[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
U.S. GOVERNMENT PRINTING OFFICE
48-869 WASHINGTON : 2009
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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
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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
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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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