hon. Richard J.
Durbin (chairman) presiding.
Present: Senator Durbin.
statement of senator richard j. durbin
Senator Durbin. Good morning. I am pleased to welcome you
to this hearing to examine the Department of the Treasury's
implementation of the Emergency Economic Stabilization Act and
other Government programs designed to minimize foreclosures and
open up the flow of credit in the financial markets. Most
importantly, this hearing will examine strategies for keeping
families in their homes during this economic crisis, which is
particularly important for us right here in Illinois and in the
Chicago area.
About 2 years ago, I started hearing from a variety of
people that, even though times were good and the economy was
humming along, there was a looming problem in the housing
markets. Wall Street veterans started mentioning the increasing
risks that the mortgage banks were taking on. Community
organizers in Chicago and around Illinois started calling me
and telling me about the rising number of foreclosures that
were beginning to hit neighborhoods as adjustable rate
mortgages began to reset in large numbers and that property
values were starting to crest.
Constituents called in even greater numbers to ask what
they could do to save their homes. For example, I want to show
you a chart that was provided to me by the Southwest Organizing
Project in Chicago. This was just given to me a few days ago,
and I've blown it up so that you might take a look at it. This
is an amazing chart which shows a small section of the city of
Chicago around Marquette Park and Midway Airport, and the
number of mortgage foreclosures initiated since January 1 of
this year.
Now let me show you a second chart that represents the
homes in foreclosure in just one Zip Code in that area. If you
will take a look at this in the most general way, it is hard to
find a single block in this Zip Code where there isn't a home
facing foreclosure.
I called, for example, Speaker Mike Madigan, who lives in
the 13th ward, who told me they already have 50 homes boarded
up in his ward and more to follow. He is a person who knows
every nook and cranny, every alley, every neighborhood, and he
understands the importance of this discussion.
The impact of these foreclosures on the future of the 13th
ward and the city of Chicago could be profound if we don't do
something. The red dots on that second chart are just one
single Zip Code on the southwest side of Chicago. I want to
thank again the Southwest Organizing Project for bringing these
charts to our attention.
In response to what I see as a growing crisis which is made
clear by these two charts, I have started working on a bill
that I thought would help to minimize the number of
foreclosures. Last fall, I introduced the Helping Families Save
Their Homes in Bankruptcy Act, legislation that would make one
simple change in the bankruptcy code in order to provide
families with a bit of leverage as they tried to negotiate with
their mortgage providers.
Meanwhile, last fall, Treasury and the mortgage banking
industry unveiled their HOPE NOW Alliance, which created a
framework for guiding servicers in reducing the number of
avoidable foreclosures. Because the program was purely
voluntary, however, the program really hasn't made a big
difference, and the number of foreclosures continues to rise.
HOPE NOW is not nearly--is not nearly enough--to relieve the
impact that foreclosures would have on market.
Just 6 months into the program, in March of this year,
Treasury and the Fed stepped in to prevent the failure of Bear
Stearns. It was at this moment that two things became clear.
First, the massive number of mortgages going into default
was no longer just a tragedy for the families affected and the
communities affected, it had morphed into a systematic risk
that threatened the entire financial industry in this country.
Second, the faster we could turn around the mortgage
markets, the faster we could rebuild the health of investors'
balance sheets which held mortgage-backed securities, and the
faster we could avoid further damage to the economy as a whole.
And yet, as Treasury, the Federal Reserve, the Federal
Deposit Insurance Corporation (FDIC) and the Federal Housing
Finance Agency (FHFA) continued over the next 6 months to
aggressively bail out Fannie Mae and Freddie Mac, the American
International]=Group (AIG), and others--using taxpayers'
dollars--nothing to match that level of urgency was applied to
the core of the crisis: the rapid rise in foreclosures which
led to the meltdown of the mortgage-backed securities market.
Delinquency rates have risen each and every quarter since
the beginning of last year, when I began working on legislation
to address this crisis. As we all know now, what began as a
problem 2 years ago in localized housing markets, has become
part of a global economic crisis that has been identified
correctly as a recession, and which rivals the worst economic
circumstance we've seen in over 75 years.
So, 2 months ago when Congress wrote the Emergency Economic
Stabilization Act, we specifically focused on the need to
reduce the number of foreclosures. I can remember a
conversation that took place in a conference room with Speaker
Nancy Pelosi. When the leaders in Congress--Democrats and
Republicans, about 14 of us--gathered at a conference table,
facing Ben Bernanke, the head of the Federal Reserve, Henry
Paulson, Secretary of the Treasury, and Chris Cox, head of the
Securities and Exchange Commission (SEC), when they disclosed
to us some of the most frightening prospects that we faced if
we didn't do something--and do it immediately--to deal with the
looming economic crisis in America.
It was a sobering moment. There was silence in the room, as
members of both political parties from the House and the Senate
paused to try to grasp what we'd been told. That we were about
to descend into a crisis of unimaginable proportions if we
didn't act, and act quickly.
By the end of that conversation, when the input started
from Members of Congress, the first issue raised was the issue
of mortgage foreclosures--why hadn't we heard anything about
that in the course of this rescue plan that was being proposed.
Finally, when the legislation was drafted, we included
specific language to say that of the $700 million going into
the rescue, a portion of it could and should be used for the
mortgage foreclosure crisis. It's the right thing to do--not
just for the people affected, but for the state of our economy,
and it's a critical step, as far as I can see, for putting this
economy back on its feet.
Yet, it appears that in implementing the economic--pardon
me, Emergency Economic Stabilization Act, the Treasury
Department has not taken full advantage of the authority
granted to minimize the number of foreclosures.
Let me recognize for the record, the Treasury Department
has been asked--under extraordinary economic circumstances--to
attempt to accomplish an extremely difficult task--to put the
American economy back on its feet. So, whatever criticism they
may receive should not be attributed to lack of effort, or lack
of good will; they're trying their best.
There's no chapter in the Department of the Treasury
playbook that you turn to when you face this kind of crisis.
They are trying to find a way to realistically turn this
economy around. I would commend all of the people involved in
the Treasury Department--Secretary Paulson, as well as some of
the others--who've worked so hard to try to stabilize this
economy.
But nonetheless, I think it's important for Congress, and
the American people, to do all that we can to minimize the
foreclosures that continue to devastate the entire American
economy, and affect the global economy.
Today we're going to hear from Neel Kashkari, the
Treasury's Interim Assistant Secretary for Financial Stability,
who has roots in our State of Illinois, and is responsible for
implementing the $700 billion plan regarding the Department's
efforts to keep homeowners in their homes.
We'll get a second, unbiased opinion on Treasury's
performance regarding foreclosure information so far, from the
Government Accountability Office (GAO) and we'll hear from
witnesses about what can be done outside of Treasury to address
this crisis, including an innovative plan from the Federal
Deposit Insurance Corporation, a landmark agreement, negotiated
by our own State Attorney General, Lisa Madigan, and efforts
underway by individual servicers and community housing
counselors, addressing the crisis family by family.
I look forward to hearing honest and straightforward
assessments from our witnesses about how current efforts are
working to minimize foreclosures, and what changes we can make
to do a better job.
I am pleased to welcome our first witness, via video
conference from Washington, DC, Neel Kashkari. I had a chance
to say hello to him on the phone this morning. He is the
Interim Assistant Secretary for Financial Stability at the
Department of the Treasury. He's been with the Department since
2006, and has overseen the Office of Financial Stability,
including the Troubled Asset Relief Program, since October of
this year.
Mr. Kashkari has previously served as Vice President at
Goldman Sachs, has a bachelor's and a master's degree in
engineering from the University of Illinois at Urbana-
Champaign, and an MBA from the Wharton School.
Mr. Kashkari, I understand that your responsibilities in
Washington make it difficult for you to travel back to
Illinois, and to Chicago, but we certainly appreciate your
willingness to testify by videoconference. The floor is yours,
and after your statement, we will have another statement, Mr.
Krimminger, and then ask questions of both of you.
So, please proceed, Mr. Kashkari.
STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY
FOR FINANCIAL STABILITY, DEPARTMENT OF THE
TREASURY
Mr. Kashkari. Thank you, Chairman. I really appreciate the
opportunity to speak today.
Chairman Durbin, members of the subcommittee, good morning,
and thank you for this opportunity.
I would like to provide an update on the Treasury
Department's actions to work through the financial crisis and
restore the flow of credit to our economy.
We have taken action with the following three critical
objectives: one, to provide stability to our financial markets;
two, to support the housing market and avoid preventable
foreclosures and support mortgage finance; and three, to
protect the taxpayers.
Before we acted, we were at a tipping point. Credit markets
were largely frozen, denying financial institutions, businesses
and consumers access to vital funding and credit. Financial
institutions were under extreme pressure, and investor
confidence in our system was dangerously low.
We have acted quickly and creatively in coordination with
the Federal Reserve, the FDIC, OTS, and the OCC to help
stabilize the financial system, and it is clear that our
coordinated actions have made an impact. Our effort to
strengthen our financial institutions so they can support our
economy is critical to working through the current economic
downturn.
Strong financial institutions and a stable financial system
will smooth the path to recovery and an eventual return to
prosperity.
We have taken the necessary steps to prevent a financial
collapse, and the authorities and flexibility granted to us by
the Congress have been key to this.
I will briefly discuss some of Treasury's priorities, and
have provided more detail in my submitted written testimony.
We have worked aggressively to avoid preventable
foreclosures, to keep mortgage finance available, and to
develop new tools to help homeowners. And here, I will briefly
highlight three key accomplishments, to date:
First, in October 2007, Treasury helped establish the HOPE
NOW Alliance, a coalition of mortgage servicers, investors and
counselors, to help struggling homeowners avoid preventable
foreclosures.
Through coordinated, industry-wide action, HOPE NOW has
significantly increased the outreach and assistance provided to
homeowners. They estimate the industry has helped nearly 2.7
million homeowners since July 2007, and is helping about
225,000 homeowners each month avoid foreclosure.
Second, we acted earlier this year to prevent the failure
of Fannie Mae and Freddie Mac, the housing Government-sponsored
enterprises (GSEs) that affect over 70 percent of mortgage
originations. These institutions are systemically critical to
financing and housing markets, and their failure would have
materially exacerbated the recent market turmoil and profoundly
impacted household wealth. We have stabilized the GSEs and
limited systemic risk.
And third, on November 11--just last month--HOPE NOW, the
Federal Housing Finance Agency and the GSEs achieved a major
industry breakthrough with the announcement of a streamlined
loan modification program that builds on the mortgage
modification protocol developed by the FDIC for IndyMac. The
adoption of this streamlined modification framework is an
additional tool that servicers now have to help avoid
preventable foreclosures. Potentially hundreds of thousands
more struggling borrowers will be enabled to stay in their
homes.
An important complement to those guidelines was the GSEs'
announcement on November 20 that they will suspend foreclosures
for 90 days. This will give homeowners and servicers time to
utilize the new streamlined program, and make it possible for
more struggling families to work out terms to stay in their
homes.
Last week, on November 25, Treasury and the Federal Reserve
announced another aggressive program aimed at making affordable
credit available for consumers. Under the troubled asset relief
program (TARP), Treasury will provide $20 billion to invest in
a Federal Reserve facility that will provide liquidity to
issuers of consumer asset-backed paper, enabling a broad range
of institutions to step up their lending, and enabling
borrowers to have access to lower-cost consumer finance, such
as credit card loans, student loans, small business loans, and
auto loans.
On December 1, Secretary Paulson underscored the critical
priorities for the most effective deployment of the remaining
TARP funds, and I will briefly discuss those priorities.
One, we continue to look at additional strategies are
capital, and as we do so, we will assess the impact of the
first capital program, and also take into consideration
existing economic and market conditions.
Two, we continue to aggressively examine strategies to
mitigate foreclosures and maximize loan modifications, which
are an important part of working through the necessary housing
correction, and maintaining the strength of our families and
communities.
And finally, as we consider potential new TARP programs, we
must also maintain flexibility and firepower for this
administration and the next administration, to address new
challenges as they arise.
It is important that we recognize that a program as large
and important as this, demands appropriate oversight and we are
committed to transparency and oversight in all aspects of this
program. We continue to take necessary measures to ensure
compliance with both the letter and the spirit of the
requirements established by the Congress, including regular
briefings with the GAO, the Financial Stability Oversight
Board, the inspector general, as well as the congressional
oversight panel. We will also continue to meet all of the
reporting requirements established by the Congress, on time.
Our system is stronger and more stable due to our actions.
Although a lot has been accomplished, we have many challenges
ahead. We will focus on the goals outlined by Secretary Paulson
and develop the right strategies to meet those objectives.
Thank you again, and I would be happy to answer your
questions.
Senator Durbin. Mr. Kashkari, thank you for your testimony.
[The statement follows:]
Prepared Statement of Neel Kashkari
Chairman Durbin, members of the subcommittee, good morning and
thank you for the opportunity to appear before you. I would like to
provide an update on the Treasury Department's actions to work through
the financial crisis and restore the flow of credit to the economy. We
have taken multiple actions with the following three critical
objectives: one, to provide stability to financial markets; two, to
support the housing market by preventing avoidable foreclosures and
supporting the availability of mortgage finance; and three, to protect
taxpayers. Before we acted, we were at a tipping point. Credit markets
were largely frozen, denying financial institutions, businesses, and
consumers access to vital funding and credit. Financial institutions
were under extreme pressure, and investor confidence in our system was
dangerously low.
We have acted quickly and creatively in coordination with the
Federal Reserve, the FDIC, OTS, and the OCC to help stabilize the
financial system and it is clear that our coordinated actions have made
an impact. Our coordinated effort to strengthen our financial
institutions so they can support our economy is critical to working
through the current economic downturn. Strong financial institutions
and a stable financial system will smooth the path to recovery and an
eventual return to prosperity.
We believe we have taken the necessary steps to prevent a financial
collapse and the authorities and flexibility granted to us by Congress
are key to this. I will briefly discuss some of Treasury's policies and
priorities today.
recent actions
First, I will start by discussing some of our most recent actions.
Consistent with our commitment to stabilize the financial system and
strengthen our financial institutions, while also protecting U.S.
taxpayers, we took two recent actions in coordination with our
regulators. On November 9, Treasury announced an investment to support
the restructuring of the American Insurance Group (AIG), together with
the Federal Reserve Bank of New York. On November 23, the U.S.
Government--Treasury, the Fed, and the FDIC--entered into an agreement
with Citigroup to provide a package of guarantees, liquidity, and
capital. We will continue to take the necessary steps to protect the
financial system and believe these actions, together with others we
have taken since the onset of the financial crisis, demonstrate a
decisive use of tools to strengthen our financial institutions and
increase confidence in our system.
equity program
Next, I will discuss the Capital Purchase Program, one of the most
significant and effective programs we have implemented to stabilize
financial markets and improve the flow of credit to businesses and
consumers. As the markets rapidly deteriorated in October, it was clear
to Secretary Paulson and Chairman Bernanke that the most timely,
effective way to improve credit market conditions was to strengthen
bank balance sheets quickly through direct purchases of equity.
Secretary Paulson announced that we would commit $250 billion of the
financial rescue package granted by Congress to purchase equity
directly from a range of financial institutions. With a stronger
capital base, our banks will be more confident and better positioned to
continue lending which, although difficult to achieve during times like
this, is essential to economic recovery. Moreover, a stronger capital
base also enables banks to take losses as they write down or sell
troubled assets.
In just over 1 month, Treasury has already disbursed an estimated
$151 billion to 52 institutions and has pre-approved many additional
applications from public depositories across the country. This progress
is remarkable not only in its speed and efficacy but also in its scope.
We have touched every banking market in the Nation already with
applications representing small and large banks alike. Taking into
account the needs of the range of institutions across the country, on
November 17, Treasury released a term sheet for privately held
institutions, and we have provided even more streamlined terms to
facilitate capital investment into community development financial
institutions. Regulators are already receiving and reviewing many
applications from these private depositories, another important source
of credit in our economy.
We feel very strongly that healthy banks of all sizes, both public
and private, should use this program to continue making credit
available in their communities. Therefore, Treasury strongly supports
the statement issued by bank regulators on November 12 in support of
this goal. The inter-agency statement emphasized that the extraordinary
Government actions taken to stabilize and strengthen the banking system
are not merely one-sided; all banks--not just those participating in
the Capital Purchase Program--have benefited from the Government's
actions to restore confidence in the U.S. banking sector. Banks, in
turn have obligations to their communities, particularly in this time
of economic disruption. They have an obligation to continue to make
credit available to creditworthy borrowers and an obligation to work
with borrowers who are struggling to avoid preventable foreclosures.
The statement also urges banks to carefully review their dividend
and compensation policies during this time of scarce resources. We
fully support this regulatory initiative and believe it is crucial to
focus on prudent lending so that institutions do not repeat the poor
lending practices that were a root cause of today's problems. Restoring
a vibrant economy won't materialize as quickly as all of us would like,
but it will happen much quicker as confidence in our financial sector
is restored in part due to the TARP.
housing/mortgage finance
Our other critical and related objective is to support the housing
market and avoid preventable foreclosures. We have worked aggressively
to avoid preventable foreclosures, keep mortgage financing available,
and develop new tools to help homeowners. Here, I will briefly
highlight three key accomplishments:
--In October 2007, Treasury helped establish the HOPE NOW Alliance, a
coalition of mortgage servicers, investors, and counselors, to
help struggling homeowners avoid preventable foreclosures.
Through coordinated, industry-wide action, HOPE NOW has
significantly increased the outreach and assistance provided to
homeowners. HOPE NOW estimates that nearly 2.7 million
homeowners have been helped by the industry since July 2007;
the industry is now helping about 225,000 homeowners a month
avoid foreclosure.
--We acted earlier this year before enactment of the EESA to prevent
the failure of Fannie Mae and Freddie Mac, the housing GSEs
that affect over 70 percent of mortgage originations. These
institutions are systemically critical to financial and housing
markets, and their failure would have materially exacerbated
the recent market turmoil and profoundly impacted household
wealth. We have stabilized the GSEs and limited systemic risk.
--On November 11, HOPE NOW, FHFA, and the GSEs achieved a major
industry breakthrough with the announcement of a streamlined
loan modification program that builds on the mortgage
modification protocol developed by the FDIC for IndyMac. The
adoption of this streamlined modification framework is an
additional tool that servicers now have to help avoid
preventable foreclosures. Potentially hundreds of thousands
more struggling borrowers will be enabled to stay in their
homes.
An important complement to those guidelines was the GSEs'
announcement on November 20 that they will suspend all foreclosures for
90 days. The foreclosure suspension will give homeowners and servicers
time to utilize the new streamlined loan modification program and make
it possible for more families to work out terms to stay in their homes.
term asset-backed securities loan facility
Next, I will discuss our most recent program, the Term Asset Backed
Securities Loan Facility (TALF). As Secretary Paulson noted on November
12, support of the consumer finance sector is a high priority for
Treasury because of its fundamental role in fueling economic growth.
Like other forms of credit, the availability of affordable consumer
credit depends on ready access to a liquid and affordable secondary
market--in this case, the asset-backed credit market. Additionally,
consumer finance relies on the non-bank financial sector as a source of
finance. However, recent credit market stresses essentially brought
this market to a halt in October, resulting in climbing credit card
rates. As a result, millions of Americans cannot find affordable
financing for their basic credit needs and everyday purchases.
Last week, on November 25, Treasury and the Federal Reserve
announced an aggressive program aimed at supporting the normalization
of credit markets and making available affordable credit for all
consumers. Under the TARP, Treasury will provide $20 billion to invest
in a Federal Reserve facility that will provide liquidity to issuers of
consumer asset backed paper, enabling a broad range of institutions to
step up their lending, and enabling borrowers to have access to lower-
cost consumer finance and small business loans. The facility may be
expanded over time and eligible asset classes may be expanded later to
include other assets, such as commercial mortgage-backed securities,
non-agency residential mortgage-backed securities or other asset
classes.
priorities for tarp
On December 1, Secretary Paulson underscored the critical
priorities for the most effective deployment of remaining TARP funds,
foremost of which is to ensure our banking sector has the necessary
capital base to continue lending to consumers and businesses and
support economic growth, and to help homeowners avoid preventable
foreclosures.
I will briefly discuss these priorities:
--In order to continue their critical role as providers of credit,
both banks, and non-banks may need more capital given their
troubled asset holdings, continued high rates of foreclosures,
and stagnant global economic conditions. We continue to look at
additional capital strategies and, as we do so, we will assess
the impact of the first capital program and also take into
consideration existing economic and market conditions.
--We continue to aggressively examine strategies to mitigate
foreclosures and maximize loan modifications, which are a
necessary part of working through the necessary housing
correction and maintaining the strength of our communities. The
new program which I highlighted above with the FHFA, the GSEs,
and HOPE NOW is just one example and we will continue working
hard to make progress here.
--As we consider potential new TARP programs, we must also maintain
flexibility and firepower for this administration and the next,
to address new challenges as they arise.
oversight
Concurrently, we recognize that a program as large and important as
the TARP demands appropriate oversight and we are committed to
transparency and oversight in all aspects of the program. We continue
to take necessary measures to ensure compliance with the letter and the
spirit of the requirements established by the Congress, including
regular briefings with the Government Accountability Office, the
Financial Stability Oversight Board, the Inspector General and the
Congressional Oversight Panel. We will also continue to meet all of the
reporting requirements established by the Congress.
conclusion
Our system is stronger and more stable due to our actions. Although
a lot has been accomplished, we have many challenges ahead of us. We
will focus on the goals outlined by Secretary Paulson and develop the
right strategies to meet those objectives. Thank you and I would be
happy to answer your questions.
Senator Durbin. We'll have Michael Krimminger testify, and
then have questions for both of you.
Our next witness is Michael Krimminger, who is the Special
Advisor for Policy to the Chairman of the Federal Deposit
Insurance Corporation. Mr. Krimminger has been the FDIC
Chairman's advisor on mortgage and housing issues throughout
the current mortgage and credit crisis, including the loan
modification process used by the FDIC and IndyMac Federal Bank.
Mr. Krimminger is a graduate of the University of North
Carolina, and has a J.D. from the Duke University School of
Law.
Mr. Krimminger, welcome, the floor is yours.
STATEMENT OF MICHAEL KRIMMINGER, SPECIAL ADVISOR TO THE
CHAIRMAN, FEDERAL DEPOSIT INSURANCE
CORPORATION
Mr. Krimminger. Good morning, and thank you, Chairman
Durbin.
I appreciate the opportunity to testify on behalf of the
FDIC's recent efforts to stabilize the Nation's financial
markets and reduce foreclosures.
As you know, conditions in the financial market have deeply
shaken the confidence of people around the world in their
financial systems. As you've just heard from Assistant
Secretary Kashkari, the Government has taken a number of
extraordinary steps to bolster confidence in the U.S. banking
industry.
Working with the Treasury Department and other bank
regulators, FDIC Chairman Bair has stated that the FDIC will do
whatever it takes to preserve the public's trust in the
financial system.
But in spite of the current challenges, the bulk of the
U.S. banking industry--while taking losses--is remaining well
capitalized. However, there is a liquidity problem.
The liquidity squeeze was initially caused by uncertainty
about the value of mortgage-related assets. Some of the actions
the FDIC has taken in concert with the Treasury and the Federal
Reserve include temporarily increasing deposit insurance
coverage, and providing guarantees to new senior unsecured debt
issued by banks, thrifts and holding companies.
The purpose of all of these programs, including the TARP
and other programs offered by the Federal Reserve and the
Treasury, is to increase bank lending, and minimize the impact
of deleveraging on the American economy.
As a result of these efforts, the financial system is now
more stable, while interest rate spreads have narrowed
substantially. However, credit remains tight, and is a serious
threat to the economic outlook.
In the meantime, the FDIC has also spent much time focusing
on the borrower side of the equation. We think that foreclosure
prevention is essential to help find a bottom for home prices,
to stabilize mortgage credit markets, and restore economic
growth.
The continuing trend of unnecessary foreclosures imposes
costs, not only on borrowers and lenders, but also on the
entire community and the economy as a whole. Foreclosures
result in vacant homes that may invite crime, and diminish the
market value of nearby property. The also create distressed
sale prices, which places even more downward pressure on
surrounding home values.
But everyone seems to agree that more needs to be done for
homeowners. Now is the time for significant, decisive action to
get at the root of our economic distress. We need to modify
loans at a much faster pace. Much more aggressive intervention
is needed, if we are to curb the damage to our neighborhoods,
and to the broader economy.
Industry leaders have told me that we need to double the
current pace of modifications in order to get a hold of the
foreclosure problem.
My written statement gives the details of our loan
modification program and experience as conservator of the
failed IndyMac Federal Bank. The bottom line is, we have
provided specific loan modification offers to more than 24,000
borrowers. So far, over 5,500 borrowers have accepted offers,
verified their incomes, and are now making payments on their
modified mortgages. Many more than this are making modified
payments following work-through processes to verify their
income.
Several weeks ago, we released the details of a foreclosure
prevention plan that would use TARP funds, that we estimate
would help 1.5 million homeowners avoid foreclosure by the end
of next year.
Our program will require about $24 billion in Federal
financing over the next 8 years. The plan is based on our
practical experience at IndyMac. The plan would set loan
modification standards, so that eligible borrowers could get
lower interest rates, and in some cases, in order to make the
loan affordable, longer amortization periods and potentially
principal forbearance, to make their monthly payments
affordable to support the long-term sustainability of the
mortgage.
All modifications would be 31 percent debt-income ratios.
This will transform bad mortgages into sustainable loans that
will keep communities stable.
To encourage the lending industry to participate, a loan
guarantee program would be established that would absorb up to
one-half of the losses, if the borrower were to default on the
modified loan. If this program, limited to loans secured by
owner-occupied homes, can keep home prices from falling by just
3 percentage points, over half a trillion dollars would remain
in homeowners' pockets. I think an important facet of this
program that we must remember, is that it is designed to go
after the main concern that investors in securituzations and
lenders have about home loan modifications, and that's the
losses that they would incur if the modification defaults. By
addressing this concern, we think this will have the most
significant impact upon incentivizing greater modification
levels. Even a conservative estimate of the wealth effect on
consumer spending would exceed $40 billion. That would be a big
stimulus for the economy, and nearly double the Government's
investment.
In conclusion, the FDIC has committed to achieving what has
been a core mission since we were created 75 years ago--to
protect depositors, and maintain public confidence in the
banking system.
Thank you, Mr. Chairman, I'd be happy to respond to your
questions.
Senator Durbin. Mr. Krimminger, thank you very much.
[The statement follows:]
Prepared Statement of Michael H. Krimminger
Chairman Durbin, I appreciate the opportunity to testify on behalf
of the Federal Deposit Insurance Corporation (FDIC) regarding recent
efforts to stabilize the Nation's financial markets and reduce
foreclosures.
The events of the past several months are unprecedented. Credit
markets have not been functioning normally, contributing to a rising
level of distress in the economy. In addition, high levels of
foreclosures are contributing to downward pressure on home prices. The
impact on confidence resulting from the cumulative impact of these
events has required the Government to take extraordinary steps to
bolster public confidence in our financial institutions and the
American economy.
Achieving this goal requires a sustained and coordinated effort by
Government authorities. Congress passed the Emergency Economic
Stabilization Act of 2008 (EESA), which provides authority for the
purchase of troubled assets and direct investments in financial
institutions, a mechanism for reducing home foreclosures, and a
temporary increase in deposit insurance coverage. Working with our
colleagues at the Treasury Department and our fellow bank regulators,
the FDIC is prepared to undertake all necessary measures to preserve
confidence in insured financial institutions.
Despite what we hear about the credit crisis and the problems
facing banks, the bulk of the U.S. banking industry is healthy and
remains well-capitalized. What we do have, however, is a liquidity
problem. This problem originally arose from uncertainty about the value
of mortgage-related assets, but credit concerns have broadened over
time, making banks reluctant to lend to each other or lend to consumers
and businesses.
In my testimony, I will detail recent actions by the FDIC to
restore confidence in insured financial institutions. I also will
discuss the FDIC's continuing efforts to address the root cause of the
current economic crisis--the failure to deal effectively with
unaffordable loans and unnecessary foreclosures.
recent actions to restore confidence
The FDIC has taken several actions in coordination with Congress,
the Treasury Department, the Federal Reserve Board, and other Federal
regulators, designed to restore confidence in insured financial
institutions. These have included temporarily increasing deposit
insurance coverage and providing guarantees to new, senior unsecured
debt issued by banks, thrifts, or holding companies. These measures
will help banks fund their operations.
Increased Deposit Insurance
With the enactment of the EESA, deposit insurance coverage for all
deposit accounts was temporarily increased to $250,000, the same amount
of coverage previously provided for self-directed retirement accounts.
Temporarily raising the deposit insurance limits has bolstered public
confidence and successfully provided additional liquidity to FDIC-
insured institutions.
The FDIC implemented the coverage increase immediately upon
enactment of EESA. The FDIC website and deposit insurance calculators
were updated promptly to reflect the increase in coverage and ensure
that depositors understand the change. It is important to note that the
increase in coverage to $250,000 is temporary and only extends through
December 31, 2009. The FDIC will work closely with Congress in the
coming year to ensure that consumers are fully informed of changes to
the deposit insurance coverage level, as well as the temporary nature
of the increase, and understand the impact on their accounts.
Temporary Liquidity Guarantee Program
On October 14, the FDIC Board of Directors approved an interim
final rule and on November 21 adopted a final rule for a new Temporary
Liquidity Guarantee Program (TLGP) to unlock inter-bank credit markets
and restore rationality to credit spreads. This voluntary program is
designed to free up funding for banks to make loans to creditworthy
businesses and consumers.
The program has two key features. The first feature is a guarantee
for new, senior unsecured debt issued by banks, thrifts, bank holding
companies, and most thrift holding companies, which will help
institutions fund their operations. Eligible entities include: (1)
FDIC-insured depository institutions; (2) U.S. bank holding companies;
and (3) U.S. savings and loan holding companies that either engage only
in activities that are permissible for financial holding companies
under section 4(k) of the Bank Holding Company Act (BHCA) or have an
insured depository institution subsidiary that is the subject of an
application under section 4(c)(8) of the BHCA regarding activities
closely related to banking. Bank and savings and loan holding companies
must own at least one insured and operating depository institution. The
FDIC may allow other affiliates of an insured depository institution to
be eligible on a case-by-case basis, after written request and positive
recommendation by the appropriate Federal banking agency.
The guarantee applies to all senior unsecured debt issued by
participating entities on or after October 14, 2008, through and
including June 30, 2009. Issuers will be limited in the amount of
guaranteed debt they raise, which generally may not exceed 125 percent
of senior unsecured debt that was outstanding as of September 30, 2008,
and scheduled to mature before June 30, 2009. For eligible debt issued
on or before June 30, 2009, coverage is only provided until the earlier
of the date of maturity of the debt or June 30, 2012.
The debt guarantee will be triggered by payment default, as opposed
to bankruptcy or receivership as provided in the interim rule. This
improvement in the nature of the guarantee has enabled FDIC-guaranteed
debt issued by participating institutions to attain the highest ratings
for that class of investment and helped ensure wide acceptance of FDIC-
guaranteed debt instruments within the investment community. Between
issuance of the final rule and November 28, three institutions have
issued approximately $17.3 billion in FDIC-guaranteed debt, with
maturities ranging from 2 years to 3\1/2\ years. The lower costs and
longer term maturities of this debt will provide banks with a stronger,
more stable funding base to support increased lending. Other banking
companies have plans to issue FDIC-guaranteed debt in coming weeks.
Under the final rule, premiums are charged on a sliding scale
depending on the length of the debt maturity. The range will be 50
basis points on debt of 180 days or less, and a maximum of 100 basis
points for debt with maturities of 1 year or longer, on an annualized
basis. Short-term debt issued for 1 month or less, including overnight
Federal funds, will not be eligible for the program.
The second feature of the new program provides insurance coverage
for all deposits in non-interest-bearing transaction accounts, as well
as NOW accounts that pay minimal interest, at insured depository
institutions unless they choose to opt out. These accounts are mainly
payment processing accounts such as payroll accounts used by
businesses. Frequently, such accounts exceed the current maximum
insurance limit of $250,000. Many smaller, healthy banks had expressed
concerns about deposit outflows based on market conditions.
The temporary guarantee on non-interest bearing transaction
accounts will expire December 31, 2009, consistent with the temporary
statutory increase in deposit insurance. This aspect of the program
allows bank customers to conduct normal business knowing that their
cash accounts are safe and sound. The guarantee has helped stabilize
these accounts, and helped the FDIC avoid having to close otherwise
viable banks because of large deposit withdrawals.
A 10 basis point surcharge will be applied to deposits in non-
interest bearing transaction deposit accounts not otherwise covered by
the existing deposit insurance limit of $250,000. This surcharge will
be added to the participating bank's existing risk-based deposit
insurance premium paid on those deposits.
It is important to note that the TLGP does not rely on taxpayer
funding or the Deposit Insurance Fund. Instead, both aspects of the
program will be paid for by direct user fees as described above.
Coverage for both parts of the program is initially automatic. An
entity must make an election to opt in or opt out of the program by
December 5. Participating institutions will be subject to supervisory
oversight to prevent rapid growth or excessive risk-taking. The FDIC,
in consultation with the entity's primary Federal regulator, will
determine continued eligibility and parameters for use.
The TLGP is similar to actions by the international community. If
the FDIC had not acted, guarantees for bank debt and increases in
deposit insurance by foreign governments would have created a
competitive disadvantage for U.S. banks. Along with Treasury's actions
to inject more capital into the banking system, the combined
coordinated measures to free up credit markets have had a stabilizing
effect on bank funding.
Since these measures were implemented on October 14, we have seen
steady progress in reducing risk premiums in money and credit markets.
Short-term LIBOR (London Interbank Offer Rate) and commercial paper
rates have moderated, as have short-term interest rate spreads
including the Libor--Treasury (TED) spread and the Libor--Overnight
Index Swap (OIS) spread. While it is clearly too early to declare the
end of the crisis in our financial markets, as a result of the
coordinated response of the Federal Reserve, the Treasury, the FDIC,
and our counterparts overseas, we are making steady progress in
returning money and credit markets to a more normal state.
The FDIC's action in establishing the TLGP is unprecedented and
necessitated by the crisis in our credit markets, which has been fed by
rising risk aversion and serious concerns about the effects this will
have on the real economy. The FDIC's action is authorized under the
systemic risk exception of the FDIC Improvement Act of 1991. In
accordance with the statute, the Secretary of the Treasury invoked the
systemic risk exception after consultation with the President and upon
the recommendation of the Boards of the FDIC and the Federal Reserve.
The systemic risk exception gives the FDIC flexibility to provide such
guarantees which are designed to avoid serious adverse effects on
economic conditions or financial stability.
TARP Capital Purchase Program
As a part of EESA, the Treasury also has developed a Capital
Purchase Program (CPP) which allows certain financial companies to make
application for capital augmentation of up to 3 percent of risk-
weighted assets. As mentioned earlier, the Federal Government
intervened to inject capital in banks and to guarantee a larger portion
of their liabilities so they can better meet the credit needs of the
economy. The ongoing financial crisis has already disrupted a number of
the channels through which market-based financing is normally provided
to U.S. businesses and households. Private asset-backed securitization
remains virtually shut down, and the commercial paper market is now
heavily dependent on credit facilities created by the Federal Reserve.
In this environment, banks will need to provide a greater share of
credit intermediation than in the past to support normal levels of
economic activity. By contrast, a significant reduction in bank lending
would be expected to have strong, negative procyclical effects on the
U.S. economy that would worsen the problems of the financial sector.
Before the recent capital infusions, banks appeared to be on course
to significantly reduce their supply of new credit as a response to an
unusually severe combination of credit distress and financial market
turmoil. Standard banking practice during previous periods of severe
credit distress has been to conserve capital by curtailing lending. In
the present episode, lending standards were likely to be tightened
further due to higher funding costs resulting from overall financial
market uncertainty. There was ample evidence in the Federal Reserve's
Senior Loan Officer Survey in October that bank lending standards were
being tightened to a degree that is unprecedented in recent history.\1\
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\1\ Federal Reserve Board, Senior Loan Officer Opinion Survey on
Bank Lending Practices, October 2008, http://www.federalreserve.gov/
boarddocs/snloansurvey/200811/.
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Government intervention was essential to interrupt this self-
reinforcing cycle of credit losses and reduced lending. We fully
support the CPP as a means of countering the procyclical economic
effects of financial sector de-leveraging. We see the TLGP as a
necessary complement to this effort, and are looking at additional ways
that we might structure our liquidity guarantees to enhance the
incentive and capacity to lend on the part of FDIC-insured
institutions.
The combined Federal policy response will make capital and debt
finance more readily available to banks on favorable terms. The
expectation is that banks will actively seek ways to use this
assistance by making sound loans to household and business borrowers.
Doing so will require a balanced perspective that takes into account
the long-term viability of these borrowers and the fact that they may
have unusual short-term liquidity needs.
We recognize that banks will need to make adjustments to their
operations, even cutting back in certain areas, to cope with recent
adverse credit trends. However, the goal of providing Government
support is to ensure that such adjustments are made mostly in areas
such as dividend policy and the management compensation, rather than in
the volume of bank lending. These considerations are consistent with
the precept that the highest and best use of bank capital in the
present crisis is to support lending activity. Ongoing supervisory
assessments of bank earnings and capital will take into account how
available capital is deployed to generate income through expanded
lending.
In addition, we maintain that compensation programs must discourage
excessive risk-taking and the pursuit of near-term rewards with long-
term risks. Only compensation structures that create appropriate
incentives for bank managers and reward long-term performance are
consistent with the basic principles of safe-and-sound banking. The
Federal banking regulators expect that all banks will compensate their
managers in ways that will encourage the type of sustainable lending
that leads to long-term profitability. Bank supervisors will consider
the incentives built into compensation policies when assessing the
quality of bank management.
Thus far, a number of the largest banking companies in the United
States have taken advantage of the CPP, significantly bolstering their
capital base during a period of economic and financial stress. In
addition, over 1,200 community financial institutions have applied to
this program. We understand that Treasury will soon finalize terms of
the CPP program for the great majority of banks which are not actively
traded public companies, including those organized as Subchapter S
corporations and mutuals.
It is critically important that community banks (commonly defined
as those under $1 billion in total assets) participate in this program.
Although, as a group, community banks have performed somewhat better
than their larger competitors, they have not fully escaped recent
economic problems.
Community banks control 11 percent of industry total assets;
however, their importance is especially evident in small towns and
rural communities. Of the 9,800 banking offices located in communities
with populations of under 10,000, 67 percent are community banks. In
these markets, the local bank is often the essential provider of
banking services and credit. Their contribution to small business and
agriculture lending is especially important and disproportionate to
their size. As of June 30, bank lending by community banks accounted
for 29 percent of small commercial and industrial loans, 40 percent of
small commercial real estate loans, 77 percent of small agricultural
production loans, and 75 percent of small farm land loans.\2\ Although
the viability of community banks as a sector continues to be strong,
the CPP offers an opportunity for individual institutions to strengthen
their balance sheets and continue providing banking services and credit
to their communities.
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\2\ Small commercial and industrial loans and small commercial real
estate loans are in amounts under $1 million. Small agricultural
production loans and small farm land loans are in amounts under
$500,000.
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Also, on November 12, the FDIC issued an Interagency Statement on
Meeting the Needs of Creditworthy Borrowers to all FDIC supervised
institutions. The statement encourages financial institutions to
support the lending needs of creditworthy borrowers, strengthen
capital, engage in loss-mitigation strategies and foreclosure-
prevention strategies with mortgage borrowers, and assess the incentive
implications of compensation policies. Further, on November 20, the
FDIC announced the availability of a comprehensive package of
information, termed ``mod-in-a-box'' to give servicers and financial
institutions all of the tools necessary to implement a systematic and
streamlined approach to modifying loans. This approach is based on the
FDIC loan modification program initiated at IndyMac Federal Bank, which
is described in detail later in this testimony.
efforts to reduce unnecessary foreclosures
Minimizing foreclosures is essential to the broader effort to
stabilize global financial markets and the U.S. economy. There were an
estimated 1.5 million U.S. foreclosures last year, and another 1.2
million in the first half alone of 2008. Foreclosure is often a very
lengthy, costly, and destructive process that puts downward pressure on
the price of nearby homes. While some level of home price decline is
necessary to restore U.S. housing markets to equilibrium, unnecessary
foreclosures perpetuate the cycle of financial distress and risk
aversion, thus raising the very real possibility that home prices could
overcorrect on the downside.
The continuing trend of unnecessary foreclosures imposes costs not
only on borrowers and lenders, but also on entire communities and the
economy as a whole. Foreclosures may result in vacant homes that may
invite crime and create an appearance of market distress, diminishing
the market value of other nearby properties. Foreclosures add inventory
and create distressed sale prices which place downward pressure on
surrounding home values. In addition, the direct costs of foreclosure
include legal fees, brokers' fees, property management fees, and other
holding costs that are avoided in workout scenarios. These costs can
total between 20 and 40 percent of the market value of the property.\3\
The FDIC has strongly encouraged loan holders and servicers to adopt
systematic approaches to loan modifications that result in affordable
loans that are sustainable over the long term.
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\3\ Capone, Jr., C. A., Providing Alternatives to Mortgage
Foreclosure: A Report to Congress, Washington, D.C.: United States
Department of Housing and Urban Development, 1996.
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Emergency Economic Stabilization Act
The EESA, recently passed by Congress, provides broad authority to
the Secretary of the Treasury to take action to ameliorate the growing
distress in our credit and financial markets, as well as the broader
economy. The EESA specifically provides the Secretary with the
authority to use loan guarantees and credit enhancements to facilitate
loan modifications to prevent avoidable foreclosures. We believe that
it is essential to utilize this authority to accelerate the pace of
loan modifications in order to halt and reverse the rising tide of
foreclosures that is imperiling the economy.
The FDIC has proposed to Treasury the creation of a guarantee
program based on the FDIC's practical experience in modifying mortgages
at IndyMac Federal Bank in California. We believe this program could
prevent as many as 1.5 million avoidable foreclosures by the end of
2009. As outlined in more detail below, we have proposed that the
Government establish standards for loan modifications and provide for a
defined sharing of losses on any default by modified mortgages meeting
those standards. By doing so, unaffordable loans could be converted
into loans that are sustainable over the long term. This proposal is
authorized by the EESA and may be implemented under the authority
provided to the Secretary under that statute. We have strongly
advocated this type of approach to Treasury and continue to believe
that it offers the best mechanism for providing appropriate protection
for homeowners.
In recent months, the FDIC has demonstrated through our actions
with the troubled loans owned or serviced by IndyMac Federal Bank that
it is possible to implement a streamlined process to modify troubled
mortgages into loans that are affordable and sustainable over the long-
term. Not only can the approach used successfully at IndyMac serve as a
model for the servicing and banking industry, but we believe it can
provide the foundation for a loss sharing guarantee program under the
EESA.
IndyMac Federal Bank Loan Modifications
As the Committee knows, the former IndyMac Bank, F.S.B., Pasadena,
California, was closed July 11. The FDIC is conservator for a new
institution, IndyMac Federal Bank, F.S.B. (IndyMac Federal), which
continues the depository, mortgage servicing, and certain other
operations of the former IndyMac Bank, F.S.B. As a result, the FDIC has
inherited responsibility for servicing a pool of approximately 653,000
first lien mortgage loans, including more than 60,000 mortgage loans
that are more than 60 days past due, in bankruptcy, in foreclosure, and
otherwise not currently paying. As conservator, the FDIC has the
responsibility to maximize the value of the loans owned or serviced by
IndyMac Federal. Like any other servicer, IndyMac Federal must comply
with its contractual duties in servicing loans owned by investors.
Consistent with these duties, we have implemented a loan modification
program to convert as many of these distressed loans as possible into
performing loans that are affordable and sustainable over the long
term. In addition, we are seeking to refinance distressed mortgages
through FHA programs, including FHA Secure and HOPE for Homeowners, and
have sent letters proposing refinancing through FHA to almost 2,000
borrowers.
On August 20, the FDIC announced a loan modification program to
systematically modify troubled residential loans for borrowers with
mortgages owned or serviced by IndyMac Federal. This program modifies
eligible, delinquent mortgages to achieve affordable and sustainable
payments using interest rate reductions, extended amortization and,
where necessary, deferring a portion of the principal. By modifying the
loans to an affordable debt-to-income ratio and using this menu of
options to lower borrowers' payments for the life of their loan, the
program improves the value of these troubled mortgages while achieving
economies of scale for servicers and stability for borrowers. Of the
more than 60,000 mortgages serviced by IndyMac Federal that are more
than 60 days past due, in bankruptcy, in foreclosure, and otherwise not
currently paying, approximately 40,000 are potentially eligible for our
loan modification program.\4\ Initially, the program was applied only
to mortgages either owned by IndyMac Federal or serviced under IndyMac
Federal's pre-existing securitization agreements. Subsequently, we have
obtained agreements to apply the program to many delinquent loans owned
by Freddie Mac, Fannie Mae, and other investors.
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\4\ Loans not eligible for a modification proposal under the
IndyMac Federal modification program include non-owner-occupied loans,
loans subject to bankruptcy proceedings, completed foreclosures, and
loans secured by properties held after a prior foreclosure.
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It is important to recognize that securitization agreements
typically provide servicers with sufficient flexibility to apply the
IndyMac Federal loan modification approach. While some have argued that
servicing agreements preclude or routinely require investor approval
for loan modifications, this is not true for the vast majority of
servicing agreements. In fact, the American Securitization Forum has
repeatedly confirmed that most servicing agreements do allow for loan
modifications for troubled mortgages that are delinquent or where
default is ``reasonably foreseeable'' if the modification is in the
best interest of securityholders as a whole.\5\ If, as under the model
applied at IndyMac Federal, the modification provides an improved net
present value for securityholders as a whole in the securitization
compared to foreclosure, the modification is permitted under the
agreements as well as applicable tax and accounting standards. In fact,
the agreements at IndyMac Federal were more restrictive than those that
apply to many other securitizations as they limited modifications to
mortgages that were ``seriously delinquent'' rather than permitting
modification when default was ``reasonably foreseeable.'' As a result,
the model applied at IndyMac Federal can be applied broadly for
securitized as well as for portfolio loans.
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\5\ ASF Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans, Dec. 6, 2007; ASF
Statement of Principles, Recommendations and Guidelines for the
Modification of Securitized Subprime Residential Mortgage Loans, June
2007.
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Using the model at IndyMac Federal to achieve mortgage payments for
borrowers that are both affordable and sustainable, the distressed
mortgages will be rehabilitated into performing loans and avoid
unnecessary and costly foreclosures. By taking this approach, future
defaults will be reduced, the value of the mortgages will improve, and
servicing costs will be cut. The streamlined modification program will
achieve improved recoveries on loans in default or in danger of
default, and improve the return to uninsured depositors, the deposit
insurance fund, and other creditors of the failed institution. At the
same time, many troubled borrowers can remain in their homes. Under the
program, modifications are only being offered where doing so will
result in an improved value for IndyMac Federal or for investors in
securitized or whole loans, and where consistent with relevant
servicing agreements.
Applying workout procedures for troubled loans in a failed bank
scenario is something the FDIC has been doing since the 1980s. Our
experience has been that performing loans yield greater returns than
non-performing loans. In recent years, we have seen troubled loan
portfolios yield about 32 percent of book value compared to our sales
of performing loans, which have yielded over 87 percent.
Through this week, IndyMac Federal has mailed more than 24,000 loan
modification proposals to borrowers, and will mail over thousands more
this week and next. We have contacted many thousands more in continuing
efforts to help avoid unnecessary foreclosures. Already, over 5,400
borrowers have accepted the offers, verified their incomes, and are now
making payments on their modified mortgages. Thousands more are making
lower payments as we complete verification of incomes. I am pleased to
report that these efforts have prevented many foreclosures that would
have been costly to the FDIC and to investors. This has been done while
providing long-term sustainable mortgage payments for borrowers who
were seriously delinquent. On average, the modifications have cut each
borrower's monthly payment by more than $380 or 23 percent of their
monthly payment on principal and interest. Our hope is that the program
we announced at IndyMac Federal will serve as a catalyst to promote
more loan modifications for troubled borrowers across the country.
Loss-Sharing Proposal To Promote Affordable Loan Modifications
Although foreclosures are costly to lenders, borrowers, and
communities, efforts to avoid unnecessary foreclosures are not keeping
pace with delinquencies. By the end of 2009, more than 4.4 million non-
GSE mortgages are estimated to become delinquent. While the HOPE for
Homeowners refinancing program is part of the solution, the limitations
inherent in refinancing mortgages out of securitization transactions
indicate that other, more streamlined approaches are necessary.
A major acceleration in loan modifications is essential if we are
to stem the growing flood of foreclosures. Yet today, only around 4
percent of seriously delinquent loans are being modified each month.
While the FDIC's experience at IndyMac demonstrates that modifications
provide a better return than foreclosure in the vast majority of
mortgages today, many servicers continue to rely on slower custom
modifications that are not focused on long-term affordability. Many
servicers continue to argue that they are concerned about proving to
investors that modifications provide a better return than foreclosure.
As a result, far too many of the responses to troubled mortgages have
focused on repayment plans, temporary forbearance, or short-term
modifications often based on verbal financial information.
Today, the stakes are too high to rely exclusively on industry
commitments to apply more streamlined loan modification protocols. The
damage to borrowers, our communities, our public finances, and our
financial institutions is already too severe. An effective remedy
requires targeted, prudent incentives to servicers that will achieve
sustainable modifications by controlling the key risk from the prior,
less sustainable modifications--the losses on redefault. The FDIC's
loss-sharing proposal addresses this risk directly by providing that
the Government will share up to 50 percent of the losses with lenders
or investors if a mortgage--modified under the sustainable guidelines
used at IndyMac Federal--later redefaults. With the Government sharing
the risk of future redefaults, we propose to reduce this risk even
further by modifying the mortgages to an even more affordable 31
percent ratio of first mortgage debt to gross income. By controlling
this risk, the greater net present value of many more modifications
compared to foreclosure will be clear.
Over the next 2 years, an estimated 4 to 5 million mortgage loans
will enter foreclosure if nothing is done. We believe that this program
has the potential to reduce the number of foreclosures by up to 1.5
million, thereby helping to reduce the overhang of excess vacant homes
that is driving down U.S. home prices. In addition, this approach keeps
modified mortgages within existing securitization transactions, does
not require approval by second lienholders, ensures that lenders and
investors retain some risk of loss, and protects servicers from the
putative risks of litigation by providing a clear benefit from the
modifications.
The program, limited to loans secured by owner-occupied homes,
would have a Government loss-sharing component available only after the
borrower has made six payments on the modified mortgage. Some of the
other features of the proposal include:
--Standard Net Present Value (NPV) Test.--In order to promote
consistency and simplicity in implementation and audit, a
standard test comparing the expected NPV of modifying past due
loans compared to foreclosure will be applied. Under this NPV
test, standard assumptions will be used to ensure that a
consistent standard of affordability is provided based on a 31
percent borrower mortgage debt-to-income ratio.
--Systematic Loan Review by Participating Servicers.--Participating
servicers would be required to undertake a systematic review of
all of the loans under their management, to subject each loan
to a standard NPV test to determine whether it is a suitable
candidate for modification, and to modify all loans that pass
this test.
--Reduced Loss Share Percentage for ``Underwater Loans''.--For loan-
to-value ratios (LTVs) above 100 percent, the Government loss
share will be progressively reduced from 50 percent to 20
percent as the current LTV rises. If the LTV for the first lien
exceeds 150 percent, no loss sharing would be provided.
--Simplified Loss Share Calculation.--In general terms, the
calculation would be based on the difference between the net
present value of the modified loan and the amount of recoveries
obtained in a disposition by refinancing, short sale or REO
sale, net of disposal costs as estimated according to industry
standards. Interim modifications would be allowed.
--De Minimis Test.--To lower administrative costs, a de minimis test
excludes from loss sharing any modification that did not lower
the monthly payment at least 10 percent.
--Eight-year Limit on Loss Sharing Payments.--The loss sharing
guarantee ends 8 years after the modification.
Assuming a re-default rate of 33 percent, our plan could reduce the
number of foreclosures initiated between now and year-end 2009 by some
1.5 million at a projected program cost of $24.4 billion.
This proposal efficiently uses Federal money to achieve an
objective that is critical to our economic recovery--stability in our
mortgage and housing markets. Mortgage loan modifications have been an
area of intense interest and discussion for more than a year now.
Meanwhile, despite the many programs introduced to address the problem,
the problem continues to get worse. During the second quarter of this
year, we saw new mortgage loans becoming 60 days or more past due at a
rate of more that 700,000 per quarter--net of past due loans that
returned to current status. No one can dispute that this remains the
fundamental source of uncertainty for our financial markets and the key
sector of weakness for our economy. We must decisively address the
mortgage problem as part of our wider strategy to restore confidence
and stability to our economy.
While the proposed FDIC program would require a cash outlay in the
event of default, we must consider the returns this guarantee would
deliver in terms of our housing markets and, by extension, the economic
well-being of our communities. While we support the various initiatives
taken to date, if we are to achieve stability in our credit and
financial markets we cannot simply provide funds to market
participants. We must address the root cause of the financial crisis--
too many unaffordable mortgages creating too many delinquencies and
foreclosures. The time is overdue for us to invest in our homes and
communities by adopting a program that will prudently achieve large-
scale loan modifications to minimize the impact of foreclosures on
households, lenders, and local housing markets.
conclusion
The FDIC has engaged in unprecedented actions to maintain
confidence and stability in the banking system. Although some of these
steps have been quite broad, we believe that they were necessary to
avoid consequences that could have resulted in sustained and
significant harm to the economy. The FDIC remains committed to
achieving what has been our core mission for the past 75 years--
protecting depositors and maintaining public confidence in the
financial system.
I will be pleased to answer any questions the Committee might have.
Senator Durbin. Mr. Kashkari, I'm sorry you can't see the
chart being presented here that shows one Zip Code in the city
of Chicago, and mortgage foreclosures this year in that Zip
Code.
As I mentioned at the outset, there's scarcely a block in
this Zip Code that doesn't have at least one home facing
foreclosure, and many of them, many more. This is just a
section of our city, and clearly there are many other parts of
the area facing even worse circumstances. Neighboring towns
like Aurora is an example.
So, I'd like to start, if I could, to ask of you, Mr.
Kashkari, do you believe that we have reached a true crisis
level in mortgage foreclosures in America?
Mr. Kashkari. Chairman, it's a very good question.
We absolutely have a crisis in our financial system that is
rooted in housing. The Secretary has said for over 1 year, that
housing is the ultimate source of the credit crisis, and it is
a crisis, and we must take--continue to take--aggressive
action, both to stabilize the financial system, but also to
help homeowners avoid preventable foreclosures.
I personally have been working on this for about 1\1/2\
years, the Secretary asked me last August to focus my energy on
this, to try to reach homeowners, to avoid foreclosure, so we
do think it's a critical issue.
Senator Durbin. Do you believe that it is possible for our
economy to emerge from this recession without taking more
aggressive steps to reduce mortgage foreclosures?
Mr. Kashkari. I believe reducing mortgage foreclosures and
taking additional steps is important. I also believe
stabilizing the housing market as a whole is also very
important, as well as the financial system as a whole--all
three are very important to getting through this crisis.
Senator Durbin. If I could ask you about this morning's
Wall Street Journal front-page story, the Treasury Department's
proposal to increase home sales, working with Fannie Mae and
Freddie Mac for 4.5 percent mortgages. As I read this article,
this news presentation, this is really focusing on new home
purchases, is that correct?
Mr. Kashkari. Chairman, the article is referencing one of
several programs that we're looking at to try to help the
housing market more broadly, which is separate, and complements
work that we're doing on the foreclosure side.
There are different programs that are being considered to
try to help people modify their mortgages and stay in their
homes, and then we have other programs that we're focusing on
to help the housing equality.
Senator Durbin. Let me ask you this directly, do you feel
that the Treasury Department has the authority under the
Emergency Economic Stabilization Act to prevent foreclosures?
Mr. Kashkari. Chairman, it's a very good question, it's
something that we've--we have worked very hard on. If you
permit me to take a step back--when we came--when the Secretary
and the Chairman came to the Congress to ask for this profound
legislation, it was first and foremost to stabilize the
financial system to prevent a collapse of the system as a
whole.
And we believe that we have done that with finite
resources, to stabilize the system so that all Americans and
all businesses can get the credit that they need. And so that's
why we've led, focusing on stabilizing the system as a whole.
Now, there are definitely tools under the legislation that
could be focused on foreclosures. So, for example, if we were
to buy mortgages or mortgage-related services to work with
servicers to modify those loans, but the Secretary made the
decision that, given the crisis, how much it deepened in the
course of September and October, where we had to lead with an
equity program first, nonetheless, to continue with our very
large mortgage foreclosure problems.
Let me give you an example, if you'll permit me, sir. We
want to use every tool in the Federal Government's arsenal to
get at these problems, and use the right tool for the right
job. So, the TARP that the Congress provided us, is the only
tool in the Federal Government that can purchase an equity in
an institution. The Federal Reserve can't do it, the FDIC can't
do it, the Treasury before the TARP couldn't do it.
But there are other tools and other programs that are also
very important to housing. Housing and Urban Development, the
FHA, the Hope for Homeless Program, there's a brand-new program
that the Congress passed, just in July, it's just got up and
running in October, we're working with HUD to help implement
that program, that's a really good program.
And just a few weeks ago, the announcement by Fannie Mae
and Freddie Mac and HOPE NOW to set a new industry standard for
loan modifications, that has the potential to touch every
mortgage in America. Because even the private mortgages that
are not Fannie or Freddie loans refer to the GSE loan
modification standards as their guiding principle.
So, we're trying to use every tool at our disposal to get
to this problem, and to use the right tool for the right job.
They don't all have to come from the TARP.
Senator Durbin. If I could ask you this, you said in your
testimony that you applauded the program for reworking Fannie
Mae and Freddie Mac mortgages that, ``builds on the mortgage
modification protocol developed by the FDIC for IndyMac.'' Yet
Treasury has refused to endorse the plan, which Mr. Krimminger
has described, proposed by FDIC Chairwoman Sheila Bair, and I'm
just wondering, why has Treasury not yet endorsed this FDIC
plan, and implemented it with the funds given to you by
Congress?
Mr. Kashkari. Chairman, it's a very good question, again,
it's a point that we're working very hard on.
We're not only evaluating the FDIC's proposed plan, we have
other plans that we're also evaluating, we're trying to
evaluate that can say--if I could take a step back, if you'll
permit me.
This is a very hard problem to solve, because we're trying
to target homeowners who need help without giving people who
don't need help free assistance, or without creating a windfall
for the banks. And so, with each of these programs, we're
studying it very carefully to understand, who really benefits?
Is it helping the homeowner? Is it helping the bank or the
lender more? Is it efficient? And so, in each of these programs
that we're studying, we're working on, and we are forming a
transition team of the work that we're doing, and keeping them
posted--we're trying to optimize against these different
objectives of helping the homeowners without creating a payoff
for the banks, and the lenders, and the investors.
Senator Durbin. If I could interrupt you for a second. So,
I understood Mr. Krimminger's testimony, though, if there is a
refinancing that leads to a default, under the FDIC's
provision, the lending institution is still on the hook for 50
percent of the loss.
So, to argue that this is a windfall for the banks, the
FDIC approach would still leave the banks with a skinned knee,
if I understand it.
Mr. Krimminger. That's correct.
Senator Durbin. Is that correct, Mr. Krimminger?
Mr. Krimminger. Yes. It's at least 50 percent, there's a
sliding scale of a higher LTV depending on the coverage the
Government would be willing to pay.
Senator Durbin. And what--Mr. Krimminger--what do you
expect that this will cost, this FDIC proposal?
Mr. Krimminger. Our estimate for the cost is around $24
billion; $24 billion in Federal funds, extended over a period
of about 8 years. We're thinking we could probably help a lot
of buyers avoid a foreclosure, in excess of 1.5 million loans.
Senator Durbin. So, Mr. Kashkari, what is lacking in the
FDIC approach under the standards that you've described to us,
trying to find a reasonable way to renegotiate mortgages that
are facing foreclosures, making sure that the lending
institutions have at least 50 percent of the exposure if, in
fact, there is a future default?
Mr. Kashkari. It's a great question, Mr. Chairman. There
are some programs we have seen that would potentially help as
many homeowners at lower cost. There are some programs that
we've seen that would keep the lending institutions on the hook
for the full cost of foreclosure, whereas the Government
assistance would be provided while the homeowners are able to
maintain it.
So, there are different ways of going at this--you could
pay for performance, where you're rewarding the bank and
rewarding the homeowners who are able to keep their home,
versus some programs that will reward the bank if the borrower
goes into default.
We think the FDIC program has a lot of merit, and we're
studying very carefully and trying to figure out which is the
right combination of tools to help homeowners not create the
wrong incentive to banks, and also protect the taxpayers while
also consulting the transition team.
Senator Durbin. If I can ask you, Mr. Kashkari, do you know
what percentage of the 2.7 million homeowners helped by HOPE
NOW since July 2007 have received a modification that has
created a sustainable mortgage over the long term? Through the
principal reductions and other aggressive means, rather than
just a temporary delay in mortgage default?
Mr. Kashkari. I do not have the specific breakdown in front
of me. I would say very few of them have been principal
reductions, I know that. Principal reductions are very rare and
we can talk about why that is.
I think most of those loan modifications are probably
interest rate reductions, those are the most common tools. If
you have a borrower who has an affordability problem, ``I want
to keep my house, I just can't afford to make the payment.''
Servicers--if they're doing their job right--should be looking
at ways of reducing my payment that are the least cost to their
investors, they have an obligation to their investors.
So, reducing interest rates can be a very effective way to
lower my payment, while also not costing the investors or the
lenders too much money. As a servicer, they're trying to find
that sweet spot, and so that's why most of the loan
modifications tend to be interest rate reductions, rather than
principal forgiveness.
Senator Durbin. Well, if you can provide me with more
detailed information on that, I'd appreciate it.
But I'd like to ask as part of the follow-up, Mr.
Krimminger stated that about 4 percent of seriously delinquent
loans are being modified each month. Credit Suisse reported in
September that 3.5 of subprime mortgages had been re-negotiated
in the month of August.
Do you think that the response thus far to the foreclosure
crisis has been sufficient, given that 96 percent of the
seriously delinquent loans are not being modified?
Mr. Kashkari. Chairman, it's a good question. I think the
key--one of the keys to look at is the difference between small
chart of time versus what's happening out there. So, picking
any one month, and saying, ``Well, only this many were modified
this month,'' I'm not sure it captures the whole picture, but
clearly we all need to do more. And that's why we're
aggressively looking at these new programs.
If I could take a step back, and talk about the program we
just announced with the GSEs. Some people have asked us,
``Well, why would we modify loans as a loan modification
strategy under the TARP?'' If we spent $700 billion--all $700
billion buying home loans, we would have been able to buy 3 to
4 million homes, and modify those loans, potentially. Versus,
by establishing a new industry standard, you know, all of the
services around the country refer back to the GSE loan
modification standards. By establishing a new industry
standard, that could potentially touch, in theory, all 35
million Americans.
And so we're focused on doing more, working aggressively,
but using the right tool for the right job, so that we can help
as many homeowners as we can.
Senator Durbin. Let me speak to the--Mr. Kashkari--let me
speak to the tools for a moment.
The initial request by Secretary Paulson for the TARP funds
was to buy mortgage bank securities, and it's my understanding,
and I've heard Secretary Paulson say as much, that
circumstances changed, facts changed, and they took a different
approach--the Treasury took a different approach with the
money, buying equity positions in banks, providing more capital
to these banks.
There was a concern, however, that the banks haven't
received the Federal taxpayers' money, or are hoarding this
money and not lending it out. I'd like you to comment as to
whether or not there has been any effort in the Treasury
Department to impose any firm lending requirements on the firms
and banks that are receiving these TARP funds. What more can
you do to ensure that the taxpayers' money is not being hoarded
by banks for other purposes, other than our goal of breathing
some life into the credit markets?
Mr. Kashkari. Chairman, that's a great question, and
something which I personally have spent a lot of time on.
I'll say a few things. Number one, we have to recognize,
about $160 billion of the $250 billion that we allocated, is
now out the door. So, a little over one-half is out the door,
it's going to take a couple of months to get the remaining
funds out, so not all of it's in the system, yet, so it's going
to take a little bit of time, number one.
Number two, we're still in a period of very low confidence
in the system. And, until confidence starts to emerge, banks
are going to be cautious about lending, and our consumers and
our businesses are going to be cautious about taking new loans.
So, we need to see confidence restored to see a big up-tick in
lending.
But more directly to your question, what we've done. We've
built in very specific contractual provisions in our
investments that dictate what they can and cannot do with the
funds. I'll give an example: We've required no increase in
dividends, we've required no share re-purchases while we have
our investment. The idea there is, we put taxpayer capital into
the bank. If there were interest dividends through a share
repurchase, that would take capital out of the system.
So, if you put capital in a bank, and they can't take it
out, there are very strong economic incentives to make them
want to lend. Because if you put more capital in the bank, the
return on equity, their return on assets will go down. So,
their own shareholders will demand that they put the capital to
its best use, or they're going to watch their return suffer.
So, we've designed very specific provisions to make sure that
they had to use the funds the right way.
At the same time, we don't think it's realistic or
reasonable to order them, ``You must make x number of new
loans.'' Because if they can't find--if they're uncomfortable
making loans, we don't want them to make loans that they don't
think are prudent. We don't want to push banks to return to the
bad lending practices that got us here in the first place.
So, it's not going to happen overnight.
Senator Durbin. Well, let me ask you this. At this point,
to comment on the recent GAO report, because the GAO--at the
direction of Congress--took a look at how these funds have been
managed, this massive infusion of money into the Treasury
Department to try to get our economy moving again.
The GAO reports it's not clear how Treasury and the
regulators have been monitored to be sure that commitments are
being met. Treasury has not instituted--according to the GAO--
any reporting requirements on the institutions that, to date,
have $200 billion in taxpayer investments.
In fact, according to GAO, 50 of the 52 institutions
receiving assistance reported that they did not intend to track
or report the use of these capital injections separately from
the rest of their operations.
Treasury disagreed with the recommendations in GAO's
report, calling for determining reporting in a timely matter,
whether the actions of national institutions were generally
consistent with the purpose of the program. Without explicit
reporting requirements and tracking on how institutions plan,
and actually use these Federal funds, how can Treasury possibly
ensure compliance with these agreements?
Mr. Kashkari. Chairman, that's a--let's talk about that,
it's a very important point.
We are putting in place processes and procedures to make
sure that they are meeting the requirements of the agreement,
in terms of dividends, share re-purchases, ensuring compliance.
So, we can talk about the GAO report some more, that's
another very important topic that I'm glad you brought up. In
terms of the use of the funds itself, here's the tough part--we
thought a lot about this, it's very hard to track, because all
dollars are green as the saying goes--it's very hard to track
where a specific dollar went to.
For example, if I had received the stimulus check last
summer--did that money go to pay my rent? Did that money go to
pay for my dinner? Did that money go to buy something that I
bought at the grocery store, or did that money go into my bank
account, increasing my bank account and supporting all of those
activities?
And so it's very hard to say--it's impossible to say--if
you put an investment into a bank, did those $10 go to make a
loan? Did they go to pay corporate expenses? Or for some other
purpose?
Since that's very hard to measure, and I haven't heard
anyone suggest how we can actually track that, what we're
focused on is, the system as a whole. Always seeing cutting
conditions get better, and we are. A lot of the progress has
been made since we first announced the capital purchase
program, and I can walk you through some statistics.
If interest rates have come down for borrowers, for banks,
as confidence is restored, we can definitely measure if that,
overall in the system--that's our highest priority. And we're
focused on making sure the banks are meeting their own
compliance requirements for the terms that we set.
But to be able to track an individual dollar as it flows--
we don't know how to do that.
Senator Durbin. I understand that. But you can understand--
from the taxpayers' point of view--this massive infusion of
taxpayers' money at a time when most families and businesses
are making sacrifices, we expect to at least see
accountability, if not results.
One particular area of concern that I hear over and over is
executive compensation. You know, we put provisions in this law
to limit the deductibility of certain levels of executive
compensation. And our belief is, that if you have an
institution that is struggling, that is not doing well, you
certainly don't want infusion of taxpayers' dollars to result
in multi-million-dollar bonuses and compensation packages for
the executives who haven't been managing very well.
What steps is the Treasury taking to institute a clear
process to monitor compliance with the executive compensation
provisions?
Mr. Kashkari. Thank you, Chairman. Let me just start by
saying, in each of the programs that we have rolled out, we
have in place very specific, aggressive executive compensation
requirements in the spirit of the letter of the legislation.
In terms of compliance, first of all, the banks have all
had to sign contracts with the Treasury committing to meet
those requirements. Their own executives who these requirements
apply to have all had to agree to these and we are, right now,
building processes and procedures for subsequent verification,
be it on a quarterly basis, or an annual basis, that they
continue to meet these requirements.
We don't want them just to meet them when we first make the
investment, we want to make sure they continue to meet them on
a go-forward basis. We're committed to this, and we're working
very hard on it.
Senator Durbin. I said that was the last question but
there's one other one I want to include here before we let you
get back to work, here. GAO also made a point of contractors'
compensation. Contracts for implementing this law include the
primary large contract with the asset manager, the Bank of New
York, Mellon, as well as smaller contracts for tasks, legal and
accounting tasks.
These contracts had for the most part a price on a time and
materials basis, meaning the Treasury and the contractors
agreed to set labor rates, where the contractors simply bill
hours worked and the cost of materials. GAO has warned that
such time and materials contracts are high-risk contracts for
taxpayers, because unlike fixed-price contracts, the structure
of time and materials provides no incentive for contractors to
control costs.
Considering the $700 billion price tag of the stabilization
package, added to a blank check to the Treasury to administer
it, how is the Treasury ensuring the strict management and
oversight processes are in place to protect taxpayers' dollars?
Mr. Kashkari. Sir, this is something that I get with a team
of people, led by our chief compliance officer, focus just on
this.
We are--if I could take a step back for a moment, it's been
just over 60 days, since the Congress passed and the President
signed the law, we have built an organization, and executed,
and designed the programs, all at the same time, and our work
is far from completed. We've had a very open dialogue with GAO,
and I personally was briefed by the GAO in advance of the
release of their report.
I felt their report was very constructive because they
identified several important areas that we're already working
on. So, we have a team of people working to make sure that we
have the proper oversight of these contractors.
One of the first steps we took is when we designed and
signed the contracts with these contractors, was that we built
in provisions that enabled us to design a much more complex and
aggressive oversight into those operations, so we took initial
steps early to build in the places where we could connect and
really manage these contracts to help protect the taxpayers.
We've been sprinting, and in parallel to that, we're setting up
the operation to do exactly what you're saying.
Senator Durbin. Mr. Krimminger, I'd like to ask you if you
could tell me--this proposal of the FDIC, that you believe
would provide incentives, national incentives and others for
renegotiations of mortgages. So far, what has been the response
from your point of view, from the FDIC's point of view, by the
Treasury Department?
Mr. Krimminger. I think we've had, in the past, some very
constructive discussions with Treasury about the elements of
the program. As Assistant Secretary Kashkari mentioned, there
are different views on the costs, and I think we're very
confident of our views of the costs of the program, and what
the--how the program would be implemented.
I think it's clearly not a subsidy, in any sense, for the
banks, it is simply trying to ensure that we can provide
adequate incentives to get what we need to have done, done. And
that is simply--more modifications at a much greater pace.
At this point, I think the Treasury is considering a number
of different alternatives. I think it's fair to say that we're
not--we are not having current discussions with them about how
to implement this proposal.
Senator Durbin. I can tell you that Mr. Kashkari and Mr.
Krimminger, that the second panel will include testimony about
what's happening, on the ground, in the neighborhoods. As I
mentioned earlier, the Southwest Organization Project came in
to meet with me with the pastor of a local Catholic church, St
Nicholas of Tolentine, they talked about the fact that many
people in that neighborhood are reluctant to talk about this
until it gets into a very sad and dangerous situation, and then
if they can bring themselves to sit down with a counselor, they
go through the grim reality that they can no longer make the
mortgage payment that they're facing.
And many of these service providers try to figure out at
that moment in time whether it's hopeless, or if there's hope.
And if there's any hope there, where a person has, for example,
a steady income, and can make a mortgage payment, they're ready
to sit down with the lender. The person who did the original
mortgage and now is initiating foreclosure. And too many times,
they can't find any place or anybody to sit down with. No one
will sit down across the table from them, and say, ``All right,
if you can't pay $1,900 a month, is it conceivable to stay in
this home for $1,200 a month? Is there a way to renegotiate the
terms in any way that $1,200 will do it?'' If they can't even
pay $1,200, they can't pay $1,900. But they can't find someone
at the other side of the table to get that job done.
Some of the banks in these areas that we're talking about,
here, are banks--out-of-State banks--some in foreign
countries--that made the loans, initially, and now don't even
have branch offices nearby. So, these folks are frustrated, you
know? They see the possibility of losing their homes, they know
that foreclosure procedure is not only devastating to the
homeowner, but to the bank, as well, and to the neighborhood,
and they just can't find any place to turn to get people to sit
down and talk to them.
Do you think the FDIC proposal would change this dynamic?
Mr. Krimminger. I think that--from our review, and this is
based on the experience of IndyMac, as well as discussions with
literally dozens and dozens of servicers, lenders, homeowner
counselor agencies in Chicago and other places around the
country--is that one of the fundamental problems that the
servicers are facing, and these servicers are doing their best,
but their resources are very stretched. Their compensation, if
you will, was designed for a time in which we did not have the
level of industry that we have now.
So, we think that the FDIC proposal would have a major
impact because it would help you to do a triage, if you will,
for troubled borrowers, in the sense that you would use this
model that we've developed at IndyMac, and is being used now,
by giving other servicers--as Assistant Secretary Kashkari
noted--is the basis for the turnaround in the FHFA and GSE
approach--and even now is adopting new developments. We think
this approach will allow you to take those mortgages that can
be helped through this model, do them much more rapidly, much
more efficiently with regard to the servicer's resources, so
that you can focus the servicer's resources on more difficult
mortgages that are going to need far more customized work.
I think that's the best way of dealing with the volume of
delinquencies that we have today.
Another issue is that part of the problem, I think, is that
servicers clearly had been concerned about the reaction of
investors. And one of our points that we've made--tried to make
very clearly--based on our experiences with IndyMac, and again,
talking with many dozen servicers, is that most of the
contracts allow servicers to do the modifications that we're
talking about. The best way of clarifying the rules, and making
sure that servicers can take the action they need to take vis-
a-vis investors is to have the incentive structure effectively
skewed toward the modification. By providing the loss to be
shared here, as we were talking about, using the TARP funds,
you would skew that incentive and the analysis of what the cost
of the defaulting modification would be, much more toward
modification. That's where we must clarify what servicers can
do, and allow them to take action much more aggressively.
The bottom line is, they've been doing a lot, but it's not
been enough.
Senator Durbin. Mr. Kashkari, why was Citi required to
follow the FDIC in that model to modify mortgages, yet Treasury
has not required other of its recipients to do so?
Mr. Kashkari. Chairman, in the Capital Purchase Program, we
designed it to be a program for healthy institutions to
volunteer for the program. We wanted banks across the country
of all sizes to apply and to get capital on equal terms. And so
we wanted to make it easy for them to access, easy for them to
want to take the capital, because healthy banks are in the best
position to step up and lend. If we gave a dollar to a healthy
bank versus a dollar to a struggling bank, that healthy bank is
going to be much more likely to turn around and extend credit.
And so, it was very important for us to make the terms
attractive, to encourage participation. In the case of
Citibank, that was a very important effort that we worked
closely with the FDIC and the Federal Reserve, to make sure
that that institution was stable. That's very different than
broad, general capital purchase program.
Senator Durbin. I want to thank you, Mr. Kashkari----
Mr. Kashkari. I'm sorry, I didn't hear you, pardon me?
Senator Durbin. I just said, I want to thank you very much
for your testimony, and joining us by teleconference, and
battling the BlackBerry interference during the course of your
testimony. I wish you the best in your efforts, and look
forward to working with you.
Mr. Krimminger, thank you, as well, for your testimony.
I thank both of you on the first panel, and I'd like, at
this point, to invite the second panel to take the table.
STATEMENT OF MATHEW SCIRE, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Scire. Mr. Chairman, thank you for the opportunity to
be here today to update our analysis of home mortgage defaults
and foreclosures and to discuss recent efforts to preserve home
ownership.
There is over $10 trillion in mortgage debt outstanding in
the United States, representing tens of millions of home
mortgages. Last year we reported that default and foreclosure
rates had risen dramatically. Since then the increase has
accelerated. Last year we reported that based on data from
thesecond quarter of 2007, just over 1 in 100 mortgages were in
default--an increase of almost 30 percent over the previous 2-
year period. This year mortgage default rates increased another
64 percent. Put another way, default rates have more than
doubled over the 3 years. The percentage of mortgages entering
the process of foreclosure grew even more rapidly. Last year we
reported that this foreclosure start rate had increased by 55
percent over the same quarter 2 years earlier. One year later
the foreclosure start rate increased an additional 83 percent.
States such as Arizona, California, Florida, and Nevada had the
highest percentage increases. These States also had some of the
highest percentages of mortgages in the process of foreclosure,
as did States such as Ohio, Michigan, Indiana, and Illinois,
all exceeding the national average.
This sharp downturn in the housing market has precipitated
severe stresses in U.S. financial markets. Defaults and
foreclosures have affected not only those losing their homes,
but also the neighborhoods where houses now stand empty.
Likewise, defaults and foreclosures have imposed
significant costs on borrowers, lenders and mortgage investors,
and have contributed to increased volatility in the United
States and global financial markets.
Two months ago, the Congress passed and the President
signed the Emergency Economic Stabilization Act of 2008,
creating the Troubled Asset Relief Program. The act authorizes
Treasury to purchase troubled mortgages, and mortgage-related
assets.
The Secretary initially intended to use the position of
owning such assets to influence loan servicers and achieve
aggressive mortgage modification standards. But in order to
effectively stabilize financial markets, the Treasury decided,
instead, to focus on directly injecting capital into financial
institutions, under its Capital Purchase Program.
In light of his decision, the Treasury is now considering a
number of options to preserve home ownership, a purpose of the
act. This includes establishing an Office of Home Ownership
Preservation, and encouraging financial institutions who are
receiving the capital injections to modify the terms of
existing residential mortgages.
However, the Treasury has not yet determined how it will
impose reporting requirements on the participating financial
institutions, which would enable Treasury to monitor, to some
extent, whether the capital infusions are achieving intended
goals.
As a result, we recommended in our first TARP oversight
report that Treasury work with the bank regulators to establish
a systematic means for reviewing and reporting on whether
financial institutions' activities are consistent with the
purposes of the program.
Mr. Chairman, Congress, financial regulators and others
have taken a number of actions to preserve homeownership. You
heard earlier about the FDIC's actions to stabilize financial
markets, and its efforts to reduce unnecessary foreclosures.
The Federal Reserve announced last week that it would
purchase up to $100 billion of direct obligations of the GSEs,
and up to $500 billion of mortgage-backed securities backed by
Fannie Mae, Freddie Mac, and Ginnie Mae.
Earlier in November, the financial regulators issued a
joint statement underscoring their expectation that all banking
organizations fulfill their fundamental role in lending. The
Federal Housing Finance Agency announced a streamlined loan
modification program for mortgages controlled by the GSEs.
Also, HUD put in place the HOPE for homeowners program,
authorized by the Housing and Economic Recovery Act of 2008.
In summary, Mr. Chairman, the dramatic increases in
defaults and foreclosures across the Nation underscore the
importance of efforts to protect home values and preserve
homeownership. Today, there are many efforts being planned, or
are underway. Going forward, it will be important to ensure
that the tools and resources of Government are effectively used
to address this daunting challenge.
We are committed to providing the Congress with effective
oversight of the Treasury's TARP program, including its efforts
to preserve homeownership. We look forward to supporting this
subcommittee's oversight efforts.
That concludes my opening remarks, thank you again for the
opportunity to speak today, I'd be glad to take any questions
you may have.
Senator Durbin. Thanks, Mr. Scire.
[The statement follows:]
Prepared Statement of Mathew J. Scire
Troubled Asset Relief Program
status of efforts to address defaults and foreclosures on home
mortgages
Why GAO Did This Study
A dramatic increase in mortgage loan defaults and foreclosures is
one of the key contributing factors to the current downturn in the U.S.
financial markets and economy. In response, Congress passed and the
President signed in July the Housing and Economic Recovery Act of 2008
and in October the Emergency Economic Stabilization Act of 2008 (EESA),
which established the Office of Financial Stability (OFS) within the
Department of the Treasury and authorized the Troubled Asset Relief
Program (TARP). Both acts establish new authorities to preserve
homeownership. In addition, the administration, independent financial
regulators, and others have undertaken a number of recent efforts to
preserve homeownership. GAO was asked to update its 2007 report on
default and foreclosure trends for home mortgages, and describe the
OFS's efforts to preserve homeownership.
GAO analyzed quarterly default and foreclosure data from the
Mortgage Bankers Association for the period 1979 through the second
quarter of 2008 (the most recent quarter for which data were
available). GAO also relied on work performed as part of its mandated
review of Treasury's implementation of TARP, which included obtaining
and reviewing information from Treasury, Federal agencies, and other
organizations (including selected banks) on home ownership preservation
efforts. To access GAO's first oversight report on Treasury's
implementation of TARP, click on GAO-09-161.
What GAO Found
Default and foreclosure rates for home mortgages rose sharply from
the second quarter of 2005 through the second quarter of 2008, reaching
a point at which more than 4 in every 100 mortgages were in the
foreclosure process or were 90 or more days past due. These levels are
the highest reported in the 29 years since the Mortgage Bankers
Association began keeping complete records and are based on its latest
available data. The subprime market, which consists of loans to
borrowers who generally have blemished credit and that feature higher
interest rates and fees, experienced substantially steeper increases in
default and foreclosure rates than the prime or Government-insured
markets, accounting for over half of the overall increase. In the prime
and subprime market segments, adjustable-rate mortgages experienced
steeper growth in default and foreclosure rates than fixed-rate
mortgages. Every State in the Nation experienced growth in the rate at
which loans entered the foreclosure process from the second quarter of
2005 through the second quarter of 2008. The rate rose at least 10
percent in every State over the 3-year period, but 23 States
experienced an increase of 100 percent or more. Several States in the
``Sun Belt'' region, including Arizona, California, Florida, and
Nevada, had among the highest percentage increases.
OFS initially intended to purchase troubled mortgages and mortgage-
related assets and use its ownership position to influence loan
servicers and to achieve more aggressive mortgage modification
standards. However, within 2 weeks of EESA's passage, Treasury
determined it needed to move more quickly to stabilize financial
markets and announced it would use $250 billion of TARP funds to inject
capital directly into qualified financial institutions by purchasing
equity. In recitals to the standard agreement with Treasury,
institutions receiving capital injections state that they will work
diligently under existing programs to modify the terms of residential
mortgages. It remains unclear, however, how OFS and the banking
regulators will monitor how these institutions are using the capital
injections to advance the purposes of the act, including preserving
homeownership. As part of its first TARP oversight report, GAO
recommended that Treasury, among other things, work with the bank
regulators to establish a systematic means for reviewing and reporting
on whether financial institutions' activities are consistent with
program goals. Treasury also established an Office of Homeownership
Preservation within OFS that is reviewing various options for helping
homeowners, such as insuring troubled mortgage-related assets or
adopting programs based on the loan modification efforts of FDIC and
others, but it is still working on its strategy for preserving
homeownership. While Treasury and others will face a number of
challenges in undertaking loan modifications, including making
transparent to investors the analysis supporting the value of
modification versus foreclosure, rising defaults and foreclosures on
home mortgages underscore the importance of ongoing and future efforts
to preserve homeownership. GAO will continue to monitor Treasury's
efforts as part of its mandated TARP oversight responsibilities.
Mr. Chairman and members of the Committee: I am pleased to be here
today to provide an update on our 2007 report on default and
foreclosure trends for home mortgages and to discuss the Department of
the Treasury's efforts to preserve homeownership as part of its
implementation of the Troubled Asset Relief Program (TARP).\1\ My
statement is grounded in recent work we did to update our 2007 report
and in our ongoing review of Treasury's implementation of TARP as
authorized by the Emergency Economic Stabilization Act of 2008, TARP's
enabling legislation.\2\
---------------------------------------------------------------------------
\1\ GAO, Information on Recent Default and Foreclosure Trends for
Home Mortgages and Associated Economic and Market Developments, GAO-08-
78R (Washington, DC: October 16, 2007).
\2\ Public Law 110-343, 122 Stat. 3765 (October 3, 2008).
---------------------------------------------------------------------------
Today the U.S. financial markets are undergoing stresses not seen
in our lifetime. These stresses were brought on by a fall in the price
of financial assets associated with housing, in particular mortgage
assets based on subprime loans that lost value as the housing boom
ended and the market underwent a dramatic correction.\3\ Defaults and
foreclosures have affected not only those losing their homes but also
the neighborhoods where houses now stand empty. They have imposed
significant costs on borrowers, lenders, and mortgage investors and
have contributed to increased volatility in the U.S. and global
financial markets.
---------------------------------------------------------------------------
\3\ Subprime loans are loans generally made to borrowers with
blemished credit that feature higher interest rates and fees than prime
loans.
---------------------------------------------------------------------------
The Emergency Economic Stabilization Act, which Congress passed and
the president signed on October 3, 2008, in response to the turmoil in
the financial and housing markets, established the Office of Financial
Stability (OFS) within the Department of the Treasury and authorized
the Troubled Asset Relief Program (TARP), which gave OFS authority to
purchase and insure troubled mortgage-related assets held by financial
institutions. One of the stated purposes of the act is to ensure that
the authorities and facilities provided by the act are used in a manner
that, among other things, preserves homeownership. Additionally, to the
extent that troubled mortgage-related assets were acquired under TARP,
Treasury was required to implement a plan that sought to ``maximize
assistance to homeowners'' and use the Secretary's authority to
encourage the use of the HOPE for Homeowners Program or other available
programs to minimize foreclosures. The HOPE for Homeowners program was
created by Congress under the Housing and Economic Recovery Act of 2008
(HERA). The program, which was put in place in October 2008, is
administered by the Federal Housing Administration within the
Department of Housing and Urban Development. It is designed to help
those at risk of default and foreclosure refinance into more
affordable, sustainable loans. HERA also made a number of other
significant changes to the housing finance system, including creating a
single regulator for the Government-sponsored enterprises (GSEs)--
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and giving
Treasury authority to purchase obligations and securities of the GSEs.
To update information contained in our 2007 report on default and
foreclosure trends, we analyzed data from the Mortgage Bankers
Association's quarterly National Delinquency Survey (NDS), which covers
about 80 percent of the mortgage market. The survey provides
information dating back to 1979 on first-lien purchase and refinance
mortgages on one- to four-family residential properties.\4\
---------------------------------------------------------------------------
\4\ The National Delinquency Survey presents default and
foreclosure rates (i.e., the number of loans in default or foreclosure
divided by the number of loans being serviced).
---------------------------------------------------------------------------
For the period 1979 through the second quarter of 2008 (the most
recent quarter for which data were available for the dataset we were
using), we examined national and State-level trends in the numbers and
percentage of loans that were in default, starting the foreclosure
process, and in the foreclosure inventory each quarter. For the second
quarter of 2005 through the second quarter of 2008, we disaggregated
the data by market segment and loan type, calculated absolute and
percentage increases in default and foreclosure measures, compared and
contrasted trends for each State, and compared default and foreclosure
start rates at the end of this period to historical highs. In our
previous report, we assessed the reliability of the NDS data by
reviewing existing information about the quality of the data,
performing electronic testing to detect errors in completeness and
reasonableness, and interviewing MBA officials knowledgeable about the
data. We determined that the data were sufficiently reliable for
purposes of the report. To describe Treasury's efforts to develop a
homeownership preservation program as part of its TARP implementation
efforts, we relied on the work that we performed as part of our
mandated review of Treasury's implementation of TARP.\5\ Specifically,
we obtained and reviewed available information, including public
statements by Treasury officials, terms for participation in the
Capital Purchase Program (CPP), data on loan modification program
efforts of other agencies and organizations, and OFS organization
charts. Additionally, we interviewed Treasury officials to obtain
information on actions taken to date and to discuss their planned
actions and priorities regarding homeownership preservation. We also
held discussions with the first eight financial institutions that
received TARP funds under its Capital Purchase Program.
---------------------------------------------------------------------------
\5\ GAO, Troubled Asset Relief Program: Additional Actions Needed
to Better Ensure Integrity, Accountability, and Transparency, GAO-09-
161 (Washington, DC: December 2, 2008).
---------------------------------------------------------------------------
The work on which this testimony is based was performed in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
finding and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
summary
Default and foreclosure rates for home mortgages rose sharply from
the second quarter of 2005 through the second quarter of 2008, reaching
a point at which more than 4 in every 100 mortgages were in the
foreclosure process or were 90 or more days past due.\6\ These levels
are the highest that have been reported in the 29 years since the
Mortgage Bankers Association began keeping complete records. The
subprime market experienced substantially steeper increases in default
and foreclosure rates than the prime or Government-insured markets,
accounting for over half of the overall increase in the number of loans
in default or foreclosure during this time frame. In both the prime and
subprime market segments, adjustable-rate mortgages experienced
relatively steeper growth in default and foreclosure rates compared
with fixed-rate mortgages, which had more modest increases. Every State
in the Nation experienced growth in the rate at which foreclosures
started from the second quarter of 2005 through the second quarter of
2008. By the end of that period, foreclosure start rates were at their
29-year maximums in 17 States. The foreclosure start rate rose at least
10 percent in every State over the 3-year period, but 23 States
experienced an increase of 100 percent or more. Several States in the
``Sun Belt'' region, such as Arizona, California, Florida, and Nevada,
had among the highest percentage increases in foreclosure start rates.
---------------------------------------------------------------------------
\6\ Although definitions vary, a mortgage loan is commonly
considered in default when the borrower has missed three or more
consecutive monthly payments (i.e., is 90 or more days delinquent).
---------------------------------------------------------------------------
In light of its initial decision not to conduct large-scale
purchases of troubled mortgage-related assets held by financial
institutions, Treasury's OFS has been considering different approaches
to preserving homeownership. OFS had initially intended to purchase
troubled mortgage-related assets and use its ownership position to
influence loan servicers and achieve more aggressive mortgage
modification standards, which would help meet the purposes of the act.
Instead, OFS chose to use $250 billion of TARP funds to inject capital
directly into qualified financial institutions through the purchase of
equity. According to OFS, this shift in strategy was intended to have
an immediate impact on the health of the U.S. financial and housing
markets by ensuring that lenders had sufficient funding and encouraging
them to provide credit to businesses and consumers, including credit
for housing. Treasury also has indicated that it intends to use its
Capital Purchase Program (CPP) to encourage financial institutions to
work to modify the terms of existing residential mortgages. However,
Treasury has not yet determined if it will impose reporting
requirements on the participating financial institutions, which would
enable Treasury to monitor, to some extent, whether the capital
infusions are achieving the intended goals. As a result, we recommended
in our first TARP oversight report that Treasury work with the bank
regulators to establish a systematic means for reviewing and reporting
on whether financial institutions' activities are consistent with the
purposes of CPP.\7\ Treasury is taking additional steps toward the
act's goal of preserving homeownership. It has established an Office of
Homeownership Protection within OFS that is considering various
options, such as insuring troubled mortgage-related assets or adopting
programs based on the loan modification efforts of FDIC and others.
These include recent efforts announced by the GSEs and their regulator
to streamline loan modifications. While loan modification presents a
number of challenges, rising defaults and foreclosures on home
mortgages underscore the importance of ongoing and future efforts to
preserve homeownership. We will continue to monitor Treasury's efforts
to preserve home ownership as part of our TARP oversight
responsibilities.
---------------------------------------------------------------------------
\7\ GAO-09-161.
---------------------------------------------------------------------------
background
As of June 2008, there were approximately 58 million first-lien
home mortgages outstanding in the United States. According to a Federal
Reserve estimate, outstanding home mortgages represented over $10
trillion in mortgage debt. The primary mortgage market has several
segments and offers a range of loan products:
--The prime market segment serves borrowers with strong credit
histories and provides the most competitive interest rates and
mortgage terms.
--The subprime market segment generally serves borrowers with
blemished credit and features higher interest rates and fees
than the prime market.
--The Alternative-A (Alt-A) market segment generally serves borrowers
whose credit histories are close to prime, but the loans often
have one or more higher-risk features, such as limited
documentation of income or assets.
--The Government-insured or -guaranteed market segment primarily
serves borrowers who may have difficulty qualifying for prime
mortgages but features interest rates competitive with prime
loans in return for payment of insurance premiums or guarantee
fees.
Across all of these market segments, two types of loans are common:
fixed-rate mortgages (FRM), which have interest rates that do not
change over the life of the loans, and adjustable-rate mortgages (ARM),
which have interest rates that change periodically based on changes in
a specified index.
Delinquency, default, and foreclosure rates are common measures of
loan performance. Delinquency is the failure of a borrower to meet one
or more scheduled monthly payments. Default generally occurs when a
borrower is 90 or more days delinquent. At this point, foreclosure
proceedings against the borrower become a strong possibility.
Foreclosure is a legal (and often lengthy) process with several
possible outcomes, including that the borrower sells the property or
the lender repossesses the home. Two measures of foreclosure are
foreclosure starts (loans that enter the foreclosure process during a
particular time period) and foreclosure inventory (loans that are in,
but have not exited, the foreclosure process during a particular time
period).
One of the main sources of information on the status of mortgage
loans is the Mortgage Bankers Association's quarterly National
Delinquency Survey. NDS provides national and State-level information
on mortgage delinquencies, defaults, and foreclosures back to 1979 for
first-lien purchase and refinance mortgages on one-to-four family
residential units.\8\ The data are disaggregated by market segment and
loan type--fixed-rate versus adjustable-rate--but do not contain
information on other loan or borrower characteristics.
---------------------------------------------------------------------------
\8\ NDS data do not separately identify Alt-A loans but include
them among loans in the prime and subprime categories. State-level
breakouts are based on the address of the property associated with each
loan. The NDS presents default and foreclosure rates (i.e., the number
of loans in default or foreclosure divided by the number of loans being
serviced).
---------------------------------------------------------------------------
In response to problems in the housing and financial markets, the
Housing and Economic Recovery Act of 2008 was enacted to strengthen and
modernize the regulation of the Government-sponsored enterprises
(GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and
expand their mission of promoting homeownership.\9\ The act established
a new, independent regulator for the GSEs called the Federal Housing
Finance Agency, which has broad new authority, generally equivalent to
the authority of other Federal financial regulators, to ensure the safe
and sound operations of the GSEs. The new legislation also enhances the
affordable housing component of the GSEs' mission and expands the
number of families Fannie Mae and Freddie Mac can serve by raising the
loan limits in high-cost areas, where median house prices are higher
than the regular conforming loan limit, to 150 percent of that limit.
The act requires new affordable housing goals for Federal Home Loan
Bank mortgage purchase programs, similar to those already in place for
Fannie Mae and Freddie Mac.
---------------------------------------------------------------------------
\9\ Public Law 110-289, 122 Stat. 2654 (July 30, 2008).
---------------------------------------------------------------------------
The act also established the HOPE for Homeowners program, which the
Federal Housing Administration (FHA) will administer within the
Department of Housing and Urban Development (HUD), to provide federally
insured mortgages to distressed borrowers. The new mortgages are
intended to refinance distressed loans at a significant discount for
owner-occupants at risk of losing their homes to foreclosure. In
exchange, homeowners share any equity created by the discounted
restructured loan as well as future appreciation with FHA, which is
authorized to insure up to $300 billion in new loans under this
program. Additionally, the borrower cannot take out a second mortgage
for the first 5 years of the loan, except under certain circumstances
for emergency repairs. The program became effective October 1, 2008,
and will conclude on September 30, 2011. To participate in the HOPE for
Homeowners program, borrowers must also meet specific eligibility
criteria as follows:
--Their mortgage must have originated on or before January 1, 2008.
--They must have made a minimum of six full payments on their
existing first mortgage and must not have intentionally missed
mortgage payments.
--They must not own a second home.
--Their mortgage debt-to-income ratio for their existing mortgage
must be greater than 31 percent.
--They must not knowingly or willfully have provided false
information to obtain the existing mortgage and must not have
been convicted of fraud in the last 10 years.
The Emergency Economic Stabilization Act, passed by Congress and
signed by the President on October 3, 2008, created TARP, which
outlines a troubled asset purchase and insurance program, among other
things.\10\ The total size of the program cannot exceed $700 billion at
any given time. Authority to purchase or insure $250 billion was
effective on the date of enactment, with an additional $100 billion in
authority available upon submission of a certification by the
President. A final $350 billion is available under the act but is
subject to congressional review. The legislation required that
financial institutions that sell troubled assets to Treasury also
provide a warrant giving Treasury the right to receive shares of stock
(common or preferred) in the institution or a senior debt instrument
from the institution. The terms and conditions of the warrant or debt
instrument must be designed to (1) provide Treasury with reasonable
participation in equity appreciation or with a reasonable interest rate
premium, and (2) provide additional protection for the taxpayer against
losses from the sale of assets by Treasury and the administrative
expenses of TARP. To the extent that Treasury acquires troubled
mortgage-related assets, the act also directs Treasury to encourage
servicers of the underlying loans to take advantage of the HOPE for
Homeowners Program. Treasury is also required to consent, where
appropriate, to reasonable requests for loan modifications from
homeowners whose loans are acquired by the Government. The act also
requires the Federal Housing Finance Agency, the Federal Deposit
Insurance Corporation (FDIC), and the Federal Reserve Board to
implement a plan to maximize assistance to homeowners, that may include
reducing interest rates and principal on residential mortgages or
mortgage-backed securities owned or managed by these institutions.
---------------------------------------------------------------------------
\10\ Public Law 110-343.
---------------------------------------------------------------------------
The regulators have also taken steps to support the mortgage
finance system. On November 25, 2008, the Federal Reserve announced
that it would purchase up to $100 billion in direct obligations of the
GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), and up
to $500 billion in mortgage-backed securities backed by Fannie Mae,
Freddie Mac, and Ginnie Mae. It undertook the action to reduce the cost
and increase the availability of credit for home purchases, thereby
supporting housing markets and improving conditions in financial
markets more generally. Also, on November 12, 2008, the four financial
institution regulators issued a joint statement underscoring their
expectation that all banking organizations fulfill their fundamental
role in the economy as intermediaries of credit to businesses,
consumers, and other creditworthy borrowers, and that banking
organizations work with existing mortgage borrowers to avoid
preventable foreclosures. The regulators further stated that banking
organizations need to ensure that their mortgage servicing operations
are sufficiently funded and staffed to work with borrowers while
implementing effective risk-mitigation measures. Finally, on November
11, 2008, the Federal Housing Finance Agency announced a streamlined
loan modification program for home mortgages controlled by the GSEs.
Most mortgages are bundled into securities called residential
mortgage-backed securities that are bought and sold by investors. These
securities may be issued by GSEs and private companies. Privately
issued mortgage-backed securities, known as private label securities,
are typically backed by mortgage loans that do not conform to GSE
purchase requirements because they are too large or do not meet GSE
underwriting criteria. Investment banks bundle most subprime and Alt-A
loans into private label residential mortgage-backed securities. The
originator/lender of a pool of securitized assets usually continues to
service the securitized portfolio. Servicing includes customer service
and payment processing for the borrowers in the securitized pool and
collection actions in accordance with the pooling and servicing
agreement. The decision to modify loans held in a mortgage-backed
security typically resides with the servicer. According to some
industry experts, the servicer may be limited by the pooling and
servicing agreement with respect to performing any large-scale
modification of the mortgages that the security is based upon. However,
others have stated that the vast majority of servicing agreements do
not preclude or routinely require investor approval for loan
modifications. We have not assessed how many potentially troubled loans
face restrictions on modification.
default and foreclosure rates have reached historical highs and are
expected to increase further
National default and foreclosure rates rose sharply during the 3-
year period from the second quarter of 2005 through the second quarter
of 2008 to the highest level in 29 years (fig. 1).\11\ More
specifically, default rates more than doubled over the 3-year period,
growing from 0.8 percent to 1.8 percent. Similarly, foreclosure start
rates--representing the percentage of loans that entered the
foreclosure process each quarter--grew almost three-fold, from 0.4
percent to 1 percent. Put another way, nearly half a million mortgages
entered the foreclosure process in the second quarter of 2008, compared
with about 150,000 in the second quarter of 2005.\12\ Finally,
foreclosure inventory rates rose 175 percent over the 3-year period,
increasing from 1.0 percent to 2.8 percent, with most of that growth
occurring since the second quarter of 2007. As a result, almost 1.25
million loans were in the foreclosure inventory as of the second
quarter of 2008.
---------------------------------------------------------------------------
\11\ In the second quarter of 2005, foreclosure rates began to rise
after remaining relatively stable for about 2 years.
\12\ We calculated the number of foreclosure starts and the
foreclosure inventory by multiplying foreclosure rates by the number of
loans that the National Delinquency Survey showed as being serviced and
rounding to the nearest thousand. Because the survey does not cover all
loans being serviced, the actual number of foreclosures is probably
higher than the amounts we calculated.
Default and foreclosure rates varied by market segment and product
type, with subprime and adjustable-rate loans experiencing the largest
increases during the 3-year period we examined. More specifically:
--In the prime market segment, which accounted for more than three-
quarters of the mortgages being serviced, 2.4 percent of loans
were in default or foreclosure by the second quarter of 2008,
up from 0.7 percent 3 years earlier. Foreclosure start rates
for prime loans began the period at relatively low levels (0.2
percent) but rose sharply on a percentage basis, reaching 0.6
percent in the second quarter of 2008.
--In the subprime market segment, about 18 percent of loans were in
default or foreclosure by the second quarter of 2008, compared
with 5.8 percent 3 years earlier. Subprime mortgages accounted
for less than 15 percent of the loans being serviced, but over
half of the overall increase in the number of mortgages in
default and foreclosure over the period. Additionally,
foreclosure start rates for subprime loans more than tripled,
rising from 1.3 percent to 4.3 percent (see fig. 2).
--In the Government-insured or -guaranteed market segment, which
represented about 10 percent of the mortgages being serviced,
4.8 percent of the loans were in default or foreclosure in the
second quarter of 2008, up from 4.5 percent 3 years earlier.
Additionally, foreclosure start rates in this segment increased
modestly, from 0.7 to 0.9 percent.
--ARMs accounted for a disproportionate share of the increase in the
number of loans in default and foreclosure in the prime and
subprime market segments over the 3-year period. In both the
prime and subprime market segments, ARMs experienced relatively
steeper increases in default and foreclosure rates, compared
with more modest growth for FRMs. In particular, foreclosure
start rates for subprime ARMs more than quadrupled over the 3-
year period, increasing from 1.5 percent to 6.6 percent.
Default and foreclosure rates also varied significantly among
States. For example, as of the second quarter of 2008, the percentage
of mortgages in default or foreclosure ranged from 1.1 percent in
Wyoming to 8.4 percent in Florida. Other States that had particularly
high combined rates of default and foreclosure included California (6.0
percent), Michigan (6.2 percent), Nevada (7.6 percent), and Ohio (6.0
percent). Every State in the Nation experienced growth in their
foreclosure start rates from the second quarter of 2005 through the
second quarter of 2008. By the end of that period, foreclosure start
rates were at their 29-year maximums in 17 States. As shown in figure
3, percentage increases in foreclosure start rates differed
dramatically by State. The foreclosure start rate rose at least 10
percent in every State over the 3-year period, but 23 States
experienced an increase of 100 percent or more. Several States in the
``Sun Belt'' region, such as Arizona, California, Florida, and Nevada,
had among the highest percentage increases in foreclosure start rates.
In contrast, 7 States experienced increases of 30 percent or less,
including North Carolina, Oklahoma, and Utah.
Some mortgage market analysts predict that default and foreclosure
rates will continue to rise for the remainder of this year and into
next year. The factors likely to drive these trends include expected
declines in home prices and increases in the unemployment rate. The
Alt-A market, in particular, may contribute to future increases in
defaults and foreclosures in the foreseeable future. According to a
report published by the Office of the Comptroller of the Currency and
the Office of Thrift Supervision, Alt-A mortgages represented 200
percent of the total number of mortgages at the end of June 2008, but
constituted over 20 percent of total foreclosures in process.\13\ The
seriously delinquent rate for Alt-A mortgages was more than four times
the rate for prime mortgages and nearly twice the rate for all
outstanding mortgages in the portfolio. Also, Alt-A loans that were
originated in 2005 and 2006 showed the highest rates of serious
delinquency compared with Alt-A loans originated prior to 2005 or since
2007, according to an August 2008 Freddie Mac financial report.\14\
This trend may be attributed, in part, to Alt-A loans with adjustable-
rate mortgages whose interest rates have started to reset, which may
translate into higher monthly payments for the borrower.
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\13\ U.S. Department of the Treasury, Comptroller of the Currency
and Office of Thrift Supervision, OCC and OTS Mortgage Metrics Report,
Disclosure of National Bank and Federal Thrift Mortgage Loan Data,
January-June 2008.
\14\ Freddie Mac, Freddie Mac's Second Quarter 2008 Financial
Results, August 6, 2008.
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treasury is examining options for homeownership preservation in light
of recent changes in the use of tarp funds
Treasury is currently examining strategies for homeownership
preservation, including maximizing loan modifications, in light of a
refocus in its use of TARP funds. Treasury's initial focus in
implementing TARP was to stabilize the financial markets and stimulate
lending to businesses and consumers by purchasing troubled mortgage-
related assets--securities and whole loans--from financial
institutions. Treasury planned to use its leverage as a major purchaser
of troubled mortgages to work with servicers and achieve more
aggressive mortgage modification standards. However, Treasury
subsequently concluded that purchasing troubled assets would take time
to implement and would not be sufficient given the severity of the
problem. Instead, Treasury determined that the most timely, effective
way to improve credit market conditions was to strengthen bank balance
sheets quickly through direct purchases of equity in banks.
The standard agreement between Treasury and the participating
institutions in the Capital Purchase Program includes a number of
provisions, some in the ``recitals'' section at the beginning of the
agreement and other detailed terms in the body of the agreement. The
recitals refer to the participating institutions' future actions in
general terms--for example, ``the Company agrees to work diligently,
under existing programs to modify the terms of residential mortgages as
appropriate to strengthen the health of the U.S. housing market.''
Treasury and the regulators have publicly stated that they expect these
institutions to use the funds in a manner consistent with the goals of
the program, which include both the expansion of the flow of credit and
the modification of the terms of residential mortgages. But, to date it
remains unclear how OFS and the regulators will monitor how
participating institutions are using the capital injections to advance
the purposes of the act. The standard agreement between Treasury and
the participating institutions does not require that these institutions
track or report how they use or plan to use their capital investments.
In our first 60-day report to Congress on the TARP program, mandated by
the Emergency Economic Stabilization Act, we recommended that Treasury,
among other things, work with the bank regulators to establish a
systematic means for reviewing and reporting on whether financial
institutions' activities are consistent with the purposes of CPP.\15\
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\15\ GAO-09-161.
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Without purchasing troubled mortgage assets as an avenue for
preserving homeownership, Treasury is considering other ways to meet
this objective. Treasury has established and appointed an interim chief
for the Office of the Chief of Homeownership Preservation under OFS.
According to Treasury officials, the office is currently staffed with
Federal Government detailees and is in the process of hiring
individuals with expertise in housing policy, community development,
and economic research. Treasury has stated that it is working with
other Federal agencies, including FDIC, HUD, and the Federal Housing
Finance Agency to explore options to help homeowners under TARP.
According to the Office of Homeownership Preservation interim chief,
Treasury is considering a number of factors in its review of possible
loan modification options, including the cost of the program, the
extent to which the program minimizes recidivism among borrowers helped
out of default, and the number of homeowners the program has helped or
is projected to help remain in their homes. However, to date the
Treasury has not completed its strategy for preserving homeownership.
Among the strategies for loan modification that Treasury is
considering is a proposal by FDIC that is based on its experiences with
loans held by a bank that was recently put in FDIC conservatorship. The
former IndyMac Bank, F.S.B., was closed July 11, 2008, and FDIC was
appointed the conservator for the new institution, IndyMac Federal
Bank, F.S.B. As a result, FDIC inherited responsibility for servicing a
pool of approximately 653,000 first-lien mortgage loans, including more
than 60,000 mortgage loans that were more than 60 days past due, in
bankruptcy, in foreclosure, and otherwise not currently paying. On
August 20, 2008, the FDIC announced a program to systematically modify
troubled residential loans for borrowers with mortgages owned or
serviced by IndyMac Federal. According to FDIC, the program modifies
eligible delinquent mortgages to achieve affordable and sustainable
payments using interest rate reductions, extended amortization, and
where necessary, deferring a portion of the principal. FDIC has stated
that by modifying the loans to an affordable debt-to-income ratio (38
percent at the time) and using a menu of options to lower borrowers'
payments for the life of their loan, the program improves the value of
the troubled mortgages while achieving economies of scale for servicers
and stability for borrowers. According to FDIC, as of November 21,
2008, IndyMac Federal has mailed more than 23,000 loan modification
proposals to borrowers and over 5,000 borrowers have accepted the
offers and are making payments on modified mortgages. FDIC states that
monthly payments on these modified mortgages are, on average, 23
percent or approximately $380 lower than the borrower's previous
monthly payment of principal and interest. According to FDIC, a Federal
loss sharing guarantee on re-defaults of modified mortgages under TARP
could prevent as many as 1.5 million avoidable foreclosures by the end
of 2009. FDIC estimated that such a program, including a lower debt-to-
income ratio of 31 percent and a sharing of losses in the event of a
re-default, would cost about $24.4 billion on an estimated $444 billion
of modified loans, based on an assumed re-default rate of 33 percent.
We have not had an opportunity to independently analyze these estimates
and assumptions.
Other similar programs under review, according to Treasury, include
strategies to guarantee loan modifications by private lenders, such as
the HOPE for Homeowners program. Under this new FHA program, lenders
can have loans in their portfolio refinanced into FHA-insured loans
with fixed interest rates. HERA had limited the new insured mortgages
to no more than 90 percent of the property's current appraised value.
However, on November 19, 2008, after action by the congressionally
created Board of Directors of the HOPE for Homeowners program, HUD
announced that the program had been revised to, among other things,
increase the maximum amount of the new insured mortgages in certain
circumstances.\16\ Specifically, the new insured mortgages cannot
exceed 96.5 percent of the current appraised value for borrowers whose
mortgage payments represent no more than 31 percent of their monthly
gross income and monthly household debt payments no more than 43
percent of monthly gross income. Alternatively, the new mortgage may be
set at 90 percent of the current appraised value for borrowers with
monthly mortgage and household debt-to-income ratios as high as 38 and
50 percent, respectively. These loan-to-value ratio maximums mean that
in many circumstances the amount of the restructured loan would be less
than the original loan amount and, therefore, would require lenders to
write down the existing mortgage amounts. According to FHA, lenders
benefit by turning failing mortgages into performing loans. Borrowers
must also share a portion of the equity resulting from the new mortgage
and the value of future appreciation. This program first became
available October 1, 2008. FHA has listed on the program's Web site
over 200 lenders that, as of November 25, 2008, have indicated to FHA
an interest in refinancing loans under the HOPE for Homeowners program.
See the appendix to this statement for examples of Federal Government
and private sector residential mortgage loan modification programs.
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\16\ See http://www.hud.gov/news/release.cfm?content=pr08-178.cfm.
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Treasury is also considering policy actions that might be taken
under CPP to encourage participating institutions to modify mortgages
at risk of default, according to an OFS official. While not technically
part of CPP, Treasury announced on November 23, 2008, that it will
invest an additional $20 billion in Citigroup from TARP in exchange for
preferred stock with an 8 percent dividend to the Treasury. In
addition, Treasury and FDIC will provide protection against unusually
large losses on a pool of loans and securities on the books of
Citigroup. The Federal Reserve will backstop residual risk in the asset
pool through a non-recourse loan. The agreement requires Citigroup to
absorb the first $29 billion in losses. Subsequent losses are shared
between the Government (90 percent) and Citigroup (10 percent). As part
of the agreement, Citigroup will be required to use FDIC loan
modification procedures to manage guaranteed assets unless otherwise
agreed.
Although any program for modifying loans faces a number of
challenges, particularly when the loans or the cash flows related to
them have been bundled into securities that are sold to investors,
foreclosures not only affect those losing their homes but also their
neighborhoods and have contributed to increased volatility in the
financial markets. Some of the challenges that loan modification
programs face include making transparent to investors the analysis
supporting the value of modification over foreclosure, designing the
program to limit the likelihood of re-default, and ensuring that the
program does not encourage borrowers who otherwise would not default to
fall behind on their mortgage payments. Additionally, there are a
number of potential obstacles that may need to addressed in performing
large-scale modification of loans supporting a mortgage-backed
security. As noted previously, the pooling and servicing agreements may
preclude the servicer from making any modifications of the underlying
mortgages without approval by the investors. In addition, many
homeowners may have second liens on their homes that may be controlled
by a different loan servicer, potentially complicating loan
modification efforts.
Treasury also points to challenges in financing any new proposal.
The Secretary of the Treasury, for example, noted that it was important
to distinguish between the type of assistance, which could involve
direct spending, from the type of investments that are intended to
promote financial stability, protect the taxpayer, and be recovered
under the TARP legislation. However, he recently reaffirmed that
maximizing loan modifications was a key part of working through the
housing correction and maintaining the quality of communities across
the Nation. However, Treasury has not specified how it intends to meet
its commitment to loan modification. We will continue to monitor
Treasury's efforts as part of our ongoing TARP oversight
responsibilities.
Going forward, the Federal Government faces significant challenges
in effectively deploying its resources and using its tools to bring
greater stability to financial markets and preserving homeownership and
protecting home values for millions of Americans.
Mr. Chairman, this concludes my statement. I would be pleased to
respond to any questions that you or other members of the subcommittee
may have at this time.
APPENDIX I.--EXAMPLES OF FEDERAL GOVERNMENT AND PRIVATE SECTOR RESIDENTIAL MORTGAGE LOAN MODIFICATION PROGRAMS
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Institution Program or effort Selected program characteristics
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Federal Government Sponsored
Programs
Federal Deposit Insurance IndyMac Loan Modification Program........... Eligible borrowers are those with loans owned or serviced by IndyMac Federal Bank.
Corporation (FDIC). Affordable mortgage payment achieved for the seriously delinquent or in default borrower through interest
rate reduction, amortization term extension, and/or principal forbearance.
Payment must be no more than 38 percent of the borrower's monthly gross income.
Losses to investor minimized through a net present value test that confirms that the modification will cost
the investor less than foreclosure.
Federal Housing Administration (FHA) Hope for Homeowners......................... Borrowers can refinance into an affordable loan insured by FHA.
Eligible borrowers are those who, among other factors, as of March 2008, had total monthly mortgage payments
due of more than 31 percent of their gross monthly income.
New insured mortgages cannot exceed 96.5 percent of the current loan-to-value ratio (LTV) for borrowers
whose mortgage payments do not exceed 31 percent of their monthly gross income and total household debt not
to exceed 43 percent; alternatively, the program allows for a 90 percent LTV for borrowers with debt-to-
income ratios as high as 38 (mortgage payment) and 50 percent (total household debt).
Require lenders to write down the existing mortgage amounts to either of the two LTV options mentioned
above.
Federal Housing Finance Agency Streamlined Loan Modification Program \1\... Eligible borrowers are those who, among other factors, have missed three payments or more.
(FHFA). Servicers can modify existing loans into a Freddie Mae or Fannie Mac loan, or a portfolio loan with a
participating investor.
An affordable mortgage payment, of no more than 38 percent of the borrower's monthly gross income, is
achieved for the borrower through a mix of reducing the mortgage interest rate, extending the life of the
loan or deferring payment on part of the principal.
Private Sector Programs
Bank of America..................... National Homeownership Retention Pro- gram. Eligible borrowers are those with subprime or pay option adjustable rate mortgages serviced by Countrywide
and originated by Countrywide prior to December 31, 2007.
Options for modification include refinance under the FHA HOPE for Homeowners program, interest rate
reductions, and principal reduction for pay option adjustable rate mortgages.
First-year payments mortgage payments will be targeted at 34 percent of the borrower's income, but may go as
high as 42 percent.
Annual principal and interest payments will increase at limited step-rate adjustments.
JPMorgan Chase & Co................. General loan modification options........... Affordable mortgage payment achieved for the borrower at risk of default through interest rate reduction and/
or principal forbearance.
Modification may also include modifying pay-option ARMs to 30-year, fixed-rate loans or interest-only
payments for 10 years.
Modification includes flexible eligibility criteria on origination dates, loan-to-value ratios, rate floors
and step-up adjustment features.
Blanket loan modification program........... Eligble borrowers are those with short-term hybrid adjustable rate mortgage owned by Chase.
Chase locks in the initial interest rate for the life of the loan on all short term adjustable rate
mortgages with interest rates that will reset in the coming quarter.
American Securitization Forum Fast Track.... Eligble borrowers are those with non-prime short-term hybrid adjustable rate mortgages serviced by Chase.
Under the program developed by the American Securitization Forum Chase freezes the current interest rate for
5 years.
Citi................................ Homeowner Assistance Program................ Eligible borrowers are those not currently behind on Citi-held mortgages but that may require help to remain
current.
Citi will offer loan workout measures on mortgages in geographic areas of projected economic distress
including falling home prices and rising unemployment rates to avoid foreclosures.
Loan Modification Program................... Affordable mortgage payment achieved for the delinquent borrower through interest rate reduction,
amortization term extension, and/or principal balance.
According to Citi, program is similar to the FDIC IndyMac Loan Modification Program.
HOPE NOW Alliance................... Foreclosure prevention assistance pro- HOPE NOW is an alliance between Department of Housing and Urban Development (HUD) certified counseling
grams. agents, servicers, investors and other mortgage market participants that provides free foreclosure
prevention assistance.
Forms of assistance include hotline services to provide information on foreclosure prevention, which
according to HOPE NOW receives an average of more than 6,000 calls per day; and access to HUD approved
housing counselors for debt management, credit, and overall foreclosure counseling.
Coordinates a nationwide outreach campaign to at-risk borrowers and states that it has sent nearly 2 million
outreach letters.
Since March 2008, has hosted workshops in 27 cities involving homeowners, lenders, and HUD certified
counselors.
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\1\ This program was created in consultation with Fannie Mae, Freddie Mac, HOPE NOW, and its 27 servicer partners, the Department of the Treasury, FHA, FHFA.
Senator Durbin. Our next witness is Bruce Gottschall, the
Executive Director of Neighborhood Housing Services of Chicago.
He's an expert in the field of housing and community
development, served in a number of housing-related committees
and was put on Chicago's Affordable Housing Task Force, and the
Federal Home Loan Bank's Advisory Council.
He graduated from Dartmouth with a master's in social
service administration from the University of Chicago.
Welcome.
STATEMENT OF BRUCE GOTTSCHALL, EXECUTIVE DIRECTOR,
NEIGHBORHOOD HOUSING SERVICES OF CHICAGO
Mr. Gottschall. Thank you, Mr. Chairman, and thank you very
much for inviting me to speak today.
My name is Bruce Gottschall, I'm the Executive Director of
Neighborhood Housing Services (NHS). We're a not-for-profit
community development organization, and counseling and
homeownership development organization in the city of Chicago.
In our experience, the Federal Government's efforts to
address the foreclosure crisis through the Emergency Economic
Stabilization Act have been in good faith, but the effects are
not trickling down to homeowners fast enough and are not
leading to significant reductions in foreclosures.
NHS has been working on addressing foreclosures in
Chicago's neighborhoods since 2002 through the homeownership
preservation initiative (HOPI). Our organization assisted over
2,000 individuals last year, and we are on track to see more
than 3,000 this year.
NHS conducted a review of some of our clients' financial
characteristics over the last year and developed a map or
typology that helps us identify, sort, and assist clients more
quickly. Eleven percent are distressed homeowners who can avoid
foreclosure by simply working out a traditional repayment plan
with their lender. Another 29 percent could avoid foreclosure
if their lender would modify the interest rate of their
mortgage down to 6 percent or a little lower. Thus, for
approximately 40 percent of homeowners facing foreclosure, a
possible solution already exists that could keep them in their
home if the loan servicer and investor are willing and able to
offer that solution.
For the remaining 60 percent, the principal balances are
too high for the loan to be sustainable. In order to avoid
foreclosure, some form of principal deferral or reduction,
coupled with an interest rate modification, is necessary.
Of course, there are severe cases in which no argument can
be made to justify foreclosure avoidance methods and in some
cases, as with speculative investors, little effort should be
made. To reach solutions, housing counselors serve as trusted
third parties who can assist borrowers in assessing their
situation.
While individuals in foreclosure will frequently avoid
their lenders because they feel intimidated or afraid, they
will talk openly and honestly with a counselor who can then
bridge the communication gap between the borrower and the
servicer.
While some of our HOPI lending and servicing partners have
taken action to increase the capacity of their organizations to
work with housing counselors and offer loan modifications, the
results across the industry are spotty at best.
Frequently servicers loss mitigation staff lack the
authority, knowledge, training and expertise to make decisions
about loss mitigation or loan modifications. Counselors' and
borrowers' inability to access staff who can make the right
decision means successful strategies to avoid foreclosure are
not being used by servicers.
Efficiency is also a challenge. Despite advances in
technology, loss mitigation departments still rely on faxing
documents back and forth between borrowers and the servicer.
These documents are frequently lost or misplaced. All of these
inefficiencies mean that many homeowners who could avoid
foreclosure are falling through the cracks.
In response to this problem, NHS--through Neighborworks
America and NHS America, and a handful of servicers are now
using a new online service called ``Best Fit,'' which allows
NHS and participating servicers to track clients and scan and
upload documents into a universal database, to which only the
servicer and counselor have access. This will create and
streamline processes that need to be expanded to more servicers
and counselors.
Many loan modifications that have been done in the past are
unaffordable. A review of 60 loan modifications that were
facilitated by NHS of Chicago counselors showed that fully one-
third of loan modifications offered to borrowers in distress
had housing ratios of over 50 percent--one-third over 50
percent housing ratio. Another one-third had housing ratios
between 35 and 50 percent, which means they were on the verge
of being unaffordable.
Considering this, reports in the press and by analyses that
50 percent of homeowners receiving loan modifications re-
default is not a surprise, since two-thirds of the loan
modifications were essentially unworkable from the outset, it
is amazing that more don't fail, considering the poor nature of
the modifications.
For these reasons, NHS supports efforts to compel mortgage
holders to offer proactive, standardized loan modifications to
large numbers of mortgagees in a systematic manner such as the
method employed by the FDIC with the IndyMac portfolio you've
heard about.
Along this line, NHS also supports the more recent proposal
by FDIC, that would partially ensure affordable and sustainable
loan modifications, which would create appropriate incentives
for mortgage servicers and investors to take the necessary
steps to stem foreclosures. Further, regulators should require
that all servicers report on not only the number of loan
modifications they offer, but also the affordability of these
loan modifications.
Also, the issue of principal deferral or reduction is
clearly necessary in many situations of foreclosure prevention
and I encourage you to move this to being used in cases where
it makes economic sense.
Finally, NHS would like to see regulators make clear to the
recipients of the TARP funds their responsibility to use those
funds to originate mortgages in low to moderate income
communities. Frequently, we receive calls and questions from
homeowners asking what the rescue funds mean for them.
Unfortunately, it is unclear that homeowners and neighborhoods
are experiencing any real benefit from the $350 billion
invested in our financial services industry.
As the subcommittee looks for suggestions on how to adapt
the program, it would be our advice that new efforts focus on
homeowners in foreclosure and the neighborhoods in which they
live. The Greater Southwest Development Corporation and the
neighborhood it serves is just one of many, many communities
and neighborhoods that are embedded severely right now by the
foreclosures.
Again, thank you for your invitation, and for focusing on
this issue. I'd be happy to answer any questions.
Senator Durbin. Thanks.
[The statement follows:]
Prepared Statement of Bruce Gottschall
Mr. Chairman, members of the Committee, thank you very much for
inviting me to testify today. My name is Bruce Gottschall and I am the
Executive Director of Neighborhood Housing Services of Chicago (NHS of
Chicago). I appreciate the opportunity to share with you the experience
NHS has had in helping families facing foreclosure in Chicago and how
that experience can and should inform a Federal response to the
foreclosure crisis. In our experience, the Federal Government's efforts
to address the foreclosure crisis through the Emergency Economic
Stabilization Act (EESA) have been in good faith, but the effects are
not trickling down to home owners fast enough and are not leading to
significant reductions in foreclosures. Until the Federal response
focuses on homeowners, not just financial institutions, these efforts
will be ineffective.
NHS has been working on addressing foreclosures in Chicago's
neighborhoods since 2002 through the Home Ownership Preservation
Initiative (HOPI). This partnership of lenders, servicers, regulators,
non-profit counselors, and the City of Chicago led by NHS of Chicago
has proved to be an effective venue for identifying and addressing
issues related to foreclosure. Our work here in Chicago has become the
national model for communities and local governments seeking to
mitigate the impact of foreclosures on their own neighborhoods.
NHS uses its own experiences working with foreclosure clients to
inform the HOPI effort. Our organization assisted over 2,000
individuals seeking advice about avoiding foreclosure last year and
this year we are on track to see more than 3,000. There is no typical
foreclosure client, which is why there is no silver bullet to solving
the foreclosure crisis. Rather, there is a wide range of individuals
experiencing foreclosures cutting across income levels, demography and
loan type.
NHS conducted a review of our clients' financial characteristics
over the last year and developed a map or typology that helps us
identify, sort, and assist clients more quickly. It also helps us
understand the nuances and complexities of the foreclosure crisis.
Based upon our review of other foreclosure data from around the
country, we are confident that this typology is a representative cross-
section of the subprime mortgage market. This typology is attached to
my written testimony.
In essence, this information shows us 11 percent of distressed
homeowners are in a strong enough financial position that they can
avoid foreclosure by simply working out a traditional repayment plan
with their lender. Another 29 percent could avoid foreclosure if their
lender would modify the interest rate of their mortgage down to 6
percent or lower. Thus, for approximately 40 percent of homeowners
facing foreclosure, a possible solution already exists that could keep
them in their home if the loan servicer and investor are willing and
able to offer that solution.
For the remaining 60 percent, their principal balances are too high
for the loan to be sustainable regardless of interest rate. In order to
avoid foreclosure, some form of principal deferral or reduction coupled
with an interest rate modification is necessary. Depending on the
homeowner's income, the amount of principal deferral/reduction
necessary ranges from a few thousand dollars up to half of the
outstanding principal. In fairness, there are severe cases in which no
argument can be made to justify foreclosure avoidance methods and in
some cases, as with speculative investors, little effort should be
made. However, in many cases, principal reduction makes sense for both
the homeowner and investor.
For those clients who can be saved from a foreclosure, housing
counselors, such as those at NHS, are important players when it comes
to securing a loan modification, workout plan, or principal write-down.
Housing counselors serve as trusted third parties who can assist
borrowers in assessing their situation, help them create a realistic
budget, and collect the necessary documents for the servicer to make a
decision. While individuals in foreclosure will frequently avoid their
lenders because they feel intimidated or afraid, they will talk openly
and honestly with a counselor who can then bridge the communication gap
between the borrower and the servicer.
NHS has the largest staff of housing counselors working on
foreclosure in the City of Chicago. Our experience working with
servicers is a valuable example of what other counseling agencies and
borrowers are also experiencing as they attempt to work with loan
servicers. The shortfall of loss mitigation efforts we have seen
highlights the need for increased action by regulators, either through
the existing authority under EESA or other mechanisms to achieve the
outcomes we all expect and desire.
Senior leadership of many lending and servicing organizations have
expressed their commitment to helping owners avoid foreclosure.
Unfortunately, this does not seem to be translating into increased
workouts and loan modification offerings nearly fast enough to address
the foreclosure crisis. While some of our HOPI lending and servicing
partners have taken action to increase the capacity of their
organizations to work with housing counselors and offer loan
modifications to their clients, the results across the industry have
been spotty at best.
In the best situations, servicers set up separate departments or
staff contacts to work directly with housing counselors. In these
cases, the counselors are able to expedite the modification process for
the servicers by collecting completed documents from the client in
person, eliminating much of the back and forth that otherwise occurs
between the borrower and servicer. They can also assist the borrower in
developing a realistic budget and push back when the servicer wants to
owner to enter into an unsustainable modification. These efforts lead
to a quicker more sustainable outcome and a foreclosure avoided.
In the worst situations, and these are still the majority, clients
and counselors are bounced back and forth between the collections and
loss mitigation departments. Their calls are frequently dropped in the
process. When they call back, there are rarely any notes from the last
conversation they had with the servicer so they have to start over
again. Fore example, one of our counselors made 17 separate contacts
with one servicer over 4 months in order to get that servicer to
correct a mistake they had made which was forcing our client into
foreclosure in error.
Most servicers continue to staff their loss mitigation departments
with individuals who either lack the authority or the knowledge,
training, and expertise to make decisions about loan modifications or
principal write-downs. Many servicing staff come from a debt-collection
background and do not receive adequate training on loss mitigation and
the role of housing counselors and so are unable to leverage the
resources and expertise of local counseling staff to help families
avoid foreclosure. Counselors' inability to access the decision makers
means some of the most creative and cutting edge strategies to avoid
foreclosure are not being used by servicers.
For example, over a year ago, NHS of Chicago developed a grant
program through which our non-profit lending arm, Neighborhood Lending
Services, offered to refinance homeowners out of unsustainable,
mortgages and into 30-year, prime rate fixed mortgages. This was
intended for customers for whom either the outstanding principal was
too much for the homeowner to afford even at the prime rate or for whom
there was considerable negative equity. We offered grant money to the
servicers on condition that they would match the grant with a
commensurate principal write down in order to achieve an affordable new
loan balance for the homeowner. Fewer than five servicers approved
writes downs of even a few thousand dollars. Despite the fact that
investors stood to lose tens of thousands of dollars more if they
proceeded with a foreclosure, they would not agree to any principal
reduction.
Efficiency is also a challenge. Despite advances in technology,
loss mitigation departments still rely on faxing documents back and
forth between borrowers and the servicer. These documents are
frequently lost or misplaced and the process must be restarted over and
over again. These small delays quickly add up to days, weeks, and even
months during which additional fees accrue and the homeowner becomes
discouraged and gives up. When homeowners and housing counselors call
servicers, too often they remain on hold for long periods of time and
are transferred numerous times before they speak to someone. Files are
shuffled between departments without any apparent rhyme or reason and
there is a disconnect and lack of communication between and even within
these departments. All of these inefficiencies mean that many
homeowners who could avoid foreclosure are falling through the cracks.
This should be considered unacceptable during such a crisis and
regulators should step in to demand better results.
In response to this problem, NHS and a handful of servicers are now
using a new online service called ``Best Fit,'' which allows NHS and
participating servicers to track clients and scan and upload documents
into a universal database, and to which only the servicer and counselor
have access. This online platform shows great promise for reducing the
unnecessary delays and waste that are keeping people from avoiding
foreclosure. However, more servicers need to adopt this tool and train
their staff in its use to maximize benefit.
Another challenge is that when servicers do loan modifications, the
modifications are often unaffordable, which means they frequently fail
down the road. A review of 60 loan modifications that were facilitated
by NHS of Chicago counselors showed that fully one-third of loan
modifications offered to borrowers in distress had housing ratios of
over 50 percent. In these cases, the interest rate was typically frozen
at its current level and the arrearage, costs, and fees were
capitalized. Another 34 percent had housing ratios between 35 and 50
percent, which means they were on the verge of being unaffordable and
had a significant likelihood of failure. It was only the final third of
the loan modifications that had reasonable housing payment ratios
giving the homeowners a real chance for long-term sustainability.
Our analysis is confirmed by recent reports that approximately 50
percent of homeowners receiving loan modifications re-default within a
few months. Since two-thirds of loan modifications are essentially
unworkable from the outset, it is no wonder that half of them fail.
However, I urge you not to draw the same conclusion that some housing
market observers have reached: namely, that loan modifications do not
work and lenders ought to foreclose instead. Instead, consider the fact
that good loan modifications that create a reasonable housing payment
do work over the long term and can go to great lengths to stem the tide
of foreclosures.
While we believe that the efforts outlined in the Emergency
Economic Stabilization Act were developed with the best of intentions,
these experiences show that the impact of the efforts thus far are not
leading to increased efforts to avoid foreclosures by lenders and
servicers and are also not translating into access to capital for
individuals to purchase homes, a necessary next step for market
recovery. We feel this is because the efforts thus far have focused on
the impact of foreclosure to the market, not on helping individual
homeowners avoid foreclosure.
Some of our counselors even report that during October and November
servicers became less willing to offer loan modifications--a response
they attribute to financial institutions waiting to see if their
troubled assets would be purchased.
It had been our hope that if the Government purchased the troubled
assets of struggling financial institutions that they could in turn
offer standardized loan modifications and principal reductions in such
a way that large numbers of foreclosure could be avoided in an
efficient and effective way. In the absence of such a program it
appears that lenders and servicers have not taken sufficient steps to
reduce foreclosures on their own.
For these reasons, NHS supports efforts to compel mortgage holders
to offer proactive, standardized loan modifications to large numbers of
mortgagees in a systematic manner such as the method employed by the
FDIC with the Indy Mac portfolio. We feel that all lenders and
servicers should undertake similar efforts immediately in order to
assist the maximum number of families avoid foreclosure. The FDIC has
even provided template documents for other investors and servicers to
use to replicate their mass loan modification program, which are
available on their website.
Along this line, NHS also supports the more recent proposal by the
FDIC to partially insure affordable and sustainable loan modifications
made by servicers, which we feel would create appropriate incentives
for mortgage servicers and investors to take the necessary steps to
stem foreclosures. Further, regulators should require that all
servicers report on not only the number of loan modifications they
offer, but also the affordability of these loan modifications. As I
have just outlined, loan modifications are a crucial component to
addressing the foreclosure crisis, so additional information about the
use and structure of loan modifications is essential.
Also, the issue of principal deferral or reduction is clearly the
cutting edge of foreclosure prevention and I encourage you to do all
you can to help move it from being only a theoretical option to one
that's used judiciously in cases where it makes economic sense. As
positive examples of what has already been done, the leadership shown
by the FDIC in its handling of the IndyMac portfolio, along with the
recent announcements by Fannie Mae and Freddie Mac, have made
significant progress towards making principal deferral or reduction the
industry standard in cases where it maximizes net present value.
However, more must be done. Servicers need guidance on how and when to
engage in principal deferral or reduction.
Finally, NHS would like to see regulators make clear to the
recipients of the TARP funds their responsibility to use those funds to
originate mortgages in LMI communities. NHS has seen an increase in
clients needing to use our purchase loans because they cannot get
traditional financing through banks. This remained the case during the
last 2 months when lenders should have been expanding their willingness
to lend the capital they received through the EESA.
We have received numerous calls from homeowners in trouble asking
what the rescue plan means for them. Unfortunately, thus far, it is
unclear that homeowners and neighborhoods are experiencing any real
benefit from the $350 billion invested in our financial services
industry.
As the committee looks for suggestions on how to adapt the program,
it would be our advice that new efforts focus on homeowners in
foreclosure and the neighborhoods in which they live.
Senator Durbin. The next witness, Marguerite Sheehan is
Senior Vice President of JPMorgan Chase, Housing Policy
Executive for Chase Home Lending. Ms. Sheehan has been with the
firm for over 25 years, starting with the predecessor company,
manufacturers Hanover.
A member of the New York State Bar, she has her B.A.,
master's and J.D. from Catholic University.
Ms. Sheehan, please proceed.
STATEMENT OF MARGUERITE E. SHEEHAN, SENIOR VICE
PRESIDENT AND HOME LENDING SENIOR
EXECUTIVE, JPMORGAN CHASE
Ms. Sheehan. Senator Durbin, members of the Senate
subcommittee, we appreciate the opportunity to appear before
you today on this most important topic of troubled homeowners.
We recognize that no one benefits in 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 over
the platforms of Chase, and more recently, WaMu and EMC, 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 $335 billion in mortgages and home
equity loans it originates and owns. It also services or
subservices more than $1.166 trillion in first-lien mortgage
loans owned by investors; that's about 78 percent of our total
services.
As you know, we announced several weeks ago, several
significant enhancements to our foreclosure prevention and loan
modification efforts. We would like to share them with you.
While Chase has 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. We announced on October 31 that we are undertaking
multiple new initiatives designed to keep more families in
their homes. We are in the process of implementing these
changes, and expect to be ready to launch the program within
the next 60 days.
While implementing these enhancements, we have stopped any
additional portfolio loans from entering the foreclosure
process. This will give potentially eligible homeowners in
owner-occupied properties with mortgages owned by Chase, WaMu
or EMC an opportunity to take advantage of these new
enhancements, and we will continue to work diligently with our
investors to get their approval to bring enhancements to loans
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
250,000 families avoid foreclosure, primarily by modifying
their loans or monthly payments.
Specifically, we will systematically review the entire
mortgage 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 pre-qualified modifications such as
interest-rate reductions and/or principal forbearance. The pre-
qualified offers will streamline the modification process and
help homeowners understand that Chase is offering a specific
option to make their monthly payment more affordable.
We will establish 24 new regional counseling centers to
provide face-to-face help in areas with high delinquency rates,
building on the success of 1- and 2-day HOPE NOW outreach days.
We will partner with our community counselors to reach more
borrowers through these centers.
We will 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. Chase will create a separate and
independent review process within Chase to examine each
mortgage before it is sent into the foreclosure process, and to
validate that the homeowner was offered appropriate
modifications. We will staff the new function with
approximately 150 people.
We will expand the range of financing alternatives to
modify pay-option ARMs which face really specific challenges.
These are loans that we inherited when we acquired the mortgage
portfolios of WaMu, and the EMC unit of Bear Stearns. We will
offer them a payment at a 30-year, fixed-rate loan, with the
appropriate interest rate reductions, principal deferral, and/
or interest-only payments for 10 years. All the alternatives
will eliminate negative amortization.
We will offer a substantial discount on, or donate, 500
homes to community groups or through nonprofit or Government
programs designed to stabilize communities. And that would be
specifically addressed to the vacant property that we find in
neighborhoods throughout our communities. And we will use more
flexible eligibility criteria on origination dates, loan-to-
value ratios, and rate floors.
These enhancements reflect Chase's commitment to continue
to seek additional ways to help homeowners. We have already
established a dedicated 800 number for customers who want to
call us and discuss loan modification options. This number is
available on the Chase website, along with other useful
information about our programs.
And in addition to what we are doing with our own programs,
we are participating with FHFA and the GSEs to implement their
streamline modification program and we are in the process of
working on the Hope for Homeowners FHA Program.
Thank you very much for your attention, I'd be happy to
take any questions.
Senator Durbin. Thanks very much, Ms. Sheehan.
[The statement follows:]
Prepared Statement of Marguerite E. Chase
Chairman Durbin and members of the Subcommittee on Financial
Services and General Government, 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, WaMu,
and EMC, 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 pre-eminent financial institutions with a heritage of
over 200 years.
Chase services about $335 billion in mortgages and home-equity
loans it owns; that's $181 billion (12 percent of total serviced) in
first-lien mortgage loans and about $154 billion in home equity (10
percent of total serviced). It also services or sub-services more than
$1.166 trillion (78 percent of total serviced) in first-lien mortgage
loans owned by investors. In the combined $1.5 trillion portfolio,
there is $144 billion (10 percent) of non prime: $23 billion owned by
Chase and $121 billion owned by investors. Pay option ARMs are 9
percent of the total serviced portfolio, with $50 billion owned by
Chase and $74 billion owned by investors. Chase inherited pay option
ARMs when we acquired WaMu's mortgage portfolio in late September and
EMC's portfolio earlier this year as part of the Bear Stearns
acquisition.
As you know, we recently announced several significant enhancements
and we would like to share those with you.
expanded foreclosure prevention initiatives
While Chase has 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's why we announced on October 31 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 pre-qualified modifications, and commence a new
process to independently review each loan before moving it into the
foreclosure process. We expect to implement these changes within the
next 60 days.
While implementing these enhancements, we have stopped any
additional portfolio loans from entering the foreclosure process. This
will give potentially eligible homeowners an opportunity to take
advantage of these enhancements, and applies to owner-occupied
properties with mortgages owned by Chase, WaMu, or EMC, or with
investor approval. Chase has worked diligently and will continue to
work diligently with investors to apply these enhancements to loans we
service on behalf of others so our efforts can have the broadest
possible impact. We also will advise homeowners in the foreclosure
process to continue to work with their assigned counselors who will
have access to our expanded range of modification alternatives.
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 250,000 families avoid
foreclosure, primarily by modifying their loans or payments. The
enhanced programs apply only to owner-occupied properties.
We inherited pay-option ARMs when we acquired WaMu's mortgage
portfolio in late September and EMC's portfolio earlier this year as
part of the Bear Stearns acquisition. After reviewing the alternatives
that were being offered to customers, we decided to add more
modification choices. All the offers will eliminate negative
amortization and are expected to be more affordable for borrowers in
the long term.
As a result of these enhancements for Chase, WaMu, and EMC
customers, Chase will:
--Systematically review its entire mortgage 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 pre-qualified
modifications such as interest-rate reductions and/or principal
forbearance. The pre-qualified offers will streamline the
modification process and help homeowners understand that Chase
is offering a specific option to make their monthly payment
more affordable.
--Establish 24 new regional counseling centers to provide face-to-
face help in areas with high delinquency rates, building on the
success of 1- and 2-day Hope Now reach-out days. We will
partner with our community counselors to reach more borrowers.
--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. Chase will add more counselors as needed.
--Create a separate and independent review process within Chase to
examine each mortgage before it is sent into the foreclosure
process--and to validate that the homeowner was offered
appropriate modifications. Chase will staff the new function
with approximately 150 people.
--Not add any more Chase-owned loans into the foreclosure process
while enhancements are being implemented.
--Disclose and explain in plain and simple terms the refinancing or
modification alternatives for each kind of loan. Chase also
will use in-language communications, including local
publications, to more effectively reach homeowners.
--Expand the range of financing alternatives offered to modify pay-
option ARMs to an affordable monthly payment, including 30-year
fixed-rate loans, interest rate reductions, principal deferral,
and interest-only payments for 10 years. All the alternatives
eliminate negative amortization.
--Offer a substantial discount on or donate 500 homes to community
groups or through non-profit or Government programs designed to
stabilize communities.
--Use more flexible eligibility criteria on origination dates, loan-
to-value ratios, rate floors and step-up features.
The enhancements reflect Chase's commitment to continue to seek
additional ways to help homeowners.
expanded offers for arm customers
Chase offers two programs for unsolicited rate modifications for
short-term hybrid ARMS (2, 3). These programs are specifically designed
to avoid delinquency and reward current borrowers who have demonstrated
a willingness and ability to pay but may be subject to future payment
shock.
--In late 2007, we began a blanket loan modification program for
Chase-owned loans. It works very simply for homeowners: We
unilaterally lock in the initial interest rate for the life of
the loan on all short-term ARMs that are due to reset in the
coming quarter. This saves homeowners hundreds of dollars a
month. We also have done similar blanket modification programs
for investors at their request. Fewer than 10 percent of these
modified loans end up in re-default. We are currently reviewing
the EMC and WaMu portfolios to see if this program should be
expanded.
--In early 2008, we kicked off the American Securitization Forum
(ASF) Fast Track loan modification program for non-prime,
short-term hybrid ARMs serviced by us. ASF developed a
systematic, highly streamlined process that quickly freezes the
loan's current interest rate for 5 years, protecting the
borrower from rate and payment increases. WaMu and EMC also use
the ASF Fast Track procedures.
Chase also provides loan modifications for customers who can not
sustain their current payment due to affordability. As a general rule,
an analysis is completed to determine an affordable payment level for
the customer that will result in a reasonable housing ratio (principal,
interest, taxes, and insurance and condo or association fees as a
percentage of income) while producing a more positive result for the
investor than foreclosure. Income is subject to verification. WaMu and
EMC presently use a net present value (NPV) and affordability model to
determine the optimal modification for the borrower and investor. Chase
is reviewing that model to determine which approach yields the most
consistent and efficient process across all the portfolios.
Chase has had a proactive outreach program for resetting ARM
customers since the first quarter of 2007, with no restriction based on
origination date. The outreach is done for all ARM customers with
contacts occurring 120 days and 60 days before reset. Under WaMu's
Program for option ARMs, starting in January 2008, customer contact
begins for all option ARM customers up to 180 days before reset to
explore workout and refinance options. EMC has a similar program of
outreach that they started in the fourth quarter of 2007, beginning
outreach up to 270 days before reset.
Also, as we announced, we will proactively reach out to homeowners
to offer pre-qualified modifications such as interest-rate reductions
and/or principal forbearance. The pre-qualified offers will streamline
the modification process and help homeowners understand that Chase is
offering a specific option to make their monthly payment more
affordable.
new offers for option arm customers
Chase did not originate or purchase option ARMs but has acquired
portfolios of Option ARMs as a result of its acquisition of EMC and
WaMu loans.
WaMu began a proactive program for its owned Option ARM portfolio
in January of 2008. Nine months later, WaMu kicked off a more
aggressive campaign with more refined targeting and offers for
borrowers due to recast in the next 180 days. The offer--and the
frequency of follow-up mailings--depends on whether the consumer is
coming up on a scheduled recast or a forced recast. Under the WaMu and
EMC programs, the first offer is a refinance into an Agency or FHA
loan, including FHASecure. Borrowers can also be referred directly to
loss mitigation counselors at their request.
Under the expanded initiatives we recently announced, our second
offer for Pay Option ARMs will be a modification to a 30-year fixed-
rate fully amortizing loan with elimination of the negative
amortization feature. In addition, terms may be extended to as long as
40 years to increase affordability. The interest rate can be reduced as
low as 3 percent to achieve affordability. If a below-market rate is
required, the loan rate will begin to step up to a market rate after 3
years with any adjustments capped at 1 percent every year to eliminate
payment shock. If needed, principal can be deferred down to as low as
90-95 percent of the current loan-to-value.
The third offer is a 10-year/interest only ARM at a discounted rate
with a floor of 3 percent and no modification fees. Negative
amortization is eliminated. Principal deferral will also be used to as
low as a 90-95 percent current loan-to-value ratio if required. If a
below-market rate is required, the loan rate will begin to step up to a
market rate after 3 years with adjustments capped at 1 percent every
year to eliminate payment shock. This program is designed for home
owners who want to stay in their home, so it is limited to owner
occupants.
Once operational at Chase, the FHA Hope for Homeowners Program will
provide an additional option for these borrowers. We were pleased that
HUD announced several modifications to the H4H Program because we
believe those changes should expand the number of borrowers we will be
able to reach and reduce the operational complexity of offering the
product.
For these loan modification programs, we will determine
affordability based on a housing ratio (principal, interest, taxes,
insurance, and condo or association fees) that generally does not
exceed a range of 31 percent to 40 percent, based on income. Borrowers
with housing ratios between 40 percent and a hard cap of 50 percent may
be eligible if they demonstrate documented compensating factors, which
can include the amount by which the monthly payment has been reduced
and payment history during the trial modification period. These ratios
are being used today by Chase in its current modification programs and
their reasonableness has been validated by the relatively low level of
recidivism. An NPV analysis will be used to evaluate refinance and
modification offers including, in both cases, potential principal
deferral. There is no interest charged on the principal forbearance,
but a required payment upon sale or refinance allows the owner of the
loan to share in any potential future appreciation.
Once borrowers provide preliminary income information, they begin
making a reduced payment. But the final modification will be subject to
the borrower making up to three consecutive payments at the modified
amount as well as receipt and validation of income information and
confirmation of current collateral value. No modification fees will be
charged and delinquency fees will be waived.
As announced, we anticipate being able to implement the program
over the next 2 months and we will not commence foreclosure proceedings
for potentially eligible borrowers for loans owned by Chase and seek
investor consent, where required, for serviced loans. Our Project Team
has been formed and is working on each of the announced initiatives and
we are making significant progress toward our goal of implementing all
of them across our portfolio by January 31. As part of that process, we
have formed a team to focus on our investors and are developing our
outreach strategy to bring these enhancements to loans we service on
behalf of investors. Our efforts then can have the broadest possible
impact. Once we are able to tangibly demonstrate the methodology and
the process, we believe our investors will become comfortable as we
roll the program out more broadly and provide any consent that may be
needed in particular cases.
We also believe that with the efforts of many servicers, the
sharing of best practices and the leadership of the FDIC and the GSEs,
the industry is starting to converge on a new industry standard for
loan modifications. To the extent the investor community joins in
accepting this emerging standard that will provide greater certainty to
the servicing industry.
We applaud the announcement by FHFA, Fannie Mae, and Freddie Mac of
their Streamlined Modification Program (SMP). This Program will bring
needed simplicity and consistency to loans being modified in the GSEs'
portfolios and securities. While the SMP only applies to loans that are
delinquent for more than 90 days, it is still an important step
forward. We encourage the FHFA and the Agencies to consider expanding
the SMP to also address the needs of homeowners that are current but
where default is reasonably foreseeable, based on the borrower's
financial profile and the terms of their loan.
The SMP is being implemented by servicers that are part of the HOPE
NOW Alliance for Agency loans they service. HOPE NOW servicers and the
GSEs have been working closely with a target date of mid-December to
develop the procedures and protocols that servicers will need to
implement the SMP. This new initiative will supplement the loan
modification efforts of all HOPE NOW servicers who have prevented
almost 2.7 million foreclosures since the Alliance began reporting in
July 2007. The GSEs have announced a freeze on new foreclosure sales
during this implementation period. Director Lockhart of the FHFA is
calling on the private investor community to adopt the SMP model--a
development that would further enhance the effectiveness of the SMP and
further reduce foreclosures.
We are pleased to provide this information to you and we will be
happy to meet with you and respond to additional questions you may have
or ideas you would like to share. In turn, as we continue to improve or
programs and efficiency, we would be happy to keep you advised. We
especially appreciate your leadership and that of subcommittee members
in keeping a focus on this important issue of keeping families in their
homes.
Senator Durbin. Attorney General Madigan, tell me what,
before you get into some legal elements here, tell me what you
think the impact is of this reign of foreclosure--even if it
stays the same, let alone increases--on a neighborhood like
what would be in this manner.
STATEMENT OF LISA MADIGAN, ATTORNEY GENERAL, STATE OF
ILLINOIS
Ms. Madigan. Mr. Chairman, let me just state that it's not
just this neighborhood in Chicago. There are many neighborhoods
where the maps would look exactly the same. The situation,
certainly on the west side, as well as the south side, not just
the southwest side where we're seeing an unmatchable rate of
foreclosures.
And so first, you have to recognize that you have the
impacts on the family that was looking to own, currently. Not
only will they be out of their housing, but they will also have
their credit destroyed, making it virtually impossible for them
to get into another house, most likely. Then they will be
forced to find rental property, which can be a challenge in
many parts of the city right now.
In addition, you have to take into consideration the impact
that this has on the property values of the surrounding homes.
So, reports that I have seen indicate almost 1 percent, in
terms of the decrease in property values experienced by
surrounding homes when there is a home that is foreclosed on.
So, you are reducing the amount that people see, you know, in
worth in terms of that home.
And because of that, as you recognized, we have a resulting
decrease in the tax base, so we don't have the resources
necessary to provide police protection, fire protection,
education, infrastructure, we cannot do that.
So, it is absolutely devastating, both on a personal level
to the family, on the neighbors' level, as well as, you know,
all of the services we have come to expect in the city of
Chicago, and in our communities. So, it's very--it's difficult,
in some ways, to fully appreciate that all of us, regardless if
we are able or unable to afford our mortgage payment, are going
to be panicking during the last year, as people have come to
realize that's the case.
[The statement follows:]
Prepared Statement of Lisa Madigan
the illinois attorney general's protection of consumers from predatory
mortgage lending practices
Introduction and Background
Senator Durbin and members of the subcommittee, thank you for
inviting me to testify at today's hearing on the implementation of the
Troubled Asset Relief Program (TARP), which is the centerpiece of the
recently enacted Emergency Economic Stabilization Act (EESA). As the
chief consumer advocate for a State that has been especially hard hit
by the nationwide foreclosure crisis, I am pleased to share my thoughts
on how the Department of Treasury can best use its authority under EESA
to ensure that millions of distressed homeowners receive the
sustainable loan modifications they need to remain in their homes.
Since taking office as Illinois Attorney General nearly 6 years
ago, I have made a priority of protecting homeowners from predatory and
irresponsible mortgage lenders. In my role as prosecutor, I have
brought enforcement actions against some of the largest mortgage
lenders in the Nation for engaging in the kinds of reckless lending
practices that attracted headlines only after the collapse of the
housing market threatened to bring the global economy to its knees. In
my role as policymaker, I have drafted and lobbied successfully for the
passage of State legislation to curb the excesses of a mortgage
industry that, during the housing bubble, had grown all too willing to
abandon time-honored prudent lending standards in pursuit of fast and
easy profits.
Despite all these efforts, there is only so much that one State
official can do to address a foreclosure crisis of global proportions.
This is especially true in view of the ongoing and lamentable movement
in Washington to limit the authority of the States to regulate mortgage
lending within their own borders. Additionally, the last 2 years have
seen a massive shift in mortgage lending to nationally chartered
financial institutions. With more than 90,000 foreclosure filings
expected in Illinois this year, this clearly is the moment for the
Federal Government to exercise the full extent of its power to regulate
the conduct of the mortgage industry. If we are to stem the rising tide
of foreclosures, the Federal Government must use TARP resources and
other legislative initiatives to incentivize the mortgage industry to
implement comprehensive loan modification programs that will keep
hardworking families in their homes and preserve surrounding
communities--not only in Illinois but throughout the Nation.
My testimony today is divided into two main parts. First, I will
review my office's investigation of Countrywide Home Loans and my
subsequent lawsuit against that company. This review will include a
summary of the landmark loan modification program at the center of our
recent settlement agreement with Countrywide's new owner, Bank of
America. The terms of the Countrywide settlement provide an excellent
template for the kind of wide-scale loan modification programs that are
necessary to address the foreclosure crisis at its root cause: namely,
the mortgage industry's insistence on originating millions of home
loans to borrowers who could not afford them in the first place.
In the second part of my testimony, I will identify some of the key
impediments standing in the way of implementing systematic loan
modifications and offer policy and legislative recommendations for
overcoming those obstacles.
The Illinois Attorney General's Prosecution of Predatory Mortgage
Lending: Ameriquest and Countrywide
As I indicated earlier, I am not a newcomer to the idea that the
mortgage industry is in serious need of tighter Government control. One
of my early major enforcement actions as Illinois Attorney General was
to join with several other State attorneys general in an investigation
of the lending practices of Ameriquest, the Nation's largest subprime
mortgage lender at the time. That investigation, which was launched
more than 5 years ago, revealed that Ameriquest was engaged in many of
the abusive business practices that, in the last year or so, have come
to characterize the mortgage industry as a whole. Those predatory
practices included: inflating appraisals of homes, inflating borrowers'
income, and using deceptive means to put homeowners into loans they
could not afford. For example, Ameriquest would switch homeowners from
fixed loans to loans with adjustable rates at the last moment, when
many borrowers felt it was too late to back out. In an especially
pernicious practice, Ameriquest would switch borrowers to a loan with a
higher rate at closing, promising to re-finance borrowers before the
loan became unaffordable, even as they were locking the borrowers into
the loans with exorbitant prepayment penalties.
As a result of our investigation, Ameriquest settled with 49 States
and the District of Columbia, in an agreement worth $325 million. Just
as importantly, the settlement's relief package contained four
essential components that went to the heart of the industry's unfair
and misleading lending practices: (1) early disclosure of essential
terms of the loan and the additional requirement that, if the terms
changed, they would be re-disclosed prior to closing; (2) scripts to be
used during the sale of the loan setting out what borrowers would be
told about the essential terms of their loan; (3) provisions ensuring
that Ameriquest would deal at arms-length with appraisers; and (4)
restrictions on placing prepayment penalties on hybrid ARMs, so that
borrowers would not be trapped in loans when their interest rates reset
upward.
Having learned to recognize the signs of abusive mortgage lending
from our investigation of Ameriquest and other mortgage lenders, we
knew by the fall of 2007 that Countrywide merited a closer look. In
September 2007, we launched an investigation into the lending practices
of the largest mortgage lender in the Nation. The story that our
investigation revealed is an allegory; it is in many ways the story of
the rise and collapse of our Nation's mortgage industry. Here, in
abridged form, is what went wrong at Countrywide.
In pursuit of market share, Countrywide engaged in a wide range of
unfair and deceptive practices, including the loosening of underwriting
standards, structuring unfair loan products with risky features,
engaging in misleading marketing and sales techniques, and
incentivizing employees and brokers to sell more and more loans with
risky features.
Countrywide's business practices resulted in unaffordable mortgage
loans and increased delinquencies and foreclosures for Illinois
homeowners, and, as we now know, for homeowners nationwide.
Countrywide's explosive growth was paralleled by the demand on the
secondary market for loans with non-traditional risky features. Through
the securitization process, Countrywide shifted the risk of the failure
of these non-traditional loans to investors. Moreover, securitization
allowed Countrywide to gain much needed capital to fuel the origination
process and reach its goal of capturing more and more market share. As
the risky Countrywide loans began to fail, the company was
contractually obligated to repurchase or replace the failing loans in
the investor pools. This created further pressure to increase the
volume of loan origination. It was a vicious cycle.
To facilitate the increase in loan origination volume, Countrywide
relaxed its underwriting standards and sold unaffordable, and
unnecessarily expensive, home loans. Reduced documentation underwriting
guidelines were heavily used to qualify many borrowers for unaffordable
loans. Countrywide mass-marketed so-called ``affordability'' loan
products, such as hybrid adjustable rate mortgages and interest-only
loan products that only required qualifying borrowers at less than the
fully indexed/fully amortized rate. Countrywide pushed products
containing layers of unduly risky features, such as pay option ARMs and
mortgage loans for 100 percent of the value of borrowers' homes. Unfair
and deceptive advertising, marketing and sales practices were utilized
to push mortgages, while hiding the real costs and risks to borrowers.
These practices included enticing borrowers with low teaser rates, low
monthly payments, and ``no closing cost'' loans that failed to make
clear disclosures of the products' risks.
For a while, these business practices paid off for Countrywide. By
the first quarter of 2007, Countrywide had become the largest
originator of subprime loans, with a total subprime loan volume of
roughly $7.8 billion. By 2008, the company was well-established as
America's largest mortgage lender. In just the first quarter of 2008,
the company originated $73 billion nationally in mortgage loans.
Countrywide is also the Nation's largest loan servicer. The company
administers $1.5 trillion in loans made by both it and other
institutions. Countrywide's servicing operation generated $1.4 billion
in revenue in the first quarter of 2008. Our focus on Countrywide's
large servicing operation was key to achieving my lawsuit's primary
goal of keeping as many families as possible in their homes: a mass
loan modification program is impossible without the cooperation of the
servicing industry.
Countrywide Settlement
On October 6, 2008, I announced a nationwide settlement with
Countrywide. The settlement established the first mandatory loan
modification program in the country, and I hope it serves as a model
for others lenders and for the Federal Government.
The settlement covers approximately 400,000 borrowers nationwide
and provides $8.7 billion in loan modifications to homeowners.
As we here today already know, the most immediate need at this
moment is to help homeowners to stay in their homes and stabilize our
communities. The features of the Countrywide settlement loan
modification program should be a part of any national home retention
program. Those features are as follows:
--A uniform and routinized approach to modifying loans to sustainable
payment levels. This should include establishing clear
guidelines for servicing staff to follow in offering loan
modifications on a standardized basis.
--Proactively reviewing loans with certain features for automatic
loan modification eligibility. Eligible borrowers will receive
notification of the modification, with the option of contacting
Countrywide if more assistance is needed.
--A streamlined documentation process that minimizes the amount of
time and financial data necessary to effect the loan
modification. There is not time for in-depth analyses of the
homeowner's finances. A review of current income should be
sufficient for many borrowers to enter into a sustainable loan
modification.
--Options for crafting a loan modification that offers the borrower
affordable payments in the present and also eases the borrower
into a sustainable market rate loan for the future. In the
Countrywide settlement, this goal is achieved with a number of
options, including:
--A reduction of the interest rate to as low as 3.5 percent for 5
years, at which time the loan will be converted to a fixed
interest rate set at the greater of the Fannie Mae rate or
the introductory interest rate on the loan. If that rate is
still unaffordable, the reduced interest rate can be
extended for another 2 years;
--A reduction of the interest rate to as low as 2.5 percent with
annual step rate increases, subject to a lifetime cap on
the interest rate on the loan; and
--A 10-year interest-only modification, with an interest rate
reduction to as low as 3.5 percent for these modifications
and yearly step rate increases, subject to a lifetime cap
on the interest rate on the loan.
--Principal reductions to 95 percent LTV for pay option ARM loans in
which the borrower has no equity in the home. Principal
reductions of at least this amount--for any type of loan--
should be used as a tool to assist any homeowner in trouble if
the reduction contributes to a sustainable loan modification.
Homeowners have less financial incentive to stay, even with
more affordable payments, if they have no or little equity in
their home. Reasonable and sustainable debt-to-income
guidelines, to lessen the possibility of defaulting on the loan
modification.
--A hold on foreclosures while loans are being reviewed for
eligibility, to ensure that homes are not lost during
implementation of the Countrywide settlement.
--Loan modification availability to homeowners in default as well as
for those for whom default is reasonably foreseeable. We
believe this is permitted by most pooling and servicing
agreements.
--Waiving certain fees as part of the loan modification.
--A reporting requirement to provide us with data on the results of
Countrywide's loan modification program.
Impediments to Implementing Wide-Scale Loan Modification Programs
After the announcement of the Countrywide/Bank of America
settlement, I worked with a group of my colleagues from around the
country and called upon all servicers to initiate loan modification
programs similar to the one negotiated with Countrywide. As a result of
that outreach, we have been engaged in a series of discussions with the
servicers. However, we continue to identify obstacles that limit the
number of loan modifications being carried out:
--Investor concerns.--Servicers have continued to voice concern about
potential investor lawsuits based on an alleged violation of
the Pooling and Servicing Agreements. In fact, a group of
investors sued Countrywide earlier this week.
--Second liens.--Additional liens can serve as an impediment in the
loan modification process. Many of the homes purchased in 2006
with subprime mortgages have second mortgages and open home
equity lines of credit secured by their home.
--Servicer staffing.--Many lenders and servicers have announced plans
for expanded loss mitigation programs and increased staffing.
However, many homeowners continue to complain to my Office that
when they contact their lender, they are unable to reach a live
person or someone with loan modification decision-making
authority.
--Servicer incentives.--The loan modification process is a labor-
intensive process that increases servicers' costs, and yet
servicers are not often compensated for loan modifications by
lenders. In contrast, servicers are reimbursed for foreclosure
costs at the end of the process.
Recommendations
Seriously delinquent loans are at a record high for both subprime
and prime. In October 2008, Credit Suisse reported that only 3.5
percent of delinquent subprime loans received modifications in August
2008. Similarly, my colleagues and I, through our State Foreclosure
Working Group, have confirmed that the current progress in stopping
foreclosures is disappointing. The data in our report indicates that
nearly 8 out of 10 seriously delinquent homeowners are not on track for
any loss mitigation outcome. What further actions can be taken? We need
to incentivize servicers quickly to enter into more sustainable loan
modifications and require that they make their process more transparent
so that we can evaluate it. Below are my suggestions:
--Guarantee Home Mortgages in Exchange for Loan Modifications.--TARP
money should be utilized to provide Federal loan guarantees to
servicers to incentivize more loan modifications. These Federal
loan guarantees should be provided when the lender can
demonstrate the modification is affordable and sustainable. The
guarantee on restructured loans will provide a new incentive
for servicers to act on behalf of investors in modifying a
loan. The FDIC has proposed such a plan. Payments to Servicers
for Restructuring Loans. Servicers receive compensation for the
cost of foreclosing on a home, but are often paid little or
nothing for the cost of doing a loan modification. This tips
the balance unfairly in favor of foreclosing on a loan, as
opposed to modifying the loan. Loan servicers should receive
payments to perform loan modifications on a per transaction
basis, similar to what the FDIC has proposed.
--Transparency and Uniformity in the Loan Modification vs.
Foreclosure Calculation.--Require transparency and uniformity
from lenders in the analyses they use to determine whether a
loan modification or foreclosure is the more cost-effective
choice. Servicers must engage in this calculation--a net
present value analysis--in order to justify a loan modification
to their investors. I support the improvements of the net
present value analysis proposed by the FDIC.
--Waiver of Fees.--For all loan modifications, lenders should waive
late fees and other fees resulting from the homeowner's
default. These fees--many of which are ``junk'' fees--
unnecessarily prevent otherwise workable solutions for
homeowners facing foreclosure.
--Explore Safe Harbor for Servicers.--Congress should explore a safe
harbor exemption from investor lawsuits for servicers who
implement systematic loan modification programs that
substantially conform to the program proposed by the FDIC.
Servicers continue to tell us they are concerned about being
sued by investors for implementing loan modification programs.
Countrywide, for example, was sued in early December for
implementing our settlement program. Moreover, any such
legislation should also amend EESA to establish that, in all
situations, servicers owe their duty to investors as a whole
and not to any particular class of investors who may be harmed
by a modification.
--Homeowner Tax Relief.--The Mortgage Debt Forgiveness Relief Act of
2007 should be amended to ensure that any debt forgiven in a
modification is not taxable to the homeowner, not just in
instances when the loan was for the purchase or improvement of
the home. A tax penalty runs counter to a loan modification's
purpose of helping families regain their financial footing.
--Loan Modifications and Bankruptcy Proceedings.--Senator Durbin has
championed legislation to authorize judicial loan modifications
for homeowners in bankruptcy. I strongly support his efforts.
It is paradoxical that all homeowner debts may be modified in
bankruptcy, except for their most important debt--the mortgage
on their home. This inequity in the bankruptcy code must be
remedied.
Conclusion
Thank you for the opportunity to testify before the subcommittee
today. I am grateful that you chose to conduct this field hearing in
Chicago, a city in which every neighborhood is suffering the
devastating effects of the foreclosure crisis. As I have described, it
is my belief that strong, comprehensive loan modification programs are
the most effective means for stemming the rising tide of foreclosures.
I call on Congress to immediately use its powers to incentivize such
programs.
Senator Durbin. Our friends from SWOP came down the other
day, they told the story, someone in one of the neighborhoods
saw, or had seen, a boarded-up home and decided to take it
over. Put their own locks on the door in a vacant, basically, a
dorm house. This is a haven for criminal activity, so it could
go from bad to even much worse.
Mr. Gottschall, you've been involved in this a long time,
I'm sure you've seen a lot of foreclosures and had some
neighborhoods. What is your impression, if this continues,
unabated?
Mr. Gottschall. Well, as you suggest, I've been working on
this since 2002, the increasing foreclosure issue, but what we
and many other community organizations look to restore that
confidence, get the best people in the neighborhoods, so we're
seeing that improvement lost over these last few years. And
increasingly, you've got a foreclosure now and over the next
months or years, the property then will stay there a long time,
be vacant for awhile, as you see on the map--three, four or
five buildings on the block that are vacant.
It impacts dramatically when people say, ``Why would you
want to do that? Restore confidence and keep those
neighborhoods strong. Or you've got some neighborhoods where
they're in on the multiple listing service because of the
vacant properties, you've got numerous buildings under $20,000
listed for sale, $120,000 or $130,000, it impacts dramatically
people's perception and impacts the value of people's
properties, impacts your capacity, then, to refinance and get
money back into those neighborhoods.
So, it has a huge, huge impact. Foreclosure is one of
these, but then how to deal with the vacant property going
forward and work to--work on blocks, one of the people to see
it as not a problem. Now in the better neighborhoods it's a
much more general problem with the State and everybody fix, you
know, making improvements and figure out how to deal with that
vacant property is the way that and we are working to have that
negative impact be not as great as it could be if you didn't do
those types of things.
Senator Durbin. Ms. Sheehan, I want to now take this from a
neighborhood perspective to the bank's perspective.
It's become cliche, people say, ``Oh foreclosure's not good
for any person, family is going to lose a home, there's going
to be a lengthy legal proceeding,'' some say up to 13 months
before a foreclosure finally reaches its conclusion, and it's
expensive. It's an expensive process in terms of legal fees and
for the bank involved in it, as well as the fees for our
system, our legal system, and in the meantime, there sits the
house, with nobody in it.
And the bankers who don't like to make--cutting grass and
pulling weeds and the like--are responsible for the property
which could be deteriorating during this period of vacancy.
Out on the west side of town, here, there's a wonderful row
of houses that people had spent a lot of money on. And there
was one, smack dab in the middle, that was boarded up, it was
going to foreclosure. You could just--you didn't have to hunt,
you could look right down the yards and tell which one had been
abandoned, because it was just full of trash and litter, and
detracted from the entire neighborhood, all of the investments
of the neighbors.
So, tell me what bankers were spending, you know, in
foreclosure, to possibly be a winner from Chase's point of
view?
Ms. Sheehan. I would say no. And generally speaking,
everything you described is true. When we look at the, sort of
negative impacts, the expense of foreclosure, the impact on the
neighborhood, generally speaking, you know, there are very,
very few situations where affecting a reasonable loan
modification would not be the best solution, all around.
From the investor perspective, from the servicer
perspective, and from the perspective of the homeowners, and I
think that one of the things we really need to emphasize to our
homeowners is the ability that they have to reach out, even
directly, to the servicer, or through their trusted counselors
to get help early and stop that foreclosure, frankly, from even
being initiated.
And one of the elements of the program that we're working
out right now, that we spoke about, and that we have been doing
for the last 6 months, and I think was mentioned by Attorney
General Madigan earlier, not just looking at delinquent loans,
but looking at loans that are coming for reset or recast, where
you're in a position to reasonably predict that that homeowner
is going to have payment shock, that they are not going to be
able to afford that loan.
Senator Durbin. I have heard repeatedly, and you tell me
whether this is close, that it costs about $50,000 to go
through a foreclosure. Is that--do you have any figures like
that?
Ms. Sheehan. That's the conventional wisdom, I will tell
you, in some neighborhoods, given the severities with
properties, it's probably more than that.
Senator Durbin. So, let me go back to Mr. Gottschall's
testimony. If I--and he can correct me if I didn't quite get
this right. But I heard him say about 40 percent of those that
were talking about it, are souls that can be saved. These are
homeowners which, if there's a modification, for example, of
the mortgage interest rate, below 6 percent, I made the call
yesterday, the current rate is below 6 percent for most
mortgages being offered this week.
Then he said there's another 60 percent where you have to
get into principal modification, they're going to have to
lower--these people are underwater. They have a principal
balance than is far greater than the current fair market value
of the home.
So, if the bank is sitting there in a position where there
comes a looming foreclosure, and a $50,000 outlay for the
foreclosure process, where they end up with this property at
the end of 13 months, it seems there would be an economic
incentive for the bank to sit down with the homeowners, even
talking about reduction in principal. At the end of the day,
the bank is not likely to even get fair market value for a home
that's been abandoned for a period of time.
So, you explained what Chase is going to do, but why don't
we see more banks coming forward, saying, ``Foreclosure is a
bad outcome for us, too. We're going to put some money on the
table to see if that family can be saved, and stay in the
home.''
Ms. Sheehan. Well, I think, in fact, many, many of the
large servicers have already implemented programs and are doing
things that they need to do to maintain the court rule. I
believe, Mr. Krimminger indicated earlier that in the last
couple of years, at least--and a lot of it has to do with the
particular loan product--a rate reduction was largely what was
needed in order to make that payment affordable.
So, there's a lot that has been done, either through the
ASF, investor loans, certainly Chase on its own loan had
blanket modified frozen in the initial rates that were
demonstrably affordable for them.
I think we're coming into a new era, I think we're going to
have new challenges as pay-option adjustable rate mortgages
(ARMs) come up to recast over the next couple of years, and
certainly we agree that you need to do more in terms of
principal forbearance.
We work very hard with the GSEs and with FHA to make sure
that the new programs being rolled out this month for the
agency-owned loans, which are--in our case--investor loans, not
Chase-owned loans--will have a feature of principal
forbearance, in addition to term extension and rate reduction.
Senator Durbin. I'd like to see for the record that after
SWOP visited me this week, reached out to Chase, I believe a
meeting's going to take place this week to talk about this
neighborhood. And for the record, if these statistics are
accurate, in this neighborhood that you see with this map,
here, there's some 217 properties in foreclosure initiated by
U.S. Bank, which is headquartered in Minneapolis, 161 by
Deutsch Bank, 151 by Bank of America, and 124 from Chase, but
that includes WaMu as well, and others in other categories.
But, the explanation for the red dots here are what banks
have filed foreclosure petitions against the homeowners. If I
could go back to the Attorney General, for a moment, so what
we're going to do with Countrywide is kind of the answer to the
problem, to come up with a settlement that mandated certain
action on the part of this lending institution so that these
people had a chance to stay in their homes.
So, what did you learn, I mean, what have you learned, so
far? Are there things that you would change in that settlement
agreement that might have been even more productive, in terms
of renegotiating?
Ms. Madigan. Mr. Chairman, we think that the settlement we
reached with Countrywide is a very good one. As I explained, it
should save about 400,000 people's homes across the country,
there are probably 20,000 more people here, in the State of
Illinois, who have received help from that settlement.
We will continue to watch how the settlement goes. As I
mentioned, the loans that will automatically be reviewed were
the ones that had the most toxic interest, so it's the higher
ARMs, those that have a low introductory rate and then will
readjust, as well as the pay-option ARMs that have a real
problem with negative amortization.
So, what we think is that--we'll give it to you to watch,
because maybe there are more loan products that will need to be
addressed in the same way that the higher ARMs and the pay-
option ARMs have been addressed. But again, we have used this
as a model to go to Chase, to go to Citi, and to go to the
other large lenders and servicers, and say, ``This is what you
should be adopting,'' for exactly the reason you just
mentioned--it should be more affordable, and it should be a
better business practice to keep people in their homes, than
having them end up in foreclosure.
But, we have not seen a whole-hearted embrace of this
program across the country by servicers; in fact, I am one of
about a dozen State Attorneys General who have been working
together in a foreclosure working group, I've been fishing
through reports, I think I made a packet on the most recent
report available to the subcommittee, and in that you will see
that 8 out of 10 seriously delinquent homeowners, aren't on
track for any sort of loss mitigation.
So, part of the problem, and we tried to address this, is
before you go there today is to make sure that people are
aware--don't be embarrassed, don't be scared, reach out and
call the lenders. They can contact the lender, let them know
that you are either having problems, or you foresee that you
will have problems making your mortgage payments, so they will
start, hopefully, to work on some form of modification.
In addition--and we really applaud the work of Mr.
Gottschall and the organizations throughout our State, he said,
reach out to HUD-certified housing counselors, we can actually
put people in contact with HUD-certified housing counselor, as
Mr. Gottschall correctly stated, people are more comfortable,
oftentimes, talking to them, then they are talking to the
lenders, talking to banks.
We actually put in place a home foreclosure referral line,
essentially, and we have gotten 5,000 calls since March, most
of those coming after our settlement with Countrywide.
And so, people do recognize that help is out there, most
people are not on track to receive any help, however.
Senator Durbin. Mr. Scire, there's been a lot of talk, and
Mr. Kashkari testified--they have the authority through the
Emergency Economic Stabilization Act to move into mortgage
foreclosure area, if the Treasury Department makes that choice,
and they're considering several options.
Mr. Krimminger talked about the FDIC option, I think
Treasury has other things under consideration that they
mentioned to you. Do you have your own opinion as to what would
be the most effective way to really start turning the tide?
I think GAO has told us that this is the highest mortgage
default rate in 29 years; I think they might have reported that
through the Mortgage Bankers Association. Do you have a
personal opinion about the best plan that we could use now to
try to turn the tide on this?
Mr. Scire. Well, our work is based on looking at TARP, and
within that program, it's unclear what strategy the Department
is taking to meet the purpose of the act in terms of preserving
homeownership and protecting home values, as we've been talking
about here.
So, what we expect to see is for Treasury to make clear
what that strategy will be. They've put together an Office of
Home Ownership Preservation, and it is looking at a number of
options, and expects to put together positions on what options
it recommends within the next few weeks, I understand.
So, we believe that Treasury needs to complete that effort,
and to lay out what their strategy will be in terms of
preserving homeownership.
Senator Durbin. Mr. Gottschall, you referred earlier, the
percentages using for Chicago, 1 percent traditional work-out,
29 percent reduced rate reduction, 6 percent or lower, and 60
percent principal reduction. Do you think these are indicative
of foreclosures nationwide, or just reflective of our situation
here in Chicago?
Mr. Gottschall. These are borrowers who have come to us and
already are asking for assistance, so it's not a complete
random sample and so forth. But it's talking with other people
and reading accounts over I think that that probably is not far
from what exists in States like Illinois, California, and
Florida. It would be hard for me to say exactly whether that
fix is probably more or principle, but their servicing is
actually in investor-home situations. And when you're listing
what can and can't be done, I think it makes a huge difference
if it's a investor portfolio, or a portfolio that is a home,
basically flexibility of working on making an examination, on
the other one when you hear the language it's always kind of
confident about what they can or can't do it.
And I think that's where the whole issue of requirement,
incentive, you know, some way that the modification becomes
more standard and something that the servicer is protected as
long as they're doing it right, is extremely important, and I
think that relates to the idea that you need principal
reduction, and it's kind of a standard way to do it, but you
figure out how to do it, and then it becomes something that's
acceptable, and the investors can't come back on the service
and say, ``Hey, wait a minute,'' like, you know, now we're
being sued by investors, because they think--some investor
thinks they might get hurt by this when in reality everybody in
the bank business has been raped.
Senator Durbin. Ms. Sheehan, I have two last questions for
you to conclude this hearing. The first of which is, in the
previous hearing, in Washington, a couple of weeks ago, when
Cook County Sheriff Tom Dart came in and talked about the
difficulties he faced on getting an eviction order on renters
who clearly have been paying their monthly rent, and the
landlord has been holding their mortgage and they were about to
have all of their earthly belongings out on the sidewalk, which
were stolen during the course of the day while they were at
work, that's another story, but certainly part of the human
side of this.
We also came up with testimony at that hearing from a
professor, a law professor, who said that there is a financial
incentive for mortgage bankers to favor foreclosure over
renegotiation, because they are paid on a cost-plus basis for
foreclosure, and a flat-fee for renegotiation. Are you familiar
with any perverse economic incentives to move toward
foreclosure rather than negotiation in the current process? In
the current system?
Ms. Sheehan. I do not believe that to be the case,
certainly that is not the case--I can't speak for every
organization, but that is not the case for us, and in fact I
think there is recognition that some historic agreements have
not provided sufficient incentives to servicers, and certainly
the GSEs have stepped up to the plate, they have been helping
servicers and encouraging servicers to modify loans, their new
streamline modification program does, actually now, even
further increase the payment to the servicer to do the
modification.
And so that should be--I think that should be significant.
Back to the point that Mr. Gottschall made about the
composition of our servicing portfolio. When you look at that,
78 percent that's investor, I'm going to guesstimate that about
half of that is actually agency. We are a big prime, as opposed
to--percentage, as opposed to subprime.
Senator Durbin. Last question, you mentioned that Chase is
going to open 24 centers--is that nationwide? Or in the State
of Illinois, or city of Chicago?
Ms. Sheehan. Okay, so what we are doing right now, by the
way, that is nationwide, so the number of 24 regional centers,
we're going to work in all of our markets, you know,
particularly with the acquisition of WaMu, we now have Oregon,
Florida, because as you know they are very distressed markets,
and we are already in Arizona, another very distressed market.
So, we are looking at the top MSAs throughout the country,
the top 24, where we see not only existing delinquency and
foreclosure, but the potential for future coming down the road
this is, emerging markets, and around that we're going to site
the regional counseling centers.
Our objective is to be completed with our analysis by the
end of December, and I think we're well on track for that,
certainly Illinois is right up there as one of the States that
has markets that need to be address through our counseling
centers.
Senator Durbin. Thank you. Thanks to all of you for
participating in this hearing. I've learned a lot of further
insight into progressive action to keep more Americans in their
homes during this challenging financial crisis.
I will just tell you, that I think that this map is the
canary in the bird cage. I think we ought to take a look at
this, and if this is the current status of mortgage
foreclosures in one Zip Code in the city of Chicago, with more
to follow, we'd better take heed and do something, and quickly,
to start stemming these tides of foreclosures. And that result,
as the Attorney General and Mr. Gottschall and others have
testified, could be a dramatic negative impact on this great
city and many others across the United States. And not to
mention the human suffering associated with families who are
evicted from their homes, and then have to find a place to live
in a very, very tough economy.
So, we've been forewarned. I hope with the new
administration coming on-board we can respond quickly with even
more creative approaches.
The hearing record will remain open for 1 week until
Thursday, December 11 at noon, for subcommittee members to
submit statements or questions.
CONCLUSION OF HEARING
The subcommittee meeting is recessed, I thank everyone for
participating.
[Whereupon, at 11:26 a.m., Thursday, December 4, the
hearing was concluded, and the subcommittee was recessed, to
reconvene subject to the call of the Chair.]
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