    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                        LOAN MODIFICATIONS: ARE MORTGAGE

                         SERVICERS ASSISTING BORROWERS

                          WITH UNAFFORDABLE MORTGAGES?

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       HOUSING AND COMMUNITY OPPORTUNITY

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               FEBRUARY 24, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 111-6

                      U.S. GOVERNMENT PRINTING OFFICE
    48-677                    WASHINGTON : 2009
    -----------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
               Subcommittee on Housing and Community Opportunity

                     MAXINE WATERS, California, Chairwoman

    NYDIA M. VELAZQUEZ, New York         SHELLEY MOORE CAPITO, West
    STEPHEN F. LYNCH, Massachusetts          Virginia
    EMANUEL CLEAVER, Missouri            THADDEUS G. McCOTTER, Michigan
    AL GREEN, Texas                      JUDY BIGGERT, Illinois
    WM. LACY CLAY, Missouri              GARY G. MILLER, California
    KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
    JOE DONNELLY, Indiana                WALTER B. JONES, Jr., North
    MICHAEL E. CAPUANO, Massachusetts        Carolina
    PAUL E. KANJORSKI, Pennsylvania      ADAM PUTNAM, Florida
    LUIS V. GUTIERREZ, Illinois          KENNY MARCHANT, Texas
    STEVE DRIEHAUS, Ohio                 LYNN JENKINS, Kansas
    MARY JO KILROY, Ohio                 CHRISTOPHER LEE, New York
    JIM HIMES, Connecticut
    DAN MAFFEI, New York

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        February 24, 2009............................................     1
    Appendix:
        February 24, 2009............................................    61

                                   WITNESSES
                           Tuesday, February 24, 2009

    Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage
      Servicing......................................................    30
    Erbey, William C., Chairman and Chief Executive Officer, Ocwen
      Financial Corporation..........................................    28
    Evers, Joseph H., Deputy Comptroller for Large Bank Supervision,
      Office of the Comptroller of the Currency......................     7
    Gardineer, Grovetta, Managing Director, Corporate and
      International Activities, Office of Thrift Supervision.........     6
    Gross, Michael, Managing Director, Loan Administration Loss
      Mitigation, Bank of America....................................    32
    Hemperly, Steven D., Executive Vice President, Real Estate
      Default Servicing, CitiMortgage, Inc...........................    35
    Lawler, Patrick J., Chief Economist, Federal Housing Finance
      Agency.........................................................     9
    Morris, Vance T., Director for Single Family Asset Management,
      U.S. Department of Housing and Urban Development...............     4
    Sheehan, Marguerite, Senior Vice President, Chase Home Lending,
      JPMorgan Chase.................................................    33

                                    APPENDIX

    Prepared statements:
        Waters, Hon. Maxine..........................................    62
        Ellison, Hon. Keith..........................................    66
        Coffin, Mary.................................................    67
        Erbey, William C.............................................    70
        Evers, Joseph H..............................................    80
        Gardineer, Grovetta..........................................   100
        Gross, Michael...............................................   111
        Hemperly, Steven D...........................................   120
        Lawler, Patrick J............................................   126
        Morris, Vance................................................   146
        Sheehan, Marguerite..........................................   152

                      LOAN MODIFICATIONS: ARE MORTGAGE

                         SERVICERS ASSISTING BORROWERS

                          WITH UNAFFORDABLE MORTGAGES?

                                  ----------

                           Tuesday, February 24, 2009

                 U.S. House of Representatives,
                            Subcommittee on Housing and
                                 Community Opportunity,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:42 p.m., in
    room 2128, Rayburn House Office Building, Hon. Maxine Waters
    [chairwoman of the subcommittee] presiding.
        Members present: Representatives Waters, Lynch, Cleaver,
    Green, Clay, Ellison, Donnelly, Driehaus, Kilroy, Maffei;
    Capito, Marchant, Jenkins, and Lee.
        Chairwoman Waters. This hearing of the Subcommittee on
    Housing and Community Opportunity will come to order. Good
    afternoon, ladies and gentlemen.
        I would first like to thank the ranking member and the
    other members of the Subcommittee on Housing and Community
    Opportunity for joining me today for this hearing on loan
    modifications: ``Are mortgage servicers assisting borrowers
    with unaffordable mortgages?''
        Today's hearing is the first in a series of hearings to
    provide Congress with an in-depth understanding of loan
    modifications, including their benefits and challenges. In the
    next few months, the subcommittee plans to hold further
    hearings on this issue, including an examination of the White
    House plan to modify loans and an investigation of the for-
    profit loan modification industry.
        Today we have before us several key regulatory agencies and
    mortgage servicers who are going to tell us about their efforts
    to assist borrowers with affordable mortgages. In addition to
    learning about their loan modification efforts, I hope this
    hearing will also serve to educate members about some of the
    fundamentals of the mortgage servicing industry, including how
    servicers are licensed, what kinds of contracts they have with
    investors, and how they receive payments for servicing loans. I
    believe that this basic information is critical to
    understanding how the number of loan modifications can be
    increased. I hope that our witnesses will be able to educate
    the subcommittee in this regard.
        Loan modifications changing the terms of the loan are
    essential to ending the foreclosure crisis. According to
    RealtyTrac, in 2008, 2.3 million households were in some stage
    of the foreclosure process, an 81 percent increase from 2007
    and a 225 percent increase from 2006. The foreclosure crisis
    shows no signs of slowing down, with Credit Suisse estimating
    that 8.1 million homes will enter foreclosure over the next 4
    years.
        However, while the pace of loan modifications has
    increased, repayment plans which simply tack the missed
    payments onto a loan, thereby delaying the inevitable
    foreclosure until a later date, still offers more than other
    kinds of loan modifications. According to the Office of the
    Comptroller of the Currency and the Office of Thrift
    Supervision, in the third quarter of 2008, new loan
    modifications increased by more than 16 percent to 133,106,
    while new repayment plans increased by 11 percent to 154,649.
        I am concerned that mortgage servicers simply aren't doing
    enough loan modifications. I am interested to hear the mortgage
    servicers before us today discuss what barriers or capacity
    issues are preventing them from performing more loan
    modifications and preventing foreclosures. And if capacity is
    an issue, I would like to hear about how we can streamline the
    modification process so that we can prevent foreclosures
    quickly and efficiently.
        Since day one, I have been a supporter of enacting a
    systematic modification program. On the first day of the 111th
    Congress, I introduced legislation, H.R. 37, the Systematic
    Foreclosure Prevention and Mortgage Modification Act of 2009,
    to put such a plan in action.
        I am also concerned about some of the redefault rates on
    modified loans. According to the OCC and the OTS, modified
    loans have been redefaulting at rates of 37 percent within 3
    months after modification and 55 percent within 6 months after
    modification, with the rates of redefault seeming to vary by
    the type of loan and the entity servicing it.
        In modifying loans, servicers must ensure that the new loan
    is more affordable to the borrower than it was before the
    modification. It makes little sense and benefits no one to
    modify a loan and to have it still be unaffordable for the
    borrower. It also makes little sense to do a slight
    modification, such as lowering the interest rate by a quarter
    of a point, for example. That makes the loan slightly more
    affordable, but still out of the reach of the borrower.
        The type of loan modification being offered is also
    important to ensure that the modified loan is affordable for
    the borrower. Credit Suisse has found that principal reduction
    modifications have lower default rates than other kinds of
    modifications. If this is the case, I would expect for mortgage
    servicers to perform more of those kinds of modifications. I am
    aware that principal reduction comes with a significant cost
    for the investor; however, that cost is substantially less than
    letting the loan enter foreclosure.
        Before I close, I would like to comment on the
    modifications that have yet to occur. There are millions of
    families out there who are struggling with their mortgages.
    They have tried to contact some of the servicers who will be
    testifying today, and they have not been able to get through or
    to reach the right person. I have experienced firsthand the
    challenges faced by borrowers who want to stay in their homes
    and who want to get current on their mortgages, but they either
    can't get their servicers to pick up the phone, or they get
    wrong, misleading, or unapproved information. I have called the
    servicers myself and waited hours for someone to answer, I have
    been misdirected and disconnected, and I understand the
    frustration borrowers have. It is unacceptable, and I think
    homeowners deserve better.
        I am very interested in hearing from today's witnesses on
    how they plan to improve their capacity and their outreach to
    ensure that the borrowers reaching out to them for help are
    able to receive the help they need. I am looking forward to
    hearing from our two panels of witnesses on the benefits, the
    challenges, and the expenses involved in modifying loans.
        I would now like to recognize our subcommittee's ranking
    member to make an opening statement.
        Mrs. Capito. Thank you, Madam Chairwoman. And I would like
    to thank the chairwoman for convening this afternoon's hearing.
        The difficulties in the housing market are central to the
    health of our overall economy. Some States have been affected
    more deeply by those difficulties than others. I know that many
    of my colleagues representing States that have been hardest hit
    by foreclosures have constituents who are struggling to make
    ends meet; however, we must be careful to those who are making
    their payments on time so that they would not be unfairly
    burdened. Whatever form of assistance this committee produces
    must be equitable to the almost 92 percent of American families
    still making those payments on time.
        I am looking forward to hearing from our second panel this
    afternoon to learn more about their efforts to do loan
    modifications. We will be hearing from five different
    institutions, many of whom have different approaches to working
    out loans and different problems with working out those loans.
    I believe it is important for this process to remain in the
    private sector as much as possible.
         Another proposal that has been put forth is to modify the
    terms of the loan in bankruptcy court, commonly referred to as
    cramdown. I have already expressed my concern in this committee
    about the effect this proposal will have on the Federal
    programs like FHA/VA and RHS. Additionally, I have concerns
    about the effect that this will have on the flow of credit on
    an already unsteady secondary market.
        Recently, I joined Mr. Bachus, the ranking member of the
    full committee, as well as our counterparts on the House
    Judiciary Committee, in sending a letter to the Treasury
    Secretary expressing our desire to work in a bipartisan manner
    to narrow changes in the bankruptcy law.
        Today's hearing will shed greater light on the current
    status of loan modifications as well as to educate members
    about the process and any potential improvements. I would like
    to thank again the chairwoman for bringing us together this
    afternoon and I look forward to hearing the testimony of our
    witnesses. Thank you.
        Chairwoman Waters. I now recognize Mr. Green.
        Mr. Green. Thank you, Madam Chairwoman. I would like to
    associate myself with the comments that you made. I thought
    that you were quite thorough in expressing concerns, and I
    adopt your language.
        I do want to add only this: That there is concern with
    reference to the defaults. When compared to loans held by
    servicing banks, the default rate is 35.06 percent after 3
    months. Loans held by private investors, the default rate is
    42.28 percent after 3 months. There seems to be a disparity
    that I am sure we can examine and understand why it exists. I
    have my suspicions, but it will be more than appropriate to
    receive empirical evidence of what is actually going on from
    this panel.
        So I thank you very much, Madam Chairwoman, and I yield
    back the balance of my time.
        Chairwoman Waters. Thank you very much.
        Ms. Jenkins for 2 minutes.
        Ms. Jenkins. Thank you, Madam Chairwoman.
        I know that many Americans are honestly struggling to pay
    their monthly mortgage payments. Unemployment is on the rise,
    yet more than 90 percent of homeowners are still able to scrimp
    and save enough each month to pay their mortgage.
        Congress and government agencies have thrown billions at
    the crisis, yet we have little to show for it. Many people
    inside the Beltway appear willing to reward lenders who sold
    irresponsible loans and reward people who purchased houses that
    were too expensive. How is this fair to those American families
    who made cuts in their monthly budget and still pay their
    mortgage on time? We may see later this week on the House Floor
    a proposal to allow bankruptcy judges to cramdown mortgages.
    While the goal of the proposal, to help more folks be able to
    stay in their homes, may be admirable, when we see redefault
    rates at 55 percent in only 6 months, is this really solving
    the problem?
        I am eager to hear from today's witnesses to see what we
    can work toward to find effective solutions. I yield back the
    remainder of my time. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        We have no more opening statements. I am pleased to welcome
    our distinguished first panel. Our first witness will be Mr.
    Vance Morris, Director for Single Family Asset Management, U.S.
    Department of Housing and Urban Development. Our second witness
    will be Ms. Grovetta Gardineer, Managing Director, Corporate
    and International Activities, Office of Thrift Supervision. Our
    third witness will be Mr. Joseph H. Evers, Deputy Comptroller
    for Large Bank Supervision, Office of the Comptroller of the
    Currency. Our fourth witness will be Mr. Patrick J. Lawler,
    Chief Economist, Federal Housing Finance Agency.
        Thank you for appearing before the subcommittee today, and,
    without objection, your written statements will be made a part
    of the record. You will now be recognized for a 5-minute
    summary of your testimony.
        Mr. Morris.

    STATEMENT OF VANCE T. MORRIS, DIRECTOR FOR SINGLE FAMILY ASSET
      MANAGEMENT, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

        Mr. Morris. Madam Chairwoman, Ranking Member Capito, and
    members of the subcommittee, on behalf of the Department of
    Housing and Urban Development, I would like to thank you for
    the opportunity to speak about FHA's loss mitigation practices,
    and in particular loan modifications practices.
        I am the Director of the Office of Single Family Asset
    Management. I am responsible for managing the servicing and
    loss mitigation activities of FHA-insured mortgages and also
    the Real Estate Owned activities. My office responsibilities
    include establishing and updating general servicing guidelines
    for FHA lenders, helping homeowners remain in their homes while
    overcoming difficulties that cause mortgage defaults,
    monitoring lenders for compliance with loss mitigation
    requirements, and managing and selling single-family properties
    acquired by HUD. These activities are instrumental in
    maintaining the FHA insurance fund, which currently has over
    4\1/2\ million insured loans at a value of $534 billion.
        In 1996, HUD completed a study titled, ``Providing
    Alternatives to Mortgage Foreclosure: A Report to Congress,''
    which formed the basis of our loss mitigation program. During
    the same year we introduced our loss mitigation program with
    the primary objective of keeping homeowners in their home in
    the event of a serious default, finding effective solutions to
    cure defaults, and reduces to the losses to the government by
    effectively finding alternatives to foreclosure.
        HUD's most utilized loss mitigation tool is loan
    modification. Loan modifications account for nearly 60 percent
    of FHA's loss modification activity annually. Loan
    modifications are intended to bring the delinquent borrower
    current. This is done by either reamortizing the loan up to 30
    years, changing the interest rate both up and down, and adding
    the delinquency into the loan modification.
        In most cases when a lender modifies the loan, they modify
    the term, and the rate is unchanged. In other cases the
    interest rate may increase or decrease. Typically, though,
    after the loan modification, the borrower's payment increases
    slightly, on average $22. The increase is due to the fact that
    the arrearages were included into the loan balance, so it
    causes a slight increase in the mortgage payment.
        Over the past 12 years, through the end of January 2009,
    FHA lenders have completed over 324,000 loan modifications. The
    numbers vary from year to year. For example, in Fiscal Year
    2008, 58,000 loan modifications were done by FHA lenders. We
    estimate that there will be a 12 percent increase this year to
    65,000 loan modifications.
        The loan modification process is fairly simple. The lender
    reviews the borrower's qualifications prior to the loan
    becoming 4 months past due. The borrower sends financial
    information to the lender, who performs an analysis and
    determines that the information is independently verified as
    correct, and then determines if the loan modification would
    benefit the borrower. If so, the loan modification--the lender
    at that time sets the rate, and a term, and the terms of the
    modification. The lender then sends the documents to be
    executed by the borrower, and the modification is recorded, and
    the loan is brought current. For completing the loan
    modifications, HUD provides an incentive fee to the lender of
    $750, plus we pay up to $250 in title work.
        HUD measures the effectiveness of its loss mitigation
    action by determining if the loan ended in foreclosure 24
    months following that action. According to our Office of
    Evaluation, this is the best measure, because past 24 months,
    if a loan goes in default, there were other actions or activity
    that caused the default. By that measure, home applications are
    an effective tool, because over 85 percent of our loans that
    were modified, 24 months following that loss mitigation action
    were still not submitted for foreclosure.
        This is not to say that our loans do not redefault. We do
    have an annual redefault rate of modified loans of 35 percent.
    However, we continue to work with the borrowers to avoid
    foreclosure. Just because a person has one loss mitigation
    action, that does not preclude us from continuing to work with
    the borrower.
        In closing, HUD is requesting new authority to enhance
    partial claim authority to enable FHA to buy down mortgage
    balances. The buydown amount would be reported as a second
    mortgage, but it would be a tool that would make the payment
    affordable to the borrower. The Administration is developing
    changes that would allow FHA to assist homeowners with
    reductions in income that are more than just temporary in
    nature.
        Again, I want to thank you for the opportunity to explain
    FHA loan modifications. I am prepared to answer your questions.
        [The prepared statement of Mr. Morris can be found on page
    146 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Ms. Gardineer.

     STATEMENT OF GROVETTA GARDINEER, MANAGING DIRECTOR, CORPORATE
       AND INTERNATIONAL ACTIVITIES, OFFICE OF THRIFT SUPERVISION

        Ms. Gardineer. Good afternoon, Chairwoman Waters, Ranking
    Member Capito, and members of the subcommittee. I am Grovetta
    Gardineer, Managing Director for Corporate and International
    Activities at the Office of Thrift Supervision. Thank you for
    the opportunity to testify on behalf of OTS about loan
    modifications and how best to keep more American families in
    their homes.
        The importance of this topic is hard to overemphasize.
    Turning back the tide of home foreclosures is an essential
    element in combating the economic crisis confronting this
    Nation and much of the rest of the world. Foreclosed homes
    spell tragedy for the uprooted families, they harm
    neighborhoods by driving down property values, and they add
    downward pressure to already depressed home values in
    communities.
        Although about 90 percent of all home mortgages in this
    country are being repaid on time, the remaining 10 percent that
    are delinquent or in foreclosure represent a historically high
    number and a contagion in our economic system. My written
    testimony goes into detail about the efforts the OTS has made,
    both in partnership with other Federal banking regulators and
    on its own, to prevent foreclosures.
        In the time I have this afternoon, I will emphasize just a
    few aspects of those efforts, but the key point I want to make
    is that OTS initiatives to reduce foreclosure are not new. They
    extend back nearly 2 years, and they are continuing today.
        Just 2 weeks ago, OTS Director Reich urged OTS-regulated
    institutions to suspend foreclosures on owner-occupied homes
    until the home loan modification program in the
    Administration's financial stability plan is finalized. Since
    then, OTS leaders have continued their work on the interagency
    team, led by the Treasury Department, to develop the details of
    this modification program.
        On February 20, 2008, almost 1 year ago to the day, the OTS
    unveiled the foreclosure prevention plan that identified three
    elements that are key to a successful loan modification
    program: an expedited process; an affordable monthly payment;
    and an approach to dealing with underwater mortgages in which
    borrowers owe more on their mortgages than their homes are
    worth. These elements were included in the legislation
    eventually passed by Congress.
        OTS has also been a central player first on its own and
    later in partnership with the Office of the Comptroller of the
    Currency in gathering for the first time extensive validated
    loan-level data on about 60 percent of all mortgages in the
    United States. The data have already yielded valuable insights
    and will enable us to gauge which modification strategies work
    best for affordable, sustainable solutions. With this useful
    yardstick for measuring progress, policymakers will know with
    greater precision where to focus scarce resources to achieve
    the most success.
        The next OCC-OTS Mortgage Metrics Report scheduled for
    release next month will reflect an expanded data collection
    effort to zero in on the elements that make loan modifications
    work. The scope of this effort is broad, covering more than 34
    million loans. The two agencies have made sizable commitments
    to this project, and we intend to stick with it, especially
    since so many families are being forced to pack up their
    American dreams of homeownership. The OTS remains committed to
    continuing its efforts until the foreclosure crisis is over.
        Thank you again, Madam Chairwoman, for your commitment to
    this important issue, and I look forward to answering your
    questions.
        [The prepared statement of Ms. Gardineer can be found on
    page 100 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Our next witness, please.

    STATEMENT OF JOSEPH H. EVERS, DEPUTY COMPTROLLER FOR LARGE BANK
         SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY

        Mr. Evers. Chairwoman Waters, and members of the
    subcommittee, on behalf of the Office of the Comptroller of the
    Currency, thank you for holding this hearing and inviting the
    OCC to testify on this important topic.
        My name is Joe Evers. I am a national bank examiner, and I
    currently serve as Deputy Comptroller for Large Bank
    Supervision. In that capacity, I am responsible for large bank
    analytics. Over the past year, I have led the OCC's project to
    develop more comprehensive and timely data on mortgage lending
    and servicing activities of national banks. This project, known
    as Mortgage Metrics, is now a joint undertaking of the OCC and
    the Office of Thrift Supervision.
        Since as early as 2005, the OCC has encouraged national
    banks to work with troubled homeowners to prevent avoidable
    foreclosures and meet the needs of creditworthy borrowers.
    Since then, the OCC has joined other regulators to urge banks
    to continue to implement effective programs to prevent
    avoidable foreclosures and to minimize potential losses.
        Several years ago, we realized the importance of obtaining
    more detailed information about the performance of mortgages
    held in the national banking system. This was done to both aid
    our supervisory activities and to incent servicers to implement
    effective programs to prevent avoidable foreclosures and to
    minimize potential losses. We have continued these efforts,
    particularly with respect to increasing affordable and
    sustainable modifications, and that improved information we are
    obtaining is helping in that effort.
        Clearly more must be done to address this challenge. The
    OCC supports the Administration's Homeowner Affordability and
    Stability Plan. This new plan takes significant steps towards
    addressing these issues, and we are taking additional steps as
    well. The Mortgage Metrics project represents an unprecedented
    effort to collect detailed information on the performance of
    loans serviced by institutions supervised by the OCC and OTS.
        Our quarterly Mortgage Metrics Report was first published
    in 2008. The Mortgage Metrics Report now covers approximately
    90 percent of the first-lien mortgages serviced by national
    banks and thrifts, and represents over 60 percent of all
    mortgages in the United States.
        Our report for the third quarter of 2008 gathered a vast
    amount of data on the effectiveness of loan modifications. It
    showed an unexpectedly high percentage of borrowers receiving
    loan modifications in the first and second quarters of 2008
    were past due on the new loan modification payment terms. An
    examination of these results led to our decision that more
    detailed information was required to enhance our analysis.
        Since then we have been working to collect additional
    details on how different types of modifications have changed
    monthly principal and interest payments resulting from
    modifications. We plan to present expanded information on
    actual changes in monthly principal and interest payments
    resulting from loan modifications in the next quarterly
    Mortgage Metrics Report due out in March. Further details on
    modifications are planned for subsequent reports.
        My written testimony addresses these efforts in more detail
    and the specific issues raised in your letter of February 17th
    by describing: one, our efforts to improve the understanding of
    loan modification performance through our Mortgage Metrics data
    collection effort; two, findings from our most recent Mortgage
    Metrics Report, including what we have learned about loan
    modifications; three, current challenges facing effective loan
    modifications; and four, our ongoing efforts to encourage
    responsible lending and appropriate loss mitigation activities,
    particularly achieving affordable and sustainable loan
    modifications.
        Again, thank you for holding this important hearing. I look
    forward to answering your questions.
        [The prepared statement of Mr. Evers can be found on page
    80 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Now, we will have Mr. Patrick Lawler.

       STATEMENT OF PATRICK J. LAWLER, CHIEF ECONOMIST, FEDERAL
                         HOUSING FINANCE AGENCY

        Mr. Lawler. Chairwoman Waters, Ranking Member Capito, and
    members of the subcommittee, thank you for the opportunity to
    testify on behalf of the Federal Housing Finance Agency. My
    name is Patrick Lawler, and I am Chief Economist of the FHFA.
        Today the country faces an enormous challenge to stabilize
    the housing market. This morning we announced that our House
    Price Index declined 3.4 percent in the fourth quarter last
    year. That is twice the average rate of decline in the previous
    four quarters.
        Many borrowers are in trouble on their mortgages, or soon
    will be. To address this need, FHFA and the housing GSEs are
    actively working on foreclosure prevention. This is a major
    component of FHFA's efforts to ensure the housing GSEs fulfill
    their mission of providing liquidity, stability, and
    affordability to the housing market.
        The housing plan outlined last Wednesday by President Obama
    includes a prominent role for Fannie Mae and Freddie Mac. My
    testimony today will summarize recent initiatives already
    underway to promote effective loan modifications and the new
    policies announced last week.
        FHFA began in September a foreclosure prevention report,
    which is a transparent review of key performance data on
    foreclosure prevention efforts. These monthly and quarterly
    reports present data for more than 3,000 approved servicers on
    30.7 million first-lien residential mortgages serviced on
    behalf of Fannie Mae and Freddie Mac of which 84 percent are
    prime.
        The recently released November report shows that for the
    first 2 full months of conservatorship, October and November,
    the number of loan modifications increased 50 percent from the
    previous 2 months. These modifications were achieved using a
    customized, labor-intensive process. Currently, though,
    servicers are challenged by the sheer volume of borrowers
    requesting assistance in their ability to effectively and
    efficiently modify those loans. Accordingly, we have focused on
    new programs with the goal of reaching more borrowers more
    quickly and making it easier and faster to execute a loan
    modification.
        In November, FHFA announced the Streamlined Modification
    Program that was rolled out in December; 90,000 solicitations
    and modification offers were mailed to a targeted population of
    borrowers who had missed three payments. While responses to
    these letters are just starting to come in, early indications
    strongly suggest that several of the program guidelines should
    be liberalized to reach a broader population and to create a
    lower, more affordable payment. This feedback was shared with
    the Treasury Housing Team working on the Administration's
    homeowner affordability plan.
        In addition to the streamline program announced in
    November, the enterprises have taken many additional steps to
    help avoid preventable foreclosures. They have suspended
    foreclosures and evictions and developed programs to protect
    renters living in foreclosed properties. They are pulling loan
    files back for a second look before foreclosures, and they are
    working with credit and housing counselors.
        Recently FHFA has been pleased to work on the development
    of the Administration's plan. It is a major step forward in
    reducing preventable foreclosures and stabilizing the housing
    market. It aggressively builds on the FDIC's and our
    Streamlined Modification Programs. The key elements of the plan
    involve Fannie Mae and Freddie Mac. The enterprises will
    provide access to low-cost financing for loans they own or
    guarantee. This will help homeowners reduce their monthly
    payments and avoid foreclosure. It is designed for current
    borrowers who seek to refinance at a lower rate or into a safer
    mortgage, but who have experienced difficulties due to
    declining home values.
        Second, a $75 billion program will establish a national
    standard for loan modifications. Treasury will share a portion
    of the costs, which will provide financial incentives to
    borrowers, lenders and servicers. The enterprises will monitor
    servicer compliance with the plan's rules, and for those loans
    owned or guaranteed by Fannie Mae or Freddie Mac, the
    enterprise will bear the full cost of the modifications.
        Third, the Treasury will support low mortgage rates by
    strengthening confidence in Fannie Mae and Freddie Mac. The
    Treasury Department will double the size of its preferred stock
    purchase agreements to $200 billion each. This increase should
    remove any possible concerns that investors in debt- and
    mortgage-backed securities have about the strong commitment of
    the U.S. Government to support Fannie Mae and Freddie Mac.
        In addition, the Treasury Department will continue to
    purchase Fannie and Freddie MBS, and is increasing the size of
    the GSEs' allowable mortgage portfolios by $50 billion each, to
    $900 billion, along with corresponding increases in allowable
    enterprise debt outstanding. Over the next several days, FHFA
    will continue working with the Administration and the
    enterprises to finalize the details and implement this program.
        I will be happy to answer questions.
        [The prepared statement of Mr. Lawler can be found on page
    126 of the appendix.]
        Chairwoman Waters. Thank you very much.
        I will yield to myself 5 minutes for questions. My first
    question is to Mr. Vance Morris, Director for Single Family
    Asset Management, U.S. Department of Housing and Urban
    Development. You have, maybe not in your unit, but you have HUD
    counselors or certified counselors who are responsible for
    counseling and advising homeowners, first-time homebuyers,
    etc., and now they have included in their work working with
    homeowners who are in trouble and trying to help them get loan
    modifications. Do you think that the HUD-certified counselors
    have the training or expertise to really help with loan
    modifications?
        Mr. Morris. Well, Madam Chairwoman, to answer your
    question, it is a two-part answer. I think the housing
    counseling agencies have the training to effectively help the
    borrowers in trouble, because really they are advising,
    counseling, and providing alternatives. But the person who has
    the authority to effect the loss mitigation action is the
    servicer themselves. So you have a group of counselors who are
    funded, active, and well-educated, but you still have to get
    the actual work completed. It still has to go to the servicer,
    the analysis has to be completed, and then the action has to be
    taken.
        Chairwoman Waters. I understand that. And from what I have
    been able to see and understand about what is happening between
    the HUD counselor and the homeowner is the homeowners find the
    HUD counselors through nonprofits and churches and other kinds
    of things, but they have as many problems--the counselors have
    as many problems getting to the servicer and getting the
    servicer, if they get them, to do a loan modification. So I am
    trying to determine what is the most effective use of the HUD
    counselors, because my experience is they are not able to
    really facilitate the loan modifications. The servicers are not
    responding to them, I have discovered. So how can we best use
    these HUD counselors?
        Mr. Morris. I would hate to characterize it as not
    responding. What has happened from the feedback that I have
    gotten from the servicers is that we have established hotlines.
    There is a foreclosure crisis. So what happened is there is
    this gigantic influx of inquiries and activity that had been
    literally pushed on the servicers themselves. So as a result,
    based on this demand, it just seems like there is insufficient
    staffing to cope with all the inquiries and demands and loan
    modifications.
        So if you are asking what should we do with the housing
    counseling agencies, that is a hard question. Technically it is
    a separate section. It seems as though they are playing a
    proper role because the housing counseling agency does housing
    counseling for origination.
        Chairwoman Waters. In those activities some of them are
    good, particularly with first-time homebuyers, but I have yet
    to see the effectiveness of their role in dealing with
    foreclosures and helping to facilitate loan modifications by
    getting in touch with the servicer, helping to interpret to the
    servicer the particular case before them. You have homeowners
    with all kinds of problems related to that mortgage, and
    oftentimes they do need some help in interpreting to the
    servicers, once you get them, what the problem is with this
    homeowner.
        But the reason I ask this is because I am thinking about
    what to do about the HUD counselors in relationship to
    foreclosures, because we shouldn't fool each other that somehow
    they are being effective when it is not their fault, it is more
    the servicers' fault, because, as you are saying, they are
    overloaded or what have you.
        Let's move on to Ms. Gardineer. When did your agency begin
    to understand what was happening with the mounting
    foreclosures, and what took so long to get involved?
        Ms. Gardineer. Well, Chairwoman Waters, I would say that
    our efforts began to really focus on the mounting loan
    foreclosures--in April of 2007, we issued a statement that
    encouraged financial institutions to work with homeowners who
    were having difficulty making their payments. We encouraged
    them to reach out to those homeowners to try to modify and
    engage in prepayment plans at this point.
        Chairwoman Waters. Is that the extent of your authority to
    encourage?
        Ms. Gardineer. Well, with regard to that, Chairwoman
    Waters, we wanted to make sure that our regulated servicers
    understood that it was more prudent for them to reach out and
    make an effective modified loan as opposed to having a failure
    on both sides of the transaction that would result in a
    foreclosure.
        Chairwoman Waters. And If they did not do this?
        Ms. Gardineer. We would look through it through our
    supervisory process.
        Chairwoman Waters. Look at what?
        Ms. Gardineer. Look at their efforts to reach out to those
    homeowners.
        Chairwoman Waters. And if they did not do it?
        Ms. Gardineer. Are you asking would they be--
        Chairwoman Waters. What is your authority?
        Ms. Gardineer. With regard to enforcement of this?
        Chairwoman Waters. Yes.
        Ms. Gardineer. I don't believe we have enforcement
    authority.
        Chairwoman Waters. I see. So when you talk about
    encouragement and doing whatever you can do to get them to work
    closely with the homeowner, that is the best you can do with
    the authority that you have; is that right?
        Ms. Gardineer. I would say that with respect to the
    creation of our Mortgage Metrics Report, which we have made a
    part of our supervisory process, we are looking to gain more
    information with regard to how effective the modifications are
    being done. And because it is a part of our supervisory
    process, and we will examine for this going forward, then I
    think our safety and soundness authority will cover our ability
    to take more effective action.
        When we look at the methodology and the data that we are
    gaining from this report, and by making it a part of
    supervision, we are helping to shape our supervisory
    expectations in understanding how servicers can do more and
    what they are doing in regard to what their current authority
    is, how we can look at how we can expand on that current
    authority, as well as helping them understand the parameters
    that we as supervisors and regulators expect.
        Chairwoman Waters. How long is it going to take you to
    include that in your supervisory responsibilities? You know, a
    lot of foreclosures are happening every day, and I guess the
    numbers that we saw here today, 2.5, or something like that,
    million. So how long is this is going to take you?
        Ms. Gardineer. As far as this being our third quarter, we
    released three quarters' worth of data, and with every release
    of the report and our analysis of the report, it allows us to
    see the information that we need to continue to understand the
    supervisory process and help shape this. We are in the midst of
    helping the Administration work out the details of the loan
    modification streamlined efforts to impact these foreclosures
    to see if we can stave them off earlier. We want servicers--
        Chairwoman Waters. What should we do in the future to get
    in front of a problem like this? We are late.
        Ms. Gardineer. Well, I think in the past, Madam Chairwoman,
    we have looked at lagging indicators, we have looked at data
    that has been based on model estimates as opposed to what we
    are getting with our fellow regulator, the OCC, at this point.
    We are looking at original loan-level data, the actual loans of
    homeowners that are being serviced by these servicers, and
    enabled to do that, and our ability to now look at that data in
    real time, today, to see what is happening in a specific ZIP
    code, geographic location, FICO scores, income verification or
    employment, and how all of these impact an ability for a loan
    to perform for that borrower. This is the kind of information
    this helps us to get in front of the problem as opposed to
    looking at model estimates, which we have--
        Chairwoman Waters. I have a great appreciation for that,
    but what you just told me gives me even greater worry. So I am
    going to move on to Ms. Capito. Thank you very much.
        Mrs. Capito. Thank you.
        Mr. Morris, can you explain to me, in your testimony you
    mentioned that in the refinancing, that $750 goes to the lender
    for a successful refinancing.
        Mr. Morris. $750 is just incentive payment for the cost of
    them doing the work. It has to be tied to cost by statute. So
    we have to be able to justify that they are experiencing the
    cost. It is the cost of them collecting the information,
    analyzing.
        Mrs. Capito. Is this similar, in your mind, to the
    incentive that the President has built into his program that he
    has put before Congress, or is this different, in addition to
    that?
        Mr. Morris. We have been operating our program since 1996.
    And I am just talking to you specifically about FHA's
    authority. Based on FHA's authority, according to our Office of
    General Counsel, when we pay an incentive fee, it has to be
    linked to some work that was actually performed. This is the
    fee structure for the work that was performed to complete the
    loan modification, plus the reimbursement for the title work.
        Mrs. Capito. If there is a 35 percent redefault rate
    recently, then every time, if you are redefaulting and you are
    going to come in to try to remanage the loan or refinance the
    loan, is there still a $750 payment every time that loan gets
    looked at?
        Mr. Morris. Yes, because the same analysis and due
    diligence is being done every time. A 35 percent default rate
    is not new.
        Mrs. Capito. That is over 10 years?
        Mr. Morris. Over the past 5 to 10 years that I have
    information, it is average, about that amount.
        Mrs. Capito. I would like to ask Mr. Lawler, you know, I
    think we encouraged folks who are in trouble, telling them, go
    to your lender, try to start working on a loan modification. My
    understanding of the President's plan is that the loan
    modifications have to be done by those loans that are held by
    Fannie and Freddie. How does a regular person figure this out?
    And what kind of outreach are you doing to make sure people are
    aware that they actually have this connection to those
    institutions?
        Mr. Lawler. There are two different parts to the
    President's plan. One deals with loan modifications, and for
    those it is not restricted to loans held or guaranteed by
    Fannie Mae and Freddie Mac. There is another part that involves
    refinances by borrowers who are current on their loans.
        Mrs. Capito. Let me just stop you right there. If you are
    current, you are refinancing; if you are in arrears, you are
    modifying?
        Mr. Lawler. Yes. Although you could qualify for a
    modification in some cases if you are current if there is a
    hardship, for example.
        Mrs. Capito. What is the difference between a modification
    and a refinance?
        Mr. Lawler. Refinance is just changing the interest rate,
    if the borrower qualifies for a new loan with a new maturity of
    30 years or 15 years.
        Mrs. Capito. But you are modifying a loan?
        Mr. Lawler. You are paying off the first loan, and you are
    getting a brand new loan.
        Mrs. Capito. Okay.
        Mr. Lawler. The other is modifying the terms of an existing
    loan.
        Mrs. Capito. Which would change the interest rate or the
    length of time?
        Mr. Lawler. Or the principal amount or the way the rates
    are computed.
        Mrs. Capito. In the President's plan can you refinance or
    change the principal amount; is that within the purview of this
    plan? I don't believe it is.
        Mr. Lawler. It is within the loan modification plan, yes.
    There is a provision for that, and the Treasury will
    participate in some of the cost in that.
        Mrs. Capito. I see.
        Let me ask you another question about the kind of
    complaints I have heard.
        Mr. Lawler. If I could finish?
        Mrs. Capito. Yes.
        Mr. Lawler. If it is a refinance, then that part of the
    plan is only for loans that are held or guaranteed by Fannie
    Mae or Freddie Mac, and one way for the borrower to find out if
    that is the case, obviously, is to call Fannie Mae or Freddie
    Mac. But I think on March 4th, there will be more details about
    exactly how to find out.
        Mrs. Capito. I think that is confusing to a lot of people,
    because they naturally assume that wherever they got the loan
    or whoever they are sending the check to is going to be the
    person or the only person they will have to be aware of as they
    are moving through the process.
        I heard--and maybe you can help me with this. I heard
    complaints from people who are buying the first-time loan or
    trying to refinance, and they maybe have credit scores that are
    not up in the 700s, but they are still good credit scores, and
    that Fannie and Freddie are assessing fees, and began assessing
    fees more here recently, that are putting, again, the price of
    refinancing that mortgage out of reach for a lot of people. Can
    you help me with this?
        Mr. Lawler. Well, part of Fannie Mae and Freddie Mac's
    problems most recently has been that this risk was underpriced,
    and so they are trying to make new loans that are priced
    fairly, but fairly to them and fairly to the borrowers. And
    they have made more use of distinctions of relative credit
    quality of borrowers. The difference between a very high credit
    rating and a good, but slightly lesser credit rating is a
    matter of basis points, but that is a distinction that they are
    making.
        Mrs. Capito. Would that same standard be applied in the
    President's plan?
        Mr. Lawler. For the refinances, Fannie Mae and Freddie Mac
    will determine what terms those loans will be available on, and
    there will be more details March 4th. For the loan
    modifications, it is really a question of lowering payments,
    not raising anybody's payments.
        Mrs. Capito. So the answer is, not really.
        Mr. Lawler. Not for loan modifications. Thank you.
        Mrs. Capito. Thank you.
        Chairwoman Waters. With that line of questioning, if you
    would like, I will yield you an additional minute, because you
    have an additional loan modification type in the HOPE for
    Homeowners program that is a refinancing program. Maybe knowing
    the difference between that, the GSEs refinancing and the loan
    modification may help us all.
        Mrs. Capito. Now you have totally confused me.
        Well, I guess I am getting to in my original statement
    looking at the fairness equation of people who are refinancing
    or loan modification or however. I am mixing them all up
    together, but I realize they are not the same; that if that
    borrower comes in and is held to one standard, and that person
    maybe has been doing all the right things, paying, working with
    their debt, paying all their credit cards on time, all these
    sorts of things, and then you have another person who is coming
    in under a different set of circumstances are not going to be
    assessed these fees, so it is going to be easier for that
    person to stay in their home than maybe this other person to
    purchase a home in the beginning or to refinance.
        Mr. Lawler. Well, people who are current can qualify for
    the loan modifications if there is hardship, if there is a
    special need.
        Mrs. Capito. Beyond a poor credit score.
        Mr. Lawler. Beyond a poor credit score, right. Losing a
    job, for example.
        Mrs. Capito. Or an illness or something to that effect.
    Thank you.
        Chairwoman Waters. Thank you.
        Mr. Green.
        Mr. Green. Thank you, Madam Chairwoman, and I thank the
    witnesses for appearing today.
        My frustration with this process emanates from an inability
    to understand why people won't do what is in their best
    interests. All of the evidence seems to indicate that it is in
    the best interests of investors to restructure the loans and
    allow the borrowers to continue to make payments, but all of
    the actions are inconsistent with what is in the best interests
    of the investors. Would someone care to just give me a very
    terse comment on this in terms of why investors are not
    amenable to doing what is in their best interests?
        Ms. Gardineer. Congressman, I think the difficulty lies in
    the pooling and servicing agreement contracts that govern the
    securitizations that many mortgages have ended up in. Those
    contracts in terms generally allow for losses that would be
    incurred under those securities to be borne by the junior
    persons who have purchased into those securities, with the
    investors protected against such losses such that it appears as
    though they would be moving against their interest. But I think
    the contracts are written in such a way to guarantee that their
    interests are paramount and protected against those losses.
        Mr. Green. Is this when we have something called tranche
    warfare to develop?
        Ms. Gardineer. Yes, Congressman.
        Mr. Green. If we provide a safe harbor for the servicer, do
    we now overcome the consternation that servicer has by virtue
    of liability and exposure; is that going to be a part of the
    key to safe harbor?
        Ms. Gardineer. I think so, Congressman. Our servicers have
    communicated to us that there are both legal and accounting
    impediments to their ability to service those loans or modify
    those loans that are in those securitizations. Our reports have
    demonstrated that it is far easier and more effective to modify
    the loans that are in portfolio. There is great latitude and
    great ability to change all of those terms. However, there are
    legal concerns about the way the contracts govern what a
    servicer's abilities to reach into those securities pools and
    modify those loans are. So providing that safe harbor to give
    them some protection against the legal liabilities and making--
    or having them being accused of doing something against the
    best interests of the trust I think would further the ability
    of the servicers to actually modify those types of loans.
        Mr. Green. Yes, sir?
        Mr. Evers. A little different perspective, particularly
    thinking of it from an investor's perspective. If an investor
    thinks the future path of home prices is going down, and if
    they are looking at modification activity, and those
    modifications are kind of just nipping and cutting at the
    edges, and there is a lot of redefaults on those, they are
    thinking they could have a bigger loss down the road. If the
    loan is modified and still ends up in foreclosure, and home
    prices still go down, they are thinking, I could have a bigger
    loss 18 or 24 months down the road than if I just foreclosed
    today at the current prices.
        Mr. Green. I see.
        Mr. Lawler. I can add one more. Investors typically analyze
    the problem from their own perspective, how many loan
    modifications is it in my interest to do, but we are in a
    situation now where the cost of foreclosures affect everybody
    else. There are substantial external costs that are not perhaps
    being fully taken into account, and the sort of broader social
    benefits of modifications may be greater than the benefits to
    the investor making the decision.
        Mr. Green. Because my time is about up, someone tell me
    quickly how or what percentage of the loans that are
    questionable and may go into default are ARMs that are about to
    reset? Does anyone know? Do we have a high percentage of ARMs
    that are about to reset, or have we gotten through the ARMs?
        Mr. Lawler. We have mostly gotten through that, the 3/27s
    and 2/28s.
        Mr. Green. Right.
        Mr. Lawler. Most of those hit the first reset date through
    last year. That was at one time the main cause of problems. Now
    we are past the hump on that, but we have a whole bunch of new
    problems.
        Mr. Green. Madam Chairwoman, I cannot see the clock. Do I
    have any time left?
        Chairwoman Waters. The discussion about whether we have
    gotten over the hump of the resets? I have been led to believe
    that we have yet to hit the height of the resets. That should
    be coming in 2009 and 2010. So would you please go ahead and
    pursue that question?
        Mr. Green. Thank you, Madam Chairwoman.
        Simply restating what the chairwoman has called to our
    attention, and I think what we were trying to get to is this:
    The ARMS and 3/27s, 3 years prior to this would take us to 2006
    or thereabouts. You would still have a good number of those
    resetting at this time; would you not?
        Mr. Lawler. We still have some, but the biggest volume was
    in 2/28s. There was a bigger volume of 2/28s than 3/27s. So it
    is not that we don't have a good number coming up, it is that
    we are past the peak of them. That is what I meant.
        Mr. Green. I understand.
        My final question is this: If we provide the safe harbor,
    if we encourage loan modifications as opposed to refinance, if
    we provide an incentive by way of an emolument, meaning a
    payment of dollars for remodification, is this going to have a
    sizable impact on the problem, or will we find ourselves with
    so many loans to be modified that we won't have enough
    servicers to accommodate the persons who are seeking
    modification?
        Mr. Lawler. Certainly capacity constraints are a matter of
    concern. But we need to have a lot more modifications than we
    have been having. There is certainly room to do a lot more. We
    need to press that capacity.
        Mr. Green. Does that mean we will have to hire more people
    is the bottom line?
        Mr. Lawler. I think servicers will find that in many cases
    they will have a need for more people, and the incentive should
    make it possible for them to hire more people.
        Mr. Green. Thank you, Madam Chairwoman. I yield back.
        Chairwoman Waters. Thank you.
        Mr. Marchant.
        Mr. Marchant. Thank you for your testimony. If I were
    sitting back in my district watching this hearing, the summary
    that I would have taken away from the testimony is that HUD is
    studying and encouraging, the OTS is studying and encouraging,
    the Office of the Comptroller is studying and collecting data,
    and the Federal Housing Finance Agency is studying, evaluating,
    and implementing monthly and quarterly foreclosure reports.
        Now, nobody should be encouraged by that. In fact, there
    doesn't seem to be a workable plan in place. In HUD's case,
    they have a dual role of protecting; in fact, HUD cited a
    report in their study, and they cited a report that was made in
    1996. And we are working off of a plan from 1996. In the case
    of the Office of Thrift Supervision, in many cases at the same
    time you are studying and urging your members and those that
    you supervise to modify, at the same time your examiners are
    out in those banks examining the very portfolios and the very
    loans that you are urging them to modify. And, in fact, if they
    do modify them, then they are put on a watch list, and they are
    required to reserve against those loans. So the very thing that
    you are urging them to do your examiners could very well
    penalize them for following through and doing.
        In the case of the FHFA, the Federal Housing Finance
    Agency, it is important. I will not argue that we have
    statistics and knowledge of the redefaults, etc., etc., but, in
    fact, all of the information that is brought forward in these
    reports actually reinforces, in my view, a lender's resolve
    probably not to modify and not to reset the mortgage, because
    what shareholder in any institution would urge its institution
    or board member would urge its institution to modify or extend
    or renew a loan that has one in three chances of relapsing?
        And, as was stated, it might be more beneficial to let them
    take the loss now, get the thing back on the market.
        So, Madam Chairwoman, the frustration on my part, and I
    know that everybody is concerned about it, is that we continue
    to pile study, letters, urgings, statistics, reports on top of
    reports, and in fact, your HUD counselors don't have anybody to
    turn to because we have as many disincentives built into the
    system to not modify and not extend and to foreclose than we
    have to do that. And it has been proven in the fact; it has
    been proven in the failure. I don't fault the attempts to come
    up with these programs, but it is very clear after, what, we
    have been working on it a year, that most of the things that we
    have tried have been counterproductive.
        So, thank you.
        Mr. Morris. Madam Chairwoman, am I allowed to--I just want
    to be accurate by my testimony. Can I make a comment?
        Chairwoman Waters. Please, yes, go right ahead.
        Mr. Morris. I am Vance Morris from the Department of
    Housing and Urban Development. The 1996 study that was
    referenced in the testimony was the basis for our loss
    mitigation program. By statute, if a lender does not engage in
    loss mitigation and they file a claim with us and we find out,
    we charge them 3 times the claim amount. That means if we paid
    $30,000 and they failed to execute loss mitigation strategies,
    if we paid them $30,000, they would have to pay us $90,000.
        We monitor lenders electronically. We review thousands of
    loan files per year. So we do have an active loss mitigation
    program. We would like to have more expansive authorities, but
    we are not in the study mode. We have been active in modifying
    loans, doing partial claims which brings people's arrearages
    current. We do special forbearances. And we have been very
    active with trying to actively manage our portfolio.
        So if I misspoke and made it seem that we are studying, we
    don't have a study program. We have an active loss mitigation
    program. Lenders are penalized if they don't follow the
    program. But we do like to see additional authority.
        Chairwoman Waters. We didn't misunderstand you. Mr.
    Marchant didn't misunderstand you. But we are quite frustrated
    because of what this country is experiencing. And when you talk
    about loss mitigation, we have discovered what some of these
    loss mitigation programs are in the banks. How do you regulate
    loss mitigation programs that are basically handled offshore?
        Mr. Morris. Well, the loss mitigation activities for FHA
    are currently not outsourced. It has to be done by an FHA-
    approved servicer. It is not an outsourced activity.
        Chairwoman Waters. I am sorry. So you are only speaking for
    the FHA?
        Mr. Morris. Yes, ma'am.
        Chairwoman Waters. Thank you very much. I am going to move
    on to Mr. Lynch.
        Thank you.
        Mr. Lynch. Thank you, Madam Chairwoman, and Ranking Member
    Capito.
        I want to thank the witnesses on this panel and others for
    coming to help this committee with its work.
        I want to go back to a point that Madam Chairwoman raised a
    little earlier, a good point. The Federal Reserve does a very
    good job in my district in terms of the data that they provide
    me. They can actually, the Boston office of the Federal
    Reserve, can actually tell me the number of mortgage resets
    that are going to happen in my district. Actually, by town,
    they can tell me these mortgage resets. And while right now,
    the mortgage resets are for the most part very low because the
    rates are low, the volume of those mortgages, as the Chair
    pointed out, in 2009 and 2010 are very high, and we really
    don't know what the picture will be at that point, although we
    heard Mr. Bernanke today say that rates would have to stay
    historically low for some time.
        More troubling for me, though, is what I am seeing now is,
    rather than reset-related defaults, I am seeing layoff-related
    defaults. People are getting thrown out of their jobs, and so a
    sound and stable mortgage is now in trouble.
        Here is my question. We have a provision that is being
    considered this week for a so-called cramdown provision, where
    a homeowner in bankruptcy would have the opportunity to have
    their mortgage modified in bankruptcy if the judge determined
    that was the right thing to do.
        If this cramdown provision succeeds, what impact do you see
    it having on the voluntary modification framework that you are
    dealing with, where--what I am saying is, are we going to see
    lenders and servicers incentivized to deal? Remember, it is all
    voluntary. Or are we going to see homeowners who are saying, I
    am so far underwater, I might as well just roll the dice, not
    go for a voluntary modification, and see what I can get out of
    the bankruptcy court?
        I know this is conjecture. It is opinion, but in your case,
    it is educated opinion. What do you think will happen if we do
    adopt that provision?
        Mr. Morris. Well, I looked at the legislation as well, and
    the net effect is still being ascertained by the Department.
        But your question refers to voluntary modifications. The
    authority that I talked about that we are requesting is
    additional authority to do larger voluntary modifications; it
    is actually called partial claim authority. We think with that
    authority, it gets us further ahead so someone would avoid
    bankruptcy, because it would actually be an alternative.
        Currently, the way our loss mitigation programs work, it
    helps you if you have a temporary but not permanent disruption
    in income. That means 12, 14, 16 months. But what is happening
    now, as you pointed out, Congressman Lynch, is that families
    are having permanent reduction of income. So we have to have a
    tool to bring the payment down to an affordable level. We are
    hopeful that we will get the authority to have this voluntary
    modification, then it will not push people to bankruptcy,
    because that will just cause the cascading effect of all the
    borrower's credit.
        Mr. Lynch. That is helpful. Could I get a couple more
    opinions on that, just different perspectives?
        Ms. Gardineer. Congressman, I think that what we are seeing
    with regard to the bill, I have looked at the Helping Families
    Save Their Homes Act, the proposal that will be on the Floor
    this week, and at OTS, we believe that another tool that would
    help us reach as many homeowners as possible if it is
    effectively done that can reach those homeowners would be a
    good thing.
        Whether or not this would incentivize servicers to engage
    in more modifications, I think that another point that
    Congressman Green raised is also important to note: Servicers
    are constrained by the contracts, the pooling of servicing
    agreements, that are in place with regard to securitizations.
        What we have seen from the data that we collect is that if
    there is a modification, a mortgage that is in portfolio, the
    modification is often far more sustainable because the powers
    to modify that loan are greater. Again, the ability to provide
    some legal insulation through additional legal action for the
    servicers would assist in that as well. So, again, the more
    tools that we see that can get to the most homeowners to
    effectively stave off the foreclosures is the better approach.
        Mr. Lynch. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        Ms. Jenkins.
        Ms. Jenkins. Thank you, Madam Chairwoman, and thank you all
    for your testimony today.
        I would like to share with you an excerpt from an article I
    read recently in Business Week, and I would just ask maybe a
    few of you to comment on the problem it describes. Federal
    banking regulators reported in December 2008 that 53 percent of
    consumers receiving loan modifications were again delinquent on
    their mortgages after 6 months.
        A law professor, Allen M. White, says the redefault rates
    are high because modifications often lead to higher rather than
    lower payments. An analysis that White did of a sample of
    21,219 largely subprime mortgages modified in November 2008
    found that only 35 percent of the cases resulted in lower
    payments. In 18 percent, payments stayed the same, and in the
    remaining 47 percent, they rose. The reason for this strange
    result was lenders and loan servicers were tacking on missed
    payments, taxes, and big fees to borrowers' monthly bills.
        Now, it seems to me that payments that rise after the loan
    is modified is counterproductive. Could some of you just
    comment on this particular problem?
        Mr. Lawler. I would be glad to. The program that we have
    been working on with the Administration is designed
    specifically to avoid that kind of problem. It is specifically
    targeted at the debt-to-income ratios of the borrowers and
    working them down to 31 percent. In many cases, they will have
    been much higher. And so the whole focus is to make an
    affordable mortgage, not simply to tack on all the arrearages,
    to figure out how much that will amortize over to over the
    existing life of the loan.
        Mr. Evers. I just would add, there may be some cases where
    the loan payment may increase, and that may be a situation
    where it is a temporary credit repair strategy going on where
    the borrower has a temporary situation and, fees and stuff are
    getting rolled into the loan getting reset. But we want to know
    the answer to that question. We want to know if this is a
    pattern of practice, just how many of these types of mods are
    out there. That is why we are collecting changes in monthly
    payments before and after the mod to know what is going on, and
    then looking at the redefault rates for the various classes for
    loans where there has been an increase in payment, where there
    has been no payment change, and where there has been a decrease
    to get a better understanding of that.
        Mr. Morris. Congresswoman Jenkins, as I mentioned in my
    testimony, that is a correct statement. On average, after the
    loan modification, the average increase is about $22. And that
    is the result of the past due amount being put into the new
    loan balance.
        The reason why I keep emphasizing this is the way that the
    loss mitigation program is set up currently is to help people
    who have temporary reductions in income. So what the servicers
    do is, when they do the financial analysis, they analyze the
    payments so that they can determine that it is an affordable
    payment. What is happening now, though, there is a permanent
    reduction in income, so we need a way to effectively reduce the
    payment in a tangible way, and that is why we are requesting
    the additional authority, so we will have additional tools to
    assess people in this situation.
        Chairwoman Waters. I am going to turn to Mr. Cleaver at
    this point. Before I do, has there been a formal request for
    additional authority so that you could basically reduce the
    amount of the mortgage payment?
        Mr. Morris. I was looking at the legislation yesterday. It
    was written in the Help Families Save Their Homes Act. It was
    in that authority. But I don't know exactly at what stage it
    is, and I will follow up.
        Chairwoman Waters. We will take a look.
        Mr. Cleaver.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        With some concern, perhaps even fear, that the redefault
    rate will be used by opponents to fight most of what some of us
    are interested in doing with either cramdown or loan
    modification, is there anything that we can do to reduce the
    redefault rate, considering of course, I mean, obviously, if
    you go by the percentages with the subprime primers generally
    having a redefault rate higher, is there a way that we can
    undergird them or do something to reduce that? Anybody?
        Ms. Gardineer. Congressman, I think that, as my colleague
    Mr. Evers said, one of the things that our mortgage metrics
    report after the release of the third quarter data showed the
    increase in the redefaults at the 30- and 60-day past due mark;
    we did go out for a broader data collection to look at how
    loans were modified that resulted in an increase in principal
    as well as payment, where there was no change to the payments,
    to reduce payments by 10 percent or less, or reduce payments by
    more than 10 percent. And our goal in getting that information
    and then sharing it with the Administration's working group,
    which our agencies are continually working to help find the
    right criteria that we believe we can get from looking at how
    these modifications were done so we can see which ones were
    more effective and what that structure was.
        In sharing that with the working group with the
    Administration and with Treasury, we hope to find that
    streamlined effort where we can show the most effective
    modifications as demonstrated from the information we get. And
    hopefully we will be able to look at the lower rates of
    redefaults and see a correlation between some of these
    criteria, and utilize that to give some structure to our
    servicers as far as trying to make the most affordable and
    sustainable modifications as opposed to the ones that could
    easily slip back into a redefault situation.
        In addition to that, I think it is important to note that
    we do see a correlation with unemployment as well as underwater
    mortgages. All of those things, I think, that we get the
    increased data and we share that with our fellow agencies, it
    allows us to have the ability to try to form that more
    sustainable mortgage and avoid those redefaults.
        Mr. Cleaver. Mr. Evers.
        Mr. Evers. I would just follow up on what Grovetta said. We
    have interagency retail credit company guidance, and in that
    guidance, it basically requires servicers to try to do one mod,
    not multiple mods for a borrower. And that is in there to make
    sure that they do the mod right and they are not doing multiple
    mods. And the only time they would do a multiple mod, if the
    borrower has some life-changing event, like loss of a job or
    unemployment or some medical problem or major loss of income.
    But the real issue is, do the mod right, install for
    affordable, sustainable payment, and structure it properly.
        Mr. Cleaver. Is there way to do this with triage? That is,
    can it also be done in a just way?
        Mr. Evers. In terms of doing more?
        Mr. Cleaver. No, no. Is there a way--I mean, there are some
    loan modifications that we--I think Ms. Gardineer has just done
    a little, some loan modifications that we should know are not
    going to work. And so there is--it is pointless to try to force
    it to work, and we actually feed the people, we feed our
    opponents when we do that because they use that to, you know,
    say you are throwing away money, and the whole 9 yards. And I
    like to feed everybody, but I don't want to feed my opponents.
        Mr. Morris. Congressman Cleaver, I think I can respond to
    that question. As I mentioned in my testimony, it is really not
    the redefault rate. It is really that you end up foreclosing.
    The cost between throwing someone on the street and doing
    another modification through FHA is $750. So we will spend
    another $750 to try to keep somebody in the home, because what
    happens is, 2 years after the fact, more than 85 out of 100
    people are still in their homes, and we are saving a lot of
    money as opposed to saying, oh, the redefault didn't work this
    time; let's not try it again.
        What happens is it takes time for people to recover from
    change in household income. It could be a disability. And it
    is--because, like I said, the current tools now, you have to go
    back to essentially your full payment. So we do have the
    redefaults, but still we work with them again to make certain
    that it sticks. And for another $750, if we can save another 60
    families from losing their homes, that is what we are doing. So
    your opponent is going to look at the redefault rate, but my
    question is, has a person still been living in the house 2
    years after the fact? Because 2 years really is the measure
    that says they fully recovered from any type of activity. If
    something happens 5 years down the road, it is probably another
    life event.
        So the question, this is just my opinion, is, what happens
    to the family? Are they ultimately foreclosed? And is it worth
    $750 to try to keep somebody in their house by doing another
    loan modification? FHA says it is worth another $750.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        Chairwoman Waters. Mr. Lee.
        Mr. Lee. I will try to be brief, but it is such an
    important issue, and I just want to touch on a few points
    because this has been such a major issue in my district. I have
    a district between Buffalo and Rochester, New York, and a very
    hardworking community who this group, we never really had a
    boom to bust in the housing market. And in some way, that has
    been a blessing because people have been able to, up until now,
    been able to stay within their homes. But we are now starting
    to see the job losses, and people who, through no fault of
    their own, now are starting to have issues, be it a medical
    illness or they had two incomes and a wife or husband has been
    laid off. And these are people who have been paying their
    credit cards. Every day in and day out, they have been meeting
    their mortgage payments, but it has been harder and harder.
        And the calls that I am receiving by the dozens is the fact
    that they are making their payments, and they now go back to
    their service provider--and I won't name names of the
    institutions--but some are finding, in some cases, are finding
    relief through a service provider A, but service provider B
    under no circumstances really has been willing to either
    remodify the loan amount, lower interest rates, or try to work
    with them. And it is very hard to go back to them and say, we
    don't have a policy.
        I would be curious to know, can we--and I know most banks
    do have a process in place, but it doesn't seem to be
    consistent. I would like to hear your views. Do we, without
    trying to hamstring, I am not a big believer in Big Brother,
    but do we have the ability to come with some standard uniform
    process so that we can tell those who are struggling that these
    are options that are available to you, those people who are
    struggling but are making their payments right now, to try to
    assist them? And then I have a follow-up.
        Mr. Lawler. This is something we are definitely trying to
    address in the program we have been working with the
    Administration on, and we will have further details on March
    4th.
        What we are trying to do is set up a standardized program
    that can be adopted throughout the country, and that will
    include people who are extremely stressed and therefore in
    imminent danger of default even though they are currently
    making their payments. And we are very hopeful that this will
    work, as we are certainly directly trying to attack this
    problem.
        Mr. Lee. And in follow up to that, because that is the
    number one call, then the follow-up call is the fact that,
    again, these hardworking individuals are frustrated because I
    think they are worried a percentage of individuals who
    misrepresented their income who, be it in different parts of
    the country where there was escalating prices, where they took
    advantage of that system. And is there any way, because I don't
    think there is anybody who wants to, if someone was trying to
    do this for personal gain versus those who have been truly
    hardworking citizens, how do we protect and make sure that we
    are not bailing out those who are trying to make a profit from
    this housing issue?
        Ms. Gardineer. Just to follow up. We are also working with
    the Administration to develop this loan modification program.
    And key to that is going to be verification of things such as
    income and employment. We believe it is important not only to
    reach as many homeowners as we can to put them into sustainable
    affordable modifications, but to be able to verify the veracity
    of the information that the borrower provides to that servicer.
        But the uniformity that we are striving for, I think, gets
    to the heart of your first question, which is the disparity
    that may be incumbent upon different servicers and the
    approaches that they use to modify different loans, and going
    to servicer A, who is willing to use a certain set of criteria,
    but that may not be utilized by servicer B.
        Our hope is that we will be able to create the streamlined
    modification effort that is able to verify, to weed out fraud,
    to make sure that those who are owner-occupied properties are
    able to get that sustainable affordable modification that will
    allow them to stay in the home and avoid an avoidable
    foreclosure.
        Mr. Lee. Thank you.
        Chairwoman Waters. Thank you very much.
        Before I call on Mr. Clay, keeping in line with that
    testimony, Ms. Gardineer, I have seen loans that--mortgages
    that people got involved in, in 2006 and 2007, where they were
    predatory loans, and the interest rates were 9 percent, 9.5
    percent, and I had one at 10.5 percent. When you are
    constructing a model that can be used to do modifications, is
    there some consideration given to the high price of mortgages
    when the interest rates were basically at 5 or 6 percent? I
    mean, could we say or is it advisable to recommend that all of
    those interest rates be reduced to 4.5 percent or something
    that would be consistent with somewhere what the mortgages
    would be today?
        Ms. Gardineer. Chairwoman Waters, I believe that part of
    the criteria that we are looking at may not be an across-the-
    board interest rate, but certainly looking at the home price
    depreciation as well as the interest rate at the time of
    origination and the payments that the borrower would be able to
    afford, looking at the debt-to-income ratio as well as the
    loan-to-value. So taking all of those things into consideration
    as well as the highest rates that may have been advanced at the
    origination, I think it is possible for us to come up with a
    streamlined approach that would indeed include a reduced
    interest rate in order to make that modification an affordable
    payment for that borrower.
        Chairwoman Waters. I do understand that, now, with the
    modification efforts that I have been involved in helping some
    of my constituents, all of those things are taken into
    consideration for the most part. But I was really asking about
    the reduction of interest rates based on what appears to be a
    predatory interest rate that was given at a time when the
    market interest rates were 5 or 6 percent, that you see, I
    mean, it just jumps out at you that this person is charged 10.5
    or 9 percent. Wouldn't that kind of be an automatic reduction
    without all the other considerations?
        Ms. Gardineer. Congresswoman, I believe that you made an
    excellent point that I will take back to the working group this
    afternoon and include in our dialogue as we move towards our
    March 4th deadline to provide that criteria and the parameters
    for the servicers. But that is an excellent point that we
    should be considering as we move forward.
        Chairwoman Waters. I appreciate that, because I have run
    across a few of those.
        Mr. Clay.
        Mr. Clay. Thank you, Madam Chairwoman, and I thank the
    panel for being here today.
        Let me start with Mr. Lawler.
        Mr. Lawler, in your testimony, you state that it is
    important to note that when calculating and analyzing redefault
    rates, common definitions are required, and there is much
    debate within the industry as to what those definitions are,
    how redefault rates should be measured, and over what
    timeframes.
        I am curious as to how you would define redefault terms and
    definition. When reporting your data, what do you consider a
    modification, and is a repayment plan a modification?
        Mr. Lawler. A repayment plan that doesn't change the terms
    of the mortgage but simply when it can be paid is not a
    modification. If it were a major change like a change in the
    term from a 30-year mortgage to a 40-year mortgage, that would
    be a modification. If it is simply taking the existing amount
    owed and saying, you can make up payments that you are behind
    at the end of the 30 years, that would just be a repayment plan
    or redistributing those amounts owed so that your payment goes
    up. Those are just repayment plans.
        As far as the definitions of redefault, the key things are,
    how many days delinquent, and over what timeframe? So, for
    example, Mr. Morris is suggesting that if you are still in your
    house 2 years later, that probably shouldn't count as a
    redefault. Sometimes you don't have as long a period. You don't
    want to wait 2 years to see how you are doing, so you compute
    how the loans are doing that you modified in a more recent time
    period and you want to know, well, how many 30-day
    delinquencies do I have, how many 60-day, how many 90-day and
    so forth.
        Mr. Clay. Thank you for that response.
        Let me ask Mr. Evers.
        Mr. Evers. I just want to follow up on that. We agree that
    there needs to be clear, standard definitions. You need to have
    a clear definition of what is a mod and what is not. A
    repayment plan, an informal repayment plan is not a mod. A mod
    is when the contractual terms of the payment have been changed
    in writing. And we only count that when it is done; nothing
    before that, nothing informal. And then we track subsequent
    performance, post-modification. And we look at the number of
    payments the borrower has made subsequent to that. That is, in
    our opinion, the best way to get an apples-to-apples comparison
    in terms of monitoring performance of post-modification loans.
        Mr. Clay. Thank you for that response. How do we establish
    a guideline to ensure that we take into account the trend of
    the day that has several people in the household contributing
    to the mortgage payment? Many of these households stayed
    current in their payments until this current crisis. When
    considering a workout with the applicant, what do you include
    as gross income? Do you include the wife or other family
    members living in the home as additional sources of income if
    they are not on the mortgage? And anyone can take a stab at it
    on the panel.
        Ms. Gardineer. Congressman, currently, the person who is
    actually on the note is the--or the couple or whoever is
    actually on the original note, that is the income that is the
    measure by which you are looking at how to modify that loan.
    There can be, and we recognize and it is a continued topic of
    discussion in the working groups right now working on the
    Treasury and Administration plan, recognizing that there are
    many households with contributors to the monthly mortgage
    income that are not actually on the note and how to recognize
    or work within that structure to create an affordable
    modification. But the current legal requirements would limit
    our ability to look at only those who are actually on the note
    for repayment modifications.
        Mr. Clay. But you know that is not traditional.
        Ms. Gardineer. I do recognize there are many households, as
    you described, and the working group is aware of that as well.
        Mr. Clay. I think, Mr. Morris, you may be able to help me
    with this. Are we trying to force the choice of a modification
    over that of a refinance? The new charges added by Fannie Mae
    and Freddie Mac in December add up to about $15,000 to
    refinance costs for the borrower. Why is that? They have added
    up to 5 points. They have new terms like adverse market fee,
    adverse credit fee, and nonowner fee. Can you give me an answer
    to that? Do you know why?
        Mr. Morris. Candidly, Congressman Clay, I think Mr. Lawler
    would have to speak about the fees.
        Mr. Clay. Mr. Lawler, could you tackle that?
        Mr. Lawler. Certainly the fees on many mortgages have gone
    up. The risks have also gone up. It is a lot riskier to make a
    loan when the expectation is that the value of the collateral
    is going to decline over the period of the loan, than in a time
    when you expect the value of the collateral to get greater. And
    in recognition of that risk, it is necessary to make some
    charges.
        At the same time, whenever it is possible, a refinance is
    probably on average going to be more successful than a
    modification if the borrower can qualify for the refinance.
        Mr. Clay. But don't we want to kind of look at what is
    reasonable here? I mean, what is actually doable for the
    average consumer?
        Mr. Lawler. We certainly do. And the most important thing
    in that area that we can do is try to get the general level of
    mortgage interest rates down.
        Mr. Clay. Without Fannie and Freddie adding onerous fees
    and arbitrary fees?
        Mr. Lawler. I hope they are not arbitrary.
        Mr. Clay. I bet they are.
        I yield back.
        Chairwoman Waters. Thank you very much.
        As we wrap this up, and since you are making
    recommendations that supposedly will be unveiled on March 4th
    in the President's plan, I would like you to give some thought
    to the fact that I have run into constituents who say they are
    the victims of fraud. Even though all of us would like to think
    we are all responsible and we know what we are doing, I am told
    that certain individuals had income that was noted on the
    documents that was much larger than their real income, and that
    that is not what they told the loan initiator; and they placed
    it on there in order to get the loan funded, the mortgage
    funded. I am told that people did not sign certain documents.
        What do we do where there is an indication of fraud? How do
    we follow that up? And how do we help the homeowner, and how do
    we penalize somebody? I mean, that is something I would like to
    give some consideration to. And FICO scores. If you have an
    adjustable rate mortgage and the margin is, I don't know, 3 or
    4 percentage points higher, and you obviously cannot pay that
    large a mortgage payment, and so you are delinquent, but you
    are trying to get a loan modification. If you were being
    considered, say, by, I don't know, Fannie or Freddie or anybody
    else who would consider your FICO score as part of those things
    you consider before you do the loan modification, what do we do
    about that? Should you be penalized for that now having damaged
    your credit while you are trying and you have been working very
    hard to do a loan modification so that you could keep your home
    and you could make payments that you could afford? So I would
    like you to give some thought to that.
        I would like to note that some members may have additional
    questions for this panel which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to these
    witnesses and to place their responses in the record.
        This panel is now dismissed. Thank you very much.
        I would like to welcome our distinguished second panel. Our
    first witness will be Mr. William C Erbey, chairman and CEO of
    Ocwen Financial Corporation.
        Welcome.

      STATEMENT OF WILLIAM C. ERBEY, CHAIRMAN AND CHIEF EXECUTIVE
                  OFFICER, OCWEN FINANCIAL CORPORATION

        Mr. Erbey. Thank you, Chairwoman Waters, Ranking Member
    Capito, and distinguished members of the subcommittee. My name
    is William Erbey, and I am chairman and chief executive officer
    of Ocwen Financial Corporation, an independent mortgage loan
    servicer.
        First, let me thank you for the opportunity to participate
    in this hearing today. I share your sense of urgency to find a
    lasting solution to our daunting foreclosure crisis, a crisis
    that lies at the very heart of our economic problems and
    threatens millions of families with the loss of their American
    dream, their home.
        I applaud the leadership of the chairwoman and subcommittee
    members in relentlessly advocating, ever since the inception of
    this crisis, the need for bold action to assist homeowners with
    unaffordable mortgages and to prevent avoidable foreclosures.
        I also applaud President Obama, Secretary Geithner, and the
    President's economic team for answering the call for bold
    action in a matter of a few weeks into the new Administration
    by launching the Homeowner Affordability and Stability Plan.
    This plan includes a substantial loan modification component
    that is the subject of today's hearing.
        Prior government-sponsored loan modification initiatives
    were all good first steps in the right direction, but the
    President's new plan is exactly the kind of insightful and
    decisive action that is needed to make a material impact on the
    foreclosure crisis.
        As one of the few remaining independent mortgage servicers,
    Ocwen is very proud of our achievements in foreclosure
    prevention through loan modifications. We are not loan
    originators. We do not make mortgage loans. Rather, Ocwen is
    engaged as a loan servicer under contracts with mortgage
    investors, i.e., the securitized REMIC trusts.
        Currently, our servicing portfolio contains approximately
    325,000 mortgage loans of which approximately 85 percent are
    subprime. Beginning in early 2007, we proactively prepared for
    an increase in mortgage delinquencies by increasing our home
    retention consulting staff by 50 percent. When the mortgage
    meltdown hit with full force later that year, we increased
    staff by another 35 percent and were the first in the industry
    to adopt an aggressive and comprehensive loan modification
    program. Our program reengineers lower mortgage payments that
    are both: (A) affordable for the homeowner; and (B) will return
    greater cash flow to investors than the net proceeds that would
    otherwise be realized in a foreclosure.
        Loan modifications crafted in this way are consistent with
    our contractual obligations and result in a win-win-win
    solution for all involved. The homeowner keeps their home; the
    investor avoids a substantial loss; and the loan servicer
    retains the loan in the servicing portfolio. Since the
    inception of the crisis, we have saved over 90,000 homes from
    foreclosure. And for investors, according to an industry study
    by Credit Suisse, Ocwen's loan modification program generates
    the highest cash flows by any servicer on 90-plus day
    delinquent loans, an amount that is twice the industry average.
        If loan modifications are to have an enduring impact, the
    reduced mortgage payments must be sustainable by the
    homeowners. The salient measure of success, therefore, is the
    redefault rate, i.e., the percentage of loans that go into
    default after modification. We are pleased to report that loan
    modifications engineered by Ocwen have a redefault rate of 19.4
    percent compared to an industry average of 42.9 percent,
    according to the most recent report issued by the OCC and the
    OTS.
        The superior sustainability of Ocwen's loan modifications
    is the result of our customized approach that addresses
    homeowners' delinquencies on a loan-by-loan basis. By combining
    our proprietary loan analytics technology with behavioral
    science research, we first comprehensively re-underwrite each
    delinquent loan we service, i.e., the way it should have been
    done with the broker or the lender at origination. Second, we
    determine whether modification is both affordable by the
    homeowner on a sustainable basis and maximizes the net present
    value for the loan owner as compared to a foreclosure. And,
    third, we provide one-on-one financial counseling to the
    homeowner aided by interactive scripting engines to maximize
    the likelihood of their keeping current on the modified loan.
        Another key to sustainability is principal reductions where
    necessary to achieve affordability: 18.7 percent of our loan
    modifications include writing down of the loan balance. This
    allows us to help more distressed homeowners with solutions. As
    reported by Credit Suisse, Ocwen leads the industry with 70
    percent of the industry's principal reduction modifications.
        Early intervention is critical to foreclosure prevention.
    Prevailing industry standards, as confirmed by the American
    Securitization Forum, make it clear that it is permissible to
    modify loans not only when the borrower is actually in default
    but also when default is imminent or reasonably foreseeable in
    the good faith judgment of the servicer. Adopting this
    standard, our early intervention unit has successfully avoided
    upwards of 9,000 foreclosures through proactive modifications.
        If a loan modification program is to have a material impact
    to redress the national foreclosure crisis, it must be
    scalable. Ocwen has invested over $100 million in R&D in
    building an automated large-scale platform that incorporates
    artificial intelligence, decisioning models, and scripting
    engines. This robust technology allows us to take on many
    multiples of the volume of delinquencies we have already cured
    in our portfolio.
        I would be remiss if I did not recognize the critical
    assistance provided to us by our nonprofit consumer advocacy
    partners. When, for whatever reason, a homeowner in distress
    does not respond to our letters or phone calls, we are unable
    to help them. Through grassroots outreach and educational
    initiatives, community groups, such as the National Training
    Information Center, Home Free U.S.A., National Fair Housing
    Alliance, National Association of Neighborhoods, National
    Council of LaRaza, St. Ambrose Housing Aid Center, and so many
    others, have greatly assisted us in making that key
    communication link with our customers. We have also recently
    established a relationship with National Community Reinvestment
    Coalition to broaden our homeowner outreach, and we will
    continue to support the foreclosure prevention efforts of the
    HOPE NOW Alliance.
        [The prepared statement of Mr. Erbey can be found on page
    70 of the appendix.]
        Chairwoman Waters. Thank you very much.
        I must move on to Ms. Mary Coffin, executive vice president
    of Wells Fargo Home Mortgage Servicing.

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

        Ms. Coffin. Chairwoman Waters, Ranking Member Capito, and
    members of the subcommittee, I am Mary Coffin, head of Wells
    Fargo Mortgage Servicing.
        Throughout this crisis, the mortgage industry and the
    government have collaborated on ways to reduce foreclosures and
    stabilize the economy. The homeowner affordability and
    stability plan is yet another positive step in addressing these
    challenges. As further details of the plan are defined, we
    fully support striking the delicate balance between providing
    aggressive solutions for those in need and guarding against
    moral hazard.
        Last year, we made it possible for half-a-million families
    to purchase a home, and we refinanced another half-a-million
    families into lower mortgage payments. At the end of 2008, for
    8 million mortgage customers Wells Fargo services, 93 of every
    100 were current on their mortgage payments; and for the 7 who
    were not, we have worked hard at keeping them in their homes.
    Since our servicing is predominantly held by other investors,
    this has required gaining consensus to honor our contracts.
        Over the past year-and-a-half, we have delivered more than
    706,000 foreclosure prevention solutions. We work with all of
    our customers, including those who are not in default, to
    determine if they qualify for a modification. They simply need
    to prove they have experienced a hardship that significantly
    changed their income and/or expenses. When we do modify a loan,
    about 7 of every 10 customers remain current or less than 90
    days past due 1 year later. We connect with 94 percent of our
    customers who have 2 or more payments past due. To be
    responsive to requests for help, we have more than doubled our
    staff to 8,000 default team members, all U.S.-based.
        These times are unprecedented, and we certainly are not
    perfect, but we do our best. And we thank you for taking your
    personal time to reach out to us when our servicer does not
    meet the standards we have set so that we can immediately work
    to correct the situation.
        When the foreclosure crisis began 2\1/2\ years ago, the
    first customers challenged were those with subprime ARM loans.
    To address their needs, streamlined processes to modify these
    loans into fixed products were created. But, clearly, as the
    housing and economic crisis has compounded, servicers have
    needed to go deeper with modification tools to provide
    sustainable solutions. In the fourth quarter of 2008, we
    provided 165,000 solutions, including term extensions, interest
    rate reductions, and/or principal forgiveness. Also, given the
    unique nature of the Wachovia option ARM loans, we used more
    aggressive solutions through a combination of means, including
    permanent principal reduction in geographies with substantial
    property declines. In total, 478,000 customers will have access
    to this program if they need it.
        As the number of customers in need rises, Wells Fargo has
    advocated the creation of a standardized modification process
    that is aligned across all investors. The one described in the
    Administration's plan will significantly improve our ability to
    serve more customers and to set appropriate consumer
    expectations for a modification. According to third quarter
    2008 FHA statistics, 56 percent of the Nation's 55 million
    mortgage loans are owned by Fannie and Freddie who are already
    aligned with this process. But more critical are the 16 percent
    held by private investors, which represent 62 percent of the
    serious delinquent mortgage loans.
        In the modifications we do today, loan terms are adjusted
    to achieve at least a 38 percent affordability target. By
    bringing borrowers to a 31 percent target as defined in the
    Administration's plan, we further increase the odds they can
    better manage their overall debt, thereby lessening the
    likelihood of redefault.
        Even though the details are not finalized, Wells Fargo has
    already begun to operationalize the standard modification
    program. We stood ready to assist our customers with
    information immediately following the President's announcement
    and our analysis to find those who may qualify is underway. We
    also will continue to stress the importance for FHA to be
    granted the authority to expand the 601 program to allow the
    assignment of mortgages to FHA and the payment of claims upon
    modification. We also support the recommended changes to HOPE
    for Homeowners.
        When asked what makes it difficult for us to help more
    borrowers, it is simply that their challenges are complex.
    Income disruption is at the root of the issue with many
    customers who are in variable or commissioned income situations
    that began destabilizing in the early part of the crisis, and
    the full impact of unemployment or underemployment is still
    unknown. While there are many tragic hardship cases, there are
    also people who got caught up in the excess of the growing
    economy and the real estate values who can no longer sustain
    the lifestyles to which they have become accustomed. No loan
    modification alone can solve this dilemma. In certain
    circumstances, counseling which considers full debt
    restructuring is required.
        In conclusion, we look forward to continuing to work with
    you on ways to turn the housing and mortgage industry around,
    and we will assist in any way possible to advance the issues we
    have addressed today.
        Thank you for your time.
        [The prepared statement of Ms. Coffin can be found on page
    67 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Our next witness is someone who has been here more than
    once, Mr. Michael Gross, manager and director for loss
    mitigation, Bank of America.
        What do you have new to tell us today, Mr. Gross?

          STATEMENT OF MICHAEL GROSS, MANAGING DIRECTOR, LOAN
            ADMINISTRATION LOSS MITIGATION, BANK OF AMERICA

        Mr. Gross. Madam Chairwoman, and Ranking Member Capito, I
    must confess, it is a pleasure to be here before you again.
        Chairwoman Waters. I bet.
        Mr. Gross. Good afternoon, and thank you for the
    opportunity to appear again to update you on our efforts to
    help families stay in their homes.
        As the country's leading mortgage lender and servicer, Bank
    of America fully appreciates its role in helping homeowners
    through these difficult times. We want to ensure that any
    homeowner who has sufficient income and the intent to maintain
    homeownership will be assisted using any and all tools we have
    available.
        Bank of America applauds the Obama Administration's
    Homeowner Affordability and Stability Plan's focus on assisting
    financially distressed homeowners with their mortgage payments
    using their refinancing and loan modification program. Ken
    Lewis, our chairman, has assessed the plan as very thoughtfully
    constructed, and believes it has a very good chance to make a
    significant and positive impact on today's crisis. We strongly
    support the Administration's focus on affordability in the loan
    modification processes in order to achieve long-term mortgage
    sustainability for homeowners. Bank of America recently
    announced a moratorium on foreclosure sales that is in effect
    until receipt of guidelines for implementing the President's
    plan. Simply put, we want to have every opportunity to help
    eligible homeowners who can be assisted by these new
    initiatives. We have already begun working with the
    Administration to develop guidelines for the implementation of
    the Homeowner Affordability and Stability Plan modification and
    refinance initiatives in order to ensure its success.
        The Administration's focus on affordability and
    sustainability is consistent with the approach that we have
    implemented which has led to more than 230,000 loan
    modifications for our customers in 2008 and 39,000 customers in
    January 2009 alone. In 2008, Bank of America committed to offer
    loan modifications to as many as 630,000 customers over the
    next 3 years to help them stay in their homes, representing
    more than $100 billion in mortgage financing.
        I would also like to provide a brief update on our mortgage
    business. We strongly believe that long-term recovery in the
    economy and housing markets relies upon lenders' responsibility
    and effectively providing loans to credit-worthy borrowers. In
    April, we will unveil our new Bank of America home loans brand.
    This launch will confirm our longstanding pledge to be a
    responsible lender and to help our customers achieve successful
    sustainable home ownership.
        Importantly, I want to emphasize that we are very much open
    for business and making new loans. In January, we produced
    $21.9 billion in new mortgages. We are now routinely publishing
    public updates on the Internet regarding our lending activity.
        Since I last appeared before Congress, Bank of America
    launched the Homeownership Retention Program. The program,
    launched in December, is designed to achieve affordable and
    sustainable mortgage payments for borrowers who financed their
    homes with subprime or pay-option adjustable-rate mortgages
    serviced and originated by Countrywide prior to December 31,
    2007.
        The centerpiece of the program is a streamlined loan
    modification process designed to provide relief to eligible
    subprime and pay-option ARM customers who are seriously
    delinquent or at the risk of imminent default as the result of
    loan features, such as rate resets or payment recasts. The
    program's goal is the same as the President's: to reduce
    monthly mortgage payments to affordable and sustainable levels.
        I would also like to update the committee on additional
    progress we have made to date on our entire home retention
    operations. Since early last year, the home retention staff for
    Bank of America has more than doubled to nearly 6,000 staff
    members. We also are continuously improving the training and
    quality of the professionals dedicated to home retention.
        As we have learned through experience, early and open
    communication with customers is the most critical step in
    helping prevent foreclosures. In 2008, we participated in more
    than 350 home retention outreach events across the country. We
    are also proactively reaching out to customers by making more
    than 10 attempts per month to contact delinquent homeowners. In
    January alone, we placed nearly 12 million outbound calls.
        In addition to sharply increasing the pace of workouts, we
    have been more aggressive in the types of workout plans
    completed. Loan modifications are now the predominant form of
    workout assistants. In 2008, loan modifications accounted for
    nearly 75 percent of all loan modification plans. Of these
    loans, interest rate modifications accounted for approximately
    80 percent of all of the loan modifications.
        I want to thank you for the opportunity to describe our
    ongoing home retention efforts. We recognize there is still
    much more to be done, and we look forward to working with
    Congress and the Administration.
        Thank you.
        [The prepared statement of Mr. Gross can be found on page
    111 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Ms. Molly Sheehan, senior vice president, Chase Home
    Lending, JP Mortgage Chase.

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

        Ms. Sheehan. Chairwoman Waters, Ranking Member Capito, and
    members of the Subcommittee on Housing and Community
    Opportunity, we appreciate the opportunity to appear before you
    today on this most important topic of helping homeowners.
        My name is Molly Sheehan. I work for the home lending
    division of JPMorgan Chase in housing policy.
        Chase is one of the largest residential mortgage servicers
    in the United States, serving more than 10 million customers
    located in every State of the country with mortgage and home
    equity loans totaling about $1.4 trillion. Chase is also one of
    the largest residential mortgage lenders, and we continue to
    make mortgage credit available even in these difficult times.
    We provide loans directly to consumers, and we purchase loans
    from smaller lenders so that they can lend to their customers.
    In 2008, Chase originated or purchased more than $105 billion
    in mortgage loans, even as mortgage applications declined
    significantly.
        At Chase, we are not only continuing to lend; we are also
    doing everything we can to help families meet their mortgage
    obligations and keep them in their homes. We believe it is in
    the best interest of both the homeowner and the mortgage holder
    to take corrective actions as early as possible, in some cases
    even before default occurs. We apply our foreclosure prevention
    initiatives to both the $325 billion of loans that we own and
    service, and the $1.1 trillion of investor-owned loans that we
    service.
        We expect to help avert 650,000 foreclosures, for a total
    of $110 billion worth of loans, by the end of 2010. We have
    already helped prevent more than 330,000 foreclosures,
    including modifying loan terms to achieve what we expect to be
    long-term sustainable mortgage payments. We are well underway
    to implementing the commitments we made in announcing our
    expanded foreclosure prevention plan last October. We have
    commenced mailing proactive modification offers to borrowers of
    Chase-owned option ARM loans at imminent risk of default. We
    have selected sites for 24 Chase homeownership centers in areas
    with high mortgage delinquencies where counselors can work
    face-to-face with struggling homeowners. We will have 13 of
    these centers in California and Florida open and serving
    borrowers by the end of this week. The other 11 around the
    country will be open by the end of next month.
        We have added significantly to our staff, and we continue
    to add more capacity in our operations to help struggling
    homeowners. We initiated an independent review process to
    ensure each borrower is contacted properly and offered
    modification prior to foreclosure as appropriate. We have
    developed a robust financial modeling tool to analyze and
    compare the net present value of a home foreclosure to the net
    present value of a proposed loan modification, which allows us
    to modify loans proactively while still meeting contractual
    obligations to our investors.
        We believe programs like ours are the right approach for
    the consumer, all consumers, and for the stability of our
    financial system as a whole. We support the Administration's
    proposal to adopt the uniform national standard for such
    programs and to encourage all sensible modification efforts
    short of bankruptcy as much as possible.
        As our CEO commented last week, we believe the Homeowner
    Affordability and Stability Plan announced by President Obama
    is good and strong, comprehensive and thoughtful. We think it
    will be successful in modifying mortgages in a way that is good
    for homeowners. Most particularly we applaud the fact that the
    plan focuses on making monthly payments affordable; will create
    a national standard and create fair and consistent treatment
    across the industry; and the standard will include verification
    of income and expense. We also applaud the partnership with
    government to reduce interest rates and payments for borrowers
    and the expanded ability of borrowers to take advantage of
    today's lower rates through refinancing. We look forward to
    working with the Administration, Congress, and others as we
    work forward on this plan.
        As we advised Chairman Frank and the members of the House
    Financial Services Committee on February 12th, we have stopped
    adding loans owned by Chase into the foreclosure process as the
    Administration's plan is being developed.
        Thank you.
        [The prepared statement of Ms. Sheehan can be found on page
    152 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Mr. Steve Hemperly, executive vice president, real estate
    default servicing, CitiMortgage.

    STATEMENT OF STEVEN D. HEMPERLY, EXECUTIVE VICE PRESIDENT, REAL
              ESTATE DEFAULT SERVICING, CITIMORTGAGE, INC.

        Mr. Hemperly. Chairwoman Waters, Ranking Member Capito, and
    members of the subcommittee, thank you for the chance to appear
    before you today to discuss Citi's loan modification efforts.
    My name is Steve Hemperly, and I am the executive vice
    president for CitiMortgage Real Estate Default Servicing.
        Citi services approximately 7 percent of the loans in the
    United States. In this enormous difficult housing market, Citi
    has moved aggressively to help distressed borrowers. We have a
    high degree of success in keeping borrowers in their homes when
    we are able to make contact with them and they want to remain
    there.
        Citi specifically focuses on finding long-term solutions
    for borrowers in need. In support of this, a key loss
    mitigation tool is loan modification. A modification agreement
    is typically used when a customer has a significant reduction
    of income that impacts his or her ability to pay and lasts
    beyond the foreseeable future. This agreement makes the
    mortgage more affordable for the customer. We have found
    modifications to be effective in helping borrowers manage
    through difficult times and avoid foreclosure.
        Citi has a specially trained servicing unit that works with
    at-risk homeowners to find solutions short of foreclosure and
    tries to ensure that, wherever possible, no borrower loses his
    or her home. Citi continuously evaluates each of its portfolios
    to identify those customers who can save money and reduce
    monthly payments and offers them timely loss mitigation
    solutions. We also provide free credit counseling, make loss
    mitigation staff available to borrowers or counseling
    organizations, and provide work-out arrangements and other
    options.
        In keeping with our commitment to help borrowers stay in
    their homes, we are implementing the FDIC streamline
    modification program for loans that we own where the borrowers
    are at least 60 days delinquent or where the long-term
    modification is appropriate even if the borrower is not yet
    delinquent.
        In November of 2008, we announced the Citi Homeowner
    Assistance Program for families in areas of economic distress
    and sharply declining home values. For those borrowers who may
    be at risk although still current on the mortgages, we are
    deploying a variety of means to help them remain current on the
    mortgages and in their homes.
        Citi's foreclosure prevention activities have good
    resolution rates for distressed borrowers whom we are able to
    reach. For example, for those going through the foreclosure
    process with whom we are in contact, we are able to help
    approximately 70 percent of them. However, we are not able to
    reach every one, and in those circumstances, there are limits
    to what we can do.
        To better meet the increased needs of the struggling
    borrowers we service regardless of delinquency status, we have
    dedicated significant resources to our loss mitigation area. We
    have stepped up our loss mitigation staffing by almost 3 times
    from last year, since last year's staffing levels, and we will
    be providing additional training to all of our staff.
        Additionally, as promised by our CEO, Vikram Pandit, to the
    House Financial Services Committee on February is 11th, Citi
    initiated a foreclosure moratorium on all Citi-owned first
    mortgages that are the principal residence of the customer as
    well as all loans Citi services where we have reached an
    understanding with the investor. The moratorium became
    effective February 12th and will continue until March 12th,
    before which time we expect finalized details on President
    Obama's loan modification program.
        Citi will not initiate any new foreclosures or complete
    pending foreclosures on eligible customers during this time.
    This commitment builds upon our existing foreclosure moratorium
    for eligible borrowers who work with us in good faith to remain
    in their primary residence and have sufficient income to make
    affordable mortgage payments.
        In order for policy makers, regulators, consumers, and
    market participants to better understand the extent of the
    current situation and our efforts to ameliorate it, we think it
    is important to share what we know. To assist in this effort,
    for the past four quarters, we have produced and publicly
    released our mortgage servicing report, which provides specific
    detail on our originations, delinquency trends, ARM resets,
    loss mitigation efforts, loan modification, foreclosures in
    process, and new foreclosures initiated. Our soon-to-be-
    released fourth quarter report will also include detailed
    information on our modification redefault rates for the first
    time.
        Our report will show that distressed borrowers serviced by
    Citi who received modifications, reinstatements or repayment
    plans outnumbered those who were foreclosed on by more than six
    to one in the fourth quarter. The number of borrowers who were
    serviced by Citi who received long-term modifications in that
    quarter increased by approximately 51 percent as compared with
    the third quarter.
        Our redefault rates, meaning the percentage of borrowers
    who have become 60-plus or 90-plus days past due at a given
    period of time after the loans are modified, do not exceed 23
    percent for loans modified over the past year. For example, of
    the loans modified in the second quarter of 2008. Only 14
    percent were 90-plus days past due 6 months after the
    modification. The fact that these borrowers are delinquent does
    not mean that will result in foreclosure. In fact, we will
    continue to work with those borrowers to make sure that we are
    able to find some kind of a long-term solution to keep them in
    their homes.
        I want to assure the committee that we share your interest
    in helping homeowners, and we strongly support this committee's
    leadership in foreclosure prevention and its tireless efforts
    to solve the housing crisis.
        Thank you, I will be happy to answer any of your questions.
        [The prepared statement of Mr. Hemperly can be found on
    page 120 of the appendix.]
        Chairwoman Waters. Thank you very much.
        I would like to start with Mr. Erbey.
        Mr. Erbey, you are an independent loan modification--a
    servicer, servicer, I am sorry. Who do you contract with? Who
    do you do business with?
        Mr. Erbey. Our customers are the securitization--
        Chairwoman Waters. I can't hear you.
        Mr. Erbey. Our customers are the securitization trust. When
    Wall Street put together securities, they would contract with
    servicers to service those loans. That was our main line of
    business.
        Chairwoman Waters. And how do the customers who are in
    trouble find you?
        Mr. Erbey. We are a servicer much like the other bank-owned
    servicers. In other words, we send out bills and statements. We
    have call centers. We are not affiliated with the bank, and we
    do not originate mortgages, but we actually, whenever you take
    over a portfolio, you send out hello letters and you call the
    people up and verify the information with regard to that. So
    there is extensive contact with our customer base much like any
    other servicer would have.
        Chairwoman Waters. Have you found any claims of fraud by
    complaining mortgage holders that they were tricked, they were
    misled, that they did not sign certain documents, that they did
    not falsify, but it was done by a loan initiator?
        Mr. Erbey. Yes.
        Chairwoman Waters. And what do you do?
        Mr. Erbey. We try to basically, in all those cases, we try
    to basically re-underwrite that loan specifically to the
    person's ability to pay that for that loan and to get them on
    to a modification plan that is sustainable and get them going
    in a stabilized situation going forward.
        Chairwoman Waters. We don't have anything in the system to
    go after those loan initiators who appear to be guilty of some
    kind of fraudulent operation, do we?
        Mr. Erbey. Unfortunately, we do not.
        Chairwoman Waters. Do you think that is needed?
        Mr. Erbey. Yes, I certainly do.
        Chairwoman Waters. I appreciate that, thank you.
        Ms. Coffin, I thank you for being here today. You know of
    my experience with Wells Fargo. And I am appreciative for your
    CEO who sent us a letter apologizing for any inconveniences,
    saying this is not typical of the way your servicing operation
    works.
        Now let me understand that the Wells Fargo home mortgage
    servicing is separate from the bank; this is a separate
    institution or business, is that right?
        Ms. Coffin. Well, we are part of Wells Fargo.
        Chairwoman Waters. I cannot hear you.
        Ms. Coffin. Is the microphone on?
        Chairwoman Waters. Pull it closer.
        Ms. Coffin. We are definitely a part of Wells Fargo bank,
    so any customer who is in need of our services can either call
    our centers, can walk into any of our branches, can look
    through our Web sites. We are very connected with the banks.
        Chairwoman Waters. So you are only servicing Wells Fargo
    loans, is that right?
        Ms. Coffin. No, that is not correct.
        Chairwoman Waters. What other loans do you service?
        Ms. Coffin. We also service loans under ASE, which stands
    for America's Servicing Company, or to the loans, just like the
    gentleman from Ocwen just mentioned--
        Chairwoman Waters. So you have contracts with investors
    also.
        Ms. Coffin. Right.
        Chairwoman Waters. The contracts you have with the
    investors, do they have clauses that prevent you from doing
    loan modifications? Do they set that out in the contracts with
    you that you sign sometimes?
        Ms. Coffin. There are a few.
        Chairwoman Waters. What percentage?
        Ms. Coffin. A very small percentage.
        Chairwoman Waters. I have run across this where I am told,
    sorry, there is nothing we can do, because we signed a contract
    with this investor where we said we would not use loan
    modifications as a way of servicing the customers.
        Ms. Coffin. When we do have those contracts today, in the
    current environment that we are operating under, we still reach
    out to those issuers and ask, based upon the net present value
    that we have calculated, if they would like us to do the
    modification.
        Chairwoman Waters. How many say, go ahead and do it?
        Ms. Coffin. Some do, and some don't.
        Chairwoman Waters. What do you think we should do about
    that? Should we support those kinds of contracts that will not
    give the servicer the opportunity to do a reasonable, credible
    loan modification?
        Ms. Coffin. As I stated in my testimony, what I think is
    most important right now is the Administration's plan that
    provides a standardized modification program that all investors
    should follow.
        Chairwoman Waters. All right.
        Now have you reduced the wait time on customers calling in
    to get some help? I waited over an hour or more. You know, that
    is a deterrent To people trying to get loan modifications.
        Ms. Coffin. I do understand.
        Chairwoman Waters. Have you increased the employment, so
    that you have more servicers?
        Ms. Coffin. Yes, we are. We continuing to hire all the time
    because of what is before us. And we strive for an 80 percent,
    which means within 3 to 4 rings, we hope to answer 80 percent
    of our calls, at all times, every day of the week.
        Chairwoman Waters. Who trains your servicers?
        Ms. Coffin. We do.
        Chairwoman Waters. There is no licensing of servicers. This
    is kind of an unregulated part of the industry. Is that right?
        Ms. Coffin. That is correct. We train them in-house.
        Chairwoman Waters. Describe their training. Do they train
    for 1 month, 2 months, a year? What kind of training do you
    give them?
        Ms. Coffin. 6 to 8 weeks, and what we normally do--
        Chairwoman Waters. What kind of background do they have to
    have?
        Ms. Coffin. In our default shop, it is a collections
    background. What we are looking for is people who have
    understood how to solve problems for people who are stressed,
    who are in these type of situations with affordability issues.
    When we bring them first on and they are trained, we do a buddy
    system. We make sure that they are sitting--
        Chairwoman Waters. What is a typical job they would have
    had prior to coming to your businesses?
        Ms. Coffin. A collections job or loss mitigation, which is
    people who help borrowers through modifying the terms of their
    loan.
        Chairwoman Waters. Any particular education?
        Ms. Coffin. No.
        Chairwoman Waters. Any particular requirement that they
    would have worked in a bank or worked with loans, mortgages?
        Ms. Coffin. What is most important to us is what we train
    them on in--
        Chairwoman Waters. Yes, but that is not the question I
    asked you. I am asking about qualifications. I am trying to
    determine how you select and identify these people that you
    train for 6 to 8 weeks. Do they have to have any background in
    finance or in working with mortgages or anything like that?
        Ms. Coffin. We will always look for people with a
    background in finance.
        Chairwoman Waters. But they don't have to have one, is that
    right?
        Ms. Coffin. No.
        Chairwoman Waters. So you are training people who may come
    from almost anywhere for 6 to 8 weeks. Do you think they are
    able to take every aspect of this mortgage and make decisions
    about whether or not or what kinds of loan modifications? They
    have a lot of flexibility there.
        Ms. Coffin. We normally don't bring people straight in as
    we hire them and bring them straight into a loss mitigation
    area of our operation. What we will often do is bring them in,
    train them, put them in a buddy system, which means they will
    first answer what we call the easier questions, and what we do
    is continually move our well-trained people who now have had
    months, sometimes years, of experience and continue to move
    them to our area which takes more skill and is more
    complicated, which is actually working through the loan
    modifications.
        Chairwoman Waters. Thank you.
        Mr. Gross, we have talked about this before, and you know,
    it is a particular little problem with me. Your loss
    mitigation, you still have some offshore?
        Mr. Gross. Yes, we do.
        Chairwoman Waters. Why?
        Mr. Gross. Because we find that the job responsibilities
    that we have assigned to that staff, which is primarily
    customer-service oriented, answering questions that homeowners
    may--
        Chairwoman Waters. Give us an example of where these
    offshore operation are? India?
        Mr. Gross. In India and Costa Rica.
        Chairwoman Waters. In India, we have people who are helping
    Americans who are in trouble who understand the system and what
    we are doing and are able to make decisions?
        Mr. Gross. No, that is not what I said. The people in India
    will receive calls from homeowners who are typically--the
    homeowner is calling in to make a promise to pay or to say a
    date specific on when a payment will be received. If they say,
    I am not able to make this payment this month and I am going to
    need long-term help, that call is immediately transferred back
    to State-side and will be worked by one of our State-side loss
    mitigation staff members.
        Chairwoman Waters. Well, what if I said to you, if you are
    going to get TARP money, you have to hire people in this
    country to do loss mitigation? Would you agree with that, since
    we are trying to create jobs?
        Why are you smiling?
        Mr. Gross. That was probably more of a grimace. I
    understand the question, but that is really outside my frame of
    reference.
        Chairwoman Waters. No, you have been here long enough to
    know that you were going to get this question from me. You
    always do. And I am sure you anticipated it.
        Mr. Gross. The--
        Chairwoman Waters. It seems to me you would have come here
    today and said: You know, we appreciate the American citizens
    having given us so much money. We are coming back to ask you
    for more. We are going to take all of our offshore operations
    and bring them home and create jobs for the taxpayers who are
    underwriting us. Well, I have said that.
        The other thing about Bank of America, you talk about this
    home retention program. I discovered in doing loan modification
    implementation work with my constituents that you have several
    departments. Have you merged them all, or do I need to go
    through with you the different ways you can end up in several
    different departments at Bank of America when you are trying to
    get help?
        Mr. Gross. They have not yet been merged, but we are
    actively working on our phone systems to make sure that when
    you call in or a homeowner calls in, that they are immediately
    connected with the appropriate individuals.
        Chairwoman Waters. Well, how long is that going to take
    you? This has been going on for an awfully long time. If you
    call in and you say, I am late on my payment, you go one place.
    If you call in and say, I am not late on my payment, but I went
    to talk to somebody so I don't get in default, you go another
    place. If you call in and you say, I have a loan modification,
    but I may reach a default on it, you go to another place. So
    what is this home retention consolidation that you have when
    you still have all of these different departments that you send
    people to.
        Mr. Gross. The process that you described, when a homeowner
    calls in and they are current on their mortgage, they are
    automatically routed to our customer service environment, since
    the vast majority of those calls do not deal with delinquent
    payments; they deal with other questions.
        So when a homeowner calls in and reaches the customer
    service staff and says, I am not going to be able to make a
    future payment, and they need in-depth assistance, then that
    call will then be transferred to the home retention department,
    and that staff member will then work with that current
    homeowner on what their issues are. That process I do not
    envision changing.
        Chairwoman Waters. Well, let me just say this, the system
    that you use is confusing to constituents. I was on the phone
    with Bank of America for hours, and your people sent me all
    over the country to different departments. And nobody seemed to
    understand what I was asking.
        And if you have something called home retention, it seems
    to me it would be consolidated so that when someone called,
    they would not be transferred around to several different
    departments and that the people who were directing them to
    supposedly the correct department would know exactly what to
    do.
        So would you consider it fair for us to say to the
    President, you must do something to force the Bank of America
    to have a consolidated effort to help homeowners in trouble
    before they get any more TARP money?
        Mr. Gross. I am not prepared to comment on the TARP funds.
        What I will commit to is that within a very short period of
    time, we will deliver back to the committee an in-depth
    description of what we do and how we do it, so that you have a
    complete written understanding of our processes.
        Chairwoman Waters. Thank you very much.
        Ms. Sheehan, you--well, before I leave Mr. Gross, are you
    doing all of Countrywide's loan modifications?
        Mr. Gross. Yes, we are. There is still the Countrywide
    mortgage servicing operation that in April will be changing
    over to the Bank of America name.
        Chairwoman Waters. But right now, Countrywide is still
    doing some of its own servicing, is that right?
        Mr. Gross. They are, yes.
        Chairwoman Waters. Okay, and Ms. Sheehan, you also contract
    with other entities to do their servicing, is that correct?
        Ms. Sheehan. Yes, we do service our own loans as well as
    loans for third parties, including Fannie and Freddie.
        Chairwoman Waters. Would you give me an example of those
    third parties?
        Ms. Sheehan. Well, it is Ginnie Mae for FHA loans,
    obviously for our GSE loans, which the bulk of the portfolio is
    Fannie and Freddie. And then there are other private investors
    for whom we service--
        Chairwoman Waters. So GSEs, Fannie and Freddie, are not
    doing their own?
        Ms. Sheehan. No, we do the servicing for them. They are the
    investor in the loan.
        Chairwoman Waters. Okay, all right.
        Mr. Hemperly, do you do servicing for anyone else other
    than Citigroup?
        Mr. Hemperly. We do. Our answer is very similar to Ms.
    Sheehan's that she gave for Chase. We do a substantial amount
    of servicing for GSEs, Fannie and Freddie, in addition to loans
    we service for the FHA and also our loans that we hold on
    balance sheet.
        Chairwoman Waters. My last question is, for those of you
    who do loan initiation and then sell those mortgages to Fannie
    and Freddie, you do the loan initiation, you sell it to Fannie
    or Freddie, then they give it back to you to do the servicing?
        Mr. Hemperly. Yes. We originate the loan. We deliver it to
    Fannie or Freddie, and we bore the loan on to our servicing
    system. So the loan is actually what we call servicing retained
    by us, and then we are responsible for all the servicing
    activities that occur on those loans.
        Chairwoman Waters. Fine, we need to take a look at that.
        And I would like to thank my members for indulging me. I
    appreciate it so much.
        Ms. Capito.
        Mrs. Capito. Thank you, Madam Chairwoman.
        Mr. Erbey, in your testimony, you mentioned that in your
    modifications, that you did a write down of the loan balances.
    Does that mean you write down the principal in some?
        Mr. Erbey. On 18.7 percent, yes.
        Mrs. Capito. 18.7 percent of your loan modifications you
    are writing down the--
        Mr. Erbey. The principal.
        Mrs. Capito. Does anybody else here in their loan
    modifications write down the principal?
        Mr. Hemperly. We write down principal on occasion, not 18.7
    percent of the time, though.
        Mrs. Capito. Like how many?
        Mr. Hemperly. It is a minority of the time. I don't have
    the percentages. It I think is probably less than 1 percent of
    the time.
        Mrs. Capito. Mr. Gross, you said you do?
        Mr. Gross. Yes, it is on a small amount, and if I could
    expand on that answer. We are contractually bound in most cases
    to present the investor for whom we service the loans the best
    return or smallest loss that we can. And in most cases, we can
    achieve a smaller loss or better return to the investor by
    doing an interest rate reduction, having an affordable and
    sustainable payment for the homeowner without having the
    principal reduction.
        Mrs. Capito. I understand that, but you were looking at a
    program here in the next--first of all, let me ask another
    question. Of all of you all on the panel, who has used or
    worked with the HOPE for Homeowners Program?
        Ms. Coffin. We have.
        Mrs. Capito. And how has that worked?
        Ms. Coffin. We have set up a separate segmented group who
    were fully educated on the HOPE for Homeowners program. We
    dedicated and analyzed our portfolios to look for those
    borrowers who looked like they were eligible. We proactively
    reached out with letter campaigns and calls to those borrowers,
    and then we began the screening process to find those borrowers
    who would actually be eligible. Unfortunately, we found very
    few under the current requirements of HOPE for Homeowners who
    met the standards.
        Mrs. Capito. My understanding is when you came, I am
    generalizing here, institutions have come before this committee
    before, showing great hope for the HOPE for Homeowners products
    as a way to help people who are in trouble. And it hasn't
    turned out that way, and that is deeply troubling to all of us
    here.
        I think part of it, and correct me if I am wrong, is part
    of it the write-down on the balance has prevented, maybe
    contractually, but otherwise because it is considered
    financially to your disadvantage to go this direction, so now
    the President's program is going to incent your institutions to
    do what Mr. Erbey's does 18 percent of the time? Am I
    interpreting the new program correctly?
        Mr. Hemperly. The new program, as I understand it relative
    to loan modifications, is not going to be very different from
    the program that we are headed towards currently with our
    commitments to the FDIC modification program. The FDIC program
    is essentially an affordability-based model, which is not
    terribly different than what we have done in the past. So we
    are headed down that path where we are going to try to get
    customers with affordable payments and they prove to us how
    much they make, and then, as a percentage of that, 31 percent,
    as a housing ratio, we give them an affordable payment to keep
    them in their home. That program is not terribly different at
    all from what we have done historically, and our redefault
    rates, we believe, are quite good.
        Mrs. Capito. And on the FDIC program, is there a fee when
    you write down principal?
        Mr. Hemperly. No, there is not a fee.
        Mrs. Capito. I mean, a reward payment of $1,000; I believe
    that is the program we are looking at.
        Mr. Hemperly. Well, on the Administration's program, my
    understanding is that there is an incentive fee to the
    servicers for booking loan modifications.
        The FDIC program is basically going to be for, our
    commitments there are for balance sheet held assets. There is
    no fee that we will collect under our current commitment to
    that program. The benefit that we get is, hopefully, we will
    get the kind of performance through that program that we have
    seen on our redefault rates that I shared in my testimony, that
    we believe keeping homeowners in their home is great for
    communities, and also we believe that it is the best way to
    minimize our own losses.
        Mrs. Capito. Let me ask you just a question out of the air,
    it just kind of hit me. You are talking to people every day who
    have mortgages who either are in trouble, anticipating being in
    trouble, and I am sure you are talking to your folks who are
    scrimping, saving, paying those mortgages everyday, are you
    hearing anything about what we are hearing in some fashion, is
    this fair? Is there a fairness quotient here? And I don't know
    if I am asking too much of an opinion here, but I would like to
    see if you have one on that and if you are hearing from your
    customers on that, who obviously are not going to qualify for
    any of these loan modification categories.
        Mr. Gross. I would say, yes, that we do hear this from our
    customers, the questions about the fairness issue.
        On the flip side of that coin, we hear from the same
    customers regarding the trauma that is caused in their
    communities and in their neighborhoods with the foreclosure
    events. And ours is a balancing act to try and make sure that
    we are as fair to all parties as we can possibly be.
        Mrs. Capito. Does anybody have--
        Ms. Sheehan. I would say, we have had a similar experience
    in terms of hearing from current customers, but I also agree
    with Michael that we need to be focused on customers and
    communities. And I think we are concerned, all of us are
    concerned, about the impact of the foreclosed property
    destabilizing neighborhoods.
        Mrs. Capito. I share that concern as well. I think, and it
    is, as Mr. Gross said, it is a balancing act. It is difficult
    for the homeowner on the verge. It is difficult for the
    neighborhood. It is difficult for the family. And so we are
    trying to weave a solution here, and I appreciate you all
    coming here and testifying.
        Thank you very much.
        Chairwoman Waters. Thank you very much.
        Mr. Cleaver.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        I would like to follow up on the Chair's questioning.
        If I could start with you, Mr. Erbey, and move down, do all
    of you have operations offshore?
        Mr. Erbey. Yes.
        Ms. Coffin. No, not for customer-facing.
        Mr. Gross. Yes.
        Ms. Sheehan. Not for customer-facing and loss mitigation.
        Mr. Hemperly. We have offshore operations, but we do not do
    any loss mitigation work offshore.
        Mr. Cleaver. I don't know if you realize how utterly
    disgusted the voters are with that. And it is ineffable, but I
    have to just say, it really creates a problem.
        Do you save money? Is this what the goal is?
        Ms. Coffin. I will make a comment to this. Wells Fargo has
    always been very strong about creating American jobs. The place
    that we do have offshore is in some of the technological areas
    where we could not find the appropriate number of people to
    help us with some of the automation of our systems.
        Mr. Cleaver. Like the dumb Americans couldn't--
        Ms. Coffin. No, sir. Not at all.
        Mr. Cleaver. The stupid Americans?
        Ms. Coffin. No.
        Mr. Cleaver. I am not sure I understand.
        Ms. Coffin. It was a supply and demand.
        Mr. Cleaver. The demand was greater than the supply?
        Ms. Coffin. And we don't have it now, sir, but this was
    previously when there was a lot of infrastructure that we were
    rebuilding and looking for a lot of technological expertise,
    and everyone was in the demand for that at the same time. Many
    of our systems were all being retooled.
        Mr. Cleaver. So it is not a financial issue where you save
    money?
        Ms. Coffin. We do not use it for that.
        Mr. Cleaver. Is everybody else the same?
        Mr. Gross. If I could comment, the global operations for
    essentially the Countrywide service portfolio, this operation
    has been in existence for 3 to 4 years now, I believe. It might
    be a little bit longer. The size of the operation is actually a
    little bit smaller than it was a year ago. And in terms of
    staff that we have added during the subsequent period has all
    been added State-side.
        Mr. Cleaver. Okay.
        Mr. Gross. But, yes, the initial motivation when we opened
    these call centers a few years ago was based upon cost.
        Mr. Cleaver. Okay.
        I am going to tell Lou Dobbs on you people.
        But let me go back to the program as laid out by President
    Obama, the Administration, is herculean. What kind of beefing-
    up of the servicers will you need to accommodate this program?
    Has there been any look at the size of the staff that will be
    needed? I am thinking a part of this whole thing that we are
    doing is creating jobs. And I am wondering if jobs can be
    created also as we try to reduce this new burden on
    neighborhoods all over the country by hiring people to do the
    modifications. And obviously, based on what Chairwoman Maxine
    Waters is experiencing, there is a need for a larger staff. So
    has there been any time spent in trying to come up with an
    estimate on when the staffing needs will be?
        Mr. Gross. If I could, as far as what the staffing needs
    will be, will be somewhat difficult to determine until the
    final rules are published on March 4th, but I would also
    suggest to you that in the mortgage servicing loss mitigation
    process, this home retention process that we are all engaged
    in, under the President's plan, we should become much more
    efficient and effective than we are today because we are going
    to have a single standardized plan that we will be able to use
    across all different portfolios.
        Right now, we have a modification plan for FHA, a different
    one for Fannie Mae, a different one for Freddie Mac, and a
    different one for privately-issued securities. So this
    standardization should enable us to process many more
    modifications and workouts using the same staff, hopefully in a
    much faster timeframe.
        Mr. Cleaver. Thank you, Madam Chairwoman.
        Chairwoman Waters. Mr. Marchant.
        Mr. Marchant. My question is about the whole
    standardization of modification. It seems like Chase, have you
    gone to your biggest investors and gotten pre-authority to
    authorize, to do modifications, so that you don't have to
    handle it on a case-by-case basis?
        Ms. Sheehan. We have spent a lot of time working with our
    investors to make sure that they understand the modifications
    options that we wanted to be able to make available. Two of our
    biggest investors are Fannie and Freddie. They have recently
    come out with a new streamlined modification program, very
    similar to what many of us offer for our own portfolio. That
    was sort of the first step towards standardization.
        I do agree with Mary, though, that we still have
    situations, not that many, but we still have situations where
    individual, you know, pooling and servicing agreements may
    hamper our ability, and in those instances, we have to go out
    for permission on a case-by-case basis.
        Mr. Marchant. And the way I read the President's proposal
    is that this will only affect the GSEs, and it well affect your
    private label investors, so it is going to force the private
    investors to accept these modifications. Mr. Erbey?
        Mr. Erbey. That is still an open issue that was being
    discussed this morning. In our portfolio, more than 90 percent,
    we have no limitations on modification at all. There is about
    say 5 percent that it is affected by, you have to get approval
    by the related agencies; another 5 percent that you have to get
    individual investor approval. But the issue becomes one of, in
    terms of the implementation of the plan, are you required to
    apply it across your entire portfolio? And if so, what impact
    does that have on the contractual obligations that you have, no
    matter how small they may be?
        Mr. Marchant. So 90 percent of your investors or REMICs
    have already given you authority to modify?
        Mr. Erbey. The structures in our part of the market, they
    have migrated over time, so that the standard pretty much for
    any of the modern ones would be that it is the servicer's
    discretion to maximize that present value on the portfolio.
        Mr. Marchant. So, in your case, you have more discretion.
    Do you service any portfolio loans that you own?
        Mr. Erbey. Nominal, I mean very, very insignificant to our
    balance sheet.
        Mr. Marchant. Well, it sounds to me like the question is
    still, that I have about the modification process, is the hit
    of principal and whether you are allowed, whether in the new
    plan, the President's new plan, whether there will be a
    substantial write down in principal, or will all the
    modification be towards the 38, 31 percentages? Do you
    understand it could be a stepped process? You go to 38 first,
    you go to 31, then you go to the principal reduction? Is there
    any kind of a look-back provision if one of the spouses is
    unemployed, and then a year later, that spouse becomes re-
    employed, is there then a recertification at some point where
    that person will call and say, ``I have a job now, I no longer
    need this 31 percent or 38 percent?'' Is there a look-back, or
    is this a once-in-a-lifetime snapshot that will be taken?
        Ms. Coffin. There are, like Michael just spoke of, there
    are details of the program that still need to be completed. But
    there is--you don't do a look-back, that if somebody then gets
    back a job, you kind of unwind the modification--
        Mr. Marchant. That is the way I read it.
        Ms. Coffin. We don't do that. But what we do in some cases
    is we may have to mod originally to a lower interest rate or
    other things to get to affordability, but then you can step
    that rate back up over a period of time.
        Mr. Marchant. So in the proposed, another piece of
    legislation that has the cramdown in it, how much more
    success--under what kind of a situation then would you put a
    person in a situation where they would not go this route
    instead of going to a bankruptcy route and put them in a
    position where they would make the decision to go the
    bankruptcy cramdown route as opposed to trying to go this
    route?
        Ms. Coffin. I would only tell someone they should go to
    bankruptcy as a last resort. What I applaud that the
    Administration has done is the standard modification program
    that should hold all of us accountable and provides
    expectations that say, if a borrower who is at risk comes to
    us, we now have the standard modification program. If, for some
    reason, that borrower cannot find a solution through that, then
    their final resort may be to go to bankruptcy, and this same
    standard modification program should be applied.
        Mr. Marchant. And this is an opinion question. Is a person
    who gets a modification at a greater risk of destroying long
    term their credit than a person who goes into bankruptcy?
        Mr. Gross. No, I think the modification approach is
    actually to the homeowners' benefit, that very quickly they
    will be showing current on their mortgage and that their credit
    score will improve dramatically. I think the bankruptcy option
    provides very serious negative implications for the homeowner
    on a long-term basis.
        Mr. Marchant. So if you were trying to prevent there from
    being a generation of borrowers who are forever doomed to be
    subprime borrowers in a world where there are no more subprime
    loans, would you go--if you were the government trying to push
    somebody towards a direction, you would push them more towards
    a modification, extended amortization instead of towards an
    easier route.
        Mr. Gross. Absolutely, we would hope that whatever
    legislation is enacted would in fact require homeowners to seek
    these modifications and to, in fact, prove that the
    modification was not attainable before the bankruptcy reduction
    was allowed.
        Mr. Marchant. Thank you.
        Chairwoman Waters. Mr. Green.
        Mr. Green. Thank you, Madam Chairwoman.
        Mr. Gross, let's continue with what you were just
    addressing, the cramdown. Is that something that can work in
    concert with what you are currently doing or, is it at odds
    with what you are doing?
        Mr. Gross. There are aspects of the current legislation
    which we find troubling. I would say that it can work as long
    as we put in sufficient safeguards that the homeowner works
    with their servicer and that the homeowner seeks available
    modifications before they do the bankruptcy cramdown route.
        Mr. Green. Is it your understanding that the current
    proposal has that language in it?
        Mr. Gross. I believe that the current proposal, and I
    apologize, I am not an expert on this, but I believe that the
    current proposal does contain some reference to it. I don't
    think that the requirements in there are as strong as we would
    like. There are probably a few too many holes in there that
    would allow homeowners to seek the bankruptcy option with
    minimal resistance.
        Mr. Green. If that aspect of it can be satisfied, would it
    then meet with your approval, ``your,'' meaning your company's
    approval, not your personal approval?
        Mr. Gross. Thank you.
        I think it would go a long way to that, because I think at
    that point what we would find is that we can effectively,
    especially under the President's new plan that we are all
    working on desperately right now to write the rules for or to
    assist in that effort, we want to have this new plan have a
    chance and to show the American public and to you that we can
    perform under this new plan and that the bankruptcy cramdown
    provisions that are currently being contemplated largely should
    not be needed.
        Mr. Green. Is your moratorium still in effect?
        Mr. Gross. It is.
        Mr. Green. Let me just ask the other participants. Do you
    have a moratorium in effect? If so, would you kindly extend a
    hand into the air? Anyone. So we only have--and you would not
    have one, is that right Mr.--is it Erbey?
        Mr. Erbey. It is Erbey.
        Mr. Green. You don't have one?
        Mr. Erbey. We don't have our own loans. Under the contracts
    that we have, we don't feel that we could have a moratorium.
        Mr. Green. Let me pause for a moment and thank all of you
    for the moratorium. It is something that I think is going to be
    a benefit to your businesses as well as to the consumers, so I
    thank you for the moratorium.
        How long will it stay in effect, Mr. Gross?
        Mr. Gross. It will stay in effect until the rules are
    published, which should be March 4th. From that point, what we
    would do is take the final rules, evaluate our portfolio to
    determine which homeowners who are at risk of foreclosure would
    in fact qualify, and then we will actively seek out those
    homeowners, offering them this plan, and we would reinstitute
    foreclosure proceedings after we either hear from the homeowner
    and determine that they are not eligible, that we cannot do it,
    or if the homeowner does not respond.
        Mr. Green. Ms. Coffin, how does yours measure up?
        Ms. Coffin. Our moratorium is in place until at least the
    13th of March. We have announced that to our borrowers. And we
    have, as I said in my testimony, already proactively began to
    analyze our portfolio with the information and the data that we
    have about the program for both the refinance opportunities and
    the modifications. And what we will turn to first, once we
    understand more of details after the 4th of March, is we will
    first turn to the borrowers who are most seriously delinquent
    or on the verge of foreclosure sale and proactively reach out
    to them.
        Mr. Green. Mr. Hemperly?
        Mr. Hemperly. Our moratorium started on February 12th, and
    it will extend for 30 days through March 12th. We are also
    eager to see the Administration's plans. Hopefully, we will see
    them on March 4th, which should give us time to understand them
    before we would schedule any additional foreclosure sales.
        Mr. Green. Ms. Sheehan?
        Ms. Sheehan. We also announced our moratorium on February
    12th. At that time, we announced it would be extended through
    March 6th. That was before we knew when the details of the
    program were going to come out. So we will this week reconvene
    and consider, based on the information we know now, what is the
    next step we should take to be fair to our homeowners.
        Mr. Green. Thank you.
        I yield back.
        Chairwoman Waters. Thank you very much.
        Mr. Clay.
        Mr. Clay. Thank you, Madam Chairwoman.
        Let me start with Mr. Erbey.
        Mr. Erbey, in your testimony, you propose two solutions for
    advanced financing to servicers. One proposal is to provide a
    $1 billion government infusion to minority-owned Robert Johnson
    Urban Trust Bank to establish a new operating division to
    provide advanced financing to servicers who commit to
    aggressive foreclosure prevention and loan modification
    measures. Currently, how many communities does the UTB service,
    or do you know?
        Mr. Erbey. I know of a handful, but I can't accurately
    describe that.
        Mr. Clay. Okay, give me examples of some.
        Mr. Erbey. They are in Florida, in the Orlando area.
        Mr. Clay. How would Mr. Johnson assist servicers with
    homeowner outreach to minority communities hardest hit, do you
    have any idea of how we he would pull that off?
        Mr. Erbey. I believe Mr. Johnson thinks he has quite a
    well-known name and reputation within the communities and that
    by being able to get out there and get the message out, that he
    would assist in that manner.
        Mr. Clay. Okay, all right. Thank you for that response.
        Ms. Coffin, when considering your total number of
    modifications, what percentage of them are modifications that
    produced a decrease in monthly payment of at least 10 percent?
    Can you give us that percentage in your reported modifications
    that fit that category?
        Ms. Coffin. I don't have that data directly here in front
    of me, but to state I think what is important about these
    modifications, and I heard the discussions earlier today, what
    is important to understand about whether the payment reduces or
    not are the circumstances of each of the borrowers that we work
    with. We have cases of borrowers where they come to us, and if
    you take the President's, the Administration's plan that they
    just announced and the affordability targets they have set, I
    tell you today we have many borrowers who have come to us who
    are already below those targets. What we still try to do is
    help them. And sometimes that is taking those payments.
    Sometimes it is the taxes that they have not paid on their
    homes. Sometimes it is payments they are in arrearage, and we
    do capitalize those, we re-amortize the loan and try to get
    them back into a performing loan. So I think, more than just
    stating the numbers, it is important to understand when and why
    we do that particular type of modification.
        Mr. Clay. So that may include making the terms longer?
        Ms. Coffin. It could make the term longer, but it could
    actually increase their payment if they have not paid their
    real estate taxes and they have significantly missed many
    payments. If they made no payment on their homes for 8 months,
    lets say, and not paid their real estate taxes, to get them
    back in a performing loan and have them stay in that home, we
    he have to do something with those missed payments and those
    missed taxes.
        Mr. Clay. Which means these people have to have employment,
    of course.
        Ms. Coffin. That is correct.
        Mr. Clay. Given the size of the program being proposed by
    the Administration, and the need to look at the ability of
    homeowners to sustain a modification, how large of an increase
    in manpower do you believe would be needed to get this job
    done? Do you have any idea?
        Ms. Coffin. I would support what Mr. Gross stated. We
    actually see the standard modification program, as laid out and
    what we know of it so far, will actually be much more efficient
    for us. We have never stopped and we didn't just because of the
    plan decide then to start hiring. We are continually in this
    kind of environment reforecasting and preparing months ahead.
    As you heard, you don't just hire these people and put them on
    the phone tomorrow. You have to go through the hiring and
    training phase. You want to make sure they have the expertise
    to actually help our borrowers. So we are forecasting months
    and months in advance, and we will continue to do that.
        But this actual plan, we believe, will make us more
    efficient for the reasons Mr. Gross stated. If we get a
    standard modification program, as we too serve Fannie, Freddie,
    FHA, multiple privates, if we got to one program and there was
    an accountability of what we were to move to a target of, it
    would be much more efficient for us.
        Mr. Clay. Anyone else on the panel?
        Ms. Sheehan.
        Ms. Sheehan. I would agree with what Mary just said. I
    think we do have 8 to 10 flavors right now of loan modification
    programs that are very complex. We have to go into databases,
    it complicates the training we talked about earlier, to be sure
    that the individuals understand all the different programs. So
    I believe it will be a tremendous benefit to servicers.
        I also would like to say on behalf of Chase that we are
    trying to look at different ways to deal with our borrowers,
    which is why we have started to set up our homeownership
    centers around the country. Not everybody is going to work well
    in a call center. In some cases, you need to do face-to-face.
    And we actually have seen some very preliminary but very
    positive results from the centers that are opening right now.
        Mr. Clay. Thank you very much for your responses.
        I yield back.
        Chairwoman Waters. Thank you very much.
        Mr. Ellison.
        Mr. Ellison. Thank you, Madam Chairwoman.
        And thank you to all of the witnesses.
        Is your servicing process different between cases where the
    servicers own the mortgage and where they don't own the
    mortgage?
        Can we start with you, Mr. Erbey?
        Mr. Erbey. Yes, certainly.
        We have almost no mortgages that we own ourselves. So
    essentially, our process is exactly the same. Every loan is
    treated individually.
        Mr. Ellison. How about by you, Ms. Coffin?
        Ms. Coffin. Yes, I will try to give you the spectrum. We
    obviously on, let's take the Wachovia option ARMs that we just
    acquired, we are going aggressive. Those are loans that we own.
    We know the geography in which many of them are located is
    extremely distressed, and so we are going aggressive with
    modification programs. But as soon as we learn from the
    programs that we develop and implement on that, we reach out
    immediately to private investors and other investors to share
    our learnings and hope that they will deploy throwing programs
    also.
        Mr. Ellison. Mr. Gross?
        Mr. Gross. I would concur with what Ms. Coffin has just
    said. One of the standard provisions in service pooling and
    servicing agreements--
        Mr. Ellison. Mr. Gross, forgive me, but when you said you
    concur with Ms. Coffin, do you mean, when the servicer owns the
    loan, you are aggressive, and when you don't, you share the
    information because that is what I heard?
        Mr. Gross. Yes, and I was amplifying on that.
        One of the standard provisions in a servicing contract
    generally is that we will service loans for that investor as we
    would for those in our own account, which means that we will
    not give loans in our own book of business, loans that we hold
    for investment, any preferential treatment over loans that we
    service for them.
        Mr. Ellison. Ms. Sheehan, how do you view this issue?
        Ms. Sheehan. I would concur with both Mr. Gross and Ms.
    Coffin. Our core servicing processes are all the same. But when
    we come to loss mitigation and loan modification, we are more
    aggressive with our own portfolio loans for all of the reasons
    that we have been talking about today.
        Mr. Ellison. Sir?
        Mr. Hemperly. A similar answer. We service for a lot of the
    same people that are our competitors do. And we also feel that
    we have more flexibility on our own portfolio.
        I didn't get to answer the last question, but we also
    believe that a standardized approach that the Administration
    plan is proposing is also going to be a more effective way to
    deal with this situation, and it should be easier to train our
    folks on a standardized plan as well.
        Mr. Ellison. Can you tell me about what your outcomes have
    been when you have the loans that you own, loans that you
    don't, have you been able to--have you written down more or
    have you remodified more loans when you own them as opposed to
    the ones that you don't own? What has your experience been, is
    what I am asking?
        Mr. Erbey, you only have one kind?
        Mr. Erbey. Correct, we have modified about 20 percent of
    all loans in our portfolio.
        Ms. Coffin. To answer your question, and as I just stated,
    we just acquired the Wachovia option ARMs, which is where we
    are going the most aggressive. I think what is important to a
    redefault, and I know there is a lot of analytics and a lot of
    speculation on redefaults, as was stated earlier, coming to a
    common industry definition of redefault, which we would stand
    by that any loan that has been modified, and seriously
    redefaults, which means 90 days delinquent within a year, is
    our definition of redefault. And because these are new
    procedures that we are developing and applying against this
    portfolio, it will take a while for us to determine what the
    true redefault is compared to historical redefault rates.
        Mr. Ellison. Do you have any numbers so far on the
    difference between the remodified loans that you own and the
    ones that you don't?
        Ms. Coffin. Well, I want to be cautious that Freddie and
    Fannie and many of the privates who have worked with us are
    very aggressive. I don't want to leave today that--
        Mr. Ellison. I am just trying to get a statistical
    understanding. Do you understand what I mean?
        Ms. Coffin. Between what we do in our portfolio, we are
    seeing a redefault rate that is probably lesser in our case
    that is lower than the 30 percent on average redefault, and you
    will so a little higher on those that do not go as significant
    in the modification terms.
        Mr. Ellison. Maybe I don't understand. Are you modifying
    more loans that you own than the ones that you don't?
        Ms. Coffin. I think the way I am interpreting this is we
    modify differently, not whether there is more or less; it is
    that we are modifying possibly differently.
        Mr. Ellison. But is there a numerical difference between
    the ones you own and the ones you don't?
        Ms. Coffin. No.
        Mr. Ellison. They are the same?
        Ms. Coffin. By numbers, just sheer volume?
        Mr. Ellison. Yes.
        Ms. Coffin. No. I mean, you would have to do that in
    relationship to the size of the portfolio. No. We are
    modifying. Like I stated earlier, there are very few of our
    contracts that don't allow us to modify.
        Mr. Ellison. So you modify the same number for the loans
    that you own and the ones that you don't?
        Ms. Coffin. The majority of the time, yes. On a ratio of
    how many loans we have, you still have to--if you want sheer
    numbers like 100 to 100, it would depend on the size of the
    portfolio and the number of loans that are in distress as a
    ratio.
        Mr. Ellison. All right. Well, do you have that information?
        Ms. Coffin. I don't have that right in front of me, but I
    can tell you that--I don't think there is a difference between
    that we can't modify. It is how we are modifying. What we are
    doing on the Wachovia loans is going more aggressive with the
    terms, such as principal forgiveness.
        Mr. Ellison. Okay. Mr. Gross.
        Mr. Gross. I apologize, I do not have the data that you are
    requesting at this time, but I would be glad to follow up with
    the committee afterwards.
        Mr. Ellison. Thank you, Mr. Gross.
        And, Ms. Coffin, I am assuming you would supply the
    information?
        Ms. Coffin. Yes.
        Mr. Ellison. Ms. Sheehan.
        Ms. Sheehan. Our servicer loans are much larger than our
    owned loans, so even if we are doing it proportionately the
    same, those numbers will be--the servicer numbers will be
    larger. But we would be happy to get that.
        Mr. Ellison. Thank you. We would request that. Thank you.
        Sir?
        Mr. Hemperly. We will pull the exact data for you as well.
    I believe that on a percentage basis, we do more deals on the
    loans that we hold on balance sheets than we do for others; and
    I think it is because we can do them earlier in the process in
    some cases than we can. And I think we have a little bit more
    flexibility to do that. But we will be happy to pull the
    numbers.
        Chairwoman Waters. Thank you very much.
        Mr. Donnelly.
        Mr. Donnelly. Thank you, Madam Chairwoman.
        Ms. Coffin, under Wachovia ARMs, when you look at them,
    what interest rate are you putting people--what product are you
    primarily putting folks into or trying to put folks into?
        Ms. Coffin. We are trying to get them into a fixed, but
    most importantly is when we see what the payment that they are
    currently able to afford, we are trying to keep them to that
    payment and modify the terms of the loan to get them to that
    payment.
        Mr. Donnelly. That is the ARM payment?
        Ms. Coffin. Yes.
        Mr. Donnelly. What is the average interest rate on those
    ARMs at the present time?
        Ms. Coffin. I am a little cautious in saying this because I
    don't have--
        Mr. Donnelly. Ballpark.
        Ms. Coffin. I will say ballpark, 2 percent, maybe slightly
    higher.
        Mr. Donnelly. So what you are doing is looking at that
    payment and saying, what kind of product can we produce that
    will keep them in the house at about that number?
        Ms. Coffin. That is correct.
        Mr. Donnelly. How many of those do you have, of these ARMs,
    of these mortgages, the Wachovia?
        Ms. Coffin. The Wachovia that we inherited was $122
    billion.
        Mr. Donnelly. I am sorry, the total number of homes.
        Ms. Coffin. The total of the portfolio, I believe it is
    approximately 350,000, I believe, 400,000.
        Mr. Donnelly. And how long does it take you to get to all
    of them? I mean, how do you prioritize that? Is it you look and
    say, this one is in trouble, they missed a couple payments, we
    had better get together with them? How long will it be before
    you get that cleaned up? Is it, these ARMs go off next month,
    so we had better do those first?
        Ms. Coffin. Let me be clear that much of this portfolio is
    performing. If they are current, we continue to look at them.
    We are looking for imminent default. We want to make sure that
    we are proactively trying to predict those loans that will
    probably have imminent default. But we are starting with the
    most serious and those that are close to foreclosure. We are
    looking at those whose ARMs are ready to recast, those who are
    delinquent, and those who look like we would predict imminent
    default.
        Mr. Donnelly. So say the ARM goes off in another month or 2
    months, but they are performing. Those ones you would already
    be working with to try to get into a new product.
        Ms. Coffin. We are working across that entire portfolio
    very aggressively.
        Mr. Donnelly. So there is not going to be folks who look up
    and their ARM is about to go off in a week, and they haven't
    heard from you yet?
        Ms. Coffin. That is correct.
        Mr. Donnelly. Mr. Erbey, when you look at the loans that
    you have in your portfolio, are there red flags that you look
    at to indicate to you, this is one we have to work on? For
    instance, somebody who has been put into a 10.5 percent rate at
    20 years, is that something you would look at and say, how do
    we rework this? Are those important figures to you, or is it
    only you look and you go, who is in trouble this month?
        Mr. Erbey. Well, you certainly sort your portfolio based on
    characteristics to try to do imminent default, where you think
    somebody will try to default and try to deal with it ahead of
    time, such as a reset or a very high-interest-cost loans. So
    you would proactively be approaching those individuals. The
    vast majority of the work, however, because of the type of
    portfolio we have, is spent on basically people who are already
    in trouble.
        Mr. Donnelly. I know you use mathematical models. Do your
    models tell you, here is the income that they have? Here is the
    interest rate? This isn't going to--you know, they are paying
    it now, even people who are current; we have to get into this
    one and get this fixed?
        Mr. Erbey. Yes. We run models that look at the person's
    ability to pay over time. So it is not just a snapshot of what
    can they do today; what are they able to do in the future? You
    also look at redefault probabilities as well as prepay
    probabilities and future housing prices. And so you are looking
    at pretty much three-dimensional vectors on all those factors.
        Mr. Donnelly. And this next question would be to the whole
    panel. I met with some mortgage folks earlier today and spent
    some time with them, and one of them was saying that one of the
    biggest problems they are having with modifying loans is some
    of the servicers. And, you know, this was not any of you folks,
    but some of the servicers that they would call, the servicers
    said, ``I have a pile 5-foot high on my desk; I am trying to
    get through them as quickly as I can. I haven't gotten to that
    one yet, and it may be a while.''
        Are you facing those kind of problems, where they are
    coming so fast, the requests for modification, or the screening
    that you are doing is indicating this should be modified, that
    timewise it is tough to get to all of them? Mr. Gross.
        Mr. Gross. In all candor, yes. Obviously, the volumes of
    homeowners who are approaching us today looking for
    modifications at times can be overwhelming. One of the
    significant issues that I think most servicers are confronted
    with today is the volume of homeowners who are current on their
    payments, but are coming to us and seeking a modification, and
    trying to determine which of those homeowners is doing it based
    upon a true financial hardship either now or in the near future
    based upon some event that may have taken place--unemployment,
    a rate increase, something has occurred--versus those people
    who have heard many statements in the media about all of the
    modifications and principal reductions that are coming forward.
    And, unfortunately, we have a lot of folks who are coming
    forward saying, where is my deal?
        Mr. Donnelly. So you would have a form or like almost a
    test?
        Mr. Gross. We would have to go through and perform the
    analytics on each loan, getting the income and expenses and
    trying to determine from the homeowner what is the hardship
    that causes you to make this request?
        Mr. Donnelly. And would something like, I started out in an
    ARM, I am now locked in at 10 percent over the next 20 years,
    and it is very tight every month; is that the kind of
    situation?
        Mr. Gross. Absolutely. Yes.
        Mr. Donnelly. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        Ms. Kilroy.
        Ms. Kilroy. Thank you, Madam Chairwoman.
        First, I would like to follow up on Ms. Coffin's answer
    regarding offshore employment and moving operations offshore,
    that Wells Fargo moved operations overseas because of a lack of
    qualified available IT personnel. I would like to suggest that
    Wells Fargo might want to take a look in my district in central
    Ohio where we have hundreds of IT persons, well-qualified, who
    have been laid off from various businesses, but including being
    laid off from major national banks; and before they were laid
    off, they were sent to India to train their replacements.
        Ms. Coffin. May I comment? I want to make sure that I am
    setting the right timeline of all this, and to be candid and
    honest with all of you, because I feel very strongly and I have
    known this, and have worked for Wells Fargo for over 11 years:
    It is one of their top principles that we create American jobs.
    And when I spoke, I wanted to make sure I was honest that it is
    that we do not go offshore. Where we have gone offshore in the
    past, not in this current unemployment environment--as a matter
    fact, I would probably have to state to you I would have to
    check whether we have anyone even in our technology today who
    is offshore. This was in our past, not maybe today. So I
    probably misstated that.
        Ms. Kilroy. I am glad to hear that correction, because what
    I heard and what I heard follow-up questioning was a comment
    that there weren't qualified people here.
        I also want to find out your philosophy or the emphasis of
    quickly liquidating assets that are deemed to be maybe
    unproductive versus working out with those homeowners. Of
    course, in my opinion, working out helps the community,
    stabilizes prices, and, to me, not only being a good social
    policy, I think ultimately in the long run is a good business
    policy.
        But I am concerned that Professor White at Vanderbilt
    recently told the New York Times that despite your testimony
    that you are aggressive on that, that Wells Fargo has modified
    few loans as a percentage of delinquent holdings. Would you
    like to comment on that?
        Ms. Coffin. Well, I am not sure if I remember that exact
    quote as you put it. I think you have to look at the nature of
    the makeup of our portfolio. Again, Wells Fargo's portfolio is
    predominantly investor owned; we do not own the loans. There is
    very little of our portfolio that we own as a balance sheet.
    And as I stated earlier today, I can give you this as fact, 8
    percent of our portfolio is held by private investors, but they
    represent almost 70 percent of our serious delinquents, and
    they represent 50 percent of our foreclosures.
        Ms. Kilroy. And do you take a different approach to those
    loans than the loans that Wells Fargo has initiated?
        Ms. Coffin. I think it is not the approach we take to it.
    There is some because of the contractual obligations I spoke of
    earlier. But more importantly is how these loans were
    originated and who was put into these loans to begin with,
    which is the importance of responsible lending. These are loans
    that we did not originate; they are loans that we did not
    underwrite. These are loans where the companies reached out to
    us to do the servicing, and that is what we are doing. But many
    of these borrowers, we are not capable of finding an affordable
    situation.
        Ms. Kilroy. What period of time are you talking about for--
    let me strike that.
        Are you aware that there were 31 complaints filed with the
    Ohio attorney general in 2007 alleging that Wells Fargo had
    refused to accept homeowners' offerings of their late mortgage
    payments?
        Ms. Coffin. You said 31?
        Ms. Kilroy. Thirty-one complaints filed with the Ohio
    attorney general.
        Ms. Coffin. That we were unwilling to accept?
        Ms. Kilroy. The late payments. That people were offering up
    their late payments, and Wells Fargo was refusing to accept
    their late payments.
        Ms. Coffin. I don't have the cases directly here in front
    of me, and I always love to state that it is very important, as
    I see in all the complaints that are brought to our attention,
    and I appreciate all of them that are, is that you have to look
    at the details case by case. Many of those that we find where
    if they are in a very serious or late stage of delinquency or
    foreclosure, and we are still looking at the income and expense
    analysis--every borrower that we look at is an income and
    expense analysis to find affordability. So just accepting late
    payments, if we still see that there is no chance of
    affordability with the modifications that we can do, we are
    avoiding the inevitable.
        Ms. Kilroy. Let me give you an individual situation
    reported in one of the local newspapers with respect to Wells
    Fargo for John and Sharon Vasquez, who bought a home in 1994 in
    Clintonville. And they had some ups and downs, once or twice
    fell behind, but they would typically get their payments back
    on track until they had a significant health issue. But even
    when the wage earner went back to work at the Postal Service,
    and they tried to work out a situation with Wells Fargo,
    initially the company refused the $5,000 that she offered. And
    then after that situation was worked through with the help of
    attorneys, they were required to pay--instead of $5,000, pay up
    $3,900 before the company would talk to them about
    restructuring the loan: A pre-payment of $3,900, and then we
    will talk to you about restructuring. They made that payment,
    and then the restructuring included terms that--included a
    balloon payment of $10,000 that was known that they can't pay.
    They are now in foreclosure proceedings.
        Also, I just had a concern. We talked a little bit about
    some of the refinancings or modifications that ended up with
    lower principal, and also you mentioned many that ended up with
    higher principal. Of course, my concern is that a home
    modification with a higher payment is far more likely to end up
    back in a redefault situation.
        Again, in the New York Times on February 19, Wells Fargo
    declined comment on increased principal charged to a Mr.
    Mitchell with back fees--fees, back payments, penalties. His
    principal was raised to above $300,000, his payments virtually
    unchanged, and he had to make an immediate $5,000 payment. He
    has now again fallen behind on his payments.
        So I guess I am not sure what the--exactly the philosophy
    is here, but it seems it is not necessarily liquidating the
    assets quickly, it is not keeping the people in their homes,
    because the terms and conditions were such that people were not
    going to be able to keep up with them one way or the other. Is
    the philosophy more of maybe getting whatever you can out of
    the mortgagee before foreclosure is initiated?
        Ms. Coffin. No. I can make that very clear, it is not
    trying to just take as much cash as we possibly can. And that
    is one of the reasons we won't receive partial payments. We
    want to make sure that if we establish what a true modification
    that is sustainable with affordable payments, and that those
    payments are made, that is a performing loan. And we will not
    take just partial payments because, again, we could be taking
    payments on something that ultimately is going to end up in
    foreclosure.
        In all of the cases that you mentioned, I want to be
    protective of privacy rights and what I can and can't say, so I
    would like to talk more generically. Any case that anyone
    brings to us, we will look under every detail and look at every
    piece of information. But until you understand the uniqueness
    of each of those cases, I think it is important to understand,
    for instance, there could be an example that the $3,900 being
    requested is for back real estate taxes. And if someone has not
    made a payment on their home in 6 months, and they have not
    paid their back real estate taxes, and we are looking at their
    income and expenses, it could be that we see they cannot afford
    the home.
        Ms. Kilroy. Let me ask you another question about
    refinancing and modifications, and that is, separate and apart
    from back taxes or penalty payments that were part of the
    mortgage, what kind of additional costs are there? We had some
    discussion of this with the earlier panel. What kind of
    additional fees are required of the home purchaser, the
    mortgager, in a refinancing in terms of title searches, title
    insurance, etc., things like that, appraisals? What
    requirements do you put on homeowners?
        Ms. Coffin. First of all, I am not an originator. I am on
    the servicing side of the business.
        Ms. Kilroy. But this would be for refinancing or
    modification.
        Ms. Coffin. I don't know that I can quote every last fee
    that is done on a refinancing, but I think what is more
    important is, I want to make this clear, that on a modification
    there is never a fee, ever. And I want to make sure our
    borrowers understand. There are some for-profit companies out
    there starting to charge them to get modifications for them,
    and they should avoid those. There is never a charge. I think I
    can say that for myself and my colleagues sitting here at the
    table.
        Number two, I think it is important that when working on a
    modification, if--I can state this for us, if there are late
    fees that are part of the back, those are waived.
        Ms. Kilroy. Is there a differentiation that you make in
    terms of a modification or refinancing in terms of those kind
    of fees?
        Ms. Coffin. Yes. Because a modification is taking the
    current loan in the state that it is in, it is usually a
    customer who is in a distressed situation, and you are trying
    to modify the terms of the loan to reach affordability for
    them. A refinance is usually a customer who has good credit and
    who wants to refinance to a lower rate, and they are trying to
    get out of the current loan they are in to get into a lower-
    interest-rate loan.
        Ms. Kilroy. So somebody who is working hard, playing by the
    rules, may be suffering some issues financially, but not in the
    foreclosure situation, not in the delinquency situation would
    be asked to pay these fees?
        Ms. Coffin. And that is also where I believe the
    Administration's plan is providing new guidelines to help more
    people to refinance into that program. And I believe the
    program in the Administration's plan is a streamlined plan that
    has very few costs associated with it. I don't believe it is
    even going to require an appraisal.
        Ms. Kilroy. The situation that I was referencing was
    somebody who e-mailed me what they said was a Wells Fargo
    streamlined plan, and the closing costs that were associated
    with the loan which would increase their principal slightly,
    lower their monthly payments slightly, shorten the years left
    on the mortgage, but the closing costs were 9 percent of the
    value of the house. That seemed to me a little bit extreme.
        Ms. Coffin. I would like--if you could, I would love to
    know the details of that e-mail and send it to us. I can have
    our staff look into it. That seems like something I would need
    to check with the group that does that. I am in charge of
    servicing.
        Ms. Kilroy. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you very much.
        I would like to thank all of our witnesses for
    participating today.
        I guess one thing that I heard was that everybody--you are
    all happy with the President's proposal, and you are glad that
    standards are being set for loan modifications. Is that
    correct? And let me just close by asking this question: How
    many of you or your companies were involved with the HOPE NOW
    program that was originated, what, a year-and-a-half ago? How
    long ago was that voluntary program put together?
        Ms. Sheehan. That really started coming together in mid-
    2007. We kicked off initially that fall.
        Chairwoman Waters. And the idea of that program was that
    instead of trying to impose upon you rules, regulations, laws,
    that you would voluntarily get together and deal with this
    foreclosure problem; is that right?
        Ms. Sheehan. Yes.
        Chairwoman Waters. That was the idea?
        I may be a little bit naive, but given your expertise and
    everything that you know about this industry, why has it taken
    so long and why has it taken the President's initiative to get
    you all happy about standards? Why didn't you come up with
    something? Why didn't you propose standards? Why didn't you all
    tell us how this should be done? That was the whole idea
    putting together HOPE NOW. Did HOPE NOW fail?
        Mr. Hemperly. The President's plan encompasses the GSEs,
    and up to this point, we hadn't had any kind of standardization
    where the GSEs were participating. And I think all of us
    probably served--the largest percentage of our servicing
    portfolios are Fannie and Freddie loans.
        Chairwoman Waters. I don't get the answer, because what I
    am asking is, you were at the table, and you were there to deal
    with this problem of foreclosures. What happened was you came
    up with a very, very weak program of using these HUD-approved
    counselors and nonprofits to counsel people and to help people,
    and that is about all you did. Why didn't you use your
    expertise and your talent to shape and form a response to the
    foreclosure meltdown that we were having? I am trying to figure
    out why the voluntary effort didn't work?
        Ms. Coffin. I would like to comment on that. I think one
    thing--and many of us have worked together outside of HOPE NOW
    and with HOPE NOW, and when this program began and when we
    launched it in 2007, the most prominent problem--the problem
    was subprime ARMs that you spoke about earlier today, and also
    getting borrowers to call us. And where HOPE NOW was very
    successful in its initial efforts was a streamlined ASF which
    allowed us to proactively go after and modify those ARM loans
    into fixed products before their ARMs reset.
        Chairwoman Waters. Let me say this, because our
    representative here representing Citi talked about having
    adopted Sheila Bair's program that she put together after she
    took over IndyMac, which really for the first time showed us
    what you can really get done. And so Sheila Bair basically took
    the IndyMac portfolio without your input, without your help,
    and came up with standards and ways by which--and one of the
    things that she did was she constructed letters that went out
    to the homeowners that said, this is what we can do for you,
    you know, under these conditions. Some other attempts, I am
    told, were letters that went out and said, come in and talk to
    us. And people said, I am not going in there; they are going to
    take my home. But she constructed letters that basically said,
    if you are in this kind of situation, here are the kind of
    things that we can do to help you.
        So I guess I point that out to you, because we have
    struggled with this problem far too long, given you were all at
    the table under a voluntary program called HOPE NOW. I want to
    abolish HOPE NOW. And I know, even though the President may be
    relating to it in his plan, I think that HOPE NOW did very
    little to deal with this crisis. And I would just like you to
    think about how you can get in front of these problems that is
    going to affect the entire industry and come up with
    resolutions if you are truly interested in helping the
    homeowners.
        I know that many of you can give me a lot of responses to
    that, but of course, we don't have any more time. And because I
    am chairing, I get a chance to do this. So I thank you for
    having been here today, and I am hopeful that as the President
    unveils his program, we are going to have the kind of
    cooperation and input to implement something that is truly
    going to deal with what is the problem facing our entire
    economy at this time. Thank you all very much.
        I am reminded that I should tell you again that some
    members may have additional questions for this panel which they
    may wish to submit in writing. Without objection, the hearing
    record will remain open for 30 days for members to submit
    written questions to these witnesses and to place their
    responses in the record.
        Now, the panel is dismissed.
        [Whereupon, at 6:10 p.m., the hearing was adjourned.]

                                A P P E N D I X

                              February 24, 2009

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