[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

                              ----------                              
                                                                   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\
---------------------------------------------------------------------------
    \1\ Federal Reserve Board, Senior Loan Officer Opinion Survey on 
Bank Lending Practices, October 2008, http://www.federalreserve.gov/
boarddocs/snloansurvey/200811/.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
 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\
---------------------------------------------------------------------------
    \15\ GAO-09-161.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \16\ See http://www.hud.gov/news/release.cfm?content=pr08-178.cfm.
---------------------------------------------------------------------------
    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
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             Institution                            Program or effort                                                     Selected program characteristics
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    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.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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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