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




                          EXAMINING THE MAKING
                        HOME AFFORDABLE PROGRAM

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-16






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

                 MAXINE WATERS, California, Chairwoman

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













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 19, 2009...............................................     1
Appendix:
    March 19, 2009...............................................    51

                               WITNESSES
                        Thursday, March 19, 2009

Baker, Dean, Ph.D., Co-Director, Center for Economic and Policy 
  Research.......................................................    31
Geanakoplos, John D., Ph.D., Professor of Economics, Yale 
  University.....................................................    27
Harnick, Ellen, Senior Policy Counsel, Center for Responsible 
  Lending........................................................    30
Jakabovics, Andrew, Associate Director for Housing and Economics, 
  Center for American Progress Action Fund.......................    33
John, David C., Senior Research Fellow, Thomas A. Roe Institute 
  for Economic Policy Studies, The Heritage Foundation...........    38
Lawler, Patrick J., Chief Economist, Federal Housing Finance 
  Agency.........................................................     8
Morris, Vance T., Director, Office of Single Family Asset 
  Management, U.S. Department of Housing and Urban Development...     6
Quercia, Roberto G., Ph.D., Director of the Center for Community 
  Capital, and Professor of City and Regional Planning, 
  University of North Carolina at Chapel Hill....................    26
Schwartz, Faith, Executive Director, HOPE NOW Alliance...........    35

                                APPENDIX

Prepared statements:
    Baker, Dean..................................................    52
    Geanakoplos, John D..........................................    56
    Harnick, Ellen...............................................    89
    Jakabovics, Andrew...........................................   104
    John, David C................................................   112
    Lawler, Patrick J............................................   119
    Morris, Vance T..............................................   126
    Quercia, Roberto G...........................................   132
    Schwartz, Faith..............................................   166

              Additional Material Submitted for the Record

    Written responses to questions submitted to Dean Baker.......   180
    Written responses to questions submitted to John Geanakoplos.   183
    Written responses to questions submitted to Ellen Harnick....   189
    Written responses to questions submitted to Vance Morris.....   191
    Written responses to questions submitted to Roberto Quercia..   197
    Written responses to questions submitted to Faith Schwartz...   203

 
                          EXAMINING THE MAKING
                        HOME AFFORDABLE PROGRAM

                              ----------                              


                        Thursday, March 19, 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 10:07 a.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, Driehaus; Capito and Lee.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order. Good 
morning, ladies and gentlemen.
    I'd like to thank the ranking member and other members of 
the Subcommittee on Housing and Community Opportunity for 
joining me today for this hearing on examining the Making Home 
Affordable Program.
    Today's hearing will examine the White House's plan to 
prevent foreclosures and keep families in their homes through 
the modification and refinancing of troubled mortgages. I have 
identified foreclosure prevention and loan modifications as a 
priority for subcommittee oversight.
    In February, we held a hearing on mortgage servicers and 
challenges to providing more effective loan modifications for 
troubled mortgages. Today, we will hear from government 
agencies and experts in the field to gain a better 
understanding and assessment of the President's plan and how it 
will assist troubled homeowners.
    As we will hear today, a systematic, or systemic loan 
modification program is necessary to streamline foreclosure 
mitigation efforts.
    Since day one, I have been a supporter of enacting a 
systematic modification program. On the first day of the 111th 
Congress, I introduced H.R. 37, the Systematic Foreclosure 
Prevention and Mortgage Modification Act of 2009, to put such a 
plan in action. The President's plan builds upon my 
legislation.
    In addition to learning about the President's foreclosure 
prevention plan, I hope that this hearing will also provide 
members with an in-depth analysis of the types of loan 
modifications that have been effective in preventing 
foreclosures and re-defaults. I believe this information will 
assist us in understanding the role of the President's plan in 
fixing the housing crisis.
    Loan modifications--that is, changing the terms of the 
loan--are essential to ending the foreclosure crisis. According 
to RealtyTrac, in 2008, 2.3 million households were in some 
stage of the foreclosure process, an 81 percent increase from 
2007, and a 225 percent increase from 2006.
    The foreclosure crisis shows no signs of slowing down, with 
Credit Suisse estimating that 8.1 million homes will enter 
foreclosure over the next 4 years.
    The President has recognized the urgency of the foreclosure 
crisis with the release of the Making Home Affordable Program.
    I'm interested to hear how the plan will provide fast and 
effective relief to troubled homeowners and begin the process 
of stabilizing the housing markets. The government witnesses 
today will discuss their collaboration to implement the 
President's plan.
    We will also hear about the obstacles that are preventing 
borrowers from staying in their homes. According to a study by 
First American Core Logic, there are a growing number of 
underwater loans, loans where the mortgaged property is worth 
less than the amount owed on the loan.
    As of December 31, 2008, more than 8.3 million U.S. 
mortgages, or 20 percent of all mortgaged properties, were 
underwater. Another 2.2 million are approaching that point.
    The witnesses today will shed light on the types of loan 
modifications that may work best for these types of troubled 
homeowners.
    In closing, I would like to comment on the urgent need for 
foreclosure assistance, and I'm pleased that the President and 
his Administration have taken some action to deal with this 
crisis.
    Millions of families are struggling with their mortgages 
and millions more are at risk of losing their homes. Saving the 
housing markets and keeping families in their homes will 
require serious effort from all key players: Congress; the 
Administration; banks; mortgage servicers; and borrowers must 
work together to implement a plan to stop the rising tide of 
foreclosures and keep millions of families in their homes.
    I am looking forward to hearing from our two panels of 
witnesses on the implementation and impact of the Making Home 
Affordable Program.
    I would now like to recognize our subcommittee's ranking 
member to make an opening statement.
    Ms. Capito.
    Mrs. Capito. I'd like to thank the chairwoman for holding 
this hearing this morning.
    As we know, many Americans are struggling to meet their 
financial obligations these days. What began as difficulties in 
the subprime mortgage market has evolved into a situation where 
many homeowners owe more on their mortgage than their home is 
worth. Foreclosures are rising and recent job losses will most 
likely exacerbate this problem.
    There have been several attempts to address the rising 
foreclosures over the last 18 months. The HOPE NOW Alliance, 
the FHASecure Program, and the HOPE for Homeowners Program have 
been rolled out nationally by both the private sector and the 
Federal Government.
    Some programs have been more effective than others. I'm 
cautiously optimistic about the proposal before us today. I do 
have concerns that the Treasury Secretary has announced that 
the President's Homeowner Affordability and Stability Plan 
could help up to 9 million homeowners.
    We have heard estimates before, with some of the 
aforementioned programs, and unfortunately, these programs have 
not even come close to helping the estimated numbers of 
families.
    We must identify who we are attempting to help, and also 
identify who we do not want to hurt.
    We should help those who are truly in need of assistance, 
but at the same time, we should not harm responsible business 
owners, business borrowers. It is simply unfair to punish those 
who have acted responsibly and tightened their budgets to meet 
their financial responsibilities. We cannot forget that nearly 
90 percent of homeowners are paying their mortgages on time.
    I'm also concerned about the oversight and accountability 
of this program. I think this is the theme of not just today, 
the week, the month, the year, and probably the decade, which 
is more oversight and more accountability when large programs 
or large commitments of Federal dollars are made.
    This program is set to go into effect within the coming 
weeks. There is uncertainty, and I hope to learn about that 
today, about the ability of the Treasury and other agencies to 
provide proper oversight.
    Congress needs to know, up front, if more manpower or 
technology upgrades are needed so that modifications and 
refinances can be performed for those who merit assistance 
while ensuring that the taxpayers' dollars are being used in a 
prudent manner.
    I look forward to hearing from our witnesses today and I 
thank the chairwoman for holding this hearing.
    Chairwoman Waters. Thank you very much.
    I will now recognize Mr. Lynch for 2 minutes.
    Mr. Lynch. Thank you, Madam Chairwoman.
    And I want to thank the panelists on both panels for their 
willingness to come before the committee and help us with our 
work.
    Over the past year-and-a-half, we've seen a housing market 
that has played a central role in the economic crisis, causing 
great losses in our financial markets, but also a severe human 
toll in our communities as more and more Americans struggle to 
stay in their homes.
    The Obama Administration, to our great appreciation, 
announced last month a new initiative designed to provide 
targeted assistance to homeowners who are having difficulty 
making their mortgage payments.
    The Making Home Affordable Program is focused, as you all 
know, on reaching homeowners who thus far have not qualified 
for a break under any other assistance program, and the key to 
the success of this program is, importantly, the 
incentivization of the program for lenders who were lacking 
encouragement in the past and the previous Administration at 
foreclosure mitigation.
    But with this program, participating lenders and borrowers 
will receive financial incentives if the mortgage holder stays 
in the home for up to 5 years, 5 consecutive years, and 
payments remain current.
    Madam Chairwoman, we all know what kind of devastating 
effect foreclosure can have on families, communities, and the 
larger housing market, and I think it energizes us all to work 
together, both lenders and borrowers, to ensure that working 
families can stay in their homes.
    I look forward to exploring this topic throughout this 
hearing, and I am waiting with great anticipation on the 
testimony of our witnesses.
    So, Madam Chairwoman, I yield back.
    Chairwoman Waters. The gentleman from Missouri, Mr. 
Cleaver.
    Mr. Cleaver. Thank you, Madam Chairwoman, Ranking Member 
Capito. I appreciate the opportunity.
    Just a brief comment, since I'm more interested in our 
guests. I do think that it is imperative that we do, I think 
what the Supreme Court said in 1954 in the Topeka decision, 
that we need to move with all deliberate speed to try to do at 
least two things: first, make housing more affordable; and 
second, stop the spiral in the housing markets. I don't think 
that it is too ambitious at all to try to save a large number 
of Americans who are on the verge of losing their homes.
    We have approximately 54 million mortgages in the United 
States. Fourteen million of them are in trouble, 27 percent, 
and in those cases, we have properties where the house is worth 
less than the mortgage, and so it creates some unique problems, 
and I'm very much interested in probing this issue to find out 
if we actually have the infrastructure in place to even do the 
refinancing, to handle all of the millions of people who will 
be coming to us.
    I appreciate both panels coming, and I look forward to a 
vigorous exchange.
    Thank you, Madam Chairwoman. I yield back the balance of my 
time.
    Chairwoman Waters. Thank you very much.
    The gentleman from Texas, Mr. Green, for 2 minutes.
    Mr. Green. Thank you, Madam Chairwoman, and I thank the 
ranking member, as well.
    Madam Chairwoman, I want to extend a special thank you to 
you, because you have been a part of the avant garde on these 
issues.
    You were quick to identify the servicers as a concern, and 
not only did you identify the concerns, you took immediate 
action to try to find solutions to what has proven to be a most 
enigmatic problem.
    You held hearings, one in my home district, in Houston, 
Texas, the Ninth Congressional District, and I thank you for 
coming there.
    You had a hearing in St. Louis. I was honored to be at that 
hearing with you. And you held hearings in your district in 
California.
    At all of these hearings, you brought in witnesses who gave 
us intelligence that has helped us literally, in my opinion, to 
get to the point where we are today.
    So I believe that it is most appropriate that I extend this 
debt of gratitude to you for being a part of the avant garde on 
these issues.
    I'd also like to thank President Obama. I think that he has 
made a bold, aggressive move. He has made this an issue of 
great concern. It has become a priority issue, because he has 
identified it as such. And I'm of the opinion that this 
program, while it may not be a panacea, it may not be the 
silver bullet, I do believe that it will help a good number of 
persons who are in danger of losing their homes.
    My intelligence indicates to me that the percentage of 
performing mortgages has decreased from 93.33 percent in the 
first quarter to 91.47 percent in the third quarter. This is a 
trend that we must reverse. We have about 8.3 million U.S. 
mortgages, or 20 percent of all properties, that are in need of 
some sort of modification, it seems.
    And this program has two important elements. It has a 
``refi,'' refinance aspect to it; and it also has a 
restructuring. Refinancing can be great and can benefit a 
certain class of people, but you have another class of people 
who will need some restructuring, interest rates reduced, some 
means by which they can have a payment that they can afford.
    Madam Chairwoman, I think that this is a hearing that is 
most timely, and I thank you for all that you've done in this 
area.
    I yield back the balance of my time.
    Chairwoman Waters. Mr. Driehaus, would you like to have a 
couple of minutes to do an opening statement, also?
    Mr. Driehaus. Yes, Madam Chairwoman.
    Chairwoman Waters. You're recognized for 2 minutes.
    Mr. Driehaus. Thank you, Madam Chairwoman, and thank you so 
much for calling this hearing today. I, too, want to applaud 
your leadership on this issue.
    My only regret is that we're having this hearing in 2009, 
and it's several years too late for many of the communities we 
represent, and many of the households that have already 
experienced the tragedy of foreclosure.
    I think the President's initiative is an important one. I 
look forward to the testimony of the witnesses describing in 
detail how they envision the program to work, but I would 
challenge them to think about how we get the information to the 
homeowners, because while we can put great plans in place, it 
is critically important that people take advantage of the 
plans.
    Many of the people we're talking about have been inundated 
with offers to restructure their debt, have been inundated with 
offers to remodify their loans from one entity or another. And 
so I think one of the greatest challenges that we will face as 
we move forward with the President's plan is being able to 
market the plan, and making sure that people are taking 
advantage of it, because as you know, people are very reluctant 
when they're facing foreclosure, when they're falling behind on 
their payments, to step forward and approach their lenders and 
approach the servicers, and suggest that they want to modify 
that loan.
    So I hope, Madam Chairwoman, that as we move forward, we 
gain some greater clarity as to how this program will be 
marketed and how we intend to get to the type of numbers that 
we envision in terms of helping people prevent foreclosure as 
we move down the road.
    And with that, I yield back the balance of my time. Thank 
you.
    Chairwoman Waters. Thank you.
    There are no more opening statements. I will move to 
welcome our distinguished first panel.
    Our first witness will be Mr. Vance Morris, Director of 
Single Family Asset Management, U.S. Department of Housing and 
Urban Development. Welcome.
    Our second witness will be Mr. Patrick Lawler, Chief 
Economist, Federal Housing Finance Agency.
    I thank you for appearing before our 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.
    We'll begin with Mr. Morris.

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

    Mr. Morris. Chairwoman Waters, Ranking Member Capito, and 
members of the committee, thank you for the opportunity to 
appear before you today.
    Many homeowners and communities throughout the country have 
been severely hurt by the current economic crisis. This 
includes many responsible families who are making their 
mortgage payments, but have experienced falling home values 
that disqualify them from opportunities to refinance with 
today's low interest rates.
    Millions of American workers have been laid off or forced 
to accept lower-paying jobs, and are significantly challenged 
to produce income to make their mortgage payment.
    Now is the time to act. The President has proposed a 
comprehensive strategy to rebuild the housing market and revive 
the economy. This will enable many of these homeowners to have 
a fighting chance to stave off foreclosure and keep the 
American dream of homeownership.
    The Making Home Affordable Program is targeted to reach as 
many as 7- to 9 million homeowners who are at risk of 
foreclosure and are struggling to stay in their homes. While 
this program supports the recovering housing market, it will 
not provide money to speculators.
    The program helps responsible homeowners at risk of losing 
their homes and helps to stabilize neighborhoods by slowing the 
rate of foreclosure that fuels falling home values.
    The Making Home Affordable Program has two components: the 
Home Affordable Refinance Program; and the $75 billion Home 
Affordable Modification Program announced by the Department of 
Treasury on March 4, 2009.
    The Home Affordable Refinance Program is expected to help 
4- to 5 million borrowers who have an existing mortgage held by 
Fannie Mae or Freddie Mac.
    This initiative is designed for borrowers who have a solid 
payment history but have been unable to refinance to a lower 
payment due to the decline in the value of their homes, which 
pushed their current loan to values above 80 percent. This 
initiative expands the maximum loan to value ratio for 
refinanced loans owned by Fannie Mae and Freddie Mac from 80 
percent to 105 percent.
    The other component is the Home Affordable Modification 
Program, which provides an opportunity to modify existing loans 
to an affordable and stable monthly payment. The Home 
Affordable Modification Program is expected to help 3- to 4 
million at-risk borrowers in all segments of the mortgage 
market avoid foreclosure, by having the government partner with 
lenders to reduce the homeowner's monthly payment to an 
affordable level.
    The modification program offers a number of incentives to 
both families and servicers to avoid foreclosure and minimize 
the damage that foreclosure imposes on financial institutions, 
borrowers, and the community. The program aims to protect 
taxpayers through sound loan modifications.
    No incentive payments will be made unless the borrower 
completes a 3-month trial period, and most payments of 
incentives are tied around the concept of ``pay for success.''
    FHA, the Veterans Administration, and the United States 
Department of Agriculture are working to implement practices 
that allow for comparable programs that will also work in 
tandem with the expanded and improved HOPE for Homeowners 
Program.
    As part of the American Recovery and Reinvestment Act, the 
Department of Housing and Urban Development will also award $2 
billion in competitive Neighborhood Stabilization Program 
grants for innovative programs to mitigate the impact of 
foreclosure by supporting new strategies to address the problem 
of vacant properties.
    The Department of Housing also looks forward to helping 
millions of homeowners to stay in FHA-insured mortgages.
    Through the new and expanded authorities included in the 
Helping Families Save Their Homes Act of 2009, H.R. 1106, FHA 
will be able to more effectively modify FHA loans.
    Finally, I am pleased today to announce some very good 
news. The Departments of Treasury and Housing and Urban 
Development have launched a new Web site to help borrowers 
determine their eligibility under the Making Home Affordable 
Program. This Web site will enable them to look up their loans, 
to find out what servicers they're with, to find out what 
options they have, to see if they qualify.
    The Web site is www.makinghomeaffordable.gov, and it's 
active now.
    Thank you very much, and I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Morris can be found on page 
126 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Lawler.

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

    Mr. Lawler. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the committee. Thank you for the 
opportunity to testify before this committee on the Making Home 
Affordable plan.
    My name is Patrick Lawler. I'm the chief economist of the 
Federal Housing Finance Agency.
    FHFA, and the housing GSEs, are actively working on 
foreclosure prevention to help homeowners in trouble through 
Making Home Affordable. This plan is a critical component of 
the President's program to restore financial stability. It will 
help millions of American homeowners refinance or modify their 
mortgages so that they will have more affordable mortgage 
payments.
    There are two principal initiatives in Making Home 
Affordable. One is the Home Affordable Refinance Program. 
Fannie Mae and Freddie Mac will provide access to low-cost 
refinancing for loans they own or guarantee. It is designed for 
borrowers who are current in their payments and seek a lower 
rate or a safer mortgage, but who have experienced difficulties 
due to declining home values and limited availability of 
mortgage insurance.
    The other major initiative is the modification plan, a $75 
billion program that will establish a national standard for 
loan modifications.
    Before going further, let me stress that a lot of work 
remains to implement these programs, so my testimony today is a 
status report. There will be further details and information 
rolled out to servicers and to the public in the days and weeks 
ahead.
    During the last 2 months, FHFA has been working with 
Treasury and HUD and the other agencies to develop the details 
of the Making Home Affordable Program. Drawing on the loan 
modification experience of Fannie Mae and Freddie Mac, we have 
provided experience and information to structure the new 
affordability plan to make it as effective as possible.
    The new loan modification plan is more aggressive than 
previous programs designed to lower borrowers' mortgage 
payments to no more than 38 percent of their income. The Making 
Home Affordable Program lowers the debt to income ratio to 31 
percent, with the government paying half the cost between 38 
and 31 percent.
    It is critically important to get to troubled borrowers as 
soon as possible before they are significantly behind on their 
payments. The Home Affordable Modification plan goes farther 
than previous programs and includes homeowners who are facing 
reasonably foreseeable or imminent default, but are still 
current on their mortgages.
    Both Fannie Mae and Freddie Mac will participate in the 
Home Affordable Modification Program, both for the loans that 
they own or guarantee, and as administrators on behalf of the 
Treasury Department for all other loan modifications under this 
program.
    In addition, Fannie Mae and Freddie Mac are implementing 
the Home Affordable Refinance Program, which includes 
refinancing flexibilities for homeowners whose loans are owned 
by each of the enterprises.
    As an administrator of the modification program, Fannie 
Mae's guidance to seller/servicers addresses not only loans 
owned by Fannie Mae and Freddie Mac but also those owned by 
investors in private label securities. Many of these securities 
have pooling arrangements that require that servicers can 
modify loans only if they follow industry standards. Fannie 
Mae's guidance will establish the new industry standards.
    This overcomes a major obstacle to loan modification, and 
will contribute, along with cash incentives, to increased 
efforts by servicers to modify loans instead of foreclosing on 
homes.
    Each enterprise has other key roles in the implementation 
of this program. Fannie Mae also has a paying agent role to 
provide the incentive payments to servicers who have modified 
loans.
    Incentives for modifications on loans that Fannie Mae and 
Freddie Mac already own will be paid out of their funds, while 
incentive payments on loans owned by other investors will be 
paid with TARP funds.
    In addition, Fannie Mae will be required to maintain data 
and report on how many loans are refinanced or modified, as 
well as relevant statistics about those loans.
    Freddie Mac has an important audit and compliance role with 
the modification program. It will take a lead role in reviewing 
servicers' compliance with the program guidelines and ensuring 
that non-compliance is reported and handled properly. This job 
includes required reporting, documentation, and onsite visits 
to the servicers.
    Both enterprises are hiring or transferring the necessary 
staff to conduct their respective roles in the program, and 
both enterprises are developing appropriate systems, 
confidentiality standards, and firewalls to ensure that this 
program has the highest integrity.
    FHFA is confident that both Fannie Mae and Freddie Mac have 
fully embraced their roles and are on track in developing the 
necessary infrastructure.
    As the enterprises' regulator, we will oversee the 
implementation of this plan and monitor its results. Our 
examination staff will focus on the data used and created by 
the program, anti-fraud efforts, servicer registration, human 
resources, system development, and Freddie Mac's compliance 
function, and internal controls over Fannie Mae's paying agent 
role.
    A great deal of information is available at 
financialstability.gov or, as Mr. Morris has pointed out, the 
new Web site, makinghomeaffordable.gov. At these Web sites, 
homeowners can learn more details about the plan and the 
options.
    If they are current on their mortgage payments, they can 
learn if Fannie Mae or Freddie Mac owns their loan, and the 
steps to apply for the refinance program.
    If they are behind on their mortgages or in imminent danger 
of falling behind, they can identify who to contact and what 
information they need to apply for the modification program.
    There is also a self-assessment tool for homeowners to 
determine if they are eligible.
    Homeowners with questions or uncertainty about their 
situation should call 1-888-995-HOPE, the HOPE NOW hotline, to 
reach a free HUD-approved housing counselor.
    I'll be happy to answer questions.
    [The prepared statement of Mr. Lawler can be found on page 
119 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Let me begin by asking questions about whose responsibility 
it is to deal with some of the scams that are developing on 
loan modifications. There are several things going on.
    One is, for example, there is something called the Federal 
Home Loan Modification Program that advertises extensively on 
television, and others that are popping up, that charge money. 
They sound as if they're government, and the one that I had a 
long conversation with asked for $3,500.
    And I'm worried that in this era where we're trying to 
teach people to reach out to get their loans modified, that 
some people are going to think this is part of the plan.
    Secondly, another effort is being made to sell mortgage 
protection insurance. The mailboxes are just being flooded with 
this material.
    I have not investigated these plans, and I don't know if 
they really pay off, or what kind of monies they are charging 
for it, but it now appears to be an aggressive campaign.
    Whose responsibility is it to look at these efforts and 
move on them to do something about it?
    Mr. Morris. Madam Chairwoman, it is an ongoing shared 
responsibility to, when we become aware of these agencies or 
entities, we work with our Office of Inspector General, we work 
with the U.S. Attorney, we take them very seriously.
    The investigation that we do, we usually have people 
evaluate the Web sites. We immediately contact the firms. And 
we also make a referral to the IG and also work with the U.S. 
Attorney's Office.
    It's very challenging, because there's money to be made 
there, so in addition to our enforcement and compliance issue, 
we have a comprehensive outreach campaign in both Spanish and 
English. We have over 2,700 housing counselors that we're 
working with. We're developing a national public awareness 
campaign. And we're also doing public service announcements. So 
the--
    Chairwoman Waters. Let me just ask, are you aware of the 
Federal Loan Modification Program?
    Mr. Morris. I have seen that commercial myself.
    Chairwoman Waters. What have you done about it?
    Mr. Morris. I'm not the enforcement--
    Chairwoman Waters. That's what I was asking. Who is 
responsible for looking into those kinds of things?
    Mr. Morris. What generally is done, we have a couple of 
entities, we have an enforcement center within HUD, we have our 
Office of Inspector General, and they also coordinate with the 
U.S. Attorney's Office.
    Chairwoman Waters. Is anybody looking into these loan 
modification programs that charge money and practically 
guarantee people that they can get their loan modified, and 
they take the money up front?
    And of course, as you know, if you've been involved in loan 
modifications, you may or may not be able to get a loan 
modified, based on a number of possibilities.
    One, right now, servicers cannot modify loans where they 
have in the contract with the investor that they will not 
modify their loan when they invest their money.
    Secondly, the person calling may have no income stream, and 
you can't do anything for them. So when they hold out that, 
``Just call us, we can guarantee, we can get one,'' it's 
misleading.
    But I guess what I'm asking is, is there anything that you 
know about that's being done now to look at these products and 
these services that are being put out there so that we can do 
something and not go down the road that we've gone down with 
all of the exotic products that were offered by the loan 
initiators that kind of got us into this trouble; what's being 
done and what should we do?
    Mr. Morris. Well, the best answer I can give you is that I 
will follow up with HUD officials and find out exactly how we 
coordinate with the Federal Trade Commission and the U.S. 
Attorney's Office, because candidly, I'm not the enforcement 
side of the office, I'm the marketing, origination, servicing 
side, and you're asking enforcement questions.
    Chairwoman Waters. That's why I asked whose 
responsibility--
    Mr. Morris. Right. I was saying I would follow up--
    Chairwoman Waters. We will follow up. If it's not your 
responsibility, we'll get to the right agency with the 
information, but I think that you should be aware of what's 
going on, and you should be feeding information to the right 
enforcement agencies, also. You can't just sit back and watch 
it happening and not do anything about it. I think it's going 
to get us all into a lot of trouble.
    And let me just ask you, while I'm talking, what do we do 
about seniors and others who are not computer literate, don't 
look at Web sites, looking for help? How do we help them get to 
their servicer?
    Mr. Morris. That's the reason why we're working with 
various groups. We're working with the HUD-approved counseling 
agencies that do face to face counseling and do outreach in the 
communities. All of these are local groups.
    We also work with the local governments, and also local HUD 
housing offices, as well.
    Chairwoman Waters. Thank you. My time is up. I'll have to 
call on Ms. Capito now. Thank you.
    Mr. Lawler. Madam Chairwoman, if I might, the phone number 
I gave at the end of my testimony is something someone without 
a computer can use to get to HOPE NOW and get access to a HUD-
approved counselor.
    Chairwoman Waters. Have you ever called HOPE NOW?
    Mr. Lawler. I have not personally.
    Chairwoman Waters. Okay. I have many times. We'll talk 
about that later.
    Ms. Capito.
    Mrs. Capito. Thank you.
    Mr. Morris, a simple question. On the Web site 
makinghomeaffordable.gov, can anybody input their data in 
there, and you have every mortgage in America to find out who 
the--if it's a Fannie or Freddie? Is that how we determine 
that? Is that what you're telling me?
    Mr. Morris. The Web site, and Mr. Lawler probably can speak 
more extensively, I was on the Web site, tested it yesterday, 
and I was using it this morning. It has a couple components 
that an individual can use to look up Fannie and Freddie loans, 
and what it does is, if you are non-Fannie or Freddie, it 
directs you to where you can get the information on how to 
contact your servicer, like it will direct you to the HOPE NOW 
network. And so it gives you information on how to obtain the 
information.
    Mrs. Capito. But it can actually tell any individual 
whether they have a Fannie or Freddie?
    Mr. Morris. It has a look-up link for both Fannie and 
Freddie, if it's a Fannie--
    Mrs. Capito. And you just input your name? Is that how it 
works?
    Mr. Lawler. You need your address, as well. And you can 
also do this on Fannie and Freddie's Web sites themselves. But 
that's two separate Web sites. This is one Web site where you 
can do the whole thing.
    Mrs. Capito. Right. Okay. Because I think that is confusing 
to a lot of people.
    My constituents that I've talked to, the first thing I 
asked them when I read about this program is, ``Do you have a 
Fannie or Freddie loan,'' and they have no idea. And they don't 
even know who Fannie or Freddie are. They think they might.
    And so I think that's a real issue for people who are 
holding mortgages.
    Mr. Lawler, you mentioned that you were going to do $75 
billion worth of loan--there's going to be $75 billion worth of 
loan modifications and you're going to have a Federal standard.
    I believe we had a lot of the large private entities in 
here who were saying that we have no standard for a loan 
modification.
    Is this going to address that issue, and how is that going 
to roll out?
    Mr. Lawler. That's what we're trying to do, and the outline 
of the plan has already been pretty clearly stated on our March 
4th announcements. There will be some further details coming 
forth. There have been lots of meetings with the various 
servicers. We will have a very clear set of standards--
    Mrs. Capito. Well, give me some examples, like what?
    Mr. Lawler. We--
    Mrs. Capito. Like your loan to value, or you've lost a job, 
or your income--
    Mr. Lawler. The debt to income ratio, for example, is it 
greater than 31 percent. If it is, can we reduce the interest 
rate first? Can we go down as low as 2 percent? Will that solve 
the problem? If that doesn't solve the problem, can we lengthen 
the time of mortgage? And so forth.
    But you have to be able to show documents that show you 
will be able to make the payments of the modified loan.
    Mrs. Capito. Where is the infrastructure going to be to--
this is complicated, these are complicated matters for the 
individuals who are the homeowners, and for a lot of other 
people, as well.
    Do you have the infrastructure in both of your agencies to 
begin to deal with all of this? I mean, if you're talking 9 
million families, that's a lot of long conversations.
    Mr. Lawler. This is a very major project. It involves not 
only Fannie Mae and Freddie Mac and government agencies like 
FHFA and HUD and Treasury and so forth, quite a few more 
agencies, as well, also the servicers, to be able to develop 
their own infrastructures to process all of these loans.
    Mrs. Capito. So basically, no, you don't have it right now?
    Mr. Lawler. No, but we have developed the structure for it, 
and the organization. Fannie and Freddie have developed, with 
the help of a lot of other agencies, the basic tools that the 
servicers need.
    Mr. Morris. Can I--
    Mrs. Capito. Yes.
    Mr. Morris. I can also clarify the question.
    There are two components. One is, do we have the 
infrastructure to oversee--
    Mrs. Capito. And that was going to be--
    Mr. Morris. --and that's what FHA or Fannie will do. And--
    Mrs. Capito. But who is the over-arching person who is 
going to watch what this money is doing and where it's going?
    Mr. Morris. For Fannie, that will be Fannie, and for FHA-
insured mortgages, it will be FHA, for VA-insured mortgages.
    But then, you're asking the capacity to actually do the 
loan modification?
    Mrs. Capito. Right.
    Mr. Morris. That is the servicers. So we're constantly 
checking with the servicers to ensure that they have sufficient 
capacity.
    Currently, now in FHA, we have about 4.7 insured mortgages, 
and we do about 100,000 modification and loss mitigation 
actions per year, so--
    Mrs. Capito. How many a year?
    Mr. Morris. We do about 100,000 per year with our current 
authority, and we're trying to get expanded authority.
    But we're confident, because it's the same servicers that 
are doing the loan modifications, so the servicers are already 
existing. We're not creating new--but of course, there have 
been more demands put on the servicers.
    Mrs. Capito. Okay, then, let me fast forward--
    Mr. Lawler. Freddie Mac will be overseeing the compliance 
of the servicers with all the rules, and they in turn will be--
    Mrs. Capito. And do they have the capacity to do this right 
now?
    Mr. Lawler. They are well on the way to having it 
developed. They have isolated resources, the people, and the 
organizations to be able to do this.
    We will be reviewing them, our IG, Treasury, all of the 
TARP oversight apparatus. So there's quite a number of layers 
of oversight here.
    Mrs. Capito. Well, then, that kind of concerns me, as well, 
because then in a year from now, say we're sitting here in the 
same hearing, and you're coming back and giving us a status 
report, you know, you've now mentioned probably seven or eight 
different entities that, you know, a lot of this is going to be 
spread over.
    Is there going to be an effort, then, to gather information 
in one central repository so when I ask you, how many people 
have been helped--
    Mr. Lawler. Yes.
    Mrs. Capito. --to what extent--
    Mr. Lawler. Yes.
    Mrs. Capito. --how are they doing, what--
    Mr. Lawler. It's Fannie Mae's job to get that information 
from the servicers. It's Freddie Mac's job to review and see 
that those loans have been handled in compliance with all the 
rules that have been set out.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Thank you. Mr. Lynch.
    Mr. Lynch. Thank you, Madam Chairwoman.
    Mr. Lawler, in your testimony, you mentioned, I understand 
we're doing whole loans and then we're also doing private label 
securitized mortgages.
    Mr. Lawler. The loans that back those private label 
securities are a focus of the loan modification program.
    Mr. Lynch. Right. And that was a real problem in the first 
iteration of this. We were getting pushed back from the 
servicers, because in some cases, it actually incentivized 
foreclosure rather than modification.
    How are we handling that right now? Do we have enough data? 
I know you said, you know, some of the stuff you're still 
compiling data on.
    How is that going with the pooling arrangements, or the 
securitized mortgages? What is our experience in terms of 
getting those modified, and what are the incentives that we're 
introducing to overcome that earlier barrier?
    Mr. Lawler. We can't, with this program, actually modify 
the terms of the pooling agreements.
    What we can do is establish industry standards by making 
them applicable to everybody who participates in this program, 
which will be virtually the entire industry, that will 
establish what kinds of loans should be modified, and it would 
be a much more aggressive modification plan than has been 
viewed as industry standards before, and that will enable many 
of these servicers of the loans behind private label securities 
to take action when they felt they couldn't before.
    Mr. Lynch. So, Mr. Morris, do you want to add to that?
    Mr. Morris. Yes. Reading the plan, one of the key 
components that differentiates them from the government loan is 
that they have a net present value test, and so this net 
present value test is an objective tool that shows the investor 
that it's in the investor's best interest to accept a 
modification as opposed to a foreclosure.
    Mr. Lynch. Right.
    Mr. Morris. And so that was the tool that was incorporated 
into their infrastructure, as well.
    Mr. Lynch. Reading between the lines here, you're trying to 
give cover to the servicers so they don't get sued?
    Mr. Lawler. That's definitely an important consideration. 
That's something that was holding servicers back. This is--
    Mr. Lynch. You're saying, if we give you the stamp of 
approval on these standards, these industry standards, and you 
use these industry standards, it will somehow immunize you from 
being sued by--
    Mr. Lawler. Not completely. It will address important 
problems in the servicing, the pooling agreements.
    Mr. Lynch. Yes.
    Mr. Lawler. It won't solve all the problems.
    Mr. Lynch. Yes. That's--well, that is a problem. That is a 
problem.
    Have you done any of these yet?
    Mr. Lawler. The program has just gotten underway. We hope 
to have all of the documentation and infrastructure finished in 
the next very few weeks.
    Mr. Lynch. Okay. So the standards aren't in place yet?
    Mr. Lawler. The standards are generally in place. There are 
some servicers that are already working with borrowers. But it 
will take a while to have everything operational fully.
    Mr. Lynch. Yes.
    Mr. Lawler. And it takes 3 months of demonstrated 
performance by the borrowers before the loan is actually 
modified.
    Mr. Lynch. Yes, I'm not--
    Mr. Morris. I talked to our senior officials, who work with 
Treasury and HUD, and all the major servicers have told us they 
are on board with the program.
    The next thing that they're waiting for is that there's a 
contract that has to be signed between the servicer and the 
Treasury. The contracts aren't completed, but will be completed 
shortly.
    So all the--most of the major servicers are on board. 
They're waiting to get an executed contract. But, as Mr. Lawler 
also mentioned, this is our pay for success component.
    There will be a lag time anyway, because we have to have 
three successful payments before the modification is actually 
executed, so--because we don't want modifications that would 
re-default.
    Mr. Lynch. Right.
    Mr. Morris. We want modifications that are effective. So 
that's where we--
    Mr. Lynch. To even get that far, you know--I'm running out 
of time--but this whole framework, I just have some skepticism, 
given the way these CDOs and these pooling arrangements are 
made, and the incentive for those in the top tranche to protect 
themselves with the lower equity and mezzanine tranches. It's 
just a thorny issue.
    But rather than get into it further, maybe I could submit 
something in writing, and we can go back and forth, rather than 
use up the committee's time.
    Thank you. Thank you, Madam Chairwoman.
    Chairwoman Waters. Mr. Lee.
    Mr. Lee. Thank you.
    Just a few questions, and I appreciate you coming today to 
help educate us about this, what I think is a very important 
issue.
    I want to talk more about capacity and metrics. And either 
one of you can jump in on this question.
    But in your mind, are servicers and lenders truly prepared 
to handle homeowner inquiries about who is eligible for the 
Administration's Homeowner Affordability and Stability Plan?
    And then secondarily, what capacity do these servicers and 
lenders have to handle the expected nearly 3- to 4 million loan 
modifications that the Administration plan envisions and the 4- 
to 5 million GSE refinancings?
    Mr. Lawler. That is going to vary from servicer to 
servicer.
    One of the things we have tried to do on determining who is 
eligible, as both of us have discussed before, is create the 
Web sites that borrowers can go to to establish some of the 
basic facts and document needs, and then they need to talk to 
their servicers, and obviously, servicers have had now several 
months to prepare for this, at least since early in January, in 
anticipation.
    Mr. Lee. So you think they're adequately prepared to handle 
this?
    Mr. Lawler. Well, I believe that many of them are still in 
the process of getting more prepared, so I wouldn't say that 
everybody is there yet. I think it will take more work.
    Mr. Lee. One other question: Do you believe homeowners who 
have put nothing down, or withdraw all their equity, would be 
eligible for refinancing?
    Mr. Lawler. For refinancing?
    Mr. Lee. Yes.
    Mr. Lawler. If it is a Fannie or Freddie loan, then they, 
even if declines in the value of the property have absorbed 
most of their down payment, as long as their current mark to 
market loan-to-value ratio is not greater than 105 percent--
    Mr. Lee. But they put nothing down. Are they--
    Mr. Lawler. Well, Fannie and Freddie didn't really have 
zero down payment loans. Their limit was generally 97 percent. 
But a 3 percent down payment that can get easily eaten up with 
declines in house prices.
    Mr. Morris. Just to answer your question, Congressman Lee, 
as Mr. Lawler said, the Fannie/Freddie was an 80 percent loan 
to value. That product refinances someone who had a decline in 
home value. So they had the equity position in some measure 
before in their home.
    If a person--you're asking if a person had no equity down, 
would they qualify for a home modification program loan? Yes. 
The answer is, they would be eligible, not saying they would 
qualify, because there is certain underwriting analysis that's 
performed to qualify.
    There is the net present value test. There is an analysis 
to see if they can afford the payment. You're not going to just 
modify--it's only for sound modifications. It's not for a 
modification that's going to re-default or for a household that 
candidly cannot afford to make the modified loan payment.
    Mr. Lee. One more question?
    Mr. Lynch. [presiding] Certainly.
    Mr. Lee. Thank you. In your mind, how is the Administration 
collaborating with Congress on establishing benchmark and 
reporting requirements?
    Mr. Lawler. Well, we certainly have a very elaborate 
program being developed, and Fannie Mae is going to be 
collecting enormous amounts of data from the servicers, which 
will be a repository that can be used by Freddie Mac to 
establish compliance, and by others to evaluate the success of 
the program.
    So I think we have a plan that is developed to provide that 
kind of information.
    Mr. Lee. Thank you.
    Mr. Lynch. Okay. The Chair recognizes the gentleman from 
Missouri, Mr. Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Morris, I'm a little concerned, although I think what 
you're doing is good with the Web site, in a way. I am 
concerned, however, about issues of privacy. Just because a 
homeowner is underwater is no reason for them to be--their 
finances to be under review by their neighbors.
    And if you're saying that any person can go to this Web 
site and find out the mortgage status of any other person, I'm 
nervous about it.
    Mr. Morris. I'm sorry, Congressman Cleaver. I misspoke.
    The purpose of the Web site is for you, if you had a 
mortgage, to determine if it's a Fannie Mae or Freddie Mac 
guaranteed mortgage or held mortgage. It's also for you to 
determine if you're eligible. And it's also for you to 
determine what resources are available to estimate what your 
new payment would be. It's not used to invade someone's 
privacy.
    Mr. Cleaver. All right, I apologize. I thought you were 
saying that you can go in and find out the status of where your 
loan is and that kind of thing.
    Mr. Morris. Ranking Member Capito was saying how people 
don't even know if they have a Fannie Mae or Freddie Mac loan.
    Mr. Cleaver. Yes, I want to get to that.
    Mr. Morris. And this Web site will enable someone with 
information on their loan to determine where their loan is. 
It's an information tool, just to make it easier. Some people 
like using the Web, some people might prefer to call.
    Mr. Cleaver. Yes.
    Mr. Morris. So it's just a way to make it easier to find 
out the basic information of someone's mortgage.
    Mr. Cleaver. I want to follow up on my friend, Ms. 
Capito's, discussion because I also think we need to take 
another step, and I don't know if this step can be taken, must 
be taken legislatively or administratively.
    I agree, most people don't know--I mean, when you say is 
your mortgage with Fannie in Washington, they think you're 
talking about Fannie Fox who was in the Tidal Basin naked with 
Congressman Wilbur Mills. They're not--you know, they have no 
idea.
    But it troubles me that people's loans can be sold and they 
have absolutely no idea who holds the mortgage, whether it's 
been securitized.
    I mean, do you believe that there's something that should 
be put in place so that people realize when their mortgage has 
been placed with some other institution or entity?
    Either one of you.
    Mr. Morris. Congressman Cleaver, the most important step in 
this plan, one of the most important components is the borrower 
just reaching out to the servicer, because the servicer has all 
the information, because that's who you're making the payment 
to, and they know exactly what type of loan, who holds it, and 
what are the parameters.
    Mr. Cleaver. I know. We agree on that.
    The point I'm trying to raise, and perhaps unsuccessfully 
and inarticulately, is that homeowners ought to know who is the 
final arbiter on their mortgage, and the fact that we have to--
that a homeowner has to ask someone, you know, ``Who is the 
entity holding my mortgage,'' just seems to me to be a little 
off center.
    Mr. Lawler?
    Mr. Lawler. Well, in many cases, servicers are going to be 
going out with announcements to the people whose loans they are 
servicing. For the most part, borrowers are indifferent to 
whether Fannie Mae or Freddie Mac has bought their loan.
    Mr. Cleaver. They used to be. That's not true anymore.
    Mr. Lawler. And now it's not true. So servicers, we expect, 
will be contacting borrowers, but borrowers can easily find out 
on Web sites or by calling the companies.
    Mr. Cleaver. Perhaps my question is more fundamental, and 
it goes way past the housing plan that we have before us, 
whether we have the housing plan or not.
    Do you believe that you ought to know whether your house is 
underwater, under attack, that you ought to know where your 
mortgage has been sent--who holds your--has somebody purchased 
your mortgage? People don't know, and that's why you have to 
put this program together.
    I guess my question is, do you think that there ought to be 
something in place--forget what we're talking about today, this 
is a slight digression--that would require that people be 
informed when their mortgage is sold?
    Mr. Lawler. It might be very complicated, in many cases. I 
think what most borrowers most want to know is if their 
responsibilities have changed. If they're still sending a check 
to the same address and have to send it by the same date, and 
they have the same rules about the consequences of being late, 
it may not be that important.
    If the mortgage gets sold to Fannie Mae or put in a Fannie 
Mae security and the original lender takes those securities 
back, is that a sale that should require notification?
    Mr. Cleaver. I'm going to work on how to ask the question, 
because I'm asking it poorly, I see, so I'm going to work on it 
and ask it again.
    I yield back.
    Mr. Lynch. The gentleman's time has expired.
    Mr. Cleaver. Thank you.
    Mr. Lynch. But we can come back to it.
    Mr. Cleaver. Thank you.
    Mr. Lynch. We'll do a second round.
    The Chair recognizes the gentleman from Ohio, Mr. Driehaus.
    Mr. Driehaus. Thank you very much, Mr. Chairman.
    I would like to pursue a couple lines of questioning, one 
going back to, you know, these ads that are running on TV and 
the potential for fraud, and then the other as to what we're 
doing to market the program.
    Mr. Morris, I have to tell you, I was a little less than 
happy with your response to the chairwoman about your viewing 
the ad and then suggesting that it doesn't fall under your 
purview, that that's really someone else's job at HUD.
    The fact of the matter is that the folks who are out there 
trying to scam homeowners are very aggressive. They have been 
very aggressive for years. And it's our job to fight against 
that.
    So it seems to me that as soon as we see an effort to 
suggest that this entity has the backing of the Federal 
Government, and then they're using that to scam a homeowner, 
all of us should be working aggressively with each other in 
making enforcement extremely aware of that, and then moving 
forward very aggressively.
    My fear is that they're going to use these Web sites, 
they're going to go on, they're going to determine that, yes, 
you have a Fannie Mae-backed loan, you have a Fannie or 
Freddie-backed loan. They're then going to call the consumer. 
They're going to say, ``You have this loan backed by Fannie or 
Freddie; we can help you out.'' And they're going to do that 
before the Federal Government does that, because they're out 
there every day, pushing it and pushing it hard.
    That's how we got into this situation, in part, because so 
many people were over their head in loans that they never 
should have gotten into, but they were being aggressively 
marketed.
    My fear is that we're not aggressively marketing the 
solution. We have a Web site. That's great. But, you know, 
that's not marketing, that's not a campaign.
    I want to know how we're marketing this thing, how are we 
taking it to the streets, how are we making people know that 
this is the Federal Government program, that we have the 
support? What community agencies are we working with to get the 
word out? How are we going on TV?
    How are we marketing this so that you don't fall into the 
same trap of having the tools out there, but it's the 
aggressive folks who are out there scamming consumers in our 
neighborhoods, who are actually taking advantage of it.
    So if you can help me with that, I would appreciate it.
    Mr. Lawler. That's one of the major work streams that is 
currently underway. Fannie Mae and Treasury are primarily 
responsible, and they are developing a significant rollout 
program to do precisely what you are suggesting.
    Mr. Morris. We can submit what the plan is, because what 
you're asking is, what is the rollout plan.
    There are various teams working. There are teams to develop 
the modification guidelines. I'm just trying to answer your 
question. And there are teams that are developing the 
oversight. And we do have a team working on that.
    If you're asking me if I can submit the plan to you at this 
moment, I cannot, but I can get the--I can have the plan 
submitted to the Chair, you know, in the future when it's--
they're working on it as we speak.
    Mr. Driehaus. I guess I--you know, I appreciate the fact 
that there's a plan and there's going to be a rollout, but I 
feel a certain sense of urgency here.
    You know, people are losing their homes every day. We have 
millions of people who are facing foreclosure. We've already 
lost millions of homes in this country. And I guess I'm a bit 
impatient when we're talking about a plan.
    You know, we have the crux of the solution together, and we 
need to get out this word just as quickly as we possibly can, 
and it should be every Member of Congress, it should be every 
local government helping people understand what's available to 
them.
    So while I'm encouraged that there is a plan, I'm very 
anxious, because I don't see it being done nearly quickly 
enough.
    And like I said, I very much appreciate the fact that this 
President has come in, and taken this issue extremely 
seriously. It's many years too late, in my mind.
    But I guess what I don't feel from you is the sense of 
urgency, and I want to know how we are dealing with that sense 
of urgency to get the information out there.
    Mr. Morris. Well, candidly, I'm sorry, I can't be more 
demonstrative for you, but there is a sense of urgency. The 
plan was announced March 4th. You would not believe the 
hundreds of staff hours and the hundreds of staff who are 
working to bring this up, to bring national standards.
    We have had conference calls with law enforcement 
communities, we have had outreach to housing counselors. We 
have worked with servicers. And we have to roll out a plan 
that's going to protect borrowers, that's going to be well-
received, and reach the disadvantaged community. So we're 
working aggressively, we're working with subject matter 
experts, and we're working in cross-departmental areas. We're 
working with Treasury. We're working with the FDIC. We're 
working with Housing.
    And so the work is enormous. The plans will be sound. There 
is a sense of urgency. I'm just impressed--I guess it's because 
you're not in the actual, in the office--I'm impressed with the 
level of effort that the team is putting in. There are 
literally people coming in 7 days a week, on weekends, 12, 14 
hours a day to roll these plans out.
    And Congressman, we are really conscientious of all the 
risk. This is the President's plan. We're dedicated to it. And 
it's going to be effective. We're doing everything we can.
    So there is a sense of urgency. We have senior 
professionals working on it. And it's being managed by the 
highest levels of our departments.
    Mr. Driehaus. I appreciate that, Mr. Morris, and I 
appreciate that, Mr. Chairman. Anything we can do to help to 
move that up and get that work out there, we certainly want to 
be doing.
    Thank you, Mr. Chairman.
    Mr. Lynch. Thank you.
    Now, I understand we're going to have votes here very 
shortly, and I think it might work out that we'll be able to 
let you guys off the hook, and then we'll bring in the next 
panel.
    I do have just a couple of ballpark questions.
    When we first heard of this program, there was a universe 
of about 9 million homeowners who were identified as being 
eligible for our program and able to be helped.
    Now, is there a way to determine how many of those folks, 
that 9 million, are in whole mortgages that we can get at 
without getting into the whole securitization problem? Do we 
know what the mix is there?
    Mr. Lawler. No. Of the total, I think 4- to 5 million were 
identified as potential refinances for Fannie Mae and Freddie 
Mac.
    The other part of this was 2- to 4 million, if I added that 
up right, for the loan modifications, and some of those would 
be Fannie Mae and Freddie Mac loans and another large portion 
would be loans backing private label securities. Some of them 
would be just whole loans held by institutions.
    Mr. Lynch. Right. But we don't know what the mix might be?
    Mr. Lawler. I would guess of that amount, probably about 
half of it would be in loans backing private label securities.
    Mr. Lynch. Okay. I'm not sure if any of the other members 
have any--oh, I'm sorry. The gentleman from Texas, Mr. Green, 
for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. And I again thank the 
witnesses.
    I am interested in making sure that I have recorded 
information correctly. I have indication that the Web site for 
persons to visit, to literally perform an asset test on your 
circumstance, is www.makinghomesaffordable.gov; is that 
correct?
    Mr. Morris. ``Home,'' makinghomeaffordable.
    Mr. Green. Okay, homeaffordable.gov. Thank you.
    And I have the phone number to receive a service from a 
person, a counselor, if you will. It is 888-995-HOPE?
    Mr. Lawler. 888-995-HOPE, yes.
    Mr. Green. Right. 888-995-HOPE.
    Now, was a second Web site voiced? Because it seems as 
though I may have missed it. I've been in and out. By the way, 
I'm in two places at the same time all day today, so if I 
appear to be a little bit discombobulated, it's because I'm 
really not here, I'm at Homeland Security right now.
    So if you would, was there a second Web site?
    Mr. Lawler. There's a lot of information at the Treasury's 
financialstability.gov Web site, as well.
    Mr. Green. Financialstability.gov. Okay--
    Mr. Lawler. Makinghomeaffordable.gov is specifically 
designed for borrowers. The financialstability.gov has a wealth 
of information about all TARP programs and so forth.
    Mr. Green. Okay. This is one that gives information on 
programs. Okay.
    Now, are there any other numbers that we can make available 
to our constituents?
    Mr. Morris. We have the HUD home counseling number, and 
what--the way that hotline works is, you would have to put in 
your--it's in English or Spanish, but you would put in your ZIP 
Code, so it would transfer you to the right geographical area, 
but that number is 800-569-4287.
    Mr. Green. 800-569-4287?
    Mr. Morris. Yes. And there's another HUD line, as well, 
which is--
    Mr. Green. All right.
    Mr. Morris. --if you have even broader issues besides that, 
it is 800-225-5342. Both of those are HUD--
    Mr. Green. HUD numbers, okay.
    Mr. Morris. Yes.
    Mr. Green. And any additional numbers or Web sites? That's 
it?
    Mr. Lawler. If you're interested in finding out if Fannie 
or Freddie own your loan, you can either use the 
makinghomeaffordable.gov or you can use the fanniemae.com or 
freddiemac.com Web sites.
    Mr. Green. Okay, thank you.
    Mr. Morris. And HUD, of course, has its www.hud.gov, which 
explains the entire department. It links into the 
makinghomeaffordable Web site, you know, talks about all our 
programs, if you're interested in a stabilization program, to 
see what the allocations were for the local governments, things 
like that.
    Mr. Green. And what was that one again, please?
    Mr. Morris. www.hud.gov.
    Mr. Green. www.hud.gov. All right.
    Now, let me just do this quickly. And this is not in any 
way to demean what you have said, because I greatly appreciate 
what you've said and I've already indicated that it's not the 
yellow brick road, it's not a panacea, it's not a silver 
bullet.
    So now with reference to these phone numbers, what is the 
wait time? And I ask, and it may be a rhetorical question, but 
I ask, because one of the complaints that I get quite regularly 
is that persons will call and not get an answer, not in the 
sense that there won't be a phone that will ring and you'll get 
some recording that says, ``The next available person will be 
with you,'' but in the sense that they never talk to the next 
available person.
    So do we have enough staffing for the phone numbers that 
you have given me?
    Mr. Morris. Yes. At HUD, the services are either contracted 
out; in addition, as I said, there is Hub technology that 
directs the call to a local counseling agency.
    We constantly monitor our Web sites. We constantly have 
active managers overseeing the wait times. And we respond as 
quickly as possible.
    It has been challenging at times, because what has happened 
with new initiatives and new programs, there has been 
unprecedented spikes in the demand for the services, but we're 
confident that we have sufficient capacity at this point, and 
I'm not aware of any recent service issues.
    Mr. Green. Well, I trust that you'll be prepared for a 
spike sometime probably around next week, because when I go 
back to my district, I'm going to give this number out over the 
air waves, and--
    Mr. Morris. We'll be ready.
    Mr. Green. --so be prepared. Thank you.
    Mr. Lawler. Fannie and Freddie are dramatically increasing 
their staff for this purpose, and they each have call centers, 
as well.
    Mr. Green. Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. You're welcome. Mr. Ellison.
    Mr. Ellison. Thank you, Madam Chairwoman, and let me thank 
you again for your excellent leadership on all housing issues, 
and all other issues, really.
    And also, members of the panel, let me thank you.
    You know, we had a forum on the foreclosure crisis in 
Minnesota about a year ago. Chairman Frank came.
    And one of the witnesses said that, because of a lack of 
low-income affordable housing, that he felt that--and because 
of a lack of requirements for documentation--he was able to get 
into a subprime mortgage that had a teaser rate that was 
literally lower than market rent, and that worked out great 
until the adjustment.
    How much of this kind of phenomenon are we seeing around 
the country? Is this part of--is the lack of affordable low-
income housing part of what drove people into subprime 
mortgages over the last several years?
    Mr. Lawler. I think it certainly was an important factor, 
because as house prices were rising extremely rapidly, 
affordable housing was much more difficult to find, and so that 
contributed. We think that essentially we put a stop to that 
kind of lending at this point. We still have a horrible problem 
to deal with the loans that were made in the past, though.
    Mr. Ellison. Yes. So some of those people are--those loans 
might have sort of trickled down, but the effects of those 
loans we're still living with.
    Could you--one of the untold stories, or lesser-told 
stories, is how about 40 percent of the foreclosures are in 
multiple housing dwellings, and when the landlord goes into 
foreclosure, the renters are then put in a very difficult 
situation. Is this something that you could offer some views 
on?
    I sponsored, along with several other members of this 
committee, a bill that would provide various protections for 
tenants on foreclosed properties. Specifically, the bill would 
allow renters to stay in investment properties through the end 
of their lease, and would give them a 90-day notice prior to 
eviction.
    Do you have any views on this legislation that you would 
share with us today?
    Mr. Lawler. Both Fannie Mae and Freddie Mac, with respect 
to their properties, have implemented just such a program.
    Mr. Ellison. Yes, they have. But, of course, not everybody 
lives in Fannie and Freddie, so this would apply generally. Are 
there any views you'd like to share, Mr. Lawler or Mr. Morris?
    Mr. Morris. For FHA-insured mortgages, when we have 
occupied conveyance requirements, which means the properties 
with the tenants, our contractors can accept the properties 
with rental agreements with those tenants. So we try to protect 
the tenant during the transition from the owner defaulting on 
the mortgage.
    Mr. Ellison. Yes. And you all are doing a great--Fannie and 
Freddie and FHA are good, but for the people who fall outside 
that ambit, you know, do you think it would benefit citizens?
    Mr. Lawler. Not only benefit citizens, but it could help 
benefit the ultimate owners of those loans, because if there's 
money coming in, evicting people just makes the problem harder.
    Mr. Ellison. And it would also help preserve the asset. I 
mean, the fact is, if nobody is living in that place, what 
happens to it? Do you have any ideas on that?
    Mr. Lawler. Properties deteriorate very rapidly without 
anybody in them. That's been the record.
    Mr. Ellison. Is that your view, Mr. Morris?
    Mr. Morris. Yes. We think if a property is occupied, it's 
much less subject to abuse, and, you know, also, in those 
situations, we think that leveraging the Neighborhood 
Stabilization Grant Program, which is really flexible--
    Mr. Ellison. Yes.
    Mr. Morris. --and then also with the competitive grants, 
that could sort of help maintain those properties and repair 
those properties, as well.
    Mr. Ellison. You know, Mr. Morris, thanks for mentioning 
the Neighborhood Stabilization Grant.
    In the latest stimulus package, the House version was $4 
billion, the Senate version was no billion, nothing, and then 
it ended up being about $2 billion.
    Do you believe that's adequate to meet the needs across 
America?
    Mr. Morris. Well, the only thing I can say is, an 
additional $2 billion is helpful. It's going to be competitive 
grants.
    Mr. Ellison. Right.
    Mr. Morris. And the way it's going to be geared is that you 
have to spend the money, so we'll be able to determine if it's 
effective.
    Mr. Ellison. Okay.
    Mr. Morris. Half the money has to be spent in 2 years, and 
100 percent of it in 3 years, and I think the notice of funding 
availability will be coming out from HUD in May.
    So to answer your question, in a very short period of time, 
we'll be able to determine if it is adequate, because we'll be 
actually using and allocating the money.
    Mr. Ellison. Yes, and that's really--and thank you for 
explaining the process and the fact--it sounds like you're 
saying you don't really know, but is that really your answer? I 
mean, do you have any preliminary view of whether the $2 
billion is fit to deal with the largest foreclosure crisis 
since the Great Depression?
    Standing from where we are now--I mean, I know time will 
tell, but from standing where we are now, do we have any reason 
to believe that this is going to get it done?
    Mr. Morris. I'm being coached by Congressman Cleaver--
    Mr. Ellison. You know, I'm one who really loves the advice 
of the great Congressman Cleaver, but I'd just as soon hear 
what you have to say about it.
    [laughter]
    Mr. Morris. I don't--
    Mr. Ellison. We're not going to have them--I only got--
    Mr. Morris. I don't have an answer for that, actually--
    Mr. Ellison. Okay, Dr. Lawler, do you have a view on this? 
Is $2 billion going to do it?
    Mr. Lawler. I really don't know.
    Mr. Ellison. All right. Well, thank you.
    If I have time for a last question, please explain the 
importance of bankruptcy reform legislation in buttressing the 
President's plan. What do you think the consequences are if the 
Senate fails to pass this bill? That was asked already?
    Chairwoman Waters. I'm sorry. Please go right ahead.
    Mr. Ellison. Okay. Was that asked already? I don't want 
to--okay, yes. What's your view on cramdown?
    Mr. Morris. Well, the bankruptcy reform legislation is 
something that the Administration favors. We think it could be 
a good tool to help reduce foreclosures, and that's the reason 
why we would think it would be very helpful in the situation of 
avoiding foreclosures.
    Mr. Ellison. Mr. Lawler?
    Mr. Lawler. We really think that if bankruptcy can be 
avoided, that's better for the borrower, and we're very hopeful 
that this loan modification plan we have will address the 
needs, and prevent a lot of people from getting into 
bankruptcy.
    We are somewhat concerned about that if there are cramdowns 
in bankruptcy legislation, that they be done in a way so as not 
to unduly alter the payment structure of securities that are 
based on an assumption that there won't be any such cramdowns, 
which could cause some problems in the securities market.
    So there are some issues to deal with that we hope are 
addressed.
    Mr. Ellison. Thank you.
    Chairwoman Waters. Thank you very much.
    I would like to thank this panel. And the Chair notes 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, and I would like to welcome 
our second panel. Thank you very much.
    Our first witness will be Dr. Roberto Quercia. Did I 
pronounce your name correctly? Would you please speak into the 
microphone?
    Mr. Quercia. Yes, you did, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    He is a professor and director of the Center for Community 
Capital, University of North Carolina at Chapel Hill.
    Our second witness will be Dr. John Geanakoplos, and I know 
I didn't pronounce yours correctly. How do you pronounce your 
name?
    Mr. Geanakoplos. You got it.
    Chairwoman Waters. Oh, all right. Very good.
    He is a professor of economics at Yale University.
    Our third witness will be Ms. Ellen Harnick, senior policy 
counsel, the Center for Responsible Lending.
    Our fourth witness will be Dr. Dean Baker, co-director, 
Center for Economic and Policy Research.
    Our fifth witness will be Mr. Andrew Jakabovics. Is that 
correct? Say it again.
    Mr. Jakabovics. ``Jakabovics.''
    Chairwoman Waters. Okay. ``Jakabovics,'' associate director 
for housing and economics, Center for American Progress.
    Our sixth witness will be Ms. Faith Schwartz, executive 
director for the HOPE NOW Alliance.
    Our seventh witness will be Mr. David John, senior research 
fellow, Heritage Foundation.
    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.
    Let us begin with our first witness, Dr. Roberto Quercia.

STATEMENT OF ROBERTO G. QUERCIA, PH.D., DIRECTOR OF THE CENTER 
   FOR COMMUNITY CAPITAL AND PROFESSOR OF CITY AND REGIONAL 
     PLANNING, UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL

    Mr. Quercia. Thank you. Good morning, Madam Chairwoman, 
Ranking Member Capito, and members of the subcommittee, and 
thank you for inviting me to be here today.
    I am Roberto Quercia, professor, and director of the Center 
for Community Capital at the University of North Carolina at 
Chapel Hill, and if I may add, I know the President speaks for 
NCAA basketball champ.
    In my remarks, I will summarize the findings of our recent 
study on loan modifications.
    First, I want to highlight my key findings and policy 
implications. There are three of them:
    First, our study finds and quantifies that modifications 
that lower mortgage payments significantly reduce foreclosure. 
Second, the finding supports the basic premise of Making Home 
Affordable plan, that loan modifications and refinances that 
reduce payments will prevent foreclosures. And third, for 
homeowners who owe more than their house is worth, the so-
called homeowners ``underwater,'' we believe that a more 
explicit use of principal reduction may be appropriate in some 
circumstances.
    The foreclosure crisis shows no sign of abating. You all 
know the statistics.
    The Obama Administration has recognized the urgency of 
addressing the root cause of the problem, the homeowner's 
inability to meet mortgage payments.
    Studies have found that most loan modifications do not 
reduce mortgage payments. In fact, the so-called ``traditional 
modifications'' that take the late fees and payments owed and 
add them to the loan amount often result in higher payments.
    Our study examines the re-default rates of different types 
of loan modifications.
    Not surprisingly, we find that not all modifications are 
created equal. The key to sustainable modifications over time 
is to reduce the mortgage payments significantly.
    Six months later, homeowners whose payments were reduced 
have a relatively 60 percent lower rate of delinquency than 
those who got traditional modifications with a payment 
increase.
    We found that nearly half of all modifications received no 
payment reduction. In fact, one third of delinquent borrowers 
got a payment increase. To us, this is like throwing a rock to 
a drowning person.
    Modifications that incorporate both payment reduction and 
principal reduction re-default even less.
    As expected, we find that local economic conditions play a 
key role in the success of loan modifications over time.
    The Making Home Affordable plan incorporates the key 
finding from our study. Namely, it relies on making home 
mortgages more affordable by lowering payments or refinancing 
loans, using a systematic and consistent framework.
    With regard to modifications, servicers are expected to 
follow a series of steps to reduce monthly payment to no more 
than 31 percent of household income.
    An important part of the President's plan is to focus on 
homeowners at risk. This is consistent with our finding that 
early modifications re-default less, so the more we wait to 
modify, the higher the risk of re-default.
    There are additional implications of the study that can 
inform the potential effectiveness of the plan.
    The plan to refinance GSE borrowers with high loan to 
values up to 105 percent can only partly solve the problem. We 
believe that more consideration needs to be given to 
incorporating principal forgiveness in loan modifications more 
broadly.
    Although permitted under the plan, the lack of guidelines 
and standards for principal reduction may limit or discourage 
its use in situations where it may be appropriate and 
necessary.
    Our study findings on the importance of principal reduction 
also support the use of bankruptcy courts as an avenue for 
modification.
    Finally, we know that government agencies are collecting 
more and better data on modifications than we have available. I 
would encourage the agencies to make the data available to 
researchers so that we can all examine what works and what is 
not working.
    In closing, I commend President Obama for proposing 
guidelines to streamline the modification process, allowing 
troubled borrowers to get fair, timely, and consistent help. I 
applaud the committee's interest in these topics, and I'll be 
glad to answer any questions you may have.
    Thank you.
    [The prepared statement of Dr. Quercia can be found on page 
132 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. John Geanakoplos.

     STATEMENT OF JOHN D. GEANAKOPLOS, PH.D., PROFESSOR OF 
                   ECONOMICS, YALE UNIVERSITY

    Mr. Geanakoplos. Thank you, Madam Chairwoman. Ms. Capito, 
thank you for inviting me.
    I just have two simple points to make:
    First, the only way to truly stop non-prime foreclosures, 
which are 70 percent of the total, is to write down principal. 
This can be done without hurting bond holders and without 
spending a time of taxpayer money.
    Second, the decision on whether to modify or foreclose 
needs to be taken away from servicers and given to an 
unconflicted agent. Servicers are standing in the way of 
sensible modification decisions.
    The Obama plan, which rejects principal reductions in favor 
of interest reductions, does not give underwater homeowners 
real incentive to pay. It will not stop the avalanche of 
foreclosures to come. At most, it will postpone the 
devastation. The people the President's plan really helps are 
the servicers, who are now owned by the banks.
    There are two ways to see that principal reductions are 
needed to stem foreclosures.
    First, the data, which I hope we talk about, basically 
shows that above-water loans pay, and underwater loans default, 
even when the payments are low.
    For underwater subprime homeowners who owe 60 percent more 
in mortgages than their house is worth, 8 percent default each 
month. At that rate, they'll almost all be gone in a year. The 
numbers for other non-prime borrowers are also dire. This is an 
urgent crisis.
    Second, we don't only have the data, there's logic to this. 
For underwater homeowners, with already compromised credit 
ratings, defaulting is the economically prudent thing to do.
    Think of a couple with a combined income of $75,000, who 
took out a mortgage for $280,000, but whose home has fallen in 
value to $200,000. Say they're paying $25,000 a year in 
mortgage payments. The problem is that this couple is 
underwater and no longer really owns the house in any 
meaningful sense of the word. Selling isn't an option. That 
would just leave them $80,000 in the hole.
    The couple will eventually walk away, save the $80,000 in 
principal, and rent a comparable home for less than half their 
current mortgage payments. Of course, walking away from their 
home will further weaken their credit rating and disrupt their 
lives, but pouring good money after bad on a home they will 
never own is costlier still, especially if their credit rating 
was not good to begin with.
    President Obama's plan won't even reduce the mortgage 
payments by much for the family in our example, because 31 
percent of $75,000 income is basically the $25,000 payment they 
are making anyway.
    Now, if the family were poor enough, then the Obama plan 
might cut their payments to near the rental, but thinking of 
this family, when the interest rate goes back up in 5 years, or 
the family needs to move, then we'll be back where we started. 
They will have no choice but to walk away and see their home 
foreclosed.
    At best, the Obama temporary interest rate reduction plan 
defers foreclosure; it doesn't stop it.
    Foreclosure is stunningly wasteful. Bond holders today 
anticipate getting back only 25 percent of the loan value 
through foreclosure. In our example, that means they would only 
expect $70,000 on the $280,000 loan.
    But consider how much might change if we wrote down the 
principal a lot, to say $160,000, 20 percent below the current 
appraised value of the house. The payments would thereby be 
dramatically reduced and wouldn't be much more than renting, 
and the couple would have equity in the house, a reason to 
continue to pay, or to spruce up the house and find a buyer.
    Either way, though, the original bond holders would have a 
very good chance of making $160,000 instead of the $70,000 that 
they're expected to make from foreclosure.
    Principal reduction helps the bond holders and the 
homeowners. And the best part is, the government doesn't have 
to pay a penny.
    The Obama plan, by contrast, does envision the government 
paying a lot to servicers, to make the modification decisions, 
but this neglects that servicers have different interests than 
bond holders or homeowners.
    Consider our example. Would the servicer choose to write 
down the principal to $160,000 in our example? No. That would 
immediately cut his fees by the same proportion. And if it 
enabled the homeowner to sell the house, then the servicer 
would lose the fees altogether.
    Servicers win by reducing interest as much as they can. 
Why? That's why they're in favor of this plan. Why? Because 
writing down interest costs the servicer nothing. He gets the 
same fees for a longer period of time.
    Second mortgage holders make out, too. While the first 
mortgage lender is getting its interest payments dramatically 
reduced, the second mortgage holder is getting paid in full.
    And who owns the second loans? The biggest holders of 
second loans are again the four biggest banks. Now we know who 
makes out best under the proposed plan--the servicers and the 
banks behind them.
    We don't need another ``help the banks'' plan. We need a 
plan that will stop the avalanche of foreclosures, a plan that 
reduces principal for those underwater, and gives that job to 
unconflicted agents, not the servicers.
    Last October, I proposed legislation that would remove the 
right to modify loans from the servicers and give it to 
community banks hired by the government. These community banks 
would have the power to modify mortgages, including reducing 
principal, when doing so would bring in more money than 
foreclosure.
    And until the cavalry arrived to modify, homeowners now 
current would be expected to keep paying. Defaulting before 
then would make you presumptively ineligible for principal 
reduction.
    That alone would serve to stabilize the current crisis.
    Our plan is simple, and would require little government 
spending, somewhere between $3 billion and $5 billion over 3 
years, not the $75 billion of the President's plan, and it 
would stop the foreclosures.
    Thank you.
    [The prepared statement of Dr. Geanakoplos can be found on 
page 56 of the appendix.]
    Chairwoman Waters. Thank you very much, and I certainly 
want to talk with you more about that plan. I also had an idea 
about community banks being able to service these loans.
    However, we're going to take a slight break. We have 6 
minutes left on the vote, I'm told.
    We will go up and take a vote. Do we just have one or two? 
Three votes. They should be 5-minute votes, I believe. And 
we'll come right back.
    So if you will be a little bit patient and relax, we will 
return as quickly as possible. Thank you.
    [recess]
    Chairwoman Waters. While the other members are making their 
way to the committee, we will resume testimony from our 
witnesses. I thank you for your patience.
    Our next witness will be Mr. Ellen Harnick.
    You may begin.

 STATEMENT OF ELLEN HARNICK, SENIOR POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Harnick. Thank you very much, Madam Chairwoman. I 
appreciate the invitation to speak to you today.
    The imperative to avoid preventable foreclosures is no 
longer in doubt. Not least among the stakeholders are the U.S. 
taxpayers, who now have a direct interest in the financial 
viability of major banks, and therefore, have every reason to 
want to prevent defaults on mortgages and mortgage-backed 
securities that these banks own.
    The Administration's Making Home Affordable Program marks a 
significant step forward, long overdue. It's smart and 
comprehensive, and addresses some of the major challenges that 
have plagued other efforts to stem the crisis to date.
    First, of three key aspects of the program, it sets clear 
standards as to what qualifies as an acceptable loan 
modification.
    Currently, as we've heard, loan modifications often 
actually increase the monthly payments. These modifications 
will no longer pass muster. The program, as we've heard, 
requires that loan modifications must be sustainable, limiting 
monthly payments to 31 percent of the homeowner's documented 
income.
    Second, servicers and investors are incented to 
participate. The program pays for each qualifying modification 
and offers success payments to give servicers a financial 
interest in the modification's outcome.
    Third, because the payments to servicers should exceed the 
servicers' modification costs, this should incent and enable 
servicers to hire and train staff at a level sufficient to meet 
the demand. Hopefully, this will move us away from the current 
practice of servicers leaving borrowers on hold for hours, 
never reaching a human being who can actually help.
    For the program to succeed, a large number of servicers 
will need to sign on. Participating servicers will need to work 
promptly to modify loans without delay, and the modifications 
will need to prove sustainable in practice.
    Accomplishing those goals will require careful monitoring 
to ensure the compliance with program rules and also to 
identify ways to make the program more effective, particularly 
in light of economic conditions as they develop.
    It's important to note that private mortgage-backed 
securities, the securities owned not by banks, not by Fannie 
and Freddie, generally, but by the private label mortgage-
backed securities, comprise 61 or 62 percent of the failing 
mortgages, and so it will be very important to see that the 
servicers of these privately owned private label securities do 
participate.
    It's encouraging to know that the four major banks have all 
expressed a willingness to participate in the program, but it 
will be important to see that they're able to participate not 
only on behalf--not only with regard to the loans on their 
balance sheets, but with regard to these private label 
securities
    As we look at the actual effects of the program as it's 
implemented, we'll have to check to see if there are, for 
instance, too many re-defaults. This may suggest the need to 
mandate principal reductions, which are widely recognized as 
the most effective modification tool.
    Similarly, too little servicer participation may suggest 
that stronger legislative or administrative measures may be 
necessary.
    Vigilant monitoring is also essential to ensure that 
consumers are treated fairly, that they're not charged for fees 
that are prohibited by program rules, and that servicers are 
not violating the spirit of the rules by overcharging for costs 
that are permitted.
    The program should have a well-staffed, well-publicized 
consumer protection hotline that homeowners can call to report 
concerns.
    Finally, transparency is essential. Lenders and servicers 
must be required to provide loan-level detail on the terms of 
the modifications they offer, both within the plan and outside 
the plan, as well as on outcomes for homeowners who are 
rejected for modification.
    This will enable State and local policymakers to keep 
abreast of mortgage-related trends in their jurisdictions and 
will ensure compliance with fair lending and other consumer 
protection laws.
    Servicers need to know that Treasury is watching. 
Homeowners need to know they have a meaningful way to raise 
concerns about how particular services are acting under the 
program. Taxpayers need to know that their money is being well 
spent.
    We applaud the House of Representatives for passing H.R. 
1106, the Helping Families Save Their Homes Act of 2009, which 
provides an essential backstop for the voluntary efforts that 
we're hoping the program will bring about in large numbers.
    It will give servicers both strong incentive to participate 
and also important cover from lawsuits by investors. There will 
be no basis for seeking damages against a servicer for a loan 
modification if the modification provides more than a 
bankruptcy court would provide.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Ms. Harnick can be found on page 
89 of the appendix.]
    Chairwoman Waters. You're welcome.
    Dr. Baker.

    STATEMENT OF DEAN BAKER, PH.D., CO-DIRECTOR, CENTER FOR 
                  ECONOMIC AND POLICY RESEARCH

    Mr. Baker. Thank you, Chairwoman Waters and Ranking Member 
Capito. I appreciate the chance to testify to the committee 
today.
    I want to speak briefly about the housing bubble, which is 
the cause of the problems in the housing market and 
foreclosures; secondly, why the failure, the continued failure 
to recognize the housing bubble has made this plan less 
effective than it otherwise would be.
    And I will at this point say, I think it's a very good 
plan, it's a very big step forward, but I think less effective 
than it could be, and like Dr. Geanakoplos, I will also give 
you my cost-less proposal for Congress to implement that will 
solve all the problems.
    Very quickly, I think it's very important we recognize, and 
we should recognize at this point, that the nature of the 
problem, the cause of the problem was an unprecedented housing 
bubble. We had house prices rise on a nationwide average 70 
percent above their trend level, and it is the collapse of 
house prices that is the cause of the foreclosure crisis.
    Now, obviously, this was worsened by the abusive mortgages, 
the predatory mortgages that we saw, which both were a part of 
the bubble and fed the bubble, but the underlying problem here 
is that we have house prices that have fallen well below the 
value of mortgages in many cases, and that is what's causing 
the large majority of foreclosures. People do not get homes 
foreclosed if they're not underwater. It's fairly 
straightforward.
    Now, the failure to recognize, and it was remarkable to me 
that there was little recognition of the bubble as it was 
inflating, but there still seems to be little recognition of 
the bubble even now, and the failure to do so in the 
construction of this plan, I think, makes it less effective in 
helping homeowners, imposes a higher burden on taxpayers, and 
it means that it will be much less effective in the hope of 
stabilizing house prices.
    Taking each of those in turn, in the case of homeowners, 
where you have a situation where you still have a bubble in the 
market, and let's just say that you have a price to rent ratio, 
the ratio of the sale price to annual rent is on the order of 
20 to 1, you're going to have a situation where homeowners will 
still be paying much more, even with the modification, in many 
cases, than they would to rent a comparable unit.
    It's very hard for me to see how we're helping a homeowner 
if we're having them pay more to stay in their house than they 
would pay if they were renting a similar unit.
    Secondly, we might say, well, if they ended up with equity, 
that would be fine, that might offset it. They won't end up 
with equity. As a nationwide average, house prices are failing 
20 percent a year. In many of the most inflated markets, places 
like Phoenix, San Diego, and Los Angeles, it's close to 30 
percent a year.
    It's unrealistic to think that people, most of whom are 
going to be moving in 3, 4, or 5 years, are going to end up 
with equity in their homes. So we're having them pay more than 
they would to rent the same home, and still leaving them with a 
situation where they're almost certainly going to be looking at 
a short sale or a foreclosure at some point 2 or 3 years down 
the road.
    The second group we're not helping is taxpayers. If we 
don't target this to areas where the bubble is already 
deflated, or where there was not a bubble, we are going to be 
basically throwing good money after bad. It's using taxpayers' 
money in basically a hopeless task.
    I don't think that's a wise use of the taxpayers' dollar, 
which brings me, of course, to the third point, that if we talk 
about stabilizing house prices, it's unrealistic to talk about 
stabilizing house prices in these bubble-inflated markets.
    Where you have markets where house prices are still, in 
many cases, overvalued by 25, 30, even 40 percent above their 
trend levels, we cannot stabilize them at those levels. It's 
not even desirable, even if we could stabilize them. I don't 
think Congress wants to have an unaffordable housing program.
    I don't think we consider it an end in itself to have house 
prices that are extraordinarily high so that young people, 
people moving into the area, can't afford decent housing. I 
don't think that's a goal that we strive for here.
    So it's not possible, and even if it were possible, I don't 
think it would be desirable.
    That brings up my cost-less alternative, which I call right 
to rent, and the idea here is a very, very simple one. It 
simply would grant people who are facing foreclosure the right 
to stay in their home for a significant period of time as 
tenants paying the market rent. This requires no taxpayer 
dollars, no bureaucracy. It could be implemented immediately 
the day it was passed and signed into law.
    What that would do is two things. On the one hand, it would 
give homeowners security in their homes, so if they like the 
home, the school, the neighborhood, they would have the right 
to stay there; and secondly, perhaps at least as importantly, 
it would give the lenders a real incentive to negotiate terms 
that allow homeowners to stay in their home as owners.
    In other words, by making foreclosure a much less 
attractive option for lenders, it makes it more likely that 
lenders themselves will take it upon themselves to renegotiate 
terms of a mortgage in a way that allows homeowners to stay in 
their home.
    So I would say that I think President Obama's proposal 
here, his plan, is a very good one. It will help a lot of 
people. It could help a lot more if it were more carefully 
targeted to areas that are not bubble markets, and coupled with 
a right to rent provision, we could go a very long way towards 
solving this problem.
    Thank you.
    [The prepared statement of Dr. Baker can be found on page 
52 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Next, we will have Mr. Jakabovics.

STATEMENT OF ANDREW JAKABOVICS, ASSOCIATE DIRECTOR FOR HOUSING 
    AND ECONOMICS, CENTER FOR AMERICAN PROGRESS ACTION FUND

    Mr. Jakabovics. Thank you, Chairwoman Waters, Ranking 
Member Capito, and distinguished members of the subcommittee.
    It's an honor to be here today to discuss with you the 
President's recently announced Making Home Affordable Program, 
as well as several proposals for Congress to consider to ensure 
that the new program meets its projected goal of keeping up to 
9 million American families in their homes.
    My name is Andrew Jakabovics. My testimony today is based 
on my work as the associate director for housing and economics 
at the Center for American Progress Action Fund, as well as 
ideas developed in consultation with members of our Mortgage 
Finance Working Group. The shortcomings, of course, are my own.
    The Home Affordable Modification Program is the piece I 
want to focus on this morning, and it's based on the simple 
truth that foreclosures are costly for nearly all involved: 
homeowners; mortgage lenders; and investors; as well as 
communities across the country.
    The beauty of the program is that it requires servicers to 
do what is in the best interest of their customers, consistent 
with their existing legal obligations under contract, by 
requiring them to offer modifications in a consistent manner on 
all loans for which they are responsible, when modification 
maximizes the net present value of a mortgage compared to 
proceeding to foreclosure.
    Success, however, is not guaranteed, which is why Congress, 
in its oversight capacity, as well as the Administration, in 
drafting the contract with servicers that we have heard already 
this morning is not yet finalized, must establish reporting 
requirements and benchmark for servicers to meet, with the 
recognition that constant evaluation should be built into the 
program from the beginning, so that if it is not working, or if 
some certain aspects are not, then we will know these things 
quickly and can take corrective action.
    So what do we mean by ``working or not?''
    Well, HAMP is predicted to modify 3 to 4 million mortgages 
over the next 2 years, and working off of the low end of that 
range, it seems reasonable to set a performance benchmark of 
750,000 sustainable modifications over the next 6 months. Or, 
calculated another way, mortgage servicers should be expected 
to modify 25 percent of their portfolios in that time frame.
    I would also encourage Congress to take additional actions 
now, well in advance of our recommended 6-month evaluation 
date, to provide the Administration with the authority 
necessary to implement the suggested next steps should it 
become clear that the mortgage modification benchmark are not 
being met, either by the program as a whole, or by servicers 
individually.
    There is no single performance metric that would 
unequivocally determine an individual servicer's success or 
failure, and by extension, that of the program as a whole, but 
we suggest a range of measurements that might be appropriate, 
including comparing a servicer's modification activities and 
re-default rates to those of loans held by Fannie Mae and 
Freddie Mac; but in short, we need both absolute and relative 
measures of modifications, as well as re-defaults.
    Crucial measurement of the program's success must be its 
ability to protect low-income and minority families from 
foreclosure. Congress and the Administration should demand 
strict adherence to fair housing laws and should monitor 
individual servicers closely to ensure that all eligible 
borrowers receive assistance.
    Given the servicers' ability to choose an interest rate 
reduction or a principal reduction under the program, I would 
also urge reporting of the types of modifications offered by 
race and income, as well.
    Beyond individual servicers, however, the whole program as 
currently conceived may not serve low-income and minority 
borrowers properly, and if we see them disproportionately 
continuing to lose their homes, program rules should be 
changed.
    Many of these borrowers live in communities hard hit by the 
foreclosure crisis, with significant declines in home values 
off the peak.
    Because of the high cost of proceeding to foreclosure, 
particularly the cost of securing and maintaining the homes, 
long holding periods, and steep discounts necessary to attract 
new buyers, borrowers in these communities may be more likely 
to be offered modifications than in places with fewer 
foreclosures or other homes for sale, whose property values may 
have remained relatively stable.
    Yet minorities also have significantly higher unemployment 
rates than whites, and income is a crucial factor in 
determining eligibility for modifications.
    It remains to be seen how house price trajectories will 
intersect with some of these income trends, particularly as 
they relate to low-income and minority borrowers.
    The reporting and evaluation process outlined may uncover 
significant barriers to modifications that are difficult to 
remedy within the existing context, and if within the next 6 
months it becomes clear that individual servicers are failing 
to meet reasonable levels of modifications, the time will have 
come to move from carrots to sticks.
    Similarly, if the program as a whole does not meet the 
anticipated level of activity, more aggressive modification 
policies should be implemented across-the-board.
    These steps include principal balance reductions, as we've 
already heard, but also applying eminent domain potentially to 
individual mortgages or to entire pools--and I'm happy to go 
into that in more detail under the questions--as well as using 
the REMIC status for a public purpose to encourage servicers 
and their trustees to modify the terms of the pooling and 
servicing agreements to eliminate barriers to modification, as 
well as under the expanded bankruptcy provisions. I would urge 
the House, should they have a chance at amending the bill that 
they've passed over to the Senate, or if it goes to conference, 
to urge consideration for amending the bill to sunset the 5-
year clawback provision that would allow noteholders to 
recapture up to 90 percent of profits generated on sale after a 
writedown of principal balance, and make that sunset provision 
in force 6 months after enactment if the program, the 
modification program fails to meet the program's benchmark.
    And so with that, I look forward to hearing your questions, 
and will be looking forward to answering them.
    [The prepared statement of Mr. Jakabovics can be found on 
page 104 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Schwartz.

   STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW 
                            ALLIANCE

    Ms. Schwartz. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the subcommittee.
    I'm Faith Schwartz, the executive director of the HOPE NOW 
Alliance, and I'm here to testify on behalf of our efforts to 
help homeowners avoid foreclosure and work to respond to the 
President's Making Home Affordable Program.
    HOPE NOW is a critical resource that is available to any 
distressed homeowner, 24 hours a day, 7 days a week. Any 
homeowner can call the 888-995-HOPE hotline, day and night, and 
talk to a HUD-approved agency, trained nonprofit counselor, who 
has the capability to speak to troubled homeowners in 21 
languages.
    Recent statistics of this hotline in February show that the 
calls that come in are answered, on average, in 35 seconds. Six 
percent of them are abandoned. And of the calls that come in, 
50 percent choose to be counseled by the hotline.
    The hotline is in existence for those troubled, when 
servicers are overwhelmed, and capacity problems at the 
servicers do exist. This is another way for borrowers to get 
help with HUD-approved counseling, trained people to give them 
counseling.
    HOPE NOW continues to reach out and assist homeowners 
through local outreach events, direct mail campaigns of over 3 
million mailings, free counseling through HUD-certified 
counseling agencies, and by helping homeowners contact their 
loan servicer.
    We created an online form for the HOPE NOW Web site to 
enable homeowners to transmit their information directly to 
their servicer. That's new.
    HOPE NOW is also serving as an important contact point 
between the government and the servicing community for 
discussions on implementing the Administration's plan.
    We estimate, based on 40 million loans that we collect, 
that servicers have modified about 100,000 loans per month in 
the last 5 months. In January, that was a high of 123,000 
loans.
    Since HOPE NOW began, servicers have provided 3.4 million 
workout solutions, which do include modifications, repayment 
plans, and this number also does include re-defaults.
    While HOPE NOW continues to help at-risk borrowers, our 
data shows that the problem is growing, and that as of January 
30th, 2.9 million people were 60 days or more past due on their 
mortgage; 1 out of 10 were delinquent. It is clear more needs 
to be done.
    HOPE NOW supports President Obama's new effort to help at-
risk borrowers, and their new tools introduced to the program, 
such as the new refinancing options and the ability to help a 
current borrower who may be pending default.
    We have been working with Treasury, HUD, Fannie Mae, and 
Freddie Mac to understand and begin to implement this important 
program, and will do our very best to make it a success.
    Many major servicers are optimistic about the program, and 
will participate and will work to make it a success.
    At this moment, the contracts with the U.S. Government and 
the program documents, such as NPV tests for servicers, are 
still being finalized by the Administration. Without final 
documents, I'm not yet able to state actual participation.
    The conversations with the Administration and agencies have 
been very positive, very helpful, and we're optimistic about 
the impact of this program.
    Servicers and the hotline are reporting large increases in 
calls from homeowners. The Administration has offered scripts 
for counselors and servicers to help navigate all questions 
from the homeowners. HOPE NOW and its members have taken action 
to handle these increased calls.
    Servicers are expanding their capacity for calls Web site 
capabilities to assist the borrowers who want a refinance or a 
modification.
    The hotline has significantly increased its capacity to 
handle more calls from troubled homeowners. Since the initial 
guidelines of the Administration's program were announced March 
4th, more than 124,000 homeowners have called the hotline. 
Since the announcement, call volume has increased 3 times the 
daily average prior to the announcement.
    HOPE NOW has upgraded our Web site to better inform, 
educate, and assist homeowners in need since the announcement, 
and HOPE NOW has experienced a doubling of visits to the Web 
site of 64,000 visits in one week.
    Borrowers can now link directly into the HOPE NOW 
servicers, and to the HUD-approved housing counselors. HUD, 
Fannie Mae, and Freddie Mac, and financialstability.gov are 
also on the Web site, so they can link back into the government 
Web sites.
    Most importantly, we created a customer intake form, which 
allows borrowers to input personal information, day or night, 
regarding their situation, which is then sent through a secured 
network directly to their servicers.
    HOPE NOW also continues to host outreach events with 
partners such as the Federal Reserve Banks and NeighborWorks 
America.
    For example, in 2008, we had five outreach events in 
California, including three in the Los Angeles area. One of 
those events was in December in L.A. That helped more than 
1,600 families. We had 14 nonprofit counseling agencies and 21 
mortgage servicers participate. Our last event was in Kansas 
City with the Kansas City Federal Reserve Bank, where we saw 
736 families.
    In all of 2008, we served over 20,000 families who came 
through these events last year.
    And our forward events are listed in my testimony and 
attached to the written testimony for 2009. We will be 
educating borrowers and all partners about the Administration's 
affordability program at those events.
    Finally, I want to thank you for your attention to the 
mortgage modification scams.
    We actually have a celebrity campaign that we are working 
with Fannie Mae on, where we have used Queen Latifah to reach 
borrowers in a different way and warn them about scams, and 
that all of this is always for free. Counseling is free, 
servicer help is for free.
    To further address this, HOPE NOW is working with the State 
attorneys general in New Jersey and Connecticut, and the 
Federal Trade Commission to make consumers aware of the 
situation.
    We want to work with this committee to ensure all 
homeowners know that services provided by HOPE NOW and its 
members are absolutely free.
    My recent experience with homeowners did result in an 
investigation being opened in Connecticut.
    [The prepared statement of Ms. Schwartz can be found on 
page 166 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Schwartz. Thank you.
    Chairwoman Waters. We will move now to our seventh witness, 
Mr. David John, senior research fellow, Heritage Foundation.

 STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, THOMAS A. 
    ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE 
                           FOUNDATION

    Mr. John. Thank you very much for having me today.
    As I drove here this morning through my neighborhood in 
West Virginia, I passed two or three houses of neighbors that 
had been foreclosed.
    Now, I also passed dozens of homes of my neighbors, many of 
whom, or actually most of whom are working-class neighbors--I 
don't live in a rich area--who actually are struggling and 
working and pushing as hard as they can to keep paying their 
mortgage. Their mortgage is more than just an economic 
decision, it's an indication that they have arrived at a 
certain area.
    The only problem is that, if you start to look at some of 
the ways that this program has been structured, and I have some 
specific objections to it also in my written testimony, you 
find that basically, these neighbors are being treated 
precisely the same way as certain neighbors a little bit around 
the corner from us, who have been far less responsible in the 
way they have handled their home finances.
    I was at my daughter's school on Friday, and one of the 
mothers came to me and asked, ``Now, how in the world can I 
train my kids to accept the responsibility for their actions 
when all we ever see on the TV and on the radio and whatever is 
that you'll get bailed out no matter what?''
    I think this is a very serious question, and I thoroughly 
believe that long-term consequences of this message being sent 
to our kids and our grandkids may actually have a higher cost 
eventually than what we're facing today in financial problems.
    Now, let me address one other area of this, which is, I am 
very concerned about rising expectations, and whether this 
program is even going to be capable of meeting these 
expectations.
    Yesterday, the Mortgage Bankers Association reported that 
mortgage applications rose 30 percent in the week ending March 
13th, primarily driven by refinance applications due to low 30-
year rates.
    Now, these are people, for the most part, who have kept 
their mortgage current. They're all going to be calling pretty 
much the same people.
    It's one thing to call for counseling, and counseling is a 
vital, crucial part of this thing. On the other hand, it's 
going to take some time before the mortgages can actually be 
modified.
    We heard FHA today say that they can modify 100,000 
mortgages a year. Well, to reach the 7- to 9 million, that's 
going to take 70 to 90 years to get that done.
    We just heard from Ms. Schwartz that her members are doing 
about 100,000 a month, which is about 1.2 million a year, which 
comes to about 5 years to do 7 to 9 million.
    We're going to have a lot of people who aren't going to be 
able to wait that long. We're going to have an equal number of 
people who are going to worry because they're not going to know 
what their ability is going to be to deal with this situation.
    And as the gentleman from Ohio asked the first panel, it's 
very likely that the predators are going to be on the telephone 
much faster than they're going to be able to get their 
mortgages dealt with otherwise.
    Dealing with that rising expectation is going to require 
admitting, pure and simple, that we can't deal with this 
problem as fast as we really need to, and recognize that we are 
probably not going to come out with the kind of results that 
we've been talking about otherwise.
    One other point. There was an article in the Washington 
Post recently, looking at the rising default rate of FHA 
mortgages, mainly because FHA can't keep track of the mortgages 
that are coming in.
    Should we find ourselves in a position where we do have 
millions of applications coming in quickly, we can expect that 
the oversight that Ms. Capito mentioned in her opening 
statement is going to be utterly crucial, and probably not 
enough.
    Now, I am not unsympathetic in the slightest to this 
effort. I think this is very key. I want to be able to look my 
neighbors in the eye and tell them, ``Yes, there are ways that 
if you work hard and you sacrifice to pay your mortgage, that 
you're going to be able to receive help,'' but the message has 
to be far more realistic, and we have to let people know far 
faster than they are now, that there is no magic bullet, there 
is no magic wand, this is going to take a great deal of time, a 
great deal of patience, and a great deal of suffering.
    Thank you.
    [The prepared statement of Mr. John can be found on page 
112 of the appendix.]
    Chairwoman Waters. Thank you very much.
    I'll recognize myself for 5 minutes to try and get a few 
questions answered. It's very difficult, in the short period of 
time that we have.
    But I am very much interested in what I heard here today. 
On more than one occasion, I heard that we really do need to 
have capital reductions. I think that the first person who 
talked about it was Mr. Geanakoplos.
    Do you want to just reiterate what you said about capital 
reductions having to be an important part of any loan 
modification program in order to be real?
    Mr. Geanakoplos. I would like to reiterate it, and thank 
you for pronouncing my name correctly twice now.
    I think that the evidence is overwhelming that for a 
certain class of borrower who, actually the non-prime borrowers 
who are creating 70 percent of the foreclosures, when they're 
deeply underwater, they default, and that if you lower the 
interest, they're going to default eventually, anyway.
    And I don't see how a program like this can succeed without 
principal reductions, and the way the program is being set up, 
it's giving the servicers and everyone else, really, the sign 
to make interest reductions and not principal reductions.
    So I'm afraid we're not going to get principal reductions, 
and pretty soon, it's going to be too late, even if we want to 
do them. They're defaulting 8 percent a month, the subprime, 
underwater homeowners. They're going to be gone in a year.
    So I think it would be good to think about this now.
    Chairwoman Waters. All right. Thank you very much.
    Mr. Baker, did you mention something about rent to own? Was 
that you?
    Mr. Baker. I said right to rent, sort of going the other 
way.
    Chairwoman Waters. Oh.
    Mr. Baker. Saying that the idea was that if you're facing 
foreclosure, we would temporarily change the rules on 
foreclosure, recognizing unusual circumstances, so that someone 
would have the right to stay in their home, say, for 10 years, 
paying the market rent, so they would be regarded as a renter, 
unless, of course, because of the changed terms of foreclosure, 
the lender decided to renegotiate terms to allow them to stay 
in their home as an owner.
    Chairwoman Waters. When you say market rent, that may be 
quite different than the mortgage.
    Mr. Baker. It would almost certainly be a great deal less, 
because again, the big problem is that you had bubble-inflated 
markets, so people are very often paying perhaps 80 percent 
more, perhaps 100 percent more on their mortgage than they 
would to rent a comparable unit, which to my mind, is a very 
serious problem, and under President Obama's plan, at least in 
some of these markets, they still might pay 100 percent more as 
an owner than they would to rent a comparable unit.
    Chairwoman Waters. Okay. Thank you very much.
    And on HOPE NOW, you know, I've been critical of HOPE NOW, 
for a lot of reasons.
    The HUD-trained counselors and the NeighborWorks and all of 
the people in your network are trained to do what by whom?
    Ms. Schwartz. Well, NeighborWorks has a great training 
program for foreclosure prevention, which is different than 
just credit card counseling for excess debt, so they have a lot 
of training for many counselors across the country, and work 
with HUD on training those counselors to--
    Chairwoman Waters. But what--
    Ms. Schwartz. --a debt management plan.
    Chairwoman Waters. Excuse me. What I'm really talking about 
is the homeowner who is in trouble--
    Ms. Schwartz. Yes.
    Chairwoman Waters. --who calls HOPE NOW.
    Ms. Schwartz. Yes.
    Chairwoman Waters. They need a loan modification. Who 
trained them to connect with servicers or to do what? How does 
it work?
    Ms. Schwartz. Through the HOPE NOW hotline, they just 
counsel the borrowers and go through debt management plans, 
budgets, and what all the issues are for that borrower, which 
sometimes are far beyond the house.
    Sometimes it's--
    Chairwoman Waters. No, no, no, no. But I'm in trouble. I'm 
going to lose my house.
    Ms. Schwartz. Right.
    Chairwoman Waters. And somebody told me to call HOPE NOW.
    Ms. Schwartz. Right.
    Chairwoman Waters. What does HOPE NOW do?
    Ms. Schwartz. So the hotline, which is part of HOPE NOW, 
allows borrowers to call, day or night, and talk to a trained, 
certified housing counselor, who is able to walk through all 
the issues around modifications, repayment plans, the debt 
management plan of that borrower, if they want to get 
counseling, just as if they go to someone's--
    Chairwoman Waters. No, no, no. I don't want counseling. I 
know all of that.
    Ms. Schwartz. Okay.
    Chairwoman Waters. My income has been reduced.
    Ms. Schwartz. Right.
    Chairwoman Waters. I've been in this mortgage for the past 
10 years. I've missed two payments already. I want a loan 
modification. What does HOPE NOW do for me?
    Ms. Schwartz. Well, they can be linked directly to the loan 
servicer through the hotline, and the hotline will take all the 
information on that borrower, including income, that the 
servicer needs to modify that loan, and maybe they're not 
calling the servicer because they're either not answering the 
phone or they didn't get through appropriately, so it gives 
them another avenue.
    And we've--every servicer in HOPE NOW has agreed, and has a 
separate 800 number, to work with counselors on escalated cases 
like that, so they come to resolution, and it's really meant to 
help the frustrated borrower who may not be calling the 
servicer--
    Chairwoman Waters. Okay.
    Ms. Schwartz. --or couldn't get in contact.
    Chairwoman Waters. Well, let me just say this. I've held 
town hall meetings where I've asked HOPE NOW and servicers and 
others to come, and I know quite a bit about this.
    While we were here in committee today, I asked one of my 
staffers to go call to see what happened. I'm not going to tell 
you openly, but I'm going to tell you privately--
    Ms. Schwartz. Okay.
    Chairwoman Waters. --what happened on this call. Okay? All 
right.
    Ms. Schwartz. They called the hotline?
    Chairwoman Waters. Yes.
    Ms. Schwartz. Okay.
    Chairwoman Waters. Okay. Ms. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. I'd like to thank 
the panelists. I have a couple of questions.
    First of all, HOPE NOW, I will say I spoke with a 
constituent on last Monday who was underwater, having a lot of 
difficulties, and our office had referred them to the HOPE NOW 
hotline, and they did have a satisfactory experience.
    They called on a Sunday. The HOPE NOW counselor was going 
to be mediating the information between the servicer and the 
borrower. I'm afraid it's not going to have a happy conclusion, 
because this particular couple, they're underwater, they've 
already gone out and rented something, in anticipation of just 
walking away, and I'm certain that happens quite frequently.
    So I did want to tell you that, in light of your efforts.
    And so I had a quick question for Ms. Harnick.
    When you talk about servicers in this plan, it's all 
optional, isn't it, servicer participation in this plan, still?
    Ms. Harnick. That is correct. Servicers can choose to 
participate or not.
    Mrs. Capito. Okay. So then the bigger question, or a 
question--I believe it's tried to be addressed in the 
President's plan--is, are the incentives enough to have the 
servicers come to the table and make the tough decisions, and 
then do what Dr. Geanakoplos says, to modify, because you say, 
sir, that there's no cost to this plan, but somebody is eating 
the principal on that loan. I assume that's the bank or the 
holder of the note?
    Mr. Geanakoplos. Shall I respond?
    Mrs. Capito. Yes.
    Mr. Geanakoplos. The point is, the bond holder is eating 
the reduction in principal. That's money the bond holder no 
longer has a right to. But by eliminating the foreclosure, the 
bond holders are only expecting 25 cents back on the 
foreclosure.
    If you cut the principal to 50 cents and the homeowner now 
pays, or finds a way to sell the house at a profit and repay 
the 50 cents, the bond holder is better off than he was before.
    So the bond holder--
    Chairwoman Waters. If it went to foreclosure?
    Mr. Geanakoplos. If it went to foreclosure. But the bonds 
are trading now. It's not just--it's where the bonds are 
trading.
    So if the homeowner actually pays, if the reduction in 
principal gets the homeowner to pay, the bond holders will feel 
better off, if they believe that--if it's done properly.
    Chairwoman Waters. If they're only going to lose half 
instead of three-quarters?
    Mr. Geanakoplos. Exactly.
    Mrs. Capito. Okay.
    Mr. Geanakoplos. So that's why it doesn't cost the 
government anything. The bond holders bear it.
    Mrs. Capito. Okay. Thanks for that clarification.
    Yes, Doctor? I had a question for you, too, while you're--
you said in your statements that the loan modifications many 
times result in higher payments.
    Are those loan modifications that would include principal 
writedowns, too, as well?
    Mr. Quercia. No, they include principal forbearance, not 
principal writedown. So what is owed is up to the principal.
    What I wanted to add is, if you--indeed, the bond holder 
may be better off losing 50 percent than 80 percent.
    The problem with that is when you have credit enhancement, 
and AIG, as we all know, is in trouble because of the credit 
enhancement, both insurance and credit swaps, that they 
provided to these bonds.
    And so from a bond holder, they may be better off 
foreclosing, and getting only 20 percent from the borrower, but 
they get the rest from AIG, meaning from us.
    Mrs. Capito. Okay. Mr. John, I would like to thank you for 
pointing out the consequence of rising or over-expectations 
here.
    If we're telling 7- to 9 million Americans that, sitting 
here, if they're watching this hearing--God bless them if they 
are--if they're watching the hearing or in the next 6 weeks, or 
we heard the HUD person say in 2 weeks we're going to be 
rolling this out more fully, you know, they're really on the 
edge of their seat. They're thinking, ``Oh, in 2 weeks, I'm 
going to get a solution and some help.''
    So I think I appreciate that, and, you know, I don't know 
if there's any way that we can tamp down expectations. We want 
to tell our constituents, as you're doing through HOPE NOW, 
that there is help out there, but at the same time, you know, 
there's all kinds of hoops that have to be jumped through.
    Did you want to make a comment?
    Mr. John. The only comment is that I'd love to come to you 
and say that I have a solution, but I don't. I'm afraid that 
it's going to have to be a little bit of honesty that's spoken.
    Mrs. Capito. Okay. The other--Mr. Jakabovics, you said that 
you were in favor of benchmark, and I'm afraid I didn't catch 
quite all your benchmark, but I actually like that idea.
    In other words, if we modified a certain amount, in a 
certain amount of time, or some kind of parameter, is that the 
theory behind your statement?
    Mr. Jakabovics. Yes, exactly. The idea, obviously, is that 
we don't have the time to waste to figure out--I don't want to 
be back here a year from now saying, ``Gee, if only we had done 
X, Y, or Z,'' and we wouldn't even have known if, in fact, the 
program is working.
    I think we need to know up front how quickly servicers can 
build the capacity to modify.
    I think moving through systemic modifications as under the 
program is important, because it creates a level playing field 
for everybody involved. But we need to keep a close eye on 
that, in fact.
    Mrs. Capito. Could I have one more question?
    Chairwoman Waters. Sure.
    Mrs. Capito. Okay. At the base of this program--well, I 
don't know if it's at the base, but one of the basic tenets of 
the program is, we know the folks who are behind, we know the 
folks who have had--that, you know, you can see on the 
statements where they're paying either not enough or they're 
paying late.
    But at the base of this is the determination of who is at 
risk. That's a pretty broad statement, and it's not something 
that can be answered in a half an hour conversation on the 
telephone.
    What--and I'd be happy to hear whomever wants to answer 
this--what do you think would be the best way to determine at 
risk? To set up a top three parameters, if you've lost your 
job, if your income has gone in half, if you've had a health 
issue, death in the family? I mean, how do we determine at 
risk?
    Because I can see a whole bunch of people out there now 
saying, ``I'm at risk,'' but definitionally, they're not going 
to be at risk.
    Yes.
    Ms. Schwartz. Well, you bring up some great points, and 
it's one of the dilemmas we're trying to work through, is that 
current borrowers, there's now an explicit opportunity to 
modify people at risk of default, but they're current, and so a 
servicer doesn't quite know that yet.
    You can't solicit a Fannie Mae and Freddie Mac loan that's 
current, that you think might be at risk, because it violates a 
security law. So you actually have--the borrower has to call in 
and let you know.
    But if you've lost your job, you also won't get a 
modification. You might get some sort of forbearance, a 3-month 
period, or something, to catch up and try to find a job.
    So there are a lot of complications on identifying just 
that issue.
    Mr. Jakabovics. Just, on top of that, I think that there 
are certain parameters of loans that exist that we know 
historically have tended to lead to foreclosure, and so 
modifying those in advance, for example, a rate reset, or if 
you have a negatively amortizing loan, those are the types of 
loans that people may be struggling with, as Mr. John 
mentioned, struggling to keep up with their payments, because 
they're determined to keep their house, and to the extent that 
those are very clearly unsuitable loan products for them, they 
may not yet be in default, but the legal standard for imminent 
default, which exists in many of these cases, should be applied 
to this at risk component.
    Mr. Quercia. I think it's also important to look at house 
price trends.
    In North Carolina, prices have declined, but not as much as 
in California or Florida. So I think that's a key issue when we 
talk about principal reduction.
    Mrs. Capito. Thank you, Doctor, but I have a problem with 
you. I graduated from Duke, so I'm really sorry. Anything you 
say from Carolina has--
    [laughter]
    Mr. Quercia. Congratulations on the championship.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Thank you. Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman. I thank the 
witnesses, as well.
    Mr. Jakabovics?
    Mr. Jakabovics. Yes.
    Mr. Green. Is that close?
    Mr. Jakabovics. That's close enough, certainly.
    Mr. Green. Let me hear you say it.
    Mr. Jakabovics. ``Jakabovics.''
    Mr. Green. Ah, ``Jakabovics.'' Mr. Jakabovics, thank you.
    Have we seen the majority of the ARMs that are going to 
reset from teaser rates to these higher interest rates, have we 
seen the majority of them reset already, or do we have more 
ahead of us than we have behind us?
    Mr. Jakabovics. Sir, the best data that I've seen on this 
is an older Credit Suisse report that predicts, really, the 
rate resets on the option ARMs are likely to peak sometime in 
2010 or 2011.
    The subprime teaser rates have largely already reset, and a 
lot of those borrowers are now currently in default or in 
foreclosure, have already lost their homes.
    But there's also the fact that, to the extent that rates 
are now being kept low, because of where Treasuries are or the 
LIBOR is, that the rate--
    Mr. Green. Just a moment. I want the chairlady to hear what 
you just said, because we were at a hearing recently, and our 
information that was given to us was that those ARMs that were 
resetting, that were causing the problem, that had already 
transpired. You might recall that, Madam Chairwoman.
    I remember at that hearing, you were amazed, in fact, you 
were thunderstruck that information was given to us.
    So your intelligence is antithetical to what we heard 
previously?
    Mr. Jakabovics. That's correct.
    The subprime adjustable rate mortgages have largely reset, 
and many of those borrowers are already in foreclosure, but 
there is a second pool of borrowers who are likely to face rate 
resets because of the option ARMs or negatively amortizing 
loans that then trigger increased payments as a result of the 
negative balance that they hit.
    Mr. Green. Do you have any information as to how large this 
block is?
    Mr. Jakabovics. I don't have those numbers specifically, 
but I could certainly find that out for you.
    Mr. Green. Thank you, if you would.
    Yes, sir, do you have--
    Mr. Quercia. Yes. There are two types of mortgages that 
have resets. One are 2/28s. They have a 2-year fixed--
    Mr. Green. Right, 2/28s, 3/27s.
    Mr. Quercia. And the other ones are 5/25.
    Mr. Green. 5/35?
    Mr. Quercia. 5/25.
    Mr. Green. Explain to me what a 5/35 is, please.
    Mr. Quercia. No, 5/25.
    Mr. Green. 5/25.
    Mr. Quercia. The ones that are going to reset are the 5/
25s, the ones that have been teaser and low for 5 years, and in 
2010 or 2011, they are going to get back to the regular market 
rate.
    Mr. Green. So that's the next wave that we will see?
    Mr. Quercia. That's the next wave. And by--
    Mr. Green. The 5/25s?
    Mr. Quercia. --the analyses I've seen, if you look at the 
hump, it will be much greater than the one we had already.
    Mr. Baker. If I could just comment quickly on that, I think 
that may be a little deceptive, because a lot of the option 
ARMs were owned as investment properties, and in a lot of 
cases, those have already been foreclosed or walked away from, 
so I don't think we're going to see the same sort of wave 
associated with those resets as what you had with subprime.
    Mr. Green. Thank you.
    Let me go to Mr. Geanakoplos. Am I correct, sir?
    Mr. Geanakoplos. Absolutely.
    Mr. Green. Mr. Geanakoplos, how many bond holders are 
there? You spoke of bond holders earlier. These are the ones 
that I'm talking about. About how many? And I don't expect you 
to know the exact number.
    Mr. Geanakoplos. You mean bond holders of all mortgages--
    Mr. Green. Bond holders that you were speaking of earlier 
who would be involved in this reduction.
    Mr. Geanakoplos. Of all deals, there are, you know, 
hundreds of thousands, probably, tens to hundreds of thousands.
    Mr. Green. Now, how many have agreed to your concept?
    Mr. Geanakoplos. I haven't asked each of them, so--
    Mr. Green. Well, let's not talk about each, because your 
concept requires that the bond holders buy into it. They would 
have to have what I would probably call some sort of 
enlightened self-interest.
    So tell me how many of them are amenable to your concept, 
because that's the key.
    Mr. Geanakoplos. Yes. So they don't have to buy in, in the 
sense of legally buy in. You're going to take care of that. But 
what they--
    Mr. Green. Whoa, whoa, whoa. Did you say I'm going to take 
care of that? Okay.
    Now, I have to ask you, my suspicion is, you're talking 
about the abrogation of contracts, but I want you to say it. 
How would I get them to buy in?
    Mr. Geanakoplos. All right. I'm thinking that the right way 
to cope with many of our problems, the problem of outreach 
and--
    Mr. Green. I only have a limited amount of time.
    Mr. Geanakoplos. Right.
    Mr. Green. And I have to ask you to go right to the bottom 
line.
    Mr. Geanakoplos. The ``right to the bottom line'' is, I'm 
hoping there's legislation that leads the government to hire 
these community bankers who will modify the loans.
    Mr. Green. Okay, but how--let's get to the modification.
    How does that modification take place such that there's an 
abrogation of contracts? Because that's what you're talking 
about.
    Do you agree that you're talking about an abrogation of 
contracts?
    Mr. Geanakoplos. The--
    Mr. Green. Would you kindly say yes or no--
    Mr. Geanakoplos. Yes.
    Mr. Green. --because time is of the essence.
    Mr. Geanakoplos. It would move, yes, from the servicers--
    Mr. Green. How do we abrogate contracts?
    Mr. Geanakoplos. You simply legislate it. This happens all 
the time, as you know, as you told me.
    Mr. Green. Okay. I know. But tell me how I would do that. 
You said this is what you want me to do, so I need, for the 
record, for you to tell me how I do it.
    Mr. Geanakoplos. You would pass legislation that transfers 
the modification power from the servicers to the government-
appointed community bankers. The bond holders, it would be nice 
to--
    Mr. Green. Okay, the modification power is transferred, but 
the power to modify is the question.
    Mr. Geanakoplos. Yes.
    Mr. Green. You can transfer what a person has, and if a 
person has nothing, then you have transferred nothing. So the 
power is what we must talk about.
    Mr. Geanakoplos. Right. The servicers have the power now to 
make--not the bond holders, the servicers have the power to 
make the--
    Mr. Green. The power that the servicers have is the power 
to do what the bond holders will agree to, so they have to 
agree--let me just do this, because time is up.
    Mr. Geanakoplos. Sure.
    Mr. Green. Are you saying, sir, that you would have the 
Congress of the United States of America pass a law that allows 
the community banks to write down the principal on these loans?
    Mr. Geanakoplos. If it maximized the value to the bond 
holders.
    Mr. Green. Yes.
    Mr. Geanakoplos. Yes, absolutely.
    Mr. Green. Is that it?
    Mr. Geanakoplos. That is it.
    Mr. Green. Okay. Comparable to what happens in bankruptcy?
    Mr. Geanakoplos. Analogous, yes.
    Mr. Green. Okay. Madam Chairwoman, thank you for being so 
generous. I apologize.
    Chairwoman Waters. You're certainly welcome.
    Mr. Ellison.
    Mr. Ellison. Thank you, Madam Chairwoman.
    And let me thank all the panelists, as well. This has been 
a great, great panel, a great day.
    Let me ask you a question I asked before, and it has to do 
with the large number of people who are renters and tenants who 
are impacted by bankruptcy when their landlord can't make their 
mortgage payments and defaults.
    Have you all--can you all give us a sense of how serious 
this problem is in your view, and what do you think we should 
be doing about it?
    Ms. Harnick. Well, I can respond.
    Mr. Ellison. Yes.
    Ms. Harnick. It is a very serious problem. You have 
homeowners who are losing their homes, but you also have 
renters who are being kicked out with no notice because 
they're, of course, unaware often of the financial straits of 
the landlord.
    And I think what needs to be done about it is, there need 
to be protections put in place to give renters notice and give 
them, you know, stability of homeownership under the contracts 
that they have--I'm sorry, not homeownership, but residence, 
under the contracts they have.
    Mr. Ellison. Mr. Geanakoplos?
    Mr. Geanakoplos. Yes. I agree that it's a serious problem.
    And if you prevent the foreclosure, then you'll be saving 
the renters, and that all too often, we just think about, is 
the owner in the place or not, when actually, it could be more 
serious, that he's not in the place, and a bunch of renters in 
the place are getting thrown out.
    Mr. Ellison. Well, you know, in my district in Minneapolis, 
about 40 percent of the foreclosures are investment properties, 
and in one neighborhood in North Minneapolis, about 60-plus 
percent. So this has really hit in our district.
    Mr. Baker, do you have something to add?
    Mr. Baker. Yes. I was just going to comment very quickly.
    If we provide protections, if you provide protections for 
renters, giving them security of tenure, you will substantially 
reduce the incentives to carry through a foreclosure.
    In other words, if I'm the lender and I know that I can't 
throw all these tenants out, I can't just have the place free 
and clear, I have much less incentive to carry through with the 
foreclosure.
    So you do start to get rid of the problem, simply by 
changing--giving renters rights in those situations.
    Mr. Ellison. I have a bill that gives 90 days after 
foreclosure for people to stay in the property.
    It sounds like what you guys are suggesting is that we 
could even improve on it. Like Ms. Harnick says we could maybe 
give them--require that there be notice when there's--notice 
for renters.
    Are there any other kind of ways that we can protect 
renters? Because I'm really trying to think about how we might 
get a really nice renter protection bill that would help people 
whose landlords are in foreclosure.
    Any other suggestions beyond the one that, the good one 
that Ms. Harnick made?
    Mr. Jakabovics. If I might?
    Mr. Ellison. Yes, sir.
    Mr. Jakabovics. One of the issues I think is that there are 
two types of renters who fall into problems.
    One is, obviously, a renter in a single-family home who has 
no clue that her landlord is not making the mortgage payments.
    But then there are also small multi-family dwellings, four 
units or smaller, which are eligible under Fannie and Freddie, 
where you may have an owner in one of the units and then the 
other two or three units are just paying rent--
    Mr. Ellison. Tenants.
    Mr. Jakabovics. --and it was structured to be that way, as 
well.
    And I think that if we think about the fact that a long-
term lease for the renters is going to be a better way to 
maintain the value of the property, so that even if the 
property goes into foreclosure, the right to stay in that 
property, not with a 90-day notice, but actually with a year's 
lease, provides a future cash flow that a potential investor 
who is likely to buy up that property will take advantage of, 
the fact is that this is already tenanted property, so the 
returns on that investment are likely to be better than having 
to go out and find new renters.
    And I think that, again, eliminating the period of vacancy 
does far more for protecting the existing value in the 
property, as well.
    Mr. Ellison. Any other good ideas before I go to my next 
question?
    [No response]
    Mr. Ellison. Thank you for the ones you've given me. I 
appreciate it.
    My next question has to do with the Neighborhood 
Stabilization Program. The House had $4 billion in it. The 
Senate put nothing in it. The compromise is, guess what, $2 
billion.
    If we were to try to forecast the needs of neighborhoods 
across America to try to buy up some of these problem 
properties that nobody is living in, save neighborhoods, stop 
them from becoming an attractive nuisance, and you know the 
whole story, what kind of money should we be having in mind 
going forward?
    Mr. Baker, you look like you have a thought.
    Mr. Baker. I do. This is the part that I actually forgot to 
say in my comments earlier, that when I was saying I would like 
to see this more carefully target the funding of President 
Obama's program, it was exactly with this in mind, that where 
we have areas where the bubble is still deflating, any efforts 
to stabilize house prices are going to be futile.
    On the other hand, if we took that money that might go, 
basically, throwing good money after bad, and focused on areas 
where there was a low price to rent ratio, we would have hope 
of stabilizing prices in those areas, and also, the risk to the 
government of losing money in that context would be very, very 
small.
    If you have a price to rent ratio, as you do in some areas, 
of 10 to 1, it's very unlikely it's going to go lower, so you 
stand a really good chance of actually making a positive 
return, unlike, say, our investment in TARP.
    Mr. Ellison. Good idea.
    So any other thoughts on this issue? I mean, is $2 billion 
going to do it for the neighborhoods across America at a time 
when we have record foreclosures, or do we need to be thinking 
about more money as we go forward?
    Mr. Jakabovics.
    Mr. Jakabovics. Thank you.
    I think that, while $2 billion is probably insufficient to 
deal with the full scope of the problem, you run into capacity 
issues on the ground, and I think that overwhelming local 
community development groups and nonprofits that really have a 
vested interest in maintaining the investments they've made 
over time in these communities, I think that their ability to 
spend this money quickly and potentially distorting markets 
upwards if too much money is sloshing around is real.
    So I think that having a larger pool of money, but 
potentially be able to spend it over the next 5 years, rather 
than 2 or 3 years, might be a better balance.
    Mr. Ellison. So you say the $2 billion is fine for now, 
given capacity, but we may be thinking about this into the 
future?
    Mr. Jakabovics. I believe that's likely going to be the 
case.
    Mr. Ellison. Last question: The President's plan has 
protections for consumers, for example, the waiver of certain--
am I done? Am I wrapping up, or am I done?
    Chairwoman Waters. You're done.
    Mr. Ellison. Okay. Well, I guess I want to thank Madam 
Chairwoman for her forbearance, and I thank the panel.
    Chairwoman Waters. Thank you very much.
    And let me thank our panelists for being here today. You 
have really given us additional information that some of us may 
be able to use as we try to perfect whatever it is we're doing 
in order to deal with this foreclosure problem and help some 
homeowners stay in their homes. I think we heard very good 
ideas today.
    Were any of you sought out to participate in the solution 
by this Administration on this problem?
    [No response]
    Chairwoman Waters. Nobody got invited to give their ideas 
or share their experience or knowledge?
    Mr. Geanakoplos. I communicated with many of the economic 
advisors to the President, but I haven't been invited to any 
panel at the White House.
    [laughter]
    Chairwoman Waters. All right. Thank you so very, very much.
    The Chair notes 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.
    The hearing is adjourned. Thank you.
    [Whereupon, at 1:14 p.m., the hearing was adjourned.]




                            A P P E N D I X



                             March 19, 2009


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