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



                      WITH UNAFFORDABLE MORTGAGES?



                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                           FEBRUARY 24, 2009


       Printed for the use of the Committee on Financial Services

                            Serial No. 111-6

48-677                    WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing 
Office  Internet: bookstore.gov Phone: toll free (866) 512-1800 
Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 20402-0001


                 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
WM. LACY CLAY, Missouri                  Virginia
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
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

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

                 MAXINE WATERS, California, Chairwoman

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

                            C O N T E N T S

Hearing held on:
    February 24, 2009............................................     1
    February 24, 2009............................................    61

                       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


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



                      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 
    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.


    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 
    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.


    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 
    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 
    [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.


    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 
    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.

                     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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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.

                    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?


    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 
    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, 
    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.


    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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