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




 
                 PROGRESS OF THE MAKING HOME AFFORDABLE
                   PROGRAM: WHAT ARE THE OUTCOMES FOR
                        HOMEOWNERS AND WHAT ARE
                       THE OBSTACLES TO SUCCESS?

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

                                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

                               __________

                           SEPTEMBER 9, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-72



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

                 MAXINE WATERS, California, Chairwoman

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 9, 2009............................................     1
Appendix:
    September 9, 2009............................................    55

                               WITNESSES
                      Wednesday, September 9, 2009

Barr, Hon. Michael S., Assistant Secretary for Financial 
  Institutions, U.S. Department of the Treasury..................     6
Calabria, Mark A., Director, Financial Regulation Studies, Cato 
  Institute......................................................    26
Coffin, Mary, Executive Vice President, Wells Fargo Home Mortgage 
  Servicing......................................................    28
Cohen, Alys, Staff Attorney, National Consumer Law Center........    30
Schakett, Jack, Mortgage Executive, Credit Loss Mitigation 
  Strategies, Bank of America....................................    32
Sheehan, Molly, Senior Vice President, Chase Home Lending, 
  JPMorgan Chase.................................................    33
Stevens, Hon. David, Assistant Secretary for Housing/FHA 
  Commissioner, U.S. Department of Housing and Urban Development.     8
Willen, Paul S., Senior Economist and Policy Advisor, Federal 
  Reserve Bank of Boston.........................................    35

                                APPENDIX

Prepared statements:
    Barr, Hon. Michael S.........................................    56
    Calabria, Mark A.............................................    63
    Coffin, Mary.................................................    69
    Cohen, Alys..................................................    79
    Schakett, Jack...............................................   148
    Sheehan, Molly...............................................   152
    Stevens, Hon. David..........................................   157
    Willen, Paul S...............................................   165

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written responses to questions submitted to Mary Coffin......   212
    Written responses to questions submitted to Molly Sheehan....   216
    Letter from Jacqueline Carlisle, Executive Vice President, 
      NID Housing Counseling Agency, dated September 8, 2009.....   219
    Letter from Antonio Villaraigosa, Mayor, City of Los Angeles, 
      to Hon. Shaun Donovan, Secretary, U.S. Department of 
      Housing and Urban Development, dated July 27, 2009.........   222
Capito, Hon. Shelley Moore:
    Written statement of John H. Dalton, President, Housing 
      Policy Council.............................................   224


                      PROGRESS OF THE MAKING HOME
                    AFFORDABLE PROGRAM: WHAT ARE THE
                    OUTCOMES FOR HOMEOWNERS AND WHAT
                     ARE THE OBSTACLES TO SUCCESS?

                              ----------                              


                      Wednesday, September 9, 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 10:39 a.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Waters, Cleaver, Green, 
Clay, Donnelly, Kilroy, Himes; Capito, Biggert, Miller of 
California, Marchant, Jenkins, and Lee.
    Ex officio present: Representatives Frank and Bachus.
    Also present: Representative Bean.
    Chairwoman Waters. Good morning. This hearing of the 
Subcommittee on Housing and Community Opportunity will come to 
order. Good morning, ladies and gentlemen.
    I would like to thank our ranking member and the other 
members of the Subcommittee on Housing and Community 
Opportunity for joining me today for this hearing on, 
``Progress of the Making Home Affordable Program: What are the 
Outcomes For Homeowners and What are the Obstacles to 
Success?''
    I would also like to thank Melissa Bean. She asked to sit 
in on today's hearing, and I request unanimous consent that 
Representative Melissa Bean be considered a member of the 
subcommittee for this hearing.
    Today's hearing will revisit the Making Home Affordable 
Program, the Administration's systemic loan modification and 
refinance program, 6 months after its introduction. In March, 
we held a hearing on the rollout of the program and heard from 
government officials and housing experts about how the program 
could assist struggling homeowners. Today we will hear from 
witnesses about some of the obstacles and challenges with the 
program, and gain a better understanding of what has worked and 
what is not working for homeowners.
    As unemployment continues to soar, reaching a record high 
of 9.7 percent in August, the number of homeowners entering 
foreclosure has also increased. According to the Mortgage 
Bankers Association, the rate of home loans in the foreclosure 
process has quadrupled from 1 percent in 2006 to over 4 percent 
in 2009. Furthermore, foreclosures have only accelerated in 
2009, with RealtyTrac reporting a 7 percent increase in 
foreclosures from June to July of this year. In my own home 
State of California, the foreclosure rate jumped from 2.15 
percent in June 2008 to 3.37 percent in June 2009. And the 
foreclosure crisis shows no sign of slowing down, with Credit 
Suisse estimating that 8.1 million homes will enter foreclosure 
over the next 4 years.
    In response to the ongoing foreclosure crisis, President 
Obama established the Making Home Affordable Program to help up 
to 7 to 9 million homeowners stay in their homes. The program 
consists of three main parts, including the Home Affordable 
Refinance Program and the Home Affordable Modification Program.
    The Home Affordable Refinance Program is designed to help 
underwater homeowners whose property is worth less than the 
amount owed on the loan. However, only 600,000 borrowers with 
loan-to-value ratios higher than 80 percent have been able to 
refinance.
    The Home Affordable Modification program was intended to 
help up to 3 to 4 million homeowners with loans not held by 
Fannie Mae or Freddie Mac by reducing their monthly mortgage 
payments. Because the program is voluntary, the government 
provides incentives to servicers for participation; however, to 
date, only 15 percent of the eligible 2.7 million homeowners 
have received assistance under this program, with 400,000 
offers extended and 230 trial modifications underway. The 
Administration has requested that servicers ramp up 
implementation to a cumulative 500,000 started by November 1, 
2009. However, more needs to be done.
    I have been hearing about homeowners and counselors waiting 
months to hear back from mortgage servicers for the processing 
of trial modifications. There are also complaints about 
participating servicers who often give incorrect information or 
are unable to answer general questions about the Home 
Affordable Modification Program. There are even servicers who 
continue to initiate foreclosure proceedings while the 
Modification Program application is pending.
    Although I recognize that servicers are dealing with an 
unprecedented volume of troubled mortgages, I also recognize 
that unless more modifications are done, the foreclosure crisis 
will not end any time soon. It is appalling that 6 months after 
the implication of the Making Home Affordable Program, some 
servicers here today reported enrollment of only 4 percent of 
all eligible borrowers in the program. I hope that our 
witnesses today will discuss the major obstacles with the 
program so that we may identify potential resolutions to these 
issues. Millions of families are losing their jobs and millions 
more are losing their homes. We need to know we have a system 
in place that will truly work for struggling American families 
and keep them in their homes.
    I would now like to recognize our subcommittee's ranking 
member to make an opening statement, and then I am going to 
call on our Chair of the full Financial Services Committee, 
Chairman Frank, to make an opening statement. Thank you very 
much.
    Mrs. Capito. Thank you, Madam Chairwoman. I would like to 
yield and have our first opening statement be given by the 
ranking member of the full committee, Mr. Bachus.
    Mr. Bachus. Thank you, Mrs. Capito. Chairwoman Waters, I 
also thank you for holding this hearing on the Obama 
Administration's foreclosure prevention plan.
    Despite recent encouraging news on home sales, we are still 
experiencing an unprecedented number of foreclosures, and it 
has become apparent that the program that the Administration 
rolled out with great fanfare some 6 months ago is likely to 
fall well short of expectations. I believe that the overall 
approach of the Administration's foreclosure prevention 
initiative was flawed from the inception. I think the best way, 
in fact the only way I think to stop this epidemic of 
foreclosures is to get our economy rolling again. As long as 
people are losing jobs, they are going to lose their homes, and 
we basically have no alternative other than to what I think is 
get the government out of the spending spree that we are 
witnessing in Washington and the cumulation of massive debts 
and allow the private sector to create those jobs. I think that 
is how you save these homes. And I think until Washington 
restores its fiscal discipline and stops the spending spree we 
are on, we are going to continue to just substitute public 
funds and taxpayer funds for the lack of private funds. A 
homeowner who has lost his job needs a job and not a government 
handout.
    Let me say this: The message I think that our constituents 
gave us over the August break, and they gave it loud and clear, 
is that they don't want to pay the bill for another untested 
government program. And I think this is one of those programs 
and, unfortunately, I don't think it is going to demonstrate a 
lot of success.
    Another concern about the Administration's foreclosure 
mitigation plan is with all these programs is the opportunity 
for fraud and abuse that it presents to those who charge 
upfront fees for loan modifications which never happen, as well 
as the borrowers who misrepresent their financial situation to 
secure more favorable terms. Going forward, transparency and 
strict oversight of the program is imperative to prevent future 
abuses and limit taxpayer losses.
    On another note, I notice that the chairman of the full 
committee is here and I want to express to him and the 
committee that I am troubled by his announcement yesterday that 
he intends to include a bankruptcy cramdown in his broader 
package of regulatory reform. A bankruptcy cramdown, which was 
rejected by the Senate earlier this year, would severely 
undermine recent measures taken to unfreeze credit by private 
markets and, I think, would prolong our housing recovery by 
adding uncertainty to the market and increasing mortgage costs 
for the vast majority of Americans and would precipitate some 
of the very things that we are attempting to prevent or the 
Administration is attempting to prevent in its legislation.
    I know the terrible cost of foreclosure not only for the 
families involved but for the communities. It is a terrible 
thing that we are all witnessing with these high foreclosure 
rates. But I still think that the government simply has to end 
its substitution of public debt for private debt. If we don't, 
not only I think are we going to continue to drag this economy 
down and cause greater losses of jobs, but we are also going to 
pile up an unpayable debt on our children and grandchildren.
    And I will close by saying I note in the Wall Street 
Journal that the dollar has hit a new low. I believe, 
importantly, that we have had a strong dollar, and that that 
has been a real benefit for us. But I think all these spending 
programs are undermining our currency, and I think that would 
be a disaster for this country.
    Thank you.
    Chairwoman Waters. Thank you very much. Mr. Chairman?
    The Chairman. Thank you, Madam Chairwoman. And I think a 
very stark difference in approach to the foreclosure issue has 
just been put before us. The gentleman from Alabama says we 
should do nothing to alleviate the specifics of foreclosures. 
His proposal is to increase jobs. I will point out that 
according to the single most important appointment to an 
economic post that George Bush made, Chairman Ben Bernanke of 
the Federal Reserve, the economic recovery program that the 
gentleman voted against and still apparently laments 
significantly increased jobs. Mr. Bernanke said that there 
would be fewer jobs if we did not have this. He in his report 
to us volunteered several instances in which he--several 
specifics which had that increase.
    So I do agree jobs are better. But I also think that the 
analysis we just heard is badly flawed because it lumps 
together all kinds of foreclosures. Yes, unemployment is 
causing a new wave of foreclosures. These are people who got 
mortgages that were perfectly sensible for them at the time 
they got them, but you can't pay your mortgage out of 
unemployment. But that ignores the fact that the foreclosure 
crisis is one that was inherited by this Administration from 
the Bush Administration back at a time when we were not in an 
unemployment crisis. That is a result of mortgages that should 
not have been made. That is the result of mortgages that should 
not have been made because officials like Alan Greenspan 
refused to use authority he was given to prevent bad mortgages 
from being made. That is what we are trying to deal with when 
we talk about new legislation to stop irresponsible mortgages.
    So, yes, it would be a useful thing to get more jobs for a 
lot of reasons. And some of the foreclosures are caused by job 
loss, but a large number are not related to job loss. And so 
what the gentleman says is he doesn't like this program, he 
doesn't like the notion of bankruptcy. His only approach is to 
get more jobs. And that is, obviously, wholly inadequate to the 
problem of those mortgage foreclosures that are happening 
because things were not done appropriately at the time the 
mortgages were granted.
    The final thing I would say is, yes, I do think bankruptcy 
has become relevant. We are talking about a bankruptcy bill 
that would be limited in time to mortgages already granted. The 
notion that this would somehow stop the flow of credit is hard 
to maintain in that case. It would have nothing to do with 
credit going forward.
    And I will reiterate, I am disappointed at the pace of this 
program. I also believe that there are legal obstacles here. We 
have second mortgages. We have a problem with nobody having the 
authority, we are told in some cases, to modify the mortgage 
because of the way the servicing model has gone forward. And 
one of the things that we will do next year, I hope, is to 
change the law so that you will not have this situation in 
which no one can modify the mortgage. It is very bad public 
policy for us to allow to exist in law a situation in which 
there are important decisions that should be made in 
everybody's interest and no one to make them. And we know that. 
There are people who say, yes, it would be good if we could 
modify this, if we could reduce the principal or do this. But 
no one has the authority do it and no one can decide how you 
arbitrate between first and second mortgages. So we will do 
that going forward. But to cut through that current tangle, I 
think bankruptcy is effective.
    And let me just say about bankruptcy, the notion that there 
are people out there eager to go bankrupt is of course 
fallacious. Bankruptcy is no picnic. We do believe that the 
possibility of bankruptcy will be an important incentive to 
getting things done.
    And I would say finally, to the servicers in particular, 
many of whom are in large banks who don't like the notion of 
bankruptcy, to a great extent whether or not that gets done 
this fall will be up to them. Yes, it is true, as the gentleman 
points out, in the Senate, that was defeated. In the House, it 
passed. But if we continue to have a situation in which people 
are so frustrated by the inability to get the mortgage 
foreclosure modifications that we need, not just for 
individuals but for the economy, for all of the negatives that 
the foreclosure rate has in the economy, they are--let me put 
it this way. The best lobbyists we have for getting bankruptcy 
legislation passed are the servicers who are not doing a very 
good job of modifying mortgages. And if they do not improve 
their performance, then they improve the chances of that 
legislation.
    Finally, let me just thank the Chair of this subcommittee 
who has been as effective and dedicated in fighting this as any 
Member. And she was one of the first to say that we need to 
change the legislation so that going forward we don't find 
ourselves in this tangle, and she will be in a major role next 
year as we do that.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much, Mr. Chairman. Mrs. 
Capito.
    Mrs. Capito. Thank you. I would like to thank Chairwoman 
Waters for holding this hearing this morning and for her 
continued dedication to helping families in need. Today's 
hearing is a follow-up to a hearing this subcommittee had in 
March of this year when the Administration first rolled out the 
Making Home Affordable Program. Introduced with the promise of 
helping 7 to 9 million troubled borrowers, this program to date 
has assisted approximately 6 percent of that population.
    While Making Home Affordable has been somewhat more 
successful than the troubled HOPE for Homeowners, I do have 
significant concerns with the potential overestimation of the 
populations assisted by the programs and the pace, as the 
chairman said. There are certainly Americans who received 
complicated mortgage products that they did not completely 
understand and now cannot afford; however, we should be good 
stewards of the taxpayers' money to ensure that we help those 
families who truly need assistance the most. We need to be fair 
to the millions of Americans who are cutting their family 
budgets to stay current on their mortgages and monthly 
expenses, and make certain that we extend that helping hand to 
those who most need the help. Furthermore, there needs to be 
strict oversight of these programs to prevent fraud by both the 
borrowers who misrepresent financial information and fraudulent 
modification businesses that we have heard testimony about in 
this committee that seek only to collect fees without modifying 
the loans.
    The difficulties in the housing market are not static; 
rather, they have continually evolved over the last several 
years. Initially, delinquencies and foreclosures began 
increasing because of resetting adjustable rate mortgages, but 
now we are seeing increases in foreclosures from more 
traditional economic events like the loss of a job or excessive 
debt. And, I would add to that, falling real estate prices. 
Rapidly approaching on the horizon are new problems like the 
resetting of interest only and option adjustable rate 
mortgages. The programs that we create must have the 
flexibility to address the ever-changing issues in the housing 
market.
    Additionally, we need to foster an environment for private 
sector job growth in this. We need the economy to improve 
dramatically. But the trend on our unemployment has risen 
drastically. Returning Americans to the workforce will allow 
them to pay their monthly expenses, which they want to do, and 
return us to the road towards prosperity.
    I look forward to hearing from the witnesses today, and I 
thank the chairwoman for holding this hearing today.
    Chairwoman Waters. Thank you very much. We are now going to 
welcome our distinguished first panel.
    Let me just inform our members here today that we basically 
have an agreement that we will do 10 minutes on each side, so 
we are going to move forward with our first panel. One of our 
witnesses must leave, so I want to make sure that we get some 
good questions in. Thank you very much.
    Our first witness will be Mr. Michael Barr, Assistant 
Secretary for Financial Institutions, U.S. Department of the 
Treasury. Our second witness will be Mr. David Stevens, 
Assistant Secretary for Financial Institutions and Federal 
Housing Administration Commissioner, U.S. Department of Housing 
and Urban Development. Welcome. Mr. Barr.

STATEMENT OF THE HONORABLE MICHAEL S. BARR, ASSISTANT SECRETARY 
  FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Barr. Thank you very much, Chairwoman Waters, and 
members of the subcommittee. Thank you for the opportunity to 
testify today about our comprehensive initiatives to stabilize 
the U.S. housing market and to support homeowners. I want to 
outline the steps that President Obama and his Administration 
have taken to strengthen the housing sector, help millions of 
homeowners, and lay the foundation for economic recovery and 
for financial stability.
    President Obama worked with Congress to enact the largest 
economic recovery plan since World War II to help the private 
sector create jobs. As part of the Recovery Act, we boosted 
housing by implementing a new home buyer credit. We announced 
Making Home Affordable, a plan to stabilize the U.S. housing 
market, lower interest rates, and offer assistance to millions 
of homeowners by reducing mortgage payments and preventing 
affordable foreclosures.
    This plan includes three main elements. First, broad 
support to Fannie Mae and Freddie Mac to support mortgage 
refinancing and affordability across the market. We have 
supported lower interest rates by strengthening confidence in 
Fannie Mae and Freddie Mac, including through an additional 
$200 billion in the stock purchase agreements and continued 
support for market liquidity.
    Second, we have increased refinancing flexibility for the 
GSEs, providing more homeowners an opportunity to refinance to 
lower monthly payments. Low rates have enabled over 2.7 million 
borrowers with GSE loans to refinance since the announcement of 
the Administration's comprehensive housing plan.
    Third, a key part of the Administration's broad housing 
plan is a comprehensive initiative to lower monthly mortgage 
payments for borrowers, providing modifications on a scale 
never previously attempted.
    There are signs the plan is working. Forty-five servicers 
have signed up for the program. More than 85 percent of loans 
in the country are covered by the program. And servicers have 
extended over 570,000 trial modification offers. Over 360,000 
trial modifications are already underway under the program. We 
are above our target pace of 20,000 to 25,000 trial 
modifications started per week, and we are now on track to 
reach our goal of 500,000 modifications, a half a million 
modifications, started by November 1st. But we can do better.
    On July 28th, we held a meeting with servicers at Treasury 
where we told servicers that they needed to ramp up faster and 
to treat borrowers better. We ask servicers to commit to doing 
more. Servicers must add more staff than previously planned, 
expand call center capabilities, provide a process for 
borrowers to escalate servicer performance and decisions, 
bolster training, enhance online offerings, and send additional 
mailings to potentially eligible borrowers. Servicers must 
report the reason for modification denials both to Treasury and 
to the borrowers. And we are working with servicers and Fannie 
Mae to streamline application documents and develop Web tools 
for borrowers.
    We also are committed to transparency and to 
accountability. On August 4th, we began publicly reporting 
servicer-specific results on a monthly basis. The second public 
report was published just this morning. These reports provide a 
transparent and public way of accounting for individual 
servicer performance as well as performance under the program 
as a whole.
    Second, we are working to establish specific operational 
metrics to measure the performance of each servicer, and these 
metrics will be included in our public reports.
    Third, we have asked Freddie Mac as compliancy agent to 
develop a second-look process pursuant to which Freddie Mac 
will audit a sample of MHA modification applications that have 
been declined by each servicer. This second-look process began 
August 3rd, and is designed to minimize the likelihood that 
borrower applications are overlooked or inadvertently denied. 
In addition, we are improving borrower outreach which is 
essential to success in the program. We have launched a 
consumer-focused Web site, established a call center for 
borrowers, and launched a series of borrower outreach events in 
cities facing high foreclosure rates across the country.
    There are a number of challenges to implementation, but we 
believe the program is on track. The program has strong 
antifraud protection. It has strong compliance protection. It 
is consistent with the ranking member's suggestion of flexible 
enough to handle the onset of new problems, new programs, new 
kinds of issues coming up.
    The program has made significant progress in increasing the 
flow of mortgage credit, bringing down mortgage rates, and 
providing many families with a second chance to stay in their 
homes. We can and we must redouble our efforts to broaden the 
reach of these programs.
    Thank you very much.
    [The prepared statement of Assistant Secretary Barr can be 
found on page 56 of the appendix.]
    Chairwoman Waters. Thank you very much. Mr. Stevens.

 STATEMENT OF THE HONORABLE DAVID STEVENS, ASSISTANT SECRETARY 
 FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND 
                       URBAN DEVELOPMENT

    Mr. Stevens. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, thank you for the opportunity to 
testify on the Making Home Affordable Program and other 
Administration efforts to homeowners and neighborhoods 
suffering in the foreclosure crisis.
    Madam Chairwoman, I would like to thank you for your 
leadership, your commitment as Chair of this subcommittee to 
ensuring that the Administration's efforts help as many 
families as possible. That is always important, but 
particularly important during this difficult time.
    My colleague has done an excellent job describing the 
progress to date in the Making Home Affordable Program. And 
while I have submitted lengthier testimony for the record, I 
would like to focus my remarks on HUD's efforts to stem the 
tide of foreclosures, both in our work in Washington and, just 
as importantly, on the grounds and neighborhoods across this 
country.
    First, the Neighborhood Stabilization Program: Recognizing 
that concentrated foreclosures can wreak havoc on once stable 
communities, HUD is working to ensure that nearly $6 billion 
appropriated by Congress for NSP help stabilize housing 
markets, and combat blight through the purchase and 
redevelopment of foreclosed and abandoned homes and residential 
properties. HUD worked quickly to allocate $4 billion in funds 
under NSP-1 to 309 grantees in 55 States and territories and 
254 selected local governments. And we allocated another $2 
billion on a competitive basis to States, local governments, 
and nonprofit organizations under the second round of funding 
authorized by the Recovery Act.
    NSP has emerged as an essential tool as we facilitate the 
transformation of foreclosed homes into affordable housing.
    Second, I want to talk about our counseling efforts, which 
are critical to turning back the foreclosure crisis. With more 
than half of all foreclosures occurring without servicers or 
borrowers ever engaging in a discussion about potential options 
to prevent foreclosures, HUD is mobilizing its vast network of 
counselors and nonprofits to provide critical assistance to the 
record numbers of homeowners at risk of foreclosure. Armed with 
this wealth of information, HUD-approved counselors provide 
assistance over the phone and in person to those seeking help 
with understanding the MHA program. They explain options 
available to FHA-insured homeowners, and often work with 
borrowers eligible for the Administration's refinancing 
modification programs to compile an intake package for the 
servicers. These services are provided free of charge by 
nonprofit housing counseling agencies working in partnership 
with the Federal Government and working in part by HUD and 
NeighborWorks America.
    In addition, HUD, working with Treasury and the Home 
Ownership Preservation Foundation, is encouraging distressed 
borrowers to contact the Homeowners HOPE hotline. The 24-hours-
a-day, 7-days-a-week hotline utilizes many HUD-approved 
counselors who can also help the homeowners reach and resolve 
issues with servicers.
    As part of the Administration's nationwide campaign to 
promote the Making Home Affordable Program in communities most 
in need, we are also involved in a series of outreach events to 
engage local housing counseling agencies, community 
organizations, and others to build public awareness of Making 
Home Affordable, educate at-risk borrowers, and prepare 
borrowers to work more efficiently with their servicers.
    As HUD leverages its own relationships with local housing 
partners on the front lines, we are also encouraging servicers 
to leverage their relationships with nonprofits to expedite the 
processing and approval of modification applications. With 
Treasury, we are working to establish guidelines for servicers 
entering relationships with trusted advisers to guide borrowers 
through the application process, and help them complete 
application packages and troubleshoot if the borrower appears 
to have been improperly deemed ineligible for the program.
    Third, we are launching the HOPE for Homeowners Program as 
a result of the new legislative improvements featured in the 
Helping Families Save Their Homes Act of 2009 and its 
integration into MHA. We believe it should be a more attractive 
option for more homeowners, particularly for underwater 
borrowers ineligible for GSE refinancing programs seeking to 
refinance their homes and gain equity in their homes. Servicers 
will now be required to offer the option for an H for H 
refinancing in tandem with an MHA, Making Home Affordable, 
trial modification option.
    Lastly, as Commissioner of FHA, I should note that 
homeowners with FHA-insured loans have long been eligible for a 
variety of loss mitigation programs to help protect them from 
foreclosure. Last year, more than 500,000 families were 
assisted through forbearance, partial claim, loan modification, 
pre-foreclosure sale, or a deed in lieu of foreclosure, amongst 
others. That is in part because the servicers of FHA-insured 
loans are required to notify delinquent homeowners about the 
options available to them to help them make their monthly 
payments and to take such steps before initiating foreclosure 
proceedings. As a result, we expect another half million 
families will be protected from foreclosure in 2009 through 
benefits provided by FHA insurance.
    We recently unveiled FHA Home Affordable to give qualified 
FHA-insured borrowers the opportunity to obtain assistance 
under terms comparable to those under MHA without increasing 
costs to the taxpayer. By offering a partial claim of up to 30 
percent of the unpaid balance, deferring repayment of mortgage 
principal through an interest free subordinate mortgage that is 
not due until the mortgage is paid off, we can permanently 
reduce the family's monthly mortgage payment to an affordable 
level.
    HUD is also working with Treasury and other Administration 
agencies as we continue to monitor the progress of the Making 
Home Affordable programs. With home prices declining, the sale 
of existing and new homes increasing for 5 consecutive months, 
and homebuyer confidence on the rise, the Administration is 
exploring a series of programmatic options to build on these 
initial signs of stabilization. Collectively, Madam Chairwoman, 
these efforts should signal to every American that the Obama 
Administration is absolutely committed to helping as many 
families as possible avoid foreclosures.
    Once again, I would like to thank you for the opportunity 
to participate in today's hearing and for your continued 
leadership and commitment. And while we have seen progress in 
the Administration's efforts to address this crisis and make 
changes where necessary, HUD shares your concern about the 
speed of progress. We are working hard to resolve the issues 
related to the implementation of core programs, and to develop 
new elements that improve and refine MHA. And, as always, we 
stand committed and ready to help and explore any options that 
Congress or other participants of the industry may have to 
improve results at this time of crisis.
    Thank you.
    [The prepared statement of Assistant Secretary Stevens can 
be found on page 157 of the appendix.]
    Chairwoman Waters. Thank you very much. I will now 
recognize myself for 5 minutes.
    Mr. Barr, while 45 servicers, as you described, have signed 
up for the Home Affordable Modification Program, representing 
nearly 85 percent of the mortgage market, only 15 percent of 
the eligible 2.7 million borrowers have received assistance. At 
the time the program was introduced, what was the expected rate 
of enrollment? How many eligible homeowners were expected to be 
enrolled? And within what time period, moving forward, what is 
the expected rate of enrollment in the next 3 months, 6 months, 
a year?
    Mr. Barr. Thank you, Madam Chairwoman. In the initial 
design of the program, our expectation was that there was going 
to be a period of ramp-up in the program. We are on track to 
meet the goals that we designed the program to meet in 
February.
    Chairwoman Waters. Excuse me one moment, please. All right. 
Thank you.
    Mr. Barr. In the initial design of the program, we expected 
there to be a ramp-up in the program given the significant time 
servicers would need to change their basic systems and for 
Treasury and the other participants, Fannie Mae and Freddie 
Mac, to put their systems in place.
    We are on track to meet the goal that we enunciated at the 
beginning of the program, which is to reach 3 to 4 million 
borrowers over the 3-year period beginning from initiation of 
the program. When we announced the program, I explained that we 
wanted to be at a rate of 20,000 to 25,000 trial modifications 
begun each week. We expected to hit that level in August. We 
actually hit it in July. So we are on track or exceeding the 
goals that we established. We are on track now with 360,000 
modifications started, we are on track to reach the goal by 
November 1st of half a million modifications begun by November 
1st. And, we expect that we will be continuing to ramp up the 
program going forward.
    Now, it doesn't mean that there is perfection out there in 
the world. There are lots of problems and program implication 
that could be done better, that need to be done better. There 
is unevenness in performance, as you can see from our public 
reports, unevenness in performance between and among the 
servicers involved. We think all the servicers can do more than 
they are doing now, and we would like to continue to work with 
them to see better results.
    Chairwoman Waters. How will the Treasury respond if the 
rates of loan modifications and refinancing continue to fall 
short? You say you are on track.
    Mr. Barr. I think there is more that we can do. We can 
continue to make improvements in the implementation of the 
program, as I suggested, better operational metrics so we know 
that servicers are treating borrowers the way we would like 
them to be treated; that borrowers are getting good response 
time at the call centers; that we are doing a better job 
reaching out to borrowers to be sure we can reach everybody we 
can under the program, and that borrowers say yes whenever they 
are contacted. We need to be sure that borrowers are not being 
inappropriately turned down. And that is why we have put in 
place the Second Look Program, to audit compliance under the 
program to be sure borrowers aren't turned down.
    So there are a number of steps, including the Web portal, 
additional compliance, additional second-look programs that we 
think can continue to ramp up performance under the program.
    Chairwoman Waters. Thank you. I am now going to recognize 
the ranking member of the full committee.
    Mr. Bachus. Thank you, Chairwoman Waters.
    Secretary Barr, as a professor at the University of 
Michigan Law School, you, along with Harvard professor 
Elizabeth Warren, are widely recognized as the chief architects 
of the conceptual framework behind the Consumer Financial 
Protection Agency. I want to ask you a few questions about the 
reasoning behind the Consumer Financial Protection Agency, 
because I think you are probably best able to give us that 
answer, you or Professor Warren.
    In a 2008 paper you published, ``Behavioral Informed 
Financial Services Regulation,'' that has been referred to in 
many articles about the new agency, you advocated repeatedly 
for limiting consumer choice and expressed concerns about 
consumers having too much choice. Is the proper role of the 
government to limit consumer choice, or is that a part of what 
this new agency would do?
    Mr. Barr. Mr. Chairman, I would not characterize my article 
about behavioral regulation as being about limiting choice. It 
is about understanding how people make decisions in the real 
world and taking that into account in the structure of 
regulations.
    So, for example, if a borrower is going to be offered a pay 
option ARM, shouldn't they have the benefit of knowing what the 
risks and costs of that are in relation to a regular ARM? The 
basic idea behind the approach is, let's give people the tools 
they need to make better financial decisions.
    So on the credit card bill, one of the things that Congress 
did is to require the credit card companies to say, what are 
the actual consequences of only paying the minimum balance? The 
actual consequence in terms of additional time and cost to pay 
off a credit card bill. And I think that is an important 
behavioral tool. That is good regulation, it is smart 
regulation. That is the kind of regulation the Consumer 
Financial Protection Agency would be empowered to offer. It 
empowers people to make better decisions. It doesn't limit 
consumer choice; it provides room for innovation, but it 
provides protection for consumers when they need it.
    Mr. Bachus. Well, you say you wouldn't want to limit 
choice. That is not what the article said. In fact, it says: 
``Product regulation would also reduce emotional pressures 
related to potential bad decision making by reducing the number 
of choices.''
    Mr. Barr. Right. So in that article, I am describing in 
distinction to product regulation, which has certain costs 
associated with it, to financial innovation, I offer an 
alternative to that, which is less restrictive in the 
marketplace. So the particular provision that you are 
describing is describing a form of regulation that is heavier 
handed than the one that I prefer and I advocated for in the 
article.
    Mr. Bachus. So you are advocating in the article a more 
heavy handed approach than you are now advocating?
    Mr. Barr. No. The article is describing a lighter approach 
to regulation. In the particular provision you are referring 
to, I am contrasting the form that I prefer to the form that 
you are describing.
    Mr. Bachus. Okay. You say here individuals consistently 
make choices that they themselves agree diminish their own 
wellbeing in significant ways.
    Mr. Barr. Yes. The empirical literature, Representative 
Bachus, suggests that in many instances, consumers make 
decisions that they later regret and that if they had been 
given full information about the financial consequences of 
their decisions, they would have made different choices. So if 
we are able to empower them in advance with the knowledge about 
what those decisions actually would mean to them, they are 
likely to make much better decisions.
    Mr. Bachus. So the new agency would not either make those 
choices or suggest certain choices to them? Or maybe establish 
a government proposed solution?
    Mr. Barr. That is right, Mr. Bachus. I think there is some 
misunderstanding, for example, about the idea of standard 
products. The idea of standard products is what I articulated 
before. So if you offer somebody a pay option ARM, you should 
give them a best case comparison. So a pay option ARM poses 
defined kinds of additional risks as compared to, say, a hybrid 
ARM, a 5/1 ARM with the following characteristics. It is a way 
of anchoring consumer decisionmaking so they can make better 
choices.
    Mr. Bachus. So you are not going to suggest a certain 
choice to them?
    Mr. Barr. The government suggests the choice? No, sir.
    Mr. Bachus. All right. I think that is all. Thank you.
    Chairwoman Waters. Thank you very much. Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman. And as an aside, 
Madam Chairwoman, I would like to thank you for the hearing 
that we held in Louisiana over the August break. It was very 
enlightening and perhaps worthy of a topic of discussion at 
another time.
    Madam Chairwoman, I would like to, if I may, quote what I 
believe to be a quote from a Republican President, Theodore 
Roosevelt, who reminded us that: ``It is not the critic who 
counts: not the man who points out how the strong man stumbles 
or where the doer of deeds could have done better. The credit 
belongs to the man who is actually in the arena, whose face is 
marred by dust and sweat and blood, who strives valiantly, who 
errs and comes up short again and again, because there is no 
effort without error or shortcoming, but who knows the great 
enthusiasms, the great devotions, who spends himself for a 
worthy cause; who, at the best, knows, in the end, the triumph 
of high achievement, and who, at the worst, if he fails, at 
least he fails while daring greatly, so that his place shall 
never be with those cold and timid souls who knew neither 
victory nor defeat.''
    We are in the arena. Dr. King reminds us that the greatest 
measure of a person is not where he stands in times of comfort 
and convenience, but where do you stand in times of challenge 
and great controversy? When you are in this arena and you have 
46 million people uninsured, unemployment is 9.7 percent, where 
do you stand? I stand with the American people. I stand for 
augmenting what we are doing today with bankruptcy. We bailed 
out Bear Stearns, tens of millions of dollars. We bailed out 
the auto industry, scores of billions of dollars. We bailed out 
AIG, $180 billion. We can bail out people who are having a 
crisis in their home foreclosures not because they are not hard 
workers but because of the cascading impact of the financial 
crisis that had impacted their jobs. They are losing their 
jobs. I want jobs right now, too. But we don't have them right 
now. So since we don't have them right now, the question isn't 
really do we want jobs right now. The question is, what do we 
do right now? What do we do when we don't have the jobs for 
people to come back and make their own way through life? Fend 
for themselves? What do we do when they are losing jobs and 
about 16 percent of all mortgages are predicted to go into 
foreclosure within the next 4 years? What do we do now, is the 
question.
    I think what you are doing is admirable, both of you 
Secretaries, but I also think that there is a place for 
bankruptcy. That allows the consumer an option that will afford 
the consumer the opportunity to, when the servicers can't 
serve, to go to court and take additional action, action that 
we should have taken earlier and hence restructured loans. That 
is what this is all about today, whether we are going to 
restructure loans or simply refinance loans. Bankruptcy allows 
for the restructuring of loans in an orderly, systematic way 
when servicers cannot do so. When servicers cannot do, 
bankruptcy can allow to be done. These are the American people 
who will be bailed out, if you want to call it a bailout. 
American people who worked hard, played by the rules, a lot of 
them with prime loans that they can't afford to pay now because 
they are losing jobs because of the financial crisis.
    So I see in this an opportunity for us to fashion a 
bankruptcy bill that is retrospective, not prospective. We 
won't have the problem of this impacting new loans because it 
won't apply to new loans. Let me repeat that. Some things bear 
repeating. This will not apply to new loans. It will not be 
prospective; it will be retrospective. Some things bear 
repeating. It will be retrospective, it won't be prospective. 
You can't make the argument that this is going to impact new 
loans because it will be retrospective, not prospective.
    I risk embarrassing myself by repeating it a third or 
fourth time, but you know what, sometimes you ought to 
embarrass yourself to make a point. It will be retrospective, 
not prospective. We ought not make that false choice. Let's do 
something for the American people. We are talking about a 
targeted group of loans that were made, many of which forced 
people into subprime loans when they qualified for prime loans. 
We know what happened. The empirical evidence is there. It is 
time to help the homeowners to maintain homeownership and 
protect the country from a loss of homes that ultimately will 
drive down prices even more. We have to do something. We are in 
the arena. We can make a difference.
    One quick question to each.
    Do you find any adverse impact that bankruptcy will have on 
the programs that you are implementing currently? Let's start 
with you, Secretary Barr. Will bankruptcy adversely impact what 
you are doing?
    Mr. Barr. Would a bankruptcy reform measure?
    Mr. Green. Bankruptcy bill that is--
    Mr. Barr. No.
    Mr. Green. Retrospective?
    Let's move now to Mr. Stevens. Retrospective bankruptcy, 
not prospective, will it adversely impact what you are doing?
    Mr. Stevens. Not on the retrospective book necessarily.
    Mr. Green. On the retrospective, that is what we are 
talking about. I would beg that we not discuss things--no 
disrespect--that I am not calling to your attention. There are 
many things that we can talk about today that I quite frankly 
want to talk about but my time is limited.
    With reference to retrospective bankruptcy, will it 
adversely impact what you are doing?
    Mr. Stevens. No.
    Mr. Green. Thank you. I yield back.
    Chairwoman Waters. Thank you very much. Mrs. Capito.
    Mrs. Capito. Thank you, Madam Chairwoman. I would like to 
ask unanimous consent to submit a statement from the Housing 
Policy Council.
    Chairwoman Waters. Without objection, it is so ordered.
    Mrs. Capito. Thank you. I have a couple of comments, 
specific questions, and then I am going to have ask a general 
question on your Making Home Affordable graph that as of August 
30th, you have the trial modifications started. Do you have any 
statistics on actual modifications that are considered past the 
trial period? Because the trial period is if you are on time 
for 3 months. What are you finding there? People staying on 
time? Have any of these moved into what, I don't know, what are 
you going to call it, a solid modification?
    Mr. Barr. The trial modifications are real modifications. 
They really reduce people's payments down to 31 percent debt to 
income. The question is when they are finalized. They get 
finalized if the borrower pays on time for 3 months at the end 
of that time period.
    Because the program takes a while to ramp up and there is a 
3-month time period through which borrowers need to pass that 
test, there are very few borrowers who have reached that moment 
in time between the 3-month trial period and the final period. 
So we don't have solid enough statistics on those in the final 
modification yet.
    Mrs. Capito. So you don't have any preliminary indications 
of people falling behind or staying on it? Or, is it too early 
to tell?
    Mr. Barr. It is just too early to tell. I want to be 
hesitant about using information unless I know exactly what the 
numbers are.
    Mrs. Capito. I want to ask about the incentives. For 
instance, CitiMortgage here has 191,000 eligible, they have 
identified eligible delinquencies. So they get paid $1,000 for 
identifying each one of those?
    Mr. Barr. No. They don't get paid anything for identifying 
any mortgage. The list here is eligible 90-day delinquencies to 
provide a baseline of comparison among the different servicers. 
The determination that a loan is eligible is nothing more than 
a data point in the chart. What they get paid for doing is for 
doing a modification that is successful, that reaches the 
status of a finalized modification. No payment is made unless 
borrowers successfully reach the point of a final modification, 
and then they get paid--
    Mrs. Capito. So we have had none of those, then, because we 
have had no final modifications.
    Mr. Barr. There has been a small amount of payments going 
to the final amount, but it is too early in the program to 
assess again exactly those numbers.
    Mrs. Capito. Just using CitiMortgage.
    Mr. Barr. But there are no significant dollars out the door 
yet.
    Mrs. Capito. Using them as an example, the Citigroup got 
$45 billion in the TARP plan, and they have the most to gain if 
they actually go this direction. I realize, in terms of their 
bottom line, it is probably a minimal thing. But it is taxpayer 
dollars going out. Are you finding that servicer payments are 
proving to be an incentive for people to get, for the servicers 
to get more involved in this program?
    Mr. Barr. We believe a combination of two things are 
providing strong incentives for servicers to participate. One 
is having clear program rules, Treasury guidance, establishing 
an industry standard for modifications. And, second is the 
structure of the incentive payments both to the servicers as 
well as to investors.
    Mrs. Capito. Last question. This is a more general 
question. We have heard, and I mentioned in my opening 
statement, too, that rising unemployment is what is 
contributing now to probably more and more of the foreclosure 
issues that we are seeing presently. So then we have the 
question, if you are going to look at loan modifications, how 
do you modify a loan for somebody who has no income or maybe 
has such minimal income that it is going to be very difficult 
for them to have a loan modification? What do you see on that 
horizon?
    Mr. Barr. Servicers generally have in place temporary 
forbearance programs for people who lose their jobs to give 
them an opportunity to get back on their feet. And I think 
there are measures we could take consistent with the program 
rules to formalize that within the program structures. So I do 
think we need to be attentive to precisely the circumstance you 
describe.
    Mrs. Capito. But in some sense, if certain servicers have a 
program in place, maybe a 3-month moratorium if you have lost 
your job, are we kicking the can down the road here, too, to 
try to help this family the best way that we can?
    Mr. Barr. I think there is a balance. I think that if the 
program goes on too long or is too generous, it is not going to 
be helpful to anybody. But if it is confined within a set 
period of time, a lot of people are going to be able to get 
back on their feet, and you want to give them a temporary 
respite to do that.
    Mrs. Capito. And finally, I would like to ask if you could 
make the committee, or at least me specifically, I am 
interested in knowing, once the trial modifications are made, 
how many are sustaining their modification? I hope it is 100 
percent. That of course is what we would all want. But what are 
you seeing in the trend? Because there could be something in 
statistics very quickly there that we could make adjustments 
to, to target our dollars more efficiently.
    Mr. Barr. As soon as we have data that we think is robust 
enough to withstand empirical testing, we are going to make 
that public as part of our regular reporting and make it 
available to the committee.
    I just want to say that although our hope would be that 
everybody can succeed, I don't think that is a realistic 
measure of success under the program. We know that some people 
aren't going to be able to make it, and I think we need to be 
realistic about our expectations in that regard.
    Chairwoman Waters. Thank you very much. Clarification, Mr. 
Barr. Did you say that servicers had forbearance for 
individuals with no income who are approaching foreclosure, 
that they were doing something to help people who have no 
income?
    Mr. Barr. What I said is many servicers have forbearance 
programs for people who are temporarily unemployed. And I do 
think it makes sense within our program to try and formalize 
that more, and that is one of the areas where I think that we 
could--
    Chairwoman Waters. Do you know of any who are doing that 
now?
    Mr. Barr. That do temporary forbearance?
    Chairwoman Waters. Yes.
    Mr. Barr. I would be happy to have our staff get back with 
your staff with particular examples.
    Chairwoman Waters. We work with them every day, and we 
haven't found any yet. I would certainly like to talk to you 
about that. But, meanwhile, let me move to Mrs. Biggert for 5 
minutes.
    Mrs. Biggert. Thank you, Madam Chairwoman. My question is 
for Mr. Stevens.
    Do you believe that the resources at FHA are enough or do 
you think that there is a need, particularly in the area of 
administrative funding, staff increases, and/or extended 
information technology capabilities to accomplish FHA's 
oversight needs?
    Mr. Stevens. I appreciate the question. I have stated 
previously and others have as well that we do believe some 
additional investment is needed from a resource standpoint, 
particularly in the area of technology as you have mentioned, 
to help bring our systems into line.
    Mrs. Biggert. How long will that take? Because we have been 
worried for several years on this technology issue and it 
hasn't been resolved in HUD, or it is not completed yet. Is 
this going to be in time to do all of the things that are 
necessary to do now?
    Mr. Stevens. Well, that is a great question. I think at the 
end of the day there is some deferred investment into systems 
into FHA in general. And there is a budget request in. Budget 
requests I know have been made in past years as well. But we 
are hoping, and we have an initiative, a transformation 
initiative right now in HUD. We have mapped out the specific 
investments that we would like to see to upgrade the systems 
and perhaps replace systems in their entirety. And it won't 
happen overnight. These are programs that will stretch out over 
a number of years in order to get them fully implemented.
    Mrs. Biggert. The Administration plans call for servicers 
to determine if borrowers are eligible for the HOPE for 
Homeowners programs. It requires the lenders to write down to 
90 percent of the original mortgage the loan to value ratio, 
and then to pay a 3 percent insurance premium. And often I 
think there is a need for servicers and lenders to have the 
flexibility as they go forward to help these borrowers. Do you 
think that the HOPE for Homeowners program is too restrictive? 
Should there be more flexibility?
    Mr. Stevens. Well, we certainly weren't satisfied with the 
results from the first HOPE for Homeowners. We are just now 
rolling out the revised improvements that were recently 
legislated, and those will be introduced to the market here in 
the very near future. Whether it has gone far enough, it is too 
soon to tell. I think there are some improvements to it; I do 
believe that it is likely that we may recommend some additional 
improvements to make it more effective.
    Mrs. Biggert. Thank you. And then, Mr. Barr, coming back, I 
think what we are all concerned about is this loss of jobs and 
then trying to do something to help those people. And I think 
that is going to grow as we see this. So by what standards 
should we judge the effectiveness of the Administration's 
Making Home Affordable plan? If a borrower receives a loan 
modification and has lower payments but builds no equity over 
the modification terms, can the plan be deemed successful?
    Mr. Barr. Well, I think the basic structure of the 
modification is designed to improve the borrower's equity 
position from the moment of modification. It does that in two 
primary ways. The first is the basic requirement that the 
structure of the mortgage amortize. And the second is the basic 
requirement that, a basic incentive for the borrower to keep 
paying on time. As long as the borrower pays on time, the 
government will provide an additional small monthly reduction 
in their principal. So it is a way of keeping borrowers in the 
program, providing further incentives, building up equity over 
time. And I think both those measures are important elements of 
the program.
    Mrs. Biggert. The borrower thinks they are going to be able 
to make those payments, but let's say they get into trouble and 
they get behind 1 or 2 or 3 months. What happens then, and how 
does that affect the equity?
    Mr. Barr. Under our program, we made a basic decision that 
borrowers were being given a second chance under the 
modification program; and if they don't perform under that 
second chance, they don't have the right to continue to 
participate in the program.
    Mrs. Biggert. So if they fall 1 month behind, they are out 
of the program?
    Mr. Barr. Not 1 month behind. But if they fall seriously 
delinquent, then they are not in the program and not eligible 
to receive these further reductions in equity.
    Mrs. Biggert. Is that true for all the servicers, then? 
They have to follow that rule?
    Mr. Barr. The servicers would prefer a rule that is even 
less generous to the borrowers.
    Mrs. Biggert. I yield back.
    Chairwoman Waters. Thank you very much. Mr. Miller.
    Mr. Miller of California. Thank you, Madam Chairwoman. I 
have really enjoyed the testimony today. This is an unusual 
market. I have been in it almost 40 years as a developer, and I 
have never seen anything like this and I applaud you for what 
you are trying to do, because it is like you are chasing a tail 
that doesn't exist trying to find it. We have gone through the 
first round of foreclosures, which are the subprimes, and that 
still continues. But you are having a second round today that 
you are having to deal with. That is people who had good homes, 
good loans, very good business people who are having serious 
trouble, people who lost their jobs and are just unable to make 
their payments. And negative home equity has been a huge 
problem.
    I introduced a bill, and I want to thank Chairman Frank and 
Spencer Bachus for agreeing to cosponsor, that allows banks to 
take the foreclosed properties and lease them for up to 5 
years, or give a lease option to buy to a former homeowner or 
anybody who wants to, to try to get the distressed property 
sales off the market. The problem you are having and we are 
having in California, California has on distressed property 
sales about 82 percent of the houses in the market are 
distressed. In L.A. County, it is about 55 percent. Even in 
Orange County, California, which is a robust housing market, 
you see about 45 percent. We are trying to chase the bottom of 
a marketplace that you can't get to. And the purpose of the 
bill I introduced is to try to allow the marketplace to find a 
reasonable bottom and start to work its way up, which would 
help you and your situation trying to deal with individuals who 
can't make their payments. I applaud you on the loan 
modification efforts you are attempting, but I want to 
highlight the fact that those are voluntary on your part.
    My good friend, and I have great respect for him, talked 
about bankruptcies and applying to the residential marketplace. 
And the problem I have with that is lenders in good faith make 
a loan to individuals they encumber by a deed of trust which 
the lender holds at that point in time. And allowing a 
bankruptcy judge to arbitrarily have the right and go in and 
restructure that bilateral contractual agreement between the 
lender and the buyer I think could have horrible consequences 
in the long run, because it puts the lender in a situation 
where they believe they are making a loan that they can secure, 
a residential structure or whether it be a commercial or 
industrial, it doesn't matter. And if that default occurs, they 
have the right if they want to voluntarily restructure it, but 
they also have the right to secure their asset that they have 
made their loan on. And I think--and with great respect to my 
good friend, because I have great respect for him and he knows 
that. I just think in the long run we are going to create great 
harm to the lending industry because a lender, whether it be a 
mortgage broker, a bank making this loan--
    Mr. Green. Would the gentleman yield?
    Mr. Miller of California. I would be happy to.
    Mr. Green. Thank you. We currently allow contracts that are 
for automobiles to be restructured. We currently allow 
contracts for farmland to be restructured. We currently allow 
contracts for your second home, your third home, your fourth 
home, your fifth home, anything beyond your first home, to be 
restructured. I would just add equality to the equation, and 
allow first home buyers to have the same opportunity as that 
second and third.
    Mr. Miller of California. Reclaiming my time, I respect 
your comments. I really do. I think, though, that heading in 
this direction could be very dangerous to the marketplace in 
the long run.
    But a question I have for you is, we announced a vote on a 
bill out of the House that allows banks to basically take 
properties back, enter as option to buy, or they can hold them 
off the marketplace and lease them for 5 years to allow the 
market to create some form of stability. What is your opinion 
as to that?
    Mr. Barr. Representative Miller, I haven't read the 
legislation. I need to focus--I think conceptually there are 
attractive features to--in the short term to that kind of 
approach. I think that in normal economic times the basic 
approach of the regulatory community is the opposite for 
reasons that you know--you know far better than I do--in terms 
of worrying about forbearance and managerial and operational 
capacity and other factors.
    The question is, in the short term does it make sense to 
have those kinds of approaches? I am attracted conceptually. I 
think that the--
    Mr. Miller of California. I don't expect you to have a firm 
opinion. But you know how mark-to-market applies to banks in 
their dealing with distressed properties. They have additional 
set-asides required based on the principals. If we can get the 
homes off the marketplace and legally allow these lenders to 
take those nonperforming assets and make them performing assets 
through leasing them, I think it puts the lenders in a much 
better financial situation and I think it removes a tremendous 
amount of stress and pressure on a down-sliding market.
    I will let you continue.
    Mr. Barr. So I think that, again, I am conceptually 
attracted, given the extraordinary circumstances we are in. 
Again, not in normal times. In normal times, you wouldn't take 
that kind of measure at all.
    Mr. Miller of California. Five years to allow this market 
to turn around.
    Mr. Barr. Well, I think in the particularly strict 
financial circumstances we are in now, it is worth considering 
that kind of approach, and I think the concern would be that 
some financial institutions have the operational managerial 
capacity, the expertise to do that well, but other firms lack 
such structures.
    Mr. Miller of California. I agree.
    Mr. Barr. You would want to make sure that if you took that 
approach, it was carefully vetted with the supervisors of those 
institutions and there were no kind of blanket-policy 
permissiveness, rather really quite institution-focused--
    Mr. Miller of California. No. I--
    Mr. Barr. --approach. So I think there is room for that 
within those set of parameters.
    Mr. Miller of California. Thank you. I yield back.
    Chairwoman Waters. Thank you.
    Ms. Kilroy.
    Ms. Kilroy. Thank you, Madam Chairwoman. I appreciate it.
    It's interesting to note that as foreclosure rates continue 
to rise--and they are continuing to rise in my community which 
has been hit so hard by high foreclosure rates over the last 8 
years--to see that continue to go on and yet to see a very slow 
pace of the Help for Homeowners Program being implemented in 
the district. And my district office gets calls on a routine 
basis from homeowners who have tried to get help from the 
program and tried to get help from their banks and are facing 
delays or denials or higher payments from the program.
    I want to know if your office has any benchmarks or 
standards that you are holding the mortgagers to or 
particularly those who have taken TARP funds as to how many or 
what percentage of the borrowers qualify for this program 
should be getting help from this program by this point in time. 
What's the standard here?
    Mr. Barr. Let me say a few words about that, and maybe Mr. 
Stevens would like to add a note, too.
    I said at the outset that we recognize the programs take a 
period of time to ramp up. We are on target to hit the goal for 
the program that we set of hitting 500,000 modifications, a 
half million modifications, by November 1st. But servicer 
performance is uneven. It is uneven among servicers. There is 
also geographic--a likely geographic unevenness as well. 
Servicers need to do a better job of reaching out to borrowers 
and finding the eligible borrowers.
    We have in place a second-look process that Freddie Mac has 
just instituted on our behalf, launched last month to look at 
loans that are being denied to make sure that eligible 
borrowers are not being excluded from the pool and also to 
check the eligible pool to make sure that borrowers in that 
pool are being offered modifications. There is more that we 
could do in this regard, but I think we are on the right track.
    Mr. Stevens. Just one comment that I would add, and I think 
one of the common foreclosure numbers that gains a lot of 
publicity are the RealtyTrac numbers. We were looking at the 
previous month's numbers, and when you break down the numbers, 
they show an aggregate amount of, say, 350,000 homeowners 
received some sort of notice of foreclosure in that month's 
period. If you break it down, a large portion of those are 
first notices; a large portion of those are second notices that 
received a first notice the previous month.
    In last month's numbers, the number of homeowners who 
actually had their homes put into REO, into foreclosure, was 
under 100,000. And I would say that one of the positive signs 
we are seeing is that the current ramp rate of the HAMP 
program, those entering the modification period, is exceeding 
the actual inventory coming into foreclosure on a run-rate 
basis. It isn't dealing with the enormous inventory issue yet. 
It is not reducing it in a significant way. But we do believe 
that the program is keeping pace with new foreclosures coming 
into that market. So I think that is a very positive sign about 
the program.
    I mean, the question we ask is, will the program sustain 
itself? Will it cover a broad enough percentage of the 
population in real--ultimately, in real numbers to be 
impactful? What will be the impact ultimately when some of the 
other large servicers who are slower to ramp up their call 
center capabilities as they do so?
    And we are getting positive signs from some of the larger 
servicers that give us reason to suspect that the numbers 
should increase, at least in the short term, as more of the 
servicing industry gets online here and gets behind the HAMP 
program.
    So the duration questions are real, questions about option 
ARMs are real. There are a lot of other issues. Unemployment is 
a real concern. But in terms of the HAMP current process, the 
activity, we believe it is showing positive signs, at least 
exceeding the actual foreclosure rates. We will just see if 
that continues.
    Ms. Kilroy. Thank you very much.
    I yield back.
    Chairwoman Waters. Thank you very much.
    Mr. Marchant.
    Mr. Marchant. Thank you, Madam Chairwoman.
    During the recent work period--I have a major servicer 
lender in my district, and I had the servicing department come 
in to talk to me, and we spent about 2 hours talking about the 
problems that they were having implementing this program. In 
this case, they are lenders and the servicers; and many of the 
loans that they service, they make. So they have a strong 
incentive to work these loans out.
    Their overall sense of why the program--the drop between 
the 570,000 and the 360,000-- 570,000 people have been offered 
a modification. Of those, only 360,000 have said, yes, we will 
accept that modification.
    I guess we should know the number of people who tried to 
enter the pipeline that the 570,000 was derived from. Is that a 
million? Is that that one out of two? They said that they are 
getting three to four calls and inquiries per finding a person 
that actually they can put into the pipeline. That's number 
one. They find that they have spent far in excess of the $1,000 
that they are being offered to modify these loans.
    They are also finding out that there is a new phenomena and 
dynamic among consumers now, and I heard this discussed a 
couple of nights ago. If the modified payment does not allow 
them to continue to make their credit card payments, to 
continue to make their other debt payments, they in many 
instances are making the decision not to make a mortgage 
payment.
    In traditional terms, we think that the first thing that 
people are going to make is their mortgage payment and then all 
other; and what they are finding is that, when they are 
recalculating these mortgages, their other debt ratios in many 
instances are 60, 70 percent, and the people simply, even after 
every one of these modifications that have been offered here, 
the servicer decides that there is over a 50 percent chance 
that even if we modify in this program, these people are not 
going to make their loans.
    So the incentive that it appears that they have to modify 
it and get $1,000 and then be paid back for every year, they 
are looking at these loans and saying, I am getting four phone 
calls. Two of the people get to step two or three. One of those 
two gets into the modification process, and then half of those 
people aren't going to make their payments under the 
modification. And the $1,000 isn't enough and the incentive 
programs that are offered in this just aren't enough because of 
what they are experiencing.
    Now, since they are the lender, they may want to modify the 
program in spite of all that. But this is a major company. This 
is what they are experiencing. I don't know if that is what 
they are telling you, but they are telling their Congressman 
this.
    The people--and I will end on this. The danger that I see 
in resurrecting the discussion about bankruptcy and the ability 
to mitigate the debt in bankruptcy is we have a great number of 
borrowers now that, if we begin to send the signal that that is 
a possibility again, we will have people who will make the 
decision to stop making their payments on their homes and wait 
for that solution.
    That's my objection to resurrecting that idea, and I can't 
believe that it does not--it would have a negligible effect on 
HUD. I just can't believe that answer it will have a negligible 
effect on HUD.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you.
    Mr. Himes.
    Mr. Himes. Thank you, Madam Chairwoman, and I thank the 
Assistant Secretaries for being with us today. Thank you for 
your hard work in addressing one of the more challenging 
aspects of our financial crisis.
    I won't take a lot of time. I just want to recount 
something that I heard quite a bit in the last 5 weeks as I was 
in the district. In between those rare moments when I could 
turn the discussion off of health care reform, I heard very 
consistently what I know you hear as well, which is just a 
great deal of frustration with the pace with which these 
programs have actually addressed the real needs of people.
    And of course you understand this here, targeting with the 
financial institutions, 500,000 modifications started by 
November, and of course we all know that the estimates are in 
the next 4 years, we may see as many as 8 million properties 
enter into foreclosure. The net result of that, which is felt 
very keenly and very pointedly by somebody like me, is that we 
are really striving to help 1 in 16 people who are in 
households that are in a lot of trouble.
    So I don't have a question, but I did want to convey the 
intensity, again amidst the intensity of the health care reform 
debate, of the sentiment in my district of how the government 
really could do more.
    And I know you are working very, very hard, but I would 
just urge big thinking. Housing was at the core of the crisis, 
and as much as I applaud the very tough and good work that you 
are doing, the remedy at this point is not adequate to the 
magnitude of the challenge.
    Mr. Barr. Thank you.
    And if I could just say a couple of words about that, I 
think that people may lose sight of the breadth of the housing 
programs that are out there. The program Making Homes 
Affordable with respect to loan modifications is one important 
piece of that. The 500,000 loans we are on track to hit by 
November 1st obviously is part of a larger pool of 3 to 4 
million loans we have to reach under the program.
    In addition to that, we have added flexibility to Fannie 
Mae and Freddie Mac to do refinancing; 2.7 million households 
have refinanced since the announcement of those flexibilities. 
We have additional funding supporting the capital base, if you 
will, of Fannie Mae and Freddie Mac to ensure market stability. 
Treasury and the Federal Reserve's purchases of mortgaged-
backed securities are ensuring liquidity in the market. 
Together with FHA, Fannie and Freddie--Fannie, Freddie, and FHA 
are providing the only mortgage financing effectively we have 
in the country today. Without the government initiatives from 
FHA and support for Fannie Mae and Freddie Mac, we would not 
see mortgage financing occurring. So there has been an enormous 
amount of energy focused on intervention in the home finance 
system to give people a way of staying in their homes, of 
refinancing, of having affordability.
    We can do better. We can do more. We need to do more. But 
let us broaden the lens a little bit.
    Mr. Himes. Thank you. I appreciate the observation, and I 
know much is being done.
    But, again, I just wanted to report back on what I heard in 
5 weeks in the district and just remind all of us that many of 
these institutions--and I applaud the work that was done by 
everyone in the government to really push the banks over the 
course of July to really accelerate this. And, of course, this 
is not simple. We don't want to push the banks into doing 
imprudent things. But I come back to the fundamental truth that 
many of these banks that perhaps haven't acted quite as fast as 
we would like them to act exist solely due to the munificence 
of the American taxpayer. So I would just urge you to keep 
steeling the spine with respect to really urging them to, when 
prudent, to just act as fast as possible to alleviate the very 
real pain that my constituents are feeling. So thank you for 
your efforts.
    Madam Chairwoman, I yield back the balance of my time.
    Chairwoman Waters. Thank you very much.
    Mr. Clay.
    Mr. Clay. Thank you so much, Madam Chairwoman.
    Thank you both for being here today.
    According to your testimony, Mr. Barr, the Treasury asked 
Freddie Mac to devise a second-look process beginning on August 
3rd in which Freddie Mac will audit a sample of MHA 
modification applications. How will the Treasury ensure that 
the sample is a cross-representation of actual borrowers 
seeking MHA modifications?
    Mr. Barr. We have asked Freddie Mac to do a sample audit 
not only of the denied borrowers but also of the eligible pool 
at each institution, and Freddie Mac in the first instance will 
be doing that analysis. That analysis will be made available to 
us. We will be checking it. We will be ensuring that it is 
appropriately designed, and we will be gathering the 
information they provide to us to help us inform our relations 
with individual servicers as well as to spot program design 
flaws that we need to correct.
    Mr. Clay. Just describe for us the provisions of the 
second-look process. What does it test for and how and what 
documents are required to be submitted?
    Mr. Barr. The second-look process is designed to determine 
whether any of two things happen: whether, first, a borrower 
who was eligible was inappropriately denied a modification; or 
second, that a pool of borrowers who ought to have been brought 
into the modification system for a look aren't even being 
looked at. And in both instances, the question is, given the 
characteristics of the borrower and the loan, why were they 
denied or not looked at? If there are individual servicer 
problems, those will be addressed in an individual servicer 
level corrected at that level; and if there is a systematic 
problem, we can bring it into improved program design overall. 
So we will be looking at using the full range of audit tools to 
make sure that happens.
    Mr. Clay. And are servicers given notice before they are 
audited? Are they given prior notice and--
    Mr. Barr. There are two separate things. There is a second-
look process with respect to being sure that borrowers are not 
inappropriately denied access to a modification. There is an 
addition to that, a broader compliance effort that Freddie Mac 
puts in place--has put in place for us that includes both 
announced and unannounced visits with respect to the servicers.
    Mr. Clay. I see. Thank you for that response.
    Mr. Stevens, according to your testimony, Administration 
officials have detailed plans to take three important steps to 
improve the program's performance, including public reporting, 
setting more operational metrics, and developing a second-look 
review process. Please describe each step and how it will help 
improve quality control and performance of the program.
    Mr. Stevens. Congressman, the steps that were outlined in 
my comments were in support of the initiatives that Mr. Barr 
has already spoken about. It is the same second-look process. 
The reporting is the report that--actually, a copy was issued 
today that was released, and it is the scorecard that is used.
    Mr. Clay. How will these steps further incent servicers to 
perform better? How do you think--
    Mr. Stevens. I think it's having a direct impact. The 
meeting that was held some weeks back in Washington with all 
the servicers that both Mr. Barr and I attended and some people 
who will be on the next panel attended as well, it clearly 
highlighted the impact of those that had first applied the 
modification terms in their operations against those that 
hadn't. Best practices were discussed, a clear understanding 
that there would be a strong inspection process and 
expectations about hitting this goal. There was consensus in 
the room at the end of the meeting that, if there are no more 
issues on the table, everybody is on board to move these things 
forward.
    And I will tell you, for some of the larger servicers which 
will impact the numbers, while they may have been slow to build 
up their operations, I believe and I hold these senior 
executives who have spoken to us and I hold them at their 
integrity in their communication to us even in recent meetings 
this past week, that they are ramping up and they are 
aggressively concerned about the report card showing them in a 
worse light than their peer.
    So I think from an intended effect for the scorecard--Mr. 
Barr may have some additional comments--I think it is having, 
at least at this point, a desired impact. And there is a lot 
more detail about who came on first, the processes they used, 
some of the issues involved. But I think at the end of the day 
this kind of scorecard really helps benchmark servicer against 
servicer, and nobody wants to be a low performer on that 
scorecard.
    Mr. Clay. I see.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. We have no more members who wish to 
raise questions of this panel, so I would like to dismiss this 
panel, and we will reserve the right to ask further questions 
in writing.
    We will now call on the second panel.
    Mr. Barr. Thank you very much.
    Mr. Stevens. Thank you.
    Chairwoman Waters. Our first witness will be Mr. Mark 
Calabria, director of financial regulation studies, the Cato 
Institute. Our second witness will be Ms. Mary Coffin, 
executive vice president, Wells Fargo Home Mortgage Servicing. 
Our third witness will be Ms. Alys Cohen, staff attorney, 
National Consumer Law Center. Our fourth witness will be Mr. 
Jack Schakett, mortgage executive, credit loss mitigation 
strategies, Bank of America. Our fifth witness will be Ms. 
Molly Sheehan, senior vice president, Chase Home Lending, 
JPMorgan Chase. And our sixth witness will be Mr. Paul Willen, 
senior economist and policy advisor, Federal Reserve Bank of 
Boston.
    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 will start with our first witness, Dr. Mark Calabria.

 STATEMENT OF MARK A. CALABRIA, DIRECTOR, FINANCIAL REGULATION 
                    STUDIES, CATO INSTITUTE

    Mr. Calabria. Thank you, Chairwoman Waters, Ranking Member 
Capito, and distinguished members of the subcommittee. I thank 
you for the invitation to appear at today's important hearing. 
I am Mark Calabria, director of financial regulation studies at 
Cato.
    My testimony today will address two specific questions, the 
first of which is, why have the current Administration and the 
previous Administration efforts along with those of the 
mortgage industry to reduce foreclosures had so little impact 
on the overall foreclosure numbers? My second question that I 
am going to try to answer is, given what we know about the 
first question, what policy options should we look at? What 
policy options do we have?
    My short answers to the first question of why previous 
efforts have not worked well is that these efforts have largely 
misdiagnosed the causes of mortgage defaults. An implicit 
assumption behind the HOPE NOW program, behind FDIC's IndyMac 
model, and behind the current Administration efforts is that 
the current wave of foreclosures is almost exclusively the 
result of predatory lending practices and exploding adjustable 
rate mortgages where payment shocks upon the reset caused 
mortgage payments to become unaffordable.
    The simple truth is that the vast majority of mortgage 
defaults are being driven by the same factors that have always 
driven mortgage defaults, generally a negative equity position 
on the part of the homeowner coupled with a life event that 
results in substantial shock to their income, most often a job 
loss or reduction in earnings. Until both of these components--
negative equity and negative income shock--are addressed, 
foreclosure rates will remain at highly elevated levels.
    If payment shock alone were the dominant driver of 
defaults, then we would observe most defaults occurring around 
the time of reset, specifically just after the reset. Yet this 
is not what has been observed. Of loans with reset features 
that have defaulted, the vast majority of defaults have 
occurred long before the reset.
    Additionally, if payment shock were the driver of default, 
the fixed rate mortgages without any payment shock would 
display default patterns significantly below those of 
adjustable rate mortgages. When one controls for homeowner 
equity, credit score, and other characteristics, the 
differences in these mortgage products largely disappear. This 
high level of foreclosures--
    Chairwoman Waters. Will you speak a little bit slower so we 
can keep up with you?
    Mr. Calabria. Yes.
    Chairwoman Waters. Thank you.
    Mr. Calabria. This high level of foreclosures has 
understandably left all of us frustrated and looking for 
answers.
    To be effective, I think these answers have to be grounded 
in solid analysis. So I would suggest, first of all, that the 
Administration, Congress via GAO, CBO, should present detailed 
estimates of how many foreclosures are driven by what causes, 
and how many of those foreclosures can be reasonably avoided.
    I would say I am not sure if we could measure the success 
of a program without having a baseline for what that success 
should be. And currently, whatever the number of modifications 
that are occurring, it is very hard to tell whether that is 
anywhere near the right level of modifications.
    I also want to note, before discussing specific policy 
suggestions, we should keep in mind that approximately 50 
percent of foreclosures are currently driven by job loss. So I 
would say the most significant way we could reduce foreclosures 
is to foster an environment that is conducive to private sector 
creation.
    I think it is also important, in addition to focusing on 
owners currently in foreclosure, to reach families before they 
fall behind. For instance, about 4 million of the jobs that 
have been lost since the start of the recession have been in 
mass layoffs. These represent a double shock to the household. 
Because you not only have a job loss, you also have a shock to 
the housing market because a major employer is downsizing.
    But as damaging as mass layoffs can be, they do have an 
advantage. We know about them ahead of time. The Department of 
Labor collects data on mass layoffs. Workers get notice. But 
despite the strong connection between mass layoffs and 
foreclosures, there is very little coordination between the 
Department of Labor and HUD.
    One of the things we can do and should do is, when you know 
there is going to be a factory closing in a town and you know 
the last date that the workers are there, you can get 
counselors in there because you know that some significant 
percentage of these workers are going to have problems within 
the next 6 to 8 months. Yet there is very little of that done. 
So I would greatly encourage the pushing of appropriated 
dollars already on housing counseling funds toward factories 
and workers experiencing mass layoffs.
    I think we could also look at encouraging bank regulators 
to give lenders more flexibility to lease out foreclosed homes 
to their current residents. Typically, banks come under 
considerable pressure from the regulators not to engage in 
long-term property leasing or management as these activities 
are not considered a core function of banks. So in addition to 
many owners who may wish to stay in their home as renters, we 
know that approximately 20 percent of foreclosures are 
occurring on renter-occupied properties. So, in many cases, if 
these renters want to continue to pay their rent and we allow 
them to actually stay and there are many banks that may prefer 
to keep them as renters and keep that income stream going 
rather than to proceed to a foreclosure sale.
    I would also stress that I think we need to focus our 
resources on those households most in need, those households 
who, but for some intervention, will lose their home. And I 
make this point to say that, broadly, lots of our programs--for 
instance, the GSE refinance programs--are aimed at households 
who are not facing foreclosure but simply cannot refinance due 
to being underwater on their mortgages. We should be downsizing 
those programs because they draw off important resources that 
are limited both to servicers and lenders. So we have spent a 
lot in terms of the programs focusing on low-hanging fruit 
rather than putting our resources on those most in need.
    Wrapping up, I will conclude with my previous observation 
that the current foreclosure efforts haven't been successful 
because they have misdiagnosed the problem. We need to focus on 
negative equity. We need to focus on some sort of income shocks 
via job loss to households. Until we deal with those, we will 
both see very high levels of foreclosures going forward.
    Thank you.
    [The prepared statement of Mr. Calabria can be found on 
page 63 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Coffin.

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

    Ms. Coffin. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, I am Mary Coffin, head of Wells 
Fargo Home Servicing.
    Thank you for the opportunity to come before this 
subcommittee today to discuss our continued commitment to doing 
everything we can to prevent avoidable foreclosures and to help 
stabilize the housing market. Wells Fargo may be a big 
corporation, but we operate with the conscience of a company 
determined to do what is right for our customers, our 
investors, and the American taxpayers.
    Since we last came before this subcommittee, much has 
changed and evolved in our economy and our efforts to assist 
struggling borrowers.
    First, we worked hard to implement the very detailed and 
evolving home affordable modification programs, which include 
different guidelines and requirements for Fannie, Freddie, 
nonGSEs, and most recently FHA borrowers.
    To handle the greater than 200 percent increase in 
borrowers requesting assistance, including the 35 to 40 percent 
who are current on their mortgages, we have hired and trained 
an additional 4,600 U.S.-based home retention staff for a total 
of more than 12,000.
    As of September 3rd, we have qualified more than 304,000 
customers for trial and completed modifications this year 
alone. As it pertains specifically to HAMP, we have offered 
78,000 customers a trial modification and we have received at 
least the first payment for approximately 44,000 of these trial 
starts.
    We have further enhanced our support systems, our training, 
and our retraining to aid our service representatives in 
appropriately communicating modification programs and 
guidelines as they continue to change and expand to help more 
borrowers.
    In addition, we have improved the ways we obtain from 
borrowers the extensive documentation the government requires 
for its programs, and we continue to work to ensure all 
documents are processed in a timely manner.
    To this point, we have asked the Treasury to meet with us 
tomorrow to discuss challenges with the Home Affordable 
Modification Programs and opportunities to make them even more 
effective.
    And most importantly, in this dynamic environment we 
continue to conduct final reviews to ensure every option is 
exhausted before a property moves to foreclosure sale. Because 
when a foreclosure happens, everyone loses.
    Wells Fargo has long adhered to responsible lending and 
servicing principles that guide our business practices. We did 
not make negative amortizing, pay option, adjustable rate 
mortgages, or subprime stated income loans, despite their 
popularity; and, as a result, we can directly attest to the 
fact that the home loans our company originated perform better 
than those loans we service but had no involvement in 
originating and/or underwriting.
    Despite widespread decreases in home values, more than 92 
percent of our customers in our entire servicing portfolio 
remain current on their mortgage payments. This is the direct 
result of our customers' efforts and our commitment to 
responsibly service all the loans in our portfolio, including 
those formerly owned by Wachovia and loans we service but did 
not originate.
    In addition, our delinquency and foreclosure rates continue 
to be significantly lower than the industry average and the 
lowest of the Nation's largest mortgage lenders. And for all of 
2008 and 2009 year to date, less than 2 percent of the owner-
occupied properties in our servicing portfolio have actually 
proceeded to foreclosure sale.
    These results would not have been achievable without the 
continued collaborative public and private sector efforts to 
inform customers of their options and the introduction of the 
new Home Affordable Modification Programs.
    While we are proud to be a part of HAMP's development--it 
is an important option--but it needs to be acknowledged that 
HAMP will not help all borrowers in need of payment relief. For 
the customers who are ineligible for HAMP and where we can 
reach affordability, we offer customized solutions. During 
June, July, and August--the same time we fully executed HAMP--
more than 83 percent of our customized modifications reduced 
payments.
    Wells Fargo is a company committed to doing what is right 
for our customers; and, to that end, I have personally spoken 
to many of our borrowers to better understand their situations 
and the experiences they are having with Wells Fargo. These 
discussions have reinforced for me how many Americans are 
struggling with changes in their personal and financial 
services including unemployment and underemployment.
    I have also learned how much they are struggling with the 
various program requirements and documentation. And in the past 
6 months, some customers have been challenged with getting 
clear, timely communication from us as the guidelines and the 
requirements for the various programs have continued to change.
    We hold ourselves to a high level of accountability for 
improving communication and returning all of our customers to 
the level of service they deserve. As servicers, we sit between 
the customer and investor, and we are responsible for doing 
modifications the right way. We also have a responsibility to 
execute these programs well for all American taxpayers by 
ensuring that customers given modifications are truly facing 
hardships and that they can afford and sustain their home 
payments after the modification is completed.
    In closing, as we have from the very beginning of this 
crisis, Wells Fargo will continue to seek innovative ways to 
address the evolving challenges facing our Nation.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Coffin can be found on page 
69 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Cohen.

STATEMENT OF ALYS COHEN, STAFF ATTORNEY, NATIONAL CONSUMER LAW 
                             CENTER

    Ms. Cohen. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, thank you for inviting me to 
testify today regarding the Making Home Affordable Program and 
its effect on foreclosures.
    I am a staff attorney at the National Consumer Law Center. 
In my work at NCLC, I provide training and technical assistance 
to attorneys across the country representing homeowners facing 
foreclosure. I testify here today on behalf of NCLC's low-
income clients and on behalf of the National Association of 
Consumer Advocates.
    For the last few months, I have been working with 
colleagues at NCLC and other organizations to promote large-
scale solutions to the foreclosure crisis. During that time, 
the pleas for help from advocates on the field on the front 
lines of saving homes have escalated both in number and in 
urgency.
    When the HAMP program was announced by the Administration 
on March 4th, hopes were high that homeowners would finally 
have the means to prevent foreclosures. Unfortunately, that 
reality has not materialized. In fact, what we increasingly 
hear is HAMP is not the core tool it should be for saving 
homes. In general, advocates find that HAMP loan modifications 
are hard to get at all and when obtained often are not 
compliant with program rules.
    Reports from the field indicate that the three servicers 
testifying today, among others, have serious HAMP compliance 
problems. Moreover, even if HAMP operated at its full capacity 
as envisioned by Treasury officials, HAMP's loan modifications 
lack the mandated principal reductions that many believe are 
necessary to stem the foreclosure tide.
    With cure rates at historic lows, more and better loan 
modifications are needed to turn around the crisis. HAMP will 
at best reduce foreclosures by one-third. It is unlikely to 
shrink the foreclosure numbers to pre-crisis levels.
    Problems with HAMP fall into two main categories: 
implementation; and design. Participating servicers violate 
HAMP guidelines by requiring borrowers to waive legal rights, 
requiring downpayments or other prerequisites to HAMP review, 
and by steering borrowers away from HAMP into other loan 
modifications that are less advantageous. Moreover, servicers 
are routinely placing homeowners in foreclosure or proceeding 
to a sale without reviewing the homeowner for HAMP.
    The design of the program hampers homeowners' ability to 
hold servicers accountable and to obtain sustainable 
modifications. The net present value test, which is the primary 
basis upon which a modification is granted or denied, is not 
available to the public. Homeowners have no ability to question 
whether a servicer's analysis is based on accurate information.
    While homeowners are seeking modifications, servicers often 
continue the foreclosure process, and pursuing both tracks 
means that servicers have little incentive to prioritize 
modifications and homeowners face increased fees that are then 
capitalized into any eventual loan modification.
    While homeowners in bankruptcy technically are eligible for 
the program, the fact that servicers have discretion about 
whether to offer modifications to these homeowners has resulted 
in almost total removal of this option.
    The lack of mandated principal reductions under HAMP raises 
questions about the long-term sustainability of the 
modifications. Homeowners who could normally refinance their 
way out of a lost job or sell their home in the face of 
foreclosure are denied both options when they owe more on their 
home than it is worth. Without principal reduction, homeowners 
who lose their jobs, have a death in the family, or otherwise 
experience a drop in income are more likely to experience 
redefault and foreclosure.
    Creating affordable and sustainable loan modifications for 
distressed homeowners is labor intensive. It is no surprise, 
then, that servicers continue to push homeowners away from HAMP 
modifications or delay the process substantially.
    In addition, servicers' profit is directly linked to the 
principal of mortgages they service and the timing for writing 
down loans. Both motivate servicers away from offering 
principal reductions. Moreover, advances paid by servicers are 
more easily recovered after a foreclosure rather than a loan 
modification, tipping the scales away from modification.
    While initial loan modification numbers are up, compliance 
with HAMP by all reports is still quite spotty, and many people 
who appear to be qualified are not getting a chance to receive 
the only type of help that may save their homes.
    Congress should pass legislation requiring loan 
modification offers to qualified homeowners where such 
modifications are more profitable to investors than 
foreclosure. It also should consider further reforms to the 
servicing industry. Loss mitigation in general should be 
preferred over foreclosure; and, as the chairman noted, that is 
needed for homeowners with loans they never could afford and 
for those facing job loss.
    H.R. 3451, recently introduced by Chairwoman Waters, 
reflects these basic goals of prioritizing loss mitigation, 
saving homes through loan modifications, and reforming how 
servicers do business.
    Congress also should adopt court-supervised mortgage loan 
modifications which would sidestep many of the structural 
barriers in the servicing industry that today are preventing 
mass loan modifications from occurring.
    Congress also should support mediation through funding and 
the establishment of standards. Congress soon should recognize 
that voluntary measures on their own by entities that profit 
from homeowner default even with incentives will not lead us 
out of this crisis.
    Thank you for the opportunity to testify before the 
subcommittee today. We look forward to working with you to 
address the challenges that face our Nation's communities.
    [The prepared statement of Ms. Cohen can be found on page 
79 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Schakett.

  STATEMENT OF JACK SCHAKETT, MORTGAGE EXECUTIVE, CREDIT LOSS 
             MITIGATION STRATEGIES, BANK OF AMERICA

    Mr. Schakett. Madam Chairwoman, Ranking Member Capito, and 
members of the subcommittee, thank you for the opportunity to 
update you on Bank of America's efforts to help responsible 
homeowners stay in their homes.
    I am Jack Schakett, credit loss mitigation strategies 
executive. I report to home loans president, Barbara Desoer, 
and have responsibility for foreclosure prevention programs for 
our mortgage servicing portfolio of nearly 14 million loans.
    As the country's largest servicer, we are a major partner 
in the Administration's Home Affordable Modification Program 
and understand the responsibilities that come with that. We are 
committed to helping the Administration achieve its goal of 
500,000 trial modifications by November 1st. Bank of America is 
working to transition 125,000 at-risk loans into trial 
modifications as a part of that goal. As a demonstration of our 
growing momentum, in August, we doubled the number of trial 
modifications that have been started.
    Throughout this historic downturn, Bank of America has 
extended credit to drive economic growth and worked to develop 
financial solutions for our customers. For example, we are one 
of the first lenders to leverage the Administration's refinance 
program; and, to date, we have completed refinancing of the 
program to more than 74,000 homeowners. Before HAMP, we were 
one of the first to implement a national homeownership 
retention program.
    Through our national program and through other efforts, 
Bank of America completed loan modifications for approximately 
170,000 customers from January to July of 2009, compared with 
230,000 modifications for all of 2008. We are now working hard 
to help ensure HAMP's success and have established a sizable 
infrastructure to handle customer demand and program details. 
Significant resources have been devoted to this effort, 
including expanding our default staff to more than 11,000, a 55 
percent increase since the beginning of the year.
    The HAMP program is now the first loan modification 
solution we consider in our home retention efforts. For our 
customers who do not qualify for HAMP, they still benefit from 
the availability of multiple programs that Bank of America 
continues to offer.
    Our recent results reflect our conversion to HAMP as the 
centerpiece of our home retention efforts. As previously noted, 
we have doubled the number of customers with the trial 
modification in 1 month from approximately 28,000 in July to 
more than 68,000 through the end of August. In that same 
period, we have also increased the number of offers extended 
under HAMP to more than 135,000.
    Importantly, as we ramped up, we placed on hold any 
foreclosure sale for borrowers who may be eligible for HAMP. 
Those holds remain in place during the time that it takes us to 
both contact and evaluate the borrower and throughout the trial 
modification period.
    With that said, we continue to critically look at our own 
loan modification process. Three areas of particular focus: 
One, how can we make the process more customer friendly and 
responsive? Two, how can we more efficiently handle customer 
documentation? And, three, how can we keep customers better 
informed throughout the process?
    In addition, there are other challenges we continue to 
confront in our efforts to help as many homeowners as possible 
realize the benefits of HAMP. Two of the most significant 
hurdles are our customers not providing required information 
and a lack of a borrowers' responsiveness to our outreach 
efforts.
    In an effort to improve our outreach and close this gap, we 
have ramped up activity through traditional avenues such as 
mail, telephone, and participation in community events. Since 
January, we have participated in more than 167 community 
events.
    We have also partnered with three national nonprofits in 
the creation of the Alliance for Stabilizing Communities. We 
have provided $2.5 million in support for this national 
coalition and their work to hold 40 housing rescue fairs over 
the next 2 years in 24 communities hardest hit by the 
foreclosure crisis.
    Regrettably, there are limits to what the current programs 
can achieve. Unemployment, lack of interest in remaining in the 
property, and other eligibility issues are current impediments 
for qualifying for HAMP modification. With unemployment still 
near 10 percent, even the most ambitious long-term modification 
program will not be able to assist borrowers who have no 
ability to make a reasonable mortgage payment. To address this, 
we began exploring with the Administration methods for allowing 
us to responsibly offer current unemployed borrowers a 
temporary solution to stay in their homes, followed with a 
long-term solution after they obtain a job.
    My written statement provides further details on the 
opportunities we still have to improve the effectiveness of the 
program.
    The entire mortgage servicing industry is racing against 
the clock to stem the tide of foreclosures and home loss. We 
fully understand the urgency and will never be satisfied that 
we have done enough until the country is through this difficult 
cycle. I am certain my colleagues agree with this statement.
    Strong focus from the Administration has added 
substantially to our collective abilities to assist homeowners. 
Yet we understand we have a long way to go under these very 
challenging circumstances. We look forward to continuing to 
work with Congress and the Administration on these important 
issues.
    I would be happy to answer any questions you have.
    [The prepared statement of Mr. Schakett can be found on 
page 148 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Sheehan.

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

    Ms. Sheehan. Chairwoman Waters, Ranking Member Capito, and 
members of the Subcommittee on Housing and Community 
Opportunity, we appreciate the opportunity to appear before you 
today on this most important topic of helping homeowners. We 
recognize that no one benefits in a foreclosure.
    My name is Molly Sheehan. I work for the Home Lending 
Division of JPMorgan Chase as the executive responsible for 
housing policy. Chase is one of the largest residential 
mortgage servicers in the United States, serving more than 10 
million customers located in every State of the country with 
mortgage and home equity loans totaling about $1.4 trillion 
that we service. We are proud to be part of one of this 
country's preeminent financial institutions with a heritage of 
over 200 years.
    At Chase, we are investing in new business initiatives, 
people, and technology to help families meet their mortgage 
obligations. Since 2007, we have developed and expanded our 
comprehensive program to keep families in their homes, which 
has helped prevent over 730,000 foreclosures.
    We have also been working hard to help borrowers through 
the Federal Government's loan modification program. From April 
6th, when Chase began processing trial modifications through 
the MHA program, through August 31, 2009, Chase has approved 
over 144,000 MHA trial mortgage modifications. Of these trial 
plans offered, 113,000 are currently active as of August 31st 
and borrowers are making their trial plan payments.
    Together with over 88,000 additional Chase loan 
modifications, over 230,000 struggling Chase, WaMu, and EMC 
customers have received approved trial modifications through 
August 31, 2009. Another 125,000 applications are currently 
being reviewed to see if they can be modified consistent with 
these program terms.
    We have been able to reach this large number of borrowers 
by creating many avenues of communication. This year alone, we 
have opened 27 Chase homeownership centers in 11 States. To 
date, more than 42,000 borrowers have met with trained 
counselors at the centers. These centers have also mailed over 
538,000 invitations to Chase customers to come discuss their 
situation with our counselors.
    We have hosted more than 120 homeowner events to educate 
and inform homeowners about the loan modification process in 
just the past 6 months.
    We have created a dedicated Web site with information about 
our programs where borrowers and counselors can download the 
documents needed to apply for a modification. In the last 6 
months, there have been more than 2.7 million visits to Chase's 
Web site.
    We rolled out a dedicated customer hotline for modification 
inquiries that has handled almost 1.3 million calls as of 
August 31, 2009.
    In addition to reaching out to borrowers, we have made a 
number of investments in our systems and personnel to improve 
the loan modification process. We have added 1,700 loan 
counselors and 3,700 mortgage operations employees as well as 
created additional training for our staff, nonprofit counseling 
partners, and borrowers attending HOPE NOW outreach events, 
reaching hundreds of internal and external loan counselors and 
borrowers.
    We estimate that, as of August 31st, Chase is servicing 
approximately 417,000 loans that are potentially eligible for 
modification under the MHA program guidelines. Of this eligible 
population, 33 percent to date have been offered a trial plan 
as of the end of this month.
    However, much of the responsibility to complete the loan 
modification process does rest with borrowers. After being 
granted relief through a trial modification, borrowers must 
document income, hardship, debts, and other important 
information to enable underwriters to complete final loan 
modification offers that conform to MHA guidelines.
    Chase's policy is to stop foreclosure sales while reviewing 
a mortgage for loan modification and other foreclosure 
prevention steps. If a loan does not qualify for an MHA loan 
modification, we next look to a Chase modification. If these 
alternatives do not produce a sustainable modification, the 
loan is referred to loss mitigation for other types of 
foreclosure prevention techniques that are more traditional 
such as short sale and deed in lieu.
    I would be happy to discuss these alternatives as well as 
Chase's own loan modification programs with the subcommittee in 
more detail during the question and answer period.
    We are pleased to have this opportunity to be with you 
today. Thank you for your attention. I will be happy to answer 
any questions you may have.
    [The prepared statement of Ms. Sheehan can be found on page 
152 of the appendix.]
    Chairwoman Waters. Thank you.
    Mr. Willen.

   STATEMENT OF PAUL S. WILLEN, SENIOR ECONOMIST AND POLICY 
            ADVISOR, FEDERAL RESERVE BANK OF BOSTON

    Mr. Willen. Chairwoman Waters, Ranking Member Capito, and 
members of the committee, thank you for your invitation to 
testify.
    My name is Paul Willen, and I am a senior economist and 
policy advisor at the Federal Reserve Bank of Boston. I come to 
you today, however, as a researcher and as a concerned citizen 
and not as a representative of the Boston Fed, the other 
Reserve Banks, or of the Board of Governors.
    Over the last 2 years, we have searched for policies to 
help troubled borrowers avoid foreclosure. In New England, we 
at the Boston Fed have worked with banks to set up a lending 
facility to help subprime borrowers refinance into prime 
mortgages. We brought borrowers and servicers together in 
large-scale foreclosure prevention events that have served as a 
national model. In the research department, we have gathered 
and analyzed detailed loan level data to help us evaluate 
policies to ameliorate the effects of the crisis on our 
communities and on the country.
    In my remarks today I would like to focus on three aspects 
of the foreclosure crisis relevant to foreclosure prevention 
plans.
    The first is that an effective plan must address the 
problem of unemployed borrowers. Long-term loan modifications 
that yield affordable payments for borrowers but also provide 
attractive payment streams to lenders will help some but cannot 
help unemployed borrowers. Thirty-one percent of an unemployed 
person's income is often 31 percent of nothing, and a payment 
of zero will never be attractive to a lender.
    This is important because our research shows that, contrary 
to popular belief, unemployment and other life events such as 
illness and divorce, much more than problematic mortgages, have 
been at the heart of this crisis all along, even before the 
collapse of the labor market in the fall of 2008. This may seem 
counterintuitive. Life events could not explain the surge in 
defaults in 2007 because there was no underlying surge in 
unemployment or illness that year, but that view reflects a 
misunderstanding of the interaction of house price depreciation 
and life events in causing default.
    When prices are rising and borrowers have positive equity, 
detrimental life events lead to profitable sales. But when 
prices are falling and borrowers cannot pay off their mortgages 
with the proceeds of a sale, those life events lead to 
foreclosures. Thus, we did not need to see a surge in life 
events to get a surge in foreclosures but, rather, a fall in 
house prices, which is exactly what we saw.
    The second policy related finding from our research is that 
it is unlikely that a modest financial nudge to servicers will 
lead to millions of modifications that will help millions of 
worthy borrowers. In a recent paper, we showed that in the 
period 2005 to 2008, lenders gave payment-reducing 
modifications to only 3 percent of seriously delinquent 
borrowers. In addition, we show that this did not result from 
contractual issues related to securitization. Lenders were just 
as reluctant to modify loans when they owned them as when they 
serviced them for securitization trusts.
    We argued that the main reason we see so few modifications 
is that it simply isn't profitable for lenders. Modification 
benefits lenders because it helps to avoid the high costs 
associated with foreclosure, but redefault risk, the 
possibility that the borrower who receives the modification 
will default again, and self-cure risk, the possibility the 
borrower would have repaid the loan without any assistance from 
the lender, can wipe out these benefits.
    The role of self-cure here is key. About a third of the 
borrowers in our large sample are current on their mortgages or 
prepay a year after they become 60 days delinquent. An investor 
would view assistance given to such a borrower as wasted money.
    A third result from our research is that policymakers need 
to exercise care in designing foreclosure prevention policies 
that provide the right incentives for borrowers and servicers. 
A program that offers a monetary incentive to do as many 
modifications as possible and to minimize the probability that 
modified loans redefault may not in fact prevent many 
foreclosures. To see why, one must realize that the easiest way 
to ensure that a borrower doesn't redefault is to choose a 
borrower who was unlikely to default in the first place. Thus, 
a servicer could make minor modifications to millions of loans 
to perfectly credit-worthy borrowers, collect large sums from 
the government, and then collect even more as the borrowers 
continue to repay the loan.
    Taking these research results into account, we believe that 
the most effective use of government money for foreclosure 
prevention would involve direct assistance to borrowers rather 
than to servicers. Two recent proposals, one authored by a 
group of Federal Reserve economists, including me, and the 
other by researchers at the University Wisconsin, target the 
unemployed to help them cover their housing expenses until they 
get their feet back on the ground. Either plan would prevent 
large numbers of foreclosures and would be a good starting 
point for an effective foreclosure relief plan.
    We hope that these findings add perhaps unexpected insights 
to your work as policymakers and thank you again for the 
opportunity to appear before you today. I would, of course, be 
happy to address any questions you have.
    [The prepared statement of Mr. Willen can be found on page 
165 of the appendix.]
    Chairwoman Waters. Thank you all very much for being here 
today.
    I will recognize myself for 5 minutes for questions.
    Let me just precede my questions with a statement about the 
concern that all the members basically have about what appears 
to be a lack of substantial loan modifications and a lot of 
unrest by homeowners who are desperately seeking loan 
modifications.
    Now, we all recognize that many of these homeowners have 
been laid off, they may have lost their jobs, and they don't 
have the kind of income that could assist in getting a loan 
modification. What I have found is, if the income appears to be 
too low, that there is just no way for them to get help. I am 
told--and it was basically stated earlier by the Assistant 
Secretary--that some servicers are finding ways or have found 
ways to help homeowners who have lost their jobs, have been 
laid off and have regular debt and have some income through 
unemployment, very little, but that income does not appear to 
be adequate to service a mortgage. Which of you have programs 
to help those who are unemployed?
    Ms. Coffin. We do.
    Chairwoman Waters. Wells Fargo. Ms.--
    Ms. Coffin. Coffin. I am with Wells.
    Chairwoman Waters. Wells Fargo, Ms. Coffin, what do you do 
with someone who is unemployed, has been in a home for 10 or 15 
years, they want to keep their home and maybe need a few months 
before they can find another job? How do you help them?
    Ms. Coffin. We help them with the forbearance plan that was 
referred to earlier.
    Chairwoman Waters. How does it work?
    Ms. Coffin. What happens is the borrower tells us I am 
about to be unemployed. They come to us sometimes when they are 
current and want to protect their credit, also.
    Chairwoman Waters. I am sorry?
    Ms. Coffin. Sometimes it is borrowers who are still current 
and know that they have lost their job and can you help me? You 
put them on a forbearance plan, and you may set it up for 6 
months. Say we will give you a period of time where you don't 
have to make your payments while you are looking for and 
establishing income again. And then at the end of that period 
and throughout that we will communicate and work with them; and 
if they do establish income, then we have to work with them to 
provide help with those payments that were missed during that 
period. And we can do that by capitalizing them onto the loan, 
spreading them over a longer period of time.
    I would suggest that all of us here and probably other 
servicers, one of the things that we will speak to the Treasury 
about tomorrow when we meet with them is actually an 
enhancement to the HAMP which is a short-term modification. 
Because what we believe borrowers do need once they reestablish 
a job, they need longer-term help in getting past that period 
where they could not make their payments; and by a short-term 
mod, we could actually provide a 12-to-24-month period of a 
modification to a loan that then would step back up.
    Chairwoman Waters. That's admirable. In helping my 
constituents, I have not found that to be true. I can't sit 
here and say that I have not found it to be true of Wells 
Fargo, because I have worked on so many different ones, but we 
have a long list in our office mostly fitting that description 
of people who have lost their jobs.
    One of the things we did find with loan modifications in 
general was the late fees and lawyer fees that are attached to 
loan modifications for those who find themselves 6 months 
behind, some of them behind many months, and when they finally 
get in touch and they finally get to work then they are 
confronted with late fees and lawyer fees and some other fees 
that are attached onto the loan, which increases the amount of 
the modified loan. How do you handle that?
    How do you handle that? Let me just ask Mr. Schakett from 
Bank of America.
    Mr. Schakett. Yes. On the temporary forbearance plan, I 
just want to maybe follow up on that also, because I do think 
the industry--everybody has in their tool kit a temporary 
forbearance for the unemployed. But as far as how it is 
employed and how formalized it is and how consistently it is 
used, I think there is much need of improvement in that area.
    Just like we were before MHA came out for modifications, 
there were a lot of inconsistencies on what person qualified, 
and I think we ourselves at Bank of America are reassessing 
exactly how to formalize that program to make it easier for our 
counselors to know whom to offer it to. And we would target the 
customers who had a good pay history in the past, had a 
reasonable debt-to-income ratio before the hardship and for 
customers who actually showed they could handle their back-end 
debt.
    So, again, a conservative program that knows exactly who we 
could offer it to and who we couldn't I think will improve the 
situation where, for the unemployed borrowers; and as well, as 
Mary mentioned, we are going to work with the Administration to 
try to develop a program where they may be able to assist in 
the process also.
    So I can understand your concerns, that you probably hear a 
lot of times we aren't helping those customers enough; and I 
think it is because we really haven't formalized the process 
enough to actually make sure we offer it consistently from 
customer to customer. So that is an improvement needed.
    The question that you asked about late fees and other--
lawyer fees, etc., I think everybody's, at this table, policy 
is to waive all late fees, and there is no charge associated 
with the actual modification itself.
    Chairwoman Waters. I have not found that to be the case. 
Does everyone at the table waive late fees?
    Ms. Sheehan. Yes. And that is a requirement of the MHA 
program.
    Chairwoman Waters. Well, let me say--since you answered, 
Ms. Sheehan, from Chase--I have here a statement, a waiver, and 
it basically says, ``JPMorgan Chase Bank, National Association 
Successor enters to Washington Mutual Bank, has offered to try 
to qualify you for a modification--an MHA modification under 
the Making Home Affordable plan announced by the Obama 
Administration March 4th.
    ``You have declined to be considered for an MHA 
modification, opting instead to go forward with the 
modification offer made by lender to you prior to the March 4th 
announcement, the prior modification. Had you qualified for MHA 
modification, you may have been entitled to the following.''
    And you go on and talk about what they may have qualified 
for.
    ``By signing below, you acknowledge that you have been 
advised and understand the above features.''
    What is this all about?
    Ms. Sheehan. That was a form that was developed at the 
time. Prior to the implementation or announcement even of MHA, 
Chase had rolled out a significant enhancement to its own loan 
modification efforts. We were in the process of communicating 
and qualifying many, many borrowers for the Chase modification 
program at the time of the MHA announcement on March 4th.
    At that point in time, we had numerous borrowers who had 
actually been approved to close on a Chase modification, but we 
wanted to make sure before they made that decision that they 
were informed that the government program had been announced, 
but the details were not yet out.
    So that was really a disclosure form that was designed to 
advise them that they had the option to wait for MHA to become 
available and to go through a trial process, but if they chose 
to go forward with the Chase mod, they could do that.
    So it really was a form of disclosure. It does not mean 
that anyone who received a Chase modification waived any right 
in the future to a HAMP modification. I have heard that 
statement made; it is incorrect. If they found their Chase 
modification was not sustainable, they would still be eligible 
then to come back to us for a HAMP modification.
    Chairwoman Waters. Thank you very much.
    Mrs. Capito.
    Mrs. Capito. Thank you. I would like to clear up--I am 
hearing two different things here. From Ms. Coffin, I heard 
that--excuse me, Ms. Cohen--that while the modifications are 
going on, the foreclosure clock is ticking at the same time, 
simultaneously.
    Is that part of what your testimony was?
    Ms. Cohen. Yes.
    Mrs. Capito. But then I thought I heard from some of the 
other servicers that is not the case. Could you clarify that 
for me?
    Mr. Schakett, could we start with you?
    Mr. Schakett. I think you heard in my testimony that we 
have customers on foreclosure hold. I think the difference is a 
distinction of the process versus the sale.
    Every customer that we are working--any kind of workout 
process we put on foreclosure hold. So that means that we will 
not have a foreclosure sale until we complete the process. It 
does not mean that we don't actually continue to go through a 
process of foreclosure.
    For instance, we could have a customer that part of the 
process of foreclosure is to file a notice of default. We would 
still file that notice of default. So the customer starts 
seeing activity toward a foreclosure at the same time they are 
working on modifications, but we assure that no customer 
actually gets foreclosed on.
    So you kind of see a process of foreclosure going, you can, 
simultaneously with the modification, but then no customer 
actually gets foreclosed on. That is the absolute hold to make 
sure that we have a chance to complete the modification first.
    Mrs. Capito. So could there be a scenario where you are 
turned down for the loan modification, and within a short 
period of time, your property is up for sale in the 
foreclosure?
    Mr. Schakett. Yes. By giving them all the normal required 
notices in the foreclosure process, they would realize kind of 
what the dates are coming up, what the date of eviction is, 
what the date of the actual foreclosure sale is. So they would 
be aware of those dates and they would be aware, if the 
modification didn't complete, that they would live by those 
dates unless there was a reason to extend those dates.
    Mrs. Capito. So I guess, better said would be, rather than 
you are holding on foreclosure, you are actually holding on 
foreclosure sale; you are not really holding on the process.
    Mr. Schakett. That is right. We are holding on foreclosure 
sale.
    Ms. Cohen. May I respond to that?
    Mrs. Capito. Sure.
    Ms. Cohen. So there are two issues. One issue is whether 
the sales are proceeding and the other issue is whether the 
foreclosure process is moving forward.
    The HAMP program is very clear that sales should not 
proceed, and we are getting calls from all over the country 
that the sales are proceeding anyway from all kinds of 
servicers around the country. So that is one compliance 
problem.
    In addition, to the extent that foreclosure processes are 
going forward, what happens, especially in a judicial 
foreclosure State, is, the homeowner is incurring greater costs 
to litigate the foreclosure or to defend the foreclosure in 
court while they are trying to negotiate a loan modification.
    There are two problems there. One is, it is easier for the 
servicer to just go to foreclosure because they are so close to 
the sale at that point. For the homeowner, because they have 
incurred greater costs, those fees are capitalized--and I think 
Chairwoman Waters was asking about this before--the lawyer 
fees, the valuation fees, are capitalized into the principal, 
and the homeowner is less likely to be MPV positive, less 
likely to qualify for a modification because of those costs.
    So both of those are issues.
    Mrs. Capito. Does anybody have another comment in response? 
Because what I think you just told me was, if I heard this 
correctly, the foreclosure lawyer fees and other things are 
rolled into the loan modification even though the property is 
not foreclosed on.
    Is that what you are saying?
    Ms. Cohen. So if you are figuring out how much the person 
owes and essentially what the outstanding principal balance is, 
that amount is also owed; and so, if the foreclosure--
    Mrs. Capito. ``That amount'' being the foreclosure fees? Is 
that what you are talking about?
    Ms. Cohen. Right. So any amount that the servicer pays the 
lawyer to pursue the foreclosure is billed to the homeowner and 
becomes part of the principal that the person has to pay back.
    I also have to tell you that attorneys around the country 
tell me, while they are negotiating loan modifications, their 
clients routinely receive foreclosure sale notices.
    Mrs. Capito. I would imagine that is something in the 
previous panel, when they set up their protocols for 
transparency and accountability, should be something that would 
come forth with a report on that.
    So that is something we need to look at.
    Ms. Coffin. And let's make sure this is really clear. In 
the Making Home Affordable program, as you saw today, there are 
many customers who have been offered the HAMP that have not yet 
made the first trial payment. As soon as that first trial mod 
payment is made, that foreclosure proceeding stops. There are 
no foreclosure proceedings while they are making their trial 
mods and turning their docs in to us.
    Mrs. Capito. That is another question I had.
    On the trial modification, during that 3-month--it is a 3-
month trial period. If you make your payments for 3 months, 
then you go to, I guess, a confirmed loan modification. During 
that period, is that when you are still bringing all your 
documentations? Or are you not documenting all of this pre-, 
temporary loan modification?
    Ms. Coffin. It depends on which program, because Freddie, 
Fannie, the government programs all have different guidelines; 
so you have to pick the particular one.
    But in general, yes, you can verbally verify a customer 
over the phone and get them started to give payment relief to 
that home immediately through verbal verification of income. So 
they can start their trial month period. And they have three 
payments they have to make under that.
    During that period, you are collecting documentation and 
then assessing that the verification of the income matches what 
you actually receive on the documents that are presented to 
you. And the completion of the modification at the end is the 
timely payment of the three payments and also the receipt and 
the--of the verification of income through the process.
    Mrs. Capito. Well, it seems to me that one of the reasons 
we got into this problem is because we didn't have any 
verification of income or documentation as to debts or any of 
this if you look at the different loans that were put forward--
one of the reasons. Unemployment understandably is probably the 
major reason right now.
    I guess I didn't realize this, and I am kind of--I am not 
shocked, but I am kind of surprised that financial institutions 
would enter into a temporary situation without having this 
documentation. It seems to me that is just as risky.
    So it goes back to the question I asked the previous panel: 
What are we going to find after we get through the trials? How 
many people actually pass the trials and move on to a major 
loan modification?
    I don't know. That seems uncertain business to me, 
especially if you look in hindsight as to how some folks were 
able to purchase a home that maybe was way beyond their reach 
when they really weren't asked for the documentation.
    Now they are back maybe asking for a loan modification. The 
price has plummeted or at least is less than what they 
initially purchased it for. And this is going to assume in this 
economy that they haven't, unless they have been lucky or 
worked really hard and gotten all the things that are due them, 
that their income is not going to increase that much over the 
last 2 or 3 years to be able to sustain this.
    I mean, that is just a comment. Obviously, this was 
designed this way, but I find that rather surprising.
    If you are doing your own loan modification within the 
bank, your other options, are you getting all this 
documentation before you do this instead of when you are Making 
Home Affordable modification? Is there a different standard?
    Mr. Schakett. I think historically most of the servicers 
did not have a trial modification built into it and, thus, they 
required--whatever they required, they required it before the 
modification was complete. That is a true statement. Clearly, 
the MHA program does actually have a much higher documentation 
than traditionally people used for modification.
    Obviously, we have taxpayers' money at risk here, so I 
think the higher documentation standard does make sense. And 
obviously the trial modification period was a compromise to 
say, if we want to get them started sooner, you know, that you 
wanted to trust the customer to go ahead and tell you what they 
make and start the trial mod period.
    So there is some risk. It actually puts the investors in a 
situation where they could end up having a 2- or 3-month period 
where the documentation doesn't work, and you have to start the 
trial mod period over again; or they fall out of the trial mod 
completely. But it does allow more customers to be helped 
sooner by the end of the trial modification period and, thus, 
you do that work during that 3-month period versus doing it 
before.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Thank you very much.
    Mr. Green.
    Mr. Green. Thank you, Madam Chairwoman.
    Ms. Cohen--let me make sure I am addressing the proper 
person. Yes, Ms. Cohen.
    Ms. Cohen, you were giving us some intelligence on legal 
fees and perhaps some other fees. Would you restate that again, 
please? Because I think a point was missed, and I would like 
to, if I may, underscore it.
    Ms. Cohen. Sure. Thank you for your question.
    During the foreclosure process, the servicer incurs fees to 
pursue the foreclosure on behalf of the investor trust, and 
that includes hiring an attorney generally to pursue the 
foreclosure, doing valuations of the property periodically. 
Those fees are paid by the homeowner; they are essentially 
billed to the homeowner.
    If a loan modification happens sometime after those fees 
have been incurred, the principal of the loan that the 
homeowner is paying back includes those fees; and it is harder 
to afford a loan modification if you have racked up a lot of 
fees. So I have received a lot of concerned inquiries from 
folks in judicial foreclosure States saying that their 
homeowners are having a harder time getting modifications 
because of the amounts that are owed extra because of this 
process.
    Mr. Green. Will you kindly give a number? And I know that 
you may not have empirical evidence to support a number that 
would be as pervasive and taken as much as we might want, but 
some indication as to how much these fees can be, please.
    Ms. Cohen. I would say thousands of dollars. Maybe not 
$10,000, but--it might be that the servicers can tell you more 
about what they charge. But our experience is that it is maybe 
$5,000.
    Mr. Green. This is a good segue to the servicers.
    First, servicers, do you agree that the fees--for our 
purposes, let's just call them fees rather than many of the 
other things that we may. Do you agree that these fees are 
added on as principal to the buyer?
    If you disagree, raise your hand. That will be the person 
that I will talk to. Let the record reflect that we have no 
hands. So I will assume that all agree with Ms. Cohen.
    Now, if this is true, if we have these additional fees 
tacked on and if we are now proceeding to restructuring, Ms. 
Cohen, do we end up restructuring and having payments that are 
near or about the same as they were before we restructured?
    Ms. Cohen. I think it really depends on a lot of factors 
for any particular individual. One of our concerns is that it 
makes it harder to afford the modification. If your balance is 
small, you are a low-income person, you live in a low-income 
area--
    Mr. Green. Do this for me. Explain, what does it mean when 
you say it is harder to afford? What does that mean, harder to 
afford the loan modification?
    Ms. Cohen. The loan modification payments are based on 
whatever total amount you owe, and so if you--if you are poor 
and you own your house, and your house is only worth $45,000 
and you incur $7,000 extra, and you sort of add that on to the 
$45,000, your monthly payment has to cover the $45,000 plus the 
$7,000. And so the monthly payment is greater because the 
$7,000 was added to the $45,000.
    So if you are low income, you don't have a lot of money 
coming in the door to begin with, and so even $7,000 on a small 
balance makes a huge difference.
    Mr. Green. I understand.
    Let me--before I come to you, sir, I know that you want to 
give a comment on this, but I have to go to the doctor from the 
Cato Institute, and I will come back to you, if I can.
    Is it ``Calabria?''
    Mr. Calabria. ``Calabria.''
    Mr. Green. All right. Sir, I have read your paper, and I 
must tell you that while I may not agree with all that you have 
contained therein, I think it is well thought through and there 
is a line of logic that is consistent. I have great 
appreciation for consistency and logic, and I appreciate the 
way you dealt with the ARMs and other aspects of what are 
ostensible causes of the crisis.
    But your conclusion is that negative equity and income 
shock, these are the causes of the current inability to 
restructure. Is that a fair statement?
    Mr. Calabria. I would say they are the predominant causes.
    Mr. Green. Predominant causes. I can read your exact words 
if you would like me to. You indicate after--well, let me just 
start with the sentence:
    ``It is not exploding ARMs or predatory lending that drives 
the current wave of foreclosures, but negative equity driven by 
house price declines coupled with adverse income shocks.''
    You didn't use those qualifiers in your statement, but I 
respect the right that you have to use them now.
    So you would now qualify these statements?
    Mr. Calabria. I would stick predominantly, and I would also 
add, my emphasis there is on the foreclosures that aren't being 
addressed. Most of the things--
    Mr. Green. Quickly, let me ask you this. You indicate that 
these two things must be addressed before we can be successful 
with these various plans.
    Is that correct? Do you also make that statement?
    Mr. Calabria. If you want to see more than just small 
numbers of marginal success, then I would say yes.
    Mr. Green. Great.
    Now tell me this quickly. How do you address the negative 
equity?
    Mr. Calabria. I think that is the--I want to be clear. A 
diagnosis does not always lead you to very clear treatment.
    Mr. Green. I understand. But you are with the Cato 
Institute. You are a brilliant man, and I would respect having 
you give me an opinion, even though I may not agree with it.
    Mr. Calabria. Sure.
    One of the things that I think is positive in regard to the 
housing market is I believe we are through most of the 
depreciation.
    Mr. Green. My time is already up, so I have to ask you to 
go straight to negative equity. How would you address negative 
equity?
    Mr. Calabria. First of all, my point about the housing 
market is that I believe we are turning up in the housing 
market, which gives homeowners some incentives to stay in it.
    To deal with negative equity directly in terms of whether 
you do a payment modification on the part of the owner, I mean, 
I am not sure necessarily how you deal with negative equity 
without basically giving the owner equity.
    Mr. Green. And is it your opinion that what we are 
attempting to do with this program addresses negative equity?
    Mr. Calabria. I don't think it does. You are not 
necessarily putting the owner in a position where they have 
equity because even most of--
    Mr. Green. Now I am going to put you in an uncomfortable 
position, but you can handle it. Do you agree then that if a 
loan is modified such that negative equity is addressed that 
there is a greater likelihood that the borrower can pay the 
loan?
    Mr. Calabria. Actually, I don't think the negative equity 
situation has anything to do with the ability of the borrower 
to pay the loan. It has to do with the incentive of the 
borrower to stay in the home.
    Mr. Green. Then the borrower will have a greater incentive 
to stay in the home. Do you agree?
    Mr. Calabria. Yes.
    Mr. Green. But your position is that this program is not 
getting us there. So now, whether you like it or not, if a 
person goes into a bankruptcy court and receives a stay which 
will deal with all these other concerns that have been 
addressed, you get an automatic stay, any additional efforts to 
foreclose are stalled and then the loan is modified 
structurally through the bankruptcy court, wouldn't that give a 
person a greater incentive to stay in the home?
    Mr. Calabria. Well, let me start with an observation that 
if we are talking about, say, a cramdown, to qualify under 
Chapter 13 you need to come up with a repayment plan, which 
means you need income, and unemployment insurance doesn't count 
for that. So it is important to remember that a cramdown would 
not work for people whose primary problem is unemployment.
    Mr. Green. Exactly. That is off the table.
    Mr. Calabria. But even as the cramdown is structured--
    Mr. Green. Let's not talk about it as structured. Let's 
talk about a cramdown. I don't like the term ``cramdown.''
    Mr. Calabria. A modification.
    Mr. Green. Okay. A bankruptcy, a bankruptcy that allows 
restructuring such that a person who can pay--and that is what 
we are talking about, so that people won't get confused and say 
that everybody is just going to run in and get bankruptcy and 
they are going to benefit from it notwithstanding their 
inability to pay. You made a good point.
    Now, given that they can pay, would this give them a 
greater incentive to make their payments?
    Mr. Calabria. It all depends on whether--
    Mr. Green. Well, now, you just said if a person--if the 
negative equity is dealt with, that would give a person greater 
incentive to pay.
    Mr. Calabria. I appreciate that.
    My point is that modifications up until now, whether you 
look at second homes or you look at investment properties, they 
do not leave the person with equity, they leave them with zero 
equity, because they cram down the amount of the mortgage to 
the value of the house, which means you have zero equity. Even 
under the previous proposals for modification, there is no 
equity that is given. So I am only basing this off of the other 
examples that we talked about, modification--
    Mr. Green. I understand. But if they modify such that there 
is equity, such that the person can now make the payment, does 
the person have greater incentives? This is pursuant to what 
you have in your paper.
    Mr. Calabria. For the small number of people--
    Mr. Green. Okay. Any number, is that true?
    Mr. Calabria. For that--for any number of people who would 
fall into that category, that would provide them greater 
incentives, yes.
    Mr. Green. And my final question to the other folks, if I 
may--
    Chairwoman Waters. Yes, you may.
    Mr. Green. My final question to those of you in the 
modification business, tell me if you agree that allowing 
bankruptcy will provide a means by which persons--let's assume 
that they have tried everything that is available without 
success and they do file for bankruptcy. Would this knowledge 
that the bankruptcy is an option--would the knowledge of the 
bankruptcy as an option, not you, but would it help some 
servicers to realize that maybe I can do a little bit more than 
I have been doing? And I am trying to be as kind as I can in 
saying this, because I don't want to create problems for people 
who are trying to do a job. And you all are.
    But let's start with the Bank of America representatives. 
Would this help some servicers and some investors to see that 
maybe we do have a little more latitude than we think we have 
in trying to modify some of these loans? Bank of America?
    Mr. Schakett. Well, I really can't speak for kind of all 
the other servicers. I can only speak for Bank of America. A 
threat of bankruptcy would not change our policies on 
modifications to keep companies, people in their homes.
    We want--it is in our best interest, our shareholders' best 
interest, the public's best interest--to do everything we can 
to make the modifications for the people who are reasonably 
able and willing. So I don't think the threat of bankruptcy 
would change our posture at all as far as working out a 
modification.
    Mr. Green. My suspicion is that your colleagues would say a 
similar thing. If anyone would differ in terms of the banks--
JP, Austin, if you would differ, raise your hand. If you don't 
differ, I won't bother to ask you the question.
    So nobody differs, no hands up, let the record reflect, 
which gets to the point I would like to make.
    The bank, the servicers, are not going to change. They are 
going to continue to do what they are doing. And if we know 
they are going to continue to do what they are doing and we 
have about 8 million homes that may go into foreclosure within 
the next 4 years, then we have to do something different. We 
cannot allow all that we have done to try to revive the 
economy, to stabilize the economy, to become the sole province 
of servicers who are not going to change their method of 
operation.
    I respect what you want to do and what you are trying to 
do, but at some point those of us who are in the arena who have 
to make these tough calls, we are going to have to make another 
call and give people another option, just as you have with your 
second home, your third home, your fourth home, just as you 
have with your auto payment, just as you have with your farm 
loan. All of these options are available to people, except the 
lowly person who can't afford a second home, third home, fourth 
home, who can't afford a farm, who may not have a fine car to 
drive, but has something called a primary residence that he or 
she or they, they are trying to protect. These people need 
help, too. That is what we have to look at.
    I appreciate where you are and I thank each of you. My time 
has expired.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. Before I dismiss 
the panel, I would like to just recognize myself to share with 
you some of the lessons I have learned as I have worked very 
closely with my staff in learning how to contact servicers, how 
to work with servicers. I get waivers from my constituents who 
are trying to seek some help and I get on the telephone with 
servicers and my constituents and I walk through the process, 
so I know a lot about it.
    I have not yet encountered a situation where the 
documentation for income and debt was not required on a loan 
modification, and I am going to take a look at the ones that 
were not handled that way, and I will be in contact directly 
with you about them since you have testified a bit differently 
here today about how you are doing some of that.
    The other thing that I have encountered is this: Some of 
the big servicers, big banks, have bought up these loans from 
other small mortgage companies along the way, and clearly there 
is fraud.
    You hire lawyers to do foreclosures. How many of you hire 
lawyers to deal with fraud when you see it?
    Wells Fargo, let me just ask, have you, your servicers, 
encountered some of the mortgages that are clearly fraudulent 
where the signatures have been falsified? A lot of income 
falsification that clearly was not true, what do you do with 
that kind of information when you encounter it?
    Ms. Coffin. Well, if we do encounter loans that definitely 
come to our attention that have fraudulent behavior, yes, we do 
bring that to the attention. Unfortunately, many of the 
companies who originated those loans are out of business.
    And, number two, I will tell you that--
    Chairwoman Waters. But the homeowner--you bought the loan. 
When you bought the loan from this mortgage company, you had to 
vet it. You had to look at it to see what you were buying, 
right? Well, maybe you didn't.
    Ms. Coffin. Not loan by loan.
    Chairwoman Waters. Not loan by loan. You bought packages, 
okay.
    So if you see fraudulent loans where the homeowner has been 
basically defrauded, what do you do? How can you help that 
homeowner?
    Ms. Coffin. I think one of the things that is toughest to 
do is determine where the fraud came from.
    Chairwoman Waters. Well, I know where it came from. It is 
very clear. It came from the person you bought them from.
    Ms. Coffin. But stated income, stated assets, which is 
where some of those loans that we acquired, determining the 
fraud--
    Chairwoman Waters. Well, but I have some where someone 
said, ``That is not my signature; I didn't sign that.''
    Ms. Coffin. That would be hard to determine.
    Chairwoman Waters. No, it wouldn't.
    All right. So--okay. Well, let's look at another kind of 
fraud that I have run into. Well, it is not fraud really. Let 
me look at another case.
    I have constituents who need a loan modification and they 
are earning the same amount of money at the time that they 
requested a loan modification as they were earning when they 
got into the loan, when you accepted them into the loan. It is 
no different.
    You accepted them into the loan with what appears to be a 
lack of adequate income to service that mortgage. They discover 
along the way that they cannot service that mortgage. It may be 
a reset, what have you. But then they are asking for a loan 
modification, and they are told, ``You don't have enough 
income.''
    But they had enough income when they got the mortgage. What 
do you do about that?
    Bank of America, have you encountered that? Have any of you 
done loan modifications? How many people have actually done a 
loan modification?
    So what do you do when you encounter someone whose income 
is exactly the same, when they request a loan modification, as 
it was when they signed on the dotted line for the mortgage; 
and now you are saying to them, ``You don't qualify; you don't 
make enough money?''
    How do you make that decision?
    Mr. Schakett. Well, first of all, we don't compare really 
what they were making at origination. And the comment about 
them not having enough money--
    Chairwoman Waters. I beg your pardon?
    Mr. Schakett. I am saying, we don't make a comparison back 
to say what they did at the origination time. The MHA program 
is set up to say how much income they have, use a 31 percent 
debt-to-income ratio.
    Chairwoman Waters. Let's forget about the 31 percent.
    Ms. Jones had an income of $3,000 a month. She got a home 
that cost $500,000. She couldn't afford the loan then and she 
certainly can't afford it now. It has reset. She has the same 
income. What do you do?
    Mr. Schakett. Well, could she not afford the same modified 
payment if we actually reduced the payment down to her level of 
income to make it affordable? Could she not afford that 
payment?
    Chairwoman Waters. No. What you are telling her is, she 
can't modify because she doesn't make enough money to even get 
a modification.
    Mr. Schakett. Well, since the MHA program allows interest 
rates as low as 2 percent, 40-year terms with forbearance up to 
30 percent--
    Chairwoman Waters. You think you can work something out for 
her?
    Mr. Schakett. For the vast, vast majority of the customers, 
we certainly could be able to have an offer for her. We would 
have to understand the particular circumstances. But definitely 
the program has very nice low floors for interest rates and 
forbearance amounts that should make the payment affordable for 
the vast majority of people.
    Chairwoman Waters. Well, I am going to call you about some 
that we have worked on that fit into that category.
    The other thing that I wanted to ask you about is, I think 
you did refer to what Mrs. Capito alluded to when you said you 
do forbearance in order to provide assistance to homeowners who 
have no income or little income, or maybe just unemployment and 
they need some time.
    Wells Fargo, you and Bank of America and Chase, you guys 
all say that you help these people with forbearance. Is that 
right?
    All right. I am going to call you directly on the ones that 
we have that have been turned down.
    Now, one last question I want to ask. It has been said that 
it is more profitable to not do a foreclosure in some cases 
than to do a foreclosure.
    I think, Ms. Cohen, you were the one that tried the explain 
to us how servicers rush to foreclosure rather than 
modification because it is not in their best interest to do it. 
Would you explain that one more time?
    Ms. Cohen. Sure. Thank you.
    When a homeowner stops making payments on the loan, the 
servicer is still required to advance those payments to the 
investors. And so one of the challenges for the servicers is to 
figure out how to finance those advances, because they are 
generally financed, and how to get the money back to pay back 
the financing. And when you result in a foreclosure, in 
general, the pooling and servicing agreements allow the 
servicer to get paid back first from the foreclosure before the 
investors get any money. So the servicer gets paid back faster 
and in a more sure way from the foreclosure.
    When is a loan modification, the investors still have 
priority. In general, they don't get paid first, the servicer 
doesn't get paid first. And the servicer has a way of 
recovering the money, but it is not as sure and it's not as 
fast.
    Chairwoman Waters. So let me just ask--Ms. Sheehan, Chase 
Home Lending, JPMorgan Chase, are you, as servicers, advancing 
payments to the investor?
    Ms. Sheehan. Yes, we do. But I will say for JPMorgan Chase, 
we do not need financing for our advances. We have a strong 
capital base, and it is not in our interest to rush to 
foreclosure. It is not economic if the loan is positive from a 
net present value perspective, whether we own the loan or 
whether we service the loan, because for our investors we have 
an obligation to do the thing that is best for the investor.
    Chairwoman Waters. Wells Fargo, are you advancing the 
payments, the mortgage payments, to the investors also?
    Ms. Coffin. Yes, we are. And I would concur with all of Ms. 
Sheehan's comments. We also have a very strong balance sheet. 
We are not looking for refinancing, and foreclosure is never a 
better option.
    Chairwoman Waters. Is this strong balance sheet because of 
the citizens' investment in your banks, in your bailouts?
    Ms. Coffin. No. Wells Fargo has been a AAA bank and we have 
a strong balance sheet.
    Chairwoman Waters. You did get money from the bailout, 
didn't you?
    Ms. Coffin. Yes. And we are--
    Chairwoman Waters. How much did you receive?
    Ms. Coffin. $25 billion.
    Chairwoman Waters. You didn't need it?
    Ms. Coffin. We are working to return those funds.
    Chairwoman Waters. But you didn't need it when you got it?
    Ms. Coffin. No.
    Chairwoman Waters. You just took it? They made you take it?
    Ms. Coffin. Yes.
    Chairwoman Waters. Okay. Have any of you found that it is 
in your best interest to foreclose rather than to hold that and 
do a modification? Is there ever a time?
    Yes, sir?
    Mr. Schakett. Yes and no. Ms. Sheehan addressed this.
    As you know, part of the Making Home Affordable program 
itself, it has a calculation called a ``net present value'' 
that actually tries to determine is it better to foreclose on 
the property or actually do the modification.
    Now, with the vast majority of the customers it is better 
to do the modification; but there are cases, if the customer 
has a lot of equity in the property and if the person can 
afford a very small payment, where the cost of the interest, 
cost to give up, is greater than the cost of foreclosure. So it 
actually makes more sense for the investor to foreclose on the 
property.
    And the Administration has built in the program a 
protection for the investors to make sure that it is something 
that both aligns the kind of consumers' interests and the 
investors' interests. So, yes, there are cases where it makes 
more sense to foreclose.
    But I would like to come back to the point that Ms. Cohen 
made earlier, which I think is just simply inaccurate, as far 
as we were talking about capitalizing third-party fees and the 
foreclosure process. And the statement was made, if you 
capitalize third-party fees, it will actually increase the 
payment amount that the customer has to make upon modification.
    It just doesn't work that way. For the--yes, indeed, you 
can have capitalized third-party fees, but as you all are 
probably aware, the MHA program itself forces you to calculate 
31 percent of the person's income, and that becomes the payment 
amount. So the payment is the same whether you have capitalized 
$2,000 of the fees or you haven't. And the difference is, the 
interest rate will go down.
    So if you have capitalized fees, then the investor will 
receive the lower interest rate and the borrower will be in the 
exact same situation as far as the payment amount under the MHA 
program whether the fees have been capitalized or not.
    Ms. Cohen. Can I respond to that?
    So there are a couple of issues. One is--what I said was, 
if the fees are capitalized and the principal is higher, when 
the computer crunches the numbers, some homeowners are less 
likely to get sort of an outcome from the computer that says 
that the modification is more profitable to the investor than 
the foreclosure--I mean, it is all related to the net present 
value calculation. So that is sort of one issue.
    I also want to say that every time I am in a meeting in 
Washington, the representatives of the servicers tell us what 
their policies are, they tell us that foreclosures are never 
profitable. But I have example after example of these servicers 
and others saying, Wells Fargo and Bank of America, you have to 
give us a payment before we will give you a modification. Bank 
of America, you need to be in default.
    Chase, a person called 5 times in the last week and could 
not find one person to give them a HAMP loan modification. And 
an Attorney General attorney called our office and said that 
Chase is the biggest noncompliant HAMP servicer when it comes 
to actual responsiveness.
    Wells Fargo will give you a 6-month forbearance with a 
balloon, and then will consider whether to give you a HAMP loan 
modification.
    Over and over again what is happening on the ground does 
not comport with what these people are saying. And until they 
are pushed in a mandatory fashion, nothing is going to change.
    Ms. Coffin. Can I make a couple of comments?
    In the forbearance--and, yes, there is a balloon at the end 
of it, and what we are looking for at the end of that 6- to 12-
month period is, they still have to obtain a job. As was stated 
earlier, you cannot do a modification on someone who does not 
have a job. So there is--and that is communicated and it is 
made clear.
    I think there is also a point to your constituents that I 
think is most important, and I will come back to the positive. 
We call early enough in to these borrowers who go delinquent 
immediately, because we know that the sooner we work with them, 
we can avoid all these fees--
    Chairwoman Waters. Hold it. Hold it right there, because I 
think Ms. Cohen said something that had been true in the past. 
And that was, some of you had policies, you have to be 
delinquent--before you will even talk to them about a 
modification--for 2 months. Is that still something that you 
practice?
    Ms. Coffin. No.
    Chairwoman Waters. Nobody practices that anymore? When did 
you stop?
    Ms. Coffin. I don't know that we ever did--
    Chairwoman Waters. Oh, yes, you did.
    Ms. Coffin. There are people who might have stated that. 
But it is in our polices and procedures to tell someone that 
you must go delinquent.
    Chairwoman Waters. Let me just stop right here.
    Bank of America, are you saying that you never had a policy 
where you had to be in default at least by 2 months before a 
loan modification could be considered?
    Mr. Schakett. No, I am not saying that. I said, with MHA we 
now have a default standard that it makes it clear, if you 
actually cannot afford your payment and you are current, you 
can still qualify for the mortgage, you have to go through the 
process.
    There was not a standard default standard prior to MHA. It 
was very uneven treatment of people that were current before, 
absolutely acknowledge that, and it was much easier to get a 
modification if you were 6 days delinquent than if you were 
current. And, of course, we did have a policy of not telling 
customers they need to go delinquent; that was certainly our 
policy. But it certainly is possible that somebody would have--
    Chairwoman Waters. Well, I found it to be consistent with 
Bank of America when I work on these loan modifications.
    Since I am talking with you, why is it Bank of America does 
so few loan modifications? Why is your percentage of loan 
modifications so much lower than everybody else's?
    Mr. Schakett. I think if you are talking about--
    Chairwoman Waters. I am just talking about modifications.
    Mr. Schakett. Well, if we are talking about modifications 
in general, I would say that our numbers are not lower than 
everybody else. And that is the reason why I am referring--the 
numbers you are probably looking at are the MHA modifications.
    One thing I think everybody would agree with, at least the 
servicers at this table, is that a better view of the kind of 
modification activity would include all the modifications the 
banks are doing today. If you look at some of the written 
testimony coming out from just Chase and Bank of America and 
Wells, all of us reference other modifications we are doing.
    Chase referenced 89,000 additional modifications they did 
that weren't MHA; those are not in the numbers. Wells 
referenced 226,000 loans either qualified for or modified that 
are not MHA numbers. And Bank of America has 225,000, either 
modification or people qualified, that are not in the MHA 
numbers.
    So we appreciate the committee's focus on the MHA numbers 
because they--obviously that is where the taxpayer money is 
being spent at. That is what the oversight is about.
    But if you want to have a full appreciation for really how 
we are helping people stay in the homes, we do believe that you 
should look at the overall modification efforts. And our 
numbers will look much better if you look at the overall 
modifications versus simply what we have done so far in the MHA 
ramp-up.
    Chairwoman Waters. Well, I recognize this is a voluntary 
program, and you can do as few or as many as you would like. 
Why are you doing so few MHAs?
    Mr. Schakett. Well, again, as I just tried to explain, it 
is really a ramp-up period. We have doubled our efforts just 
the last month. We have set a target goal of 125,000 by 
November 1st, which I think we will make.
    We got a little bit of a--we had a national retention 
program which I referenced earlier. We were doing lots of 
modifications prior to MHA, and we made a decision to continue 
with that program and kind of ramp over with the MHA program 
versus holding back customers and putting everything directly 
in MHA. So that kind of hurt our numbers a little bit, because 
we didn't have the ability of--kind of a lift of a new program; 
we already had an existing program.
    But I think if you look out 6 months from now you will 
find, as we fully ramp up, our numbers will be, on MHA, 
comparable to industry standards or better.
    Chairwoman Waters. And how many will support H.R. 3451, our 
loss mitigation program that helps to direct servicers a bit 
more than they are directed now?
    Are you familiar with that legislation that I have 
introduced? No? Not yet? Okay.
    Well, I would like to thank you all for being here. We just 
have to do better with loan modifications. There are several 
reasons: Number one, people just need help, and they want to 
stay in their homes; and number two, the American citizens have 
been very generous with the banks.
    And most of you represent banks, and your servicers also. 
Not only have you gotten bailout money, but the complaints are 
just overwhelming about the credit crunch, the decrease in 
credit card limits. The complaints are just ongoing, and we 
want to do everything that we possibly can to help you to do a 
better job. We think that you are missing the mark.
    I don't have the information here to compare what you are 
doing with the President's program as opposed to what you may 
be doing. That may be better or worse; I don't know. But I 
would hope that you would take care to tell us what we can do 
to help you to do more to help more people--to help unemployed 
people, to help people who are the victims of fraud, to make 
your servicers even more accessible and more available.
    It would be great to see particularly, the big banks who 
have locations in so many places, to put some of your servicers 
on the ground. The menus are still difficult to negotiate when 
you are on the telephone.
    People would like to see some of you, your servicers, face-
to-face. You could put some right next to your banking 
operations so that servicers can talk to individuals. I would 
like you to think about some of these things, think about and 
take seriously what we are saying about our concerns.
    You heard a lot of discussion about bankruptcy here today. 
You heard our chairman, who is getting very, very concerned. 
And I am hopeful that we will be able to do a lot better than 
we have been doing.
    Again, without objection, your written statements will be 
made a part of the record. 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.
    We do have something to enter into the record that we must 
do. Without objection, this is a letter from NID Housing 
Counseling Agency.
    Thank you so very much for your patience. We went a little 
bit beyond our normal time, and I thank you for engaging us.
    This panel is now dismissed.
    [Whereupon, at 1:32 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           September 9, 2009

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