[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE PRIVATE SECTOR AND GOVERNMENT
RESPONSE TO THE MORTGAGE
FORECLOSURE CRISIS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
DECEMBER 8, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-93
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56-236PDF WASHINGTON : 2010
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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
C O N T E N T S
----------
Page
Hearing held on:
December 9, 2009............................................. 1
Appendix:
December 9, 2009............................................. 53
WITNESSES
Thursday, September 00, 2009
Allison, Herbert M., Jr., Assistant Secretary for Financial
Stability, U.S. Department of the Treasury..................... 35
Goodman, Laurie S., Senior Managing Director, Amherst Securities. 13
Gordon, Julia, Senior Policy Counsel, Center for Responsible
Lending........................................................ 9
Krimminger, Michael H., Special Advisor for Policy, Office of the
Chairman, Federal Deposit Insurance Corporation (FDIC)......... 37
Marks, Bruce, Chief Executive Officer and Founder, Neighborhood
Assistance Corporation of America (NACA)....................... 14
Roeder, Douglas W., Senior Deputy Comptroller for Large Bank
Supervision, Office of the Comptroller of the Currency (OCC)... 39
Sanders, Anthony B., Distinguished Professor of Real Estate
Finance, Professor of Finance, School of Management, George
Mason University............................................... 11
Schakett, Jack, Credit Loss Mitigation Strategies Executive, Bank
of America..................................................... 7
Sheehan, Molly, Senior Vice President, Chase Home Finance........ 6
APPENDIX
Prepared statements:
Carson, Hon. Andre........................................... 54
Marchant, Hon. Kenny......................................... 56
Allison, Herbert M., Jr...................................... 58
Goodman, Laurie S............................................ 68
Gordon, Julia................................................ 73
Krimminger, Michael H........................................ 95
Marks, Bruce................................................. 115
Roeder, Douglas W............................................ 119
Sanders, Anthony B........................................... 136
Schakett, Jack............................................... 140
Sheehan, Molly............................................... 146
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Written statement of the HOPE NOW Alliance................... 156
Allison, Hon. Herbert M., Jr.:
Written responses to questions submitted by Representatives
Adler and Baca............................................. 162
Gordon, Julia:
Written responses to questions submitted by Representatives
Adler and Baca............................................. 165
Krimminger, Michael H.:
Written responses to questions submitted by Representatives
Adler and Baca............................................. 167
Roeder, Douglas W.:
Written responses to questions submitted by Representatives
Adler and Baca............................................. 170
Sheehan, Molly:
Written responses to questions submitted by Representatives
Adler and Baca............................................. 173
THE PRIVATE SECTOR AND GOVERNMENT
RESPONSE TO THE MORTGAGE
FORECLOSURE CRISIS
----------
Tuesday, December 8, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Waters, Maloney,
Watt, Moore of Kansas, Clay, Baca, Lynch, Miller of North
Carolina, Scott, Green, Cleaver, Klein, Donnelly, Carson,
Kosmas, Himes, Peters; Royce, Capito, Hensarling, Neugebauer,
Marchant, Jenkins, and Paulsen.
The Chairman. Good morning. I apologize for the delay, but
with the major legislative product of this committee coming up,
we are a little busy. We will convene this hearing today. We
have had a series of conversations obviously on an ongoing
basis with a variety of people.
We have a great frustration at the failure of the combined
efforts of elements of the Federal Government to make a
substantial impact on the foreclosure issue. Programs have been
put forward and revised, but no one can think we have done a
satisfactory job. Part of it is mistakes of the past, and one
of the things we are determined to do going forward--the
gentlewoman from California, Ms. Waters and others have talked
about this--is to change the law so that some of the problems
we now have will not continue. Namely, we will not have
situations where there are mortgages that we believe it is in
the public interest to modify and no one has the authority to
modify it, or at least if someone has the authority to modify
it, he or she is able to dodge the responsibility by invoking
some shared responsibility. That cannot be allowed to continue.
So we will straighten that out going forward, but we are in
a current situation with a tangle of problems. Many of us feel
that bankruptcy for primary residences is ultimately going to
be necessary to get a substantial improvement. Those who
disagree with that have a particular burden in my mind of
showing that it is possible to achieve substantial avoidance of
foreclosure, with all the negative consequences that has for
the society, without it.
And I do want to stress that when we talk about mortgage
foreclosure avoidance, we're not simply talking about
compassion for individuals. Many of the individuals involved
are the victims of circumstance. Many were misled. Some were
themselves less than responsible. But the problem is, even if
people want to say, okay, they made their bad mortgage
decision, let them live with it, that has reverberating
consequences for the whole society.
Foreclosures create concentric circles of harm, primarily
to the individual family, but then to the neighborhood, to the
municipality, and to the whole economy because of the
widespread dispersion of mortgage-backed securities. So slowing
down the rate of foreclosures is very important.
We will in the bill before us this week be including a
provision--I hope that it will be accepted--that will deal with
a new class of foreclosure, a relatively new class, those who
took out mortgages that were not themselves problematic but who
are unemployed and find that you cannot make mortgage payments
out of unemployment compensation if that's your sole source of
income. We will be putting forward a program modeled on a
successful one in Philadelphia that will lend money to those
who are unemployed and face loss of their homes for the
duration of their unemployment or some other period. That will
help some. But we still have the problem of those mortgages
that have to be disentangled. And as I said, we are
dissatisfied with the progress, and what we are doing again
today, we hope, is to get specific proposals that will help us
further disentangle this situation.
So with that, I'm going to recognize the ranking member of
the Housing Subcommittee, and we have a total of 10 minutes on
each side, and we will proceed from there. The gentlewoman from
West Virginia.
Mrs. Capito. Thank you, Mr. Chairman. I would like to thank
you for holding this hearing this morning, and I too share the
chairman's frustration. And he and I are both well aware, as we
had a similar meeting in the Housing and Community Opportunity
Subcommittee in September of this year on the very issue of
tracking progress with the Administration's foreclosure
mitigation program.
Introduced in early 2009, the Making Home Affordable
Program was rolled out with the promise of assisting seven to
nine million troubled borrowers, yet the program has thus far
assisted only a small fraction of that estimate. While the
Administration's plan was somewhat more successful than the
troubled HOPE for Homeowners program, I have significant
concerns with the overestimation of the population served by
these programs. Although there are many Americans who are
struggling to pay their mortgages, it has become clear that
these programs simply may not be capable of handling the volume
of borrowers, nor is it realistic to suggest that every
struggling borrower will be able to benefit from a
modification.
Furthermore, there should not be a push to achieve these
targets at the expense of ensuring that modifications are being
processed in a manner that ensures the lender has as complete a
picture of the borrower's financial situation as possible. To
this end, I was very troubled to learn that some modifications
are being performed with minimal documentation. After all, it
was this very practice of no- or low-documentation loans that
helped create the housing crisis we face today. We should not
be in the business of perpetuating this practice.
According to the Treasury Department, 375,000 trial
modifications are set to convert to permanent modification by
the end of the year. However, JPMorgan Chase recently disclosed
that in November, close to 25 percent of the trial
modifications failed to make the first payment, and nearly 50
percent of borrowers failed to make all 3 payments.
Furthermore, the Federal Reserve Bank of Boston cites that 30
to 45 percent of borrowers who receive modifications end up in
default within 6 months. This raises significant concerns about
the ability of these programs to meet the long-term
expectations outlined earlier this year.
These challenges are greatly compromised by a shift in the
root causes of foreclosures. With the downturn in the economy,
as the chairman mentioned, we are now facing more traditional
causes of foreclosure, namely the loss of a job. As these
programs progress, we must have a realistic understanding of
their capability, and we have an obligation to our taxpayers to
focus our efforts first and foremost on families who truly need
assistance.
I look forward to hearing from our witnesses this morning,
and I again want to thank the chairman for holding this
important hearing.
Mr. Watt. [presiding] The gentlelady yields back, and the
gentleman from Georgia, Mr. Scott, is recognized for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman. I can't think
of a more pressing issue for us to deal with at this time than
the foreclosure situation. It is alarming. RealtyTrac, for
example, reports that in the third quarter of 2009, my State of
Georgia had a 25 percent increase in home foreclosures over the
third quarter in 2008. That is a total of over 36,000
foreclosure filings, or 1 in every 98 households. That is
absolutely devastating.
But I want to turn just for a moment about what is an even
more devastating situation, perhaps the most insidious side of
our current foreclosure crisis and loan modification process,
and that is the unfortunate scamming of vulnerable homeowners
who are in desperate need of assistance in saving their homes.
It is one of the most tragic aspects of human existence, in my
opinion, that whenever and wherever people are downtrodden,
others will move in and prey upon them and worsen their
condition.
I was just contacted last night by a constituent who had
contracted with a group called Prodigy Law Group in Irvine,
California, just to help him to navigate the loan modification
process. They contacted him and said they could bring it down
far better than anyone else. And unfortunately what my
constituent did not know was that this firm had a reputation as
being scam artists. In fact, the Better Business Bureau of
California as well as numerous other outfits had identified the
Prodigy Law Group as known scammers.
So as we debate this issue, not only must we deal with what
is before us and what we're doing, but we have to find a way to
put these predatory beasts that are preying on people who are
already in bad conditions out of business.
I yield back the balance of my time.
Mr. Watt. The gentleman yields back. Mr. Hensarling is
recognized, it says for 3 minutes, but actually you have a
little bit more than that. I'm not sure exactly how much time
is left, 3\1/2\ minutes, I think.
Mr. Hensarling. Thank you, Mr. Chairman. By any standard of
measurement, the foreclosure mitigation programs of this
Administration and this Congress have been abject failures.
HOPE for Homeowners had $300 billion authorized at least as of
summer, the latest date I have available, 1,000 applications,
and 50 loans closed by July. The Home Affordable Modification
Program, $75 billion cost, supposed to help 3 to 4 million
homeowners, 650,000 modifications, trial modifications.
The Home Affordable Refinance Program, supposed to help 4
to 5 million homeowners, latest numbers available, 116,500. Yet
we know that foreclosure rates and delinquency rates continue
to rise from 9.9 percent in the third quarter of 2008 to now
14.1 percent in the third quarter of 2009. Government taxpayer-
funded foreclosure mitigation programs have been an abject
failure. On the other hand, those who actually hold loans have
a financial incentive for borrowers who can work out to make
modifications. And under the HOPE NOW Program, at least as of
the latest data available, 4.7 million have been afforded
workout plans since August of 2007 with no cost to the
taxpayer.
Now there is no better foreclosure mitigation plan than a
job. And unfortunately, the job creation program of this
Administration has also been an abject failure, as we suffer
through the highest unemployment rate that we have had in a
generation, 3\1/2\ million of our fellow countrymen having lost
their jobs since the President took office.
The best way to have a foreclosure mitigation plan, again,
is to create a job. And the best way to create a job is to tell
job creators that they're not going to have to contend with a
trillion dollar nationalized takeover of a health care system,
that a $600 billion threatened energy tax to our economy will
not take place, that the tax relief in this decade that brought
upon one of the longest periods of economic prosperity will not
be allowed to expire so that tax rates on income, on dividends,
on capital gains increase, that some certainty will be brought
to the market, and the bill that Chairman Frank will bring to
the Floor tomorrow, which will be a job-crushing bailout bill,
whether that too would not become law.
That is a plan. That is a recipe to create jobs in our
economy, to take away the looming storm clouds of Obamanomics
and let this economy create jobs. And if you create jobs, then
people can keep their homes. Nothing short of that will work.
We have to signal to those who ultimately have to pay the bill
that this is a Congress and this is an Administration
ultimately that is going to be serious about the debt and the
deficit. Throwing more money at programs that do not work is
absolutely insane, and it does not work. Why we would be
considering giving more money to the same programs is beyond
me.
I yield back the balance of my time.
Mr. Watt. The gentleman's time has expired, and I will
recognize myself for 2 minutes, and then I will go to Mr. Klein
as our final opening statement.
Let me just say that it is obvious that we have a serious
foreclosure problem, default problem, and that has come home to
all of us with the nature of the calls that have come into our
offices. Generally, before this economic meltdown, our job was
to intervene with the Federal Government on behalf of
constituents to get Social Security checks or VA benefits or
travel documents. The bulk of the business that we are now
doing is calls from people trying to get credit or trying to
get out from under or survive the credit that they were already
extended. Disproportionately, our calls are that.
And I got an even greater appreciation for that this past
weekend when Mr. Marks' group, the Neighborhood Assistance
Corporation of America, brought their road show to my
congressional district in Charlotte and well over 50,000 people
showed up from all over the country seeking to have their loans
modified. We are in a serious problem, and the programs that
are out there, even when they are working, are not working on a
scale that's large enough to have the impact that needs to be
had. And then on top of that, the loss of jobs has added a
whole other wave of foreclosures and defaults that has made the
problem worse.
So I welcome this opportunity to hear from the witnesses
today. My time has expired, and I will now recognize the
gentleman from Florida, Mr. Klein, for 2 minutes.
Mr. Klein. Thank you, Mr. Chairman, and thank you for
holding this important hearing. I'm from South Florida, and we
face serious problems with our housing market, as many other
parts of the country do. And I think we all understand it's
essential for both banks and servicers as well as the Federal
Government to implement effective programs to increase loan
modification and prevent foreclosures where they can be
prevented.
I'm pleased to see the increased focus on foreclosure
prevention from the Obama Administration, and they have taken
some steps in the right direction, but we have a long way to
go. One of the problems with the Home Affordable Modification
Program and other initiatives is incomplete paperwork, and we
hear this over and over again. Documents are submitted for the
loan modification, and we just keep hearing that it's not the
right documents, and then from the borrower's side, we hear
that they have been asked over and over to present the same
documents. It's a communication problem, it's a dragging of the
feet problem, and in some cases, it's a problem of the
servicers and banks not having adequate personnel, quantity and
quality, to service these loan modifications and to address the
problems.
I'm also concerned about the process of short sales, and I
appreciate the new Treasury guidelines that have come into play
to expedite the closings on short sales. Yet I still have
concerns they don't go far enough to address some of the issues
complicating the execution of short sales, particularly
secondary liens and investor interest, which my attitude is,
where there's a will, there's a way. I think these are things
that can be worked through.
Another issue is appraisals. This seems to be a constant
issue in terms of working through difficulties in loan
modifications, because some properties were overvalued on the
way up and because there's very little activity at the ground
level right now, appraisals are coming in exceedingly low and
not necessarily reflective of the value. Again, I think this is
something that's deepening the problem and prolonging the
agony.
Lastly, I want to point out that in many cases, banks are
also sitting on foreclosure proceedings, so they don't have to
necessarily write down the asset or take title and step in the
shoes of the borrower, and that's creating another problem in
the communities because people who aren't keeping up with their
mortgages are not keeping up with their taxes and not keeping
up with their homeowners assessments and condominium
assessments, and it's creating a whole problem in terms of the
marketability of properties in those communities and the value
in those properties.
So I just want to say that we have a lot of work to do. I
appreciate everybody coming here today, and giving us their
thoughts and ideas, and we need to move expeditiously on this
important issue.
I thank the chairman.
Mr. Moore of Kansas. [presiding] The Chair recognizes Ms.
Sheehan.
STATEMENT OF MOLLY SHEEHAN, SENIOR VICE PRESIDENT, CHASE HOME
FINANCE
Ms. Sheehan. Good morning. My name is Molly Sheehan. I work
for the Home Lending Division of JPMorgan Chase as the
executive responsible for housing policy. At Chase, we have
been working very hard to help prevent foreclosures and keep
families in their homes. Since 2007, under our expansive
programs, we have helped prevent over 885,000 foreclosures.
Since January 1, 2009, Chase has offered over 568,000
modifications to struggling homeowners for a value of over $100
billion in mortgage loans. We have approved or completed over
112,000 permanent modifications under HAMP, Chase Proprietary
Modification programs or other modification programs offered by
the GSEs and FHA/VA. We have given specific details of all of
that activity in our written testimony for you to review.
This year alone, we have opened 30 Chase Homeownership
Centers in 13 States. Over 60,000 struggling borrowers around
the country have been able to meet with trained counselors
face-to-face. We plan to add an additional 21 sites early next
year. We have added over 2,500 loan modification counselors in
2009, bringing the total number to 5,200 loan modification
counselors in 15 sites around the country. We have hired over
2,800 additional mortgage operation employees to handle the
unprecedented volume. So we now have nearly 14,000 home lending
employees at Chase dedicated to helping our homeowners.
We have handled over 12.8 million inbound calls, and our
outbound foreclosure prevention calls increased to 4 million in
2009, up from 400,000 the year earlier. And we have had 3.6
million visits to our dedicated Web site for loan modifications
where borrowers have been able to download over 1.6 million
modification packages that they can provide to Chase.
Through HAMP alone, we have offered trial plans to over
200,000 homeowners and are working very hard to make those
modifications permanent. Based on our experience, for every 100
HAMP trial plans initiated from April through September 2009,
29 borrowers did not make all required payments under their
trial plan, making them ineligible for a permanent modification
under HAMP. Seventy-one borrowers made all three payments under
their trial plans. Of those 71, 20 borrowers did not submit yet
all the documents required for underwriting. Thirty-one
customers have submitted all the required documents, but the
documents do not yet meet HAMP underwriting standards. Twenty
borrowers have completed all required documents and are
eligible for underwriting. And out of those 20, 16 will likely
be approved or have already been approved for a permanent HAMP
modification.
To the extent a borrower is not approved for a permanent
HAMP modification, we have other alternatives available to them
under Chase modification programs and programs offered by the
GSEs and FHA/VA. Right now, we are very focused on helping the
51 percent of borrowers who are paying but need help completing
documents, and have implemented aggressive new initiatives: A
coordinated program to call our customers 36 times; reach out
by mail 15 times; and make at least 2 home visits, if
necessary, to help complete documents. Also, ordering key
documents earlier in the process so they're ready when the
borrower's documents come in to expedite underwriting;
targeting outreach efforts to borrowers who live near our Chase
Homeownership Center so they can come in in person to get help
completing their documents; and assigning specific pools of
accounts to loan modification counselors to provide continuity
in dealing with the customer and end processing.
Under this program recently launched, we have completed
over 4 million calls, letters, and home visits, for an average
of 27 activities per borrower through the end of November to
help the conversion process to permanent.
We are also paying special attention to the 31 percent
whose documents are in but don't meet HAMP requirements. And we
will be working on very specific initiatives to get that
process completed with the Treasury in order to simplify the
documentation for our borrowers.
Thank you very much. I would be happy to answer any
questions you have.
[The prepared statement of Ms. Sheehan can be found on page
146 of the appendix.]
Mr. Moore of Kansas. Thank you, Ms. Sheehan.
The Chair next recognizes Mr. Jack Schakett, credit loss
mitigation strategies executive, Bank of America. Sir, you have
5 minutes.
STATEMENT OF JACK SCHAKETT, CREDIT LOSS MITIGATION STRATEGIES
EXECUTIVE, BANK OF AMERICA
Mr. Schakett. Chairman Moore, Congresswoman Capito, and
members of the committee, thank you for the opportunity to
update you on Bank of America's loan modification efforts and
to discuss areas where we can work together to help more
homeowners stay in their homes.
I am Jack Schakett, Bank of America's credit loss
mitigation executive, and I have the responsibility of
foreclosure prevention programs with a mortgage servicing
portfolio of more than 14 million. Bank of America is a proud
partner in the Administration's Home Affordable Modification
Program, HAMP. With more than 160,000 customers currently
active in trial modifications, HAMP has proven a valuable tool
that complements the aggressive loan modification programs that
Bank of America already has in place.
Over the last 2 years, Bank of America, with the combined
effort of HAMP, has offered help to 615,000 homeowners. In over
100,000 calls a day, we hear from our customers, their concerns
and their frustrations. We believe we have improved
significantly our ability to handle the large volume associated
with these calls, but we also believe much more needs to be
done.
We fully share Treasury's commitment to convert successful
trial modifications to permanent as quickly as possible. In
support of that commitment, Bank of America is focusing on
assisting customers and providing all the necessary documents
for the underwriting process. Otherwise, homeowners are at risk
of missing this opportunity to obtain a HAMP loan modification,
an outcome that none of us want.
As this committee knows from prior hearings, in addition to
the customers making three timely trial payments, the servicer
must fully underwrite the permanent modification. This includes
verifying income, occupancy status, and tax returns.
Specifically, Bank of America has approximately 65,000
customers who have made more than 3 trial payments on time.
These modifications are set to expire on December 31st. Of
those customers, 50,000 have either not submitted some or all
the required documents or the documents they have submitted
revealed a discrepancy that needs to be followed up on with the
customer.
For these customers, Bank of America last week sent by
overnight mail an urgent request for the documents needed to be
complete in the process and set up the timeframes required to
avoid losing the Treasury's modification program benefits. We
included a return, prepaid express mail envelope to make the
process as easy as possible. This is in addition to the
previous reminder calls and mailing attempts.
We have dedicated substantial resources to these efforts,
including the expansion of our default management staff to
nearly 13,000. For all the customers who have now submitted
their documentation, we are confident that we can meet the
Treasury's requirement to fully underwrite 100 percent of these
loans before the trial expiration.
But despite these efforts, it was clear that some portion
of these customers who are facing a December 31st expiration
would not be able to complete the process and would narrowly
miss the deadline. Late yesterday, after a meeting with the
Treasury Department, where we discussed our concerns about the
looming expiration date, Treasury released new guidance that
will prove to be very helpful in relief to the customers who
have submitted all their documents and where servicers are
still working on completing the underwriting or the
notarization process. We think this new guidance will go a long
way to eliminate fallout on technical grounds, and we really
appreciate the assistance from the Treasury Department.
Today, I would also like to offer several areas for
consideration where HAMP could be enhanced to help more
customers. Based on the Treasury survey data, the total
customers eligible today for assistance of the program is
estimated to be 1.5 million. Bank of America's share of that is
about 340,000. Bank of America has made offers to 74 percent of
that population and has started trial modifications with nearly
half. This compares favorably to the latest Treasury report for
all servicers participating in the program.
We believe this demonstrates that HAMP is an effective
program in reaching certain borrowers. However, the program was
not designed to assist borrowers who have vacated their homes
or no longer occupy their home as their principal residence.
Nor was the program structured to assist for the unemployed or
those already with a relatively affordable housing payment of
less than 31 percent of their income.
We encourage Treasury to expand HAMP to assist in meeting
some of these challenges, specifically including a program for
the unemployed and allowances for a housing ratio less than 31
percent for the low- to moderate-income borrowers. In any case,
Bank of America will continue to provide solutions to these
customers that fall outside the reach of HAMP.
At Bank of America, our goal is to keep as many customers
in their homes as possible. We understand the urgency of all
solutions, not only for the customers we serve, but to further
encourage the housing recovery that has begun to take root. We
appreciate the continued strong support and partnership with
the Administration and Congress on this very important issue.
Thank you.
[The prepared statement of Mr. Schakett can be found on
page 140 of the appendix.]
Mr. Moore of Kansas. Thank you very much.
We next recognize for testimony Ms. Julia Gordon, senior
policy counsel for the Center for Responsible Lending. Ms.
Gordon, you have 5 minutes.
STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Good morning, Chairman Moore, Ranking Member
Capito, and members of the committee. Thank you for inviting me
today to talk about stopping foreclosures.
Without stronger policy intervention, not only will
millions of families lose their homes unnecessarily, but
foreclosures will continue to destroy communities, especially
minority communities, hamper the housing market, and slow or
prevent a full economic recovery. I serve as senior policy
counsel at the Center for Responsible Lending, a nonpartisan
research and policy organization dedicated to protecting
homeownership and family wealth.
We are affiliates of Self-Help, a nonprofit financial
institution that makes mortgage loans in lower-income
neighborhoods, and is consequently grappling with many of the
same issues encountered by other lenders. And my testimony is
informed by this experience. The government's principal anti-
foreclosure program, HAMP, has not reached its potential. One
obstacle impeding HAMP's success is that the private servicing
industry as a whole is either unable or unwilling to do what it
has agreed to do. To address this problem, Congress should
mandate loss mitigation prior to foreclosure.
For many servicers, only a legal requirement will cause
them to build the systems and safeguards necessary to ensure
that such evaluations occur before the home is lost. One
relatively simple way to improve the HAMP program would be for
Treasury to require servicers to stop all foreclosure
proceedings while borrowers are being evaluated for a HAMP
modification. Right now, foreclosures may proceed up to the
point of sale on a parallel track with the loss mitigation
discussions. As a result, homeowners receive a confusing mix of
communications from their lender, some of which tell the
borrower they're being considered for a modification, but
others of which warn of an impending foreclosure.
Confused borrowers who think they're going to lose their
homes may fail to send in their documentation, may default
early on a trial modification, may not answer the phone when
their servicer calls, or they may leave the home, which makes
them ineligible for HAMP. It's also crucial for Treasury to
make the NPV model public, so that homeowners can tell whether
their HAMP evaluation was done correctly, and for Treasury to
provide full public access to the HAMP database to encourage
evidence-based program creation and ideas, similar to the way
we get full data under the ``Home Mortgage Disclosure Act.''
Only that data will be able to tell us what works and what
doesn't, what servicers are doing the best job, and whether
minority homeowners are being helped to the same degree as
White homeowners. The foreclosure problem also has evolved, and
we must expand HAMP to meet new challenges, such as negative
equity and unemployment. Others on this panel will talk more
about the importance of principal reduction, something we
believe would be enormously useful under this program, and we
also should expand HAMP to assist homeowners who have lost
their jobs and may not have the 9 months of guaranteed
unemployment income that they need to be eligible for HAMP. And
this is what would be done through Chairman Frank's TARP for
Main Street bill.
Beyond the HAMP program, we urge Congress to lift the ban
on judicial modifications of principal residence mortgages.
This solution costs nothing to the U.S. taxpayer. It's the only
solution that cuts through the Gordian Knot of second liens,
securitization, negative equity, and back-end consumer debt. It
would also serve as a stick to the carrot of HAMP incentive
payments.
Finally, we commend this committee for its work on
legislation to create the Consumer Financial Protection Agency
and we urge the full House to pass that bill this week. We now
know it's much less expensive and much easier to prevent these
problems than to clean up after them. The CFPA would gather in
one place the consumer protection authority which is currently
scattered across many different agencies, and it would remain
fully focused on the sole mission of protecting our families
and economy from the dire consequences of predatory lending and
consumer abuse.
Thank you for inviting me today, and I look forward to your
questions.
[The prepared statement of Ms. Gordon can be found on page
73 of the appendix.]
Mr. Moore of Kansas. Thank you for your testimony, Ms.
Gordon.
Next is Dr. Anthony B. Sanders, distinguished professor of
real estate finance, professor of finance, School of Management
at George Mason University.
Sir, you are recognized for 5 minutes.
STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF
REAL ESTATE FINANCE, PROFESSOR OF FINANCE, SCHOOL OF
MANAGEMENT, GEORGE MASON UNIVERSITY
Mr. Sanders. Mr. Chairman and members of the committee,
thank you for the invitation to testify before you today.
According to the Treasury Service Performance Report
through October of 2009, 920,000 trial modification plans have
been offered to borrowers, and 651,000 trial modifications have
been made. Given the fall off the cliff of housing prices in
many States, the surge of unemployment, and the evaporation of
liquidity for banks and related institutions in the second half
of 2007, I am frankly surprised that the servicing industry has
moved so quickly to make loan modifications in such large
numbers.
With 14.4 percent of borrowers in foreclosure or delinquent
on their mortgages, this creates an incredible challenge to the
servicing industry. It is a real challenge to servicers to make
loan modifications succeed when 70 percent of loan
modifications that have only interest rate cuts have gone into
default, redefault after 12 months. If the loan modification
affordability calculation is done, or HAMP only uses first lien
mortgages, the failure of these modifications is not
unanticipated. And as I mentioned in the House TARP hearings
during November 2008, the negative equity problem in the sand
States of California, Arizona, Nevada, and Florida is going to
be very, very challenging for the servicing industry.
Loan modifications must take into account consideration for
the negative equity position of households to determine the
likelihood of success in making these payments. Why are so few
loans expected to be permanent? Well, there are several reasons
for this. The first reason for the projected failure rate is
the degree to which many residential loans in the United States
are in a negative equity situation. According to a Deutsche
Bank research report, they are expecting 25 million homes to be
in negative equity position.
The second reason is the unemployment rate. While a 10
percent unemployment rate is bad enough, the true unemployment
rate, including wage and salary curtailment, is closer to 17\1/
2\ percent. This is a very challenging obstacle to overcome for
the servicing industry.
The third is the documentation problem, which we have heard
about today. To qualify for a trial loan modification, the HAMP
program is following the stated income approach that does not
require documentation. Like stated income loans, qualification
for temporary loan modifications is fertile ground for moral
hazard problems, where borrowers/applicants who are insulated
from risks may behave differently from the way they would if
they were fully exposed to the risk. In this case, borrowers
may not want to submit the required documentation, since they
may be denied for permanent modification. This is not to say
that some borrowers have not experienced true documentation
problems, which would be consistent with the dramatic growth in
demand for loan modifications through HAMP as servicing
entities ramp up their servicing efforts to meet the demand.
The fourth reason is that many borrowers are having trouble
making the three consecutive payments, because they either have
too much income, not enough income, or a house that has fallen
too much in value. The Making Home Affordable Program provides
a service performance report that rank orders the servicers in
terms of active trial modifications, a share of eligible 60-
plus days delinquencies, the higher the better.
The problem with this accounting for success, is it does
not control for servicers who are servicing loans in
particularly hard areas, such as bubble States like California,
Arizona, Nevada, and Florida. Servicers in these States where
housing prices have collapsed by as much as 50 percent in some
areas are going to be heavily challenged to perform these
modifications. When you add in the already high unemployment
rates in these States, these are indeed great challenges. In
addition, the highest unemployment rates by metropolitan area
as of September are: Detroit, 18\1/2\ percent; Warren, a
suburb, 17 percent; Riverside, 14.1 percent; Las Vegas, 13.7
percent; and L.A., 12.7 percent.
While Arizona has only an unemployment rate of 9.1 percent,
the difficulty of modifications must be considered when
combined with the crash of the housing crises that have
occurred there. The States and metropolitan areas with the
highest unemployment rates should be taken into consideration
when determining the loan modification success rates.
My recommendation is for Treasury to account for loans that
are serviced in the bubble States and the Midwest economically
malaised States, such as Ohio and Michigan. In short, modifying
loans in Nebraska is likely to be far easier than modifying
loans in Arizona, Nevada, and the Inland Empire. One thing we
should consider is allowing financial institutions, rather than
taking immediate hits to their capital when we have a
modification or default, allowing them to amortize their losses
over a 5-year period. That would enable sales of some of these
distressed assets as TARP was originally intended to do and
allow other participants to jump into the market to do more
innovative programs like short payoffs, short sales
foreclosures, conversions to leases, which Fannie Mae is
considering, and broader loan modifications that make
particular sense. Particularly given the vacancy rates in many
States in the housing market, conversions at least make some
sense when the comparatively low rental rates compare to
mortgage payments.
I appreciate the opportunity to speak with you.
[The prepared statement of Dr. Sanders may be found on page
136 of the appendix.]
Mr. Moore of Kansas. Thank you, sir. The Chair appreciates
your testimony.
And next, the Chair recognizes Ms. Goodman for 5 minutes.
Ms. Goodman is the senior managing director for Amherst
Securities.
You are recognized, ma'am.
STATEMENT OF LAURIE S. GOODMAN, SENIOR MANAGING DIRECTOR,
AMHERST SECURITIES
Ms. Goodman. Mr. Chairman and members of the committee, I
am honored to testify today. My name is Laurie Goodman and I am
a senior managing director at Amherst Securities, a leading
broker-dealer specializing in the trading of residential
mortgage-backed securities.
I am in charge of strategy and business development. To
keep abreast of trends in the residential, mortgage-backed
securities market, we do an extensive amount of data-intensive
research. I will share some of our results with you today.
As a result of my testimony, I hope to leave you with two
points. First, the housing market is fundamentally in very bad
shape. The largest single problem is negative equity. Second,
the current modification program does not address negative
equity and is therefore destined to fail. There is no single
solution to this crisis. The arsenal of measures must include
principal reduction and must explicitly address the loss
allocation between first lien investors and second lien
investors.
In order to place today's topic into context, let's look
closely at the housing market. The mortgage bankers delinquency
survey for Q3 shows that 14.1 percent of borrowers are not
making their mortgage payments. That is 7.9 million homeowners.
This dramatic increase from several years ago is the result of
three things: first, borrowers are transitioning into
delinquency at a rapid rate; second, cure rates are extremely
low; and third, the time between when a borrower first goes
delinquent and when the home is liquidated has lengthened
dramatically.
Given the current trajectory, we estimate that
approximately 7 million of these 7.9 million homeowners will be
forced into vacating their properties. This estimate of 7
million units includes only the borrowers who have already
stopped making their mortgage payments. It does not include the
250,000 new borrowers per month who are going delinquent for
the first time. Modifications can't help considerably as their
success rate has been low.
The real problem is that many borrowers have negative
equity in their home. Most borrowers don't default because of
negative equity alone. Generally, a borrower experiences a
change in financial circumstances, misses a payment on their
mortgage, and then reevaluates their financial priorities. If
the home has substantial negative equity, they will choose to
walk. A few numbers will help illustrate this point. At
Amherst, we did a study looking at all prime borrowers who were
30 days delinquent on their mortgage 6 months ago. Six months
later, we found for prime borrowers with 20 percent equity,
only 38 percent had become 60-plus days delinquent. For prime
borrowers with substantial negative equity, 75 percent had
become 60-plus days delinquent.
There is a substantial group of people who have argued that
the primary problem is not negative equity, it is unemployment.
This is not supported by the evidence. First, the increase in
delinquencies for subprime, Alt-A, and pay option ARM mortgages
began to accelerate in Q2 2007. By contrast, we did not begin
to see large increases in unemployment until Q3 2008.
Further evidence of the importance of negative equity comes
from another study we recently completed. We found that the
combined loan to value ratio, or CLTV, plays a critical role.
For Alt-A and prime loans in low unemployment areas, the
default frequency was at least 4 times greater for borrowers
underwater by 20 percent than it was for borrowers with at
least a 20 percent equity position. We also found that if a
borrower has positive equity, unemployment plays a negligible
role. All borrowers with positive equity perform similarly, no
matter what the local level of unemployment. Indeed, negative
equity is the most important predictor of default. When the
borrower has negative equity, unemployment acts as one of many
possible catalysts greatly increasing the probability of
default.
HAMP modifications, as you are aware, are primarily a
payment reduction plan. HAMP has three fatal flaws. First, the
agent retained to make the modification was a mortgage servicer
rather than an originator. Second, HAMP only considers the
first mortgage payment, taxes, and insurance. It does not
consider the borrower's total financial circumstances. Third
and most importantly, the program does not emphasize the re-
equification of the borrower.
What can/should be done? Here are some imperatives. First,
there is no ``one-size-fits-all'' approach to modifications.
Second, moving principal reduction higher in the HAMP
modification waterfall would be the most natural way to raise
the success of the modification program. Would investors
support this type of program? Absolutely. While foreclosure is
devastating to a borrower, it's also devastating to an
investor, because recovery rates are low. The interest of the
first lien investor and the borrower are totally aligned.
Third, any principal reduction program requires the
Administration to address the second lien problem head on.
Fourth, we endorse the revamped HOPE for Homeowners Program.
Fifth, we need more transparency on the data.
We are concerned that if policies continue to kick the can
down the road, working with a modification program that does
not address negative equity, delinquencies will continue to
spiral with no end in sight.
Thank you very much for allowing me to testify today. I am
happy to answer any questions. It has been an honor.
[The prepared statement of Ms. Goodman can be found on page
68 of the appendix.]
Mr. Moore of Kansas. Thank you, Ms. Goodman, for your
testimony.
And finally, the Chair recognizes Mr. Bruce Marks from
Neighborhood Assistance Corporation of America.
Sir, you have 5 minutes.
STATEMENT OF BRUCE MARKS, CHIEF EXECUTIVE OFFICER AND FOUNDER,
NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA (NACA)
Mr. Marks. Thank you very much. It is very good to be here.
My name is Bruce Marks and I am CEO and founder of NACA, the
Neighborhood Assistance Corporation of America. We are a
nonprofit homeownership advocacy organization.
I am not going to read from the prepared remarks that we
have done, because I think we have an interesting panel. So I
want to respond to some of the points that were made in the
panel.
One thing I wanted to go through is we have legally binding
agreements with every major servicer and the two major
investors in the country for closure prevention. So we have
Bank of America, Citi, Sachs, and Fannie Mae. These are legally
binding agreements: Litton, GMAC, Freddie Mac, One West, Chase,
Wells. We have American Homes, HSBC. Again, every one of the
major servicers in the country and every one of the major
investors in the country, we have a legally binding agreement.
There are only two real solutions out there. One is to
restructure the mortgage for someone with a stable income to
make their mortgage affordable, not to refinance. To
restructure by permanently reducing the interest rate or the
outstanding principal to make it affordable, and I say
permanent. That means not a reset in 5 years to make that
payment affordable, and we agree with what Laura and some of
the other people on the panel said: We should do more principal
reductions so you can keep the re-interest rate at the market
rate, and make it affordable by doing a principal reduction.
That clearly hasn't happened.
The other action, which you do when someone does not have
stable income, because they are unemployed, is a forbearance
agreement. Lenders have been doing the forbearance agreements
for many, many years, and they really continue to do that.
We have homeowners here: Dana Holmes, who is in the
audience; as well as Paul Roberts. Dana went to a Save the
Dream event that NACA has been doing. We have done 12 around
the country. Each one has about 40,000 to 60,000 people in
attendance. Paul has reduced his mortgage payment by $1,400 a
month. He is at a new fixed-rate at 3 percent locked in. Dana
has gone to one of the Save the Dream events, saving $833.
Again, she is in the audience, with an interest rate of 3
percent fixed, as well. But I think it's really interesting to
hear we have two of the major servicers here.
We have Bank of America and we have Chase. So one of the
things we have heard about is what is not working. Well, let's
take the two examples of who we have here. We have Bank of
America. What they have done at the Save the Dream events is
that they are doing on-site mortgage restructures, and that
means that they get all the documents, they get the
verification of income.
They get that piece done, and they actually have the
homeowners signing the legal documents, signing them at the
event so people in one place are walking away with a
restructure, saving $500, $1,000, sometimes $2,000 a month,
getting the job done. And almost 15 percent of the people who
are coming through are doing that.
Then you have Chase. Chase, out of all these servicers
here, is the worst. And the fact of the matter is when you look
at their documentation and you look at what they're doing, they
are playing you. The fact of the matter is, when they say that
they are doing these trial mods, and all of that, and all of a
sudden, it's the borrower's fault because the homeowners can't
get the documents there, it's because they're underwriting them
after 3 months, so they refuse to do on-site, permanent
restructures. They put people through the process.
They're impossible to work with. Talk to the homeowners
about that. So I think it's a really interesting contrast that
you have the one who does the best, and that's Bank of America,
and the one who does the worst, and that is Chase. So when you
get Jamie Dimon up here, ask him for the facts of that.
Let's talk about what the solutions are and what they
really should be. Well, the Administration has to stop
pleading, begging, and bribing the servicer to do the right
thing, because the fact of the matter is a lot of their
business models don't work. They're in the collection business.
They're in the business of remitting that money to the
investors. They're not in the origination business, which is
what we're at now.
So the fact of the matter is, where are the OCC and the
Federal Reserve? They should be requiring the servicers to do
the mortgage restructures, to do what they should be doing.
That's their job, and that doesn't require the TARP money.
Clearly, when we had a financial crisis, we required the lender
to take the TARP money, because there was a safety and
soundness issue. We can have that same standard, that same
standard to say, let's require the servicers, the lenders, to
stop the foreclosures, to restructure the mortgages and to make
them affordable without use of the taxpayer money out there.
So thank you very much. I would be glad to answer any other
questions.
[The prepared statement of Mr. Marks can be found on page
115 of the appendix.]
Mr. Moore of Kansas. Thank you, Mr. Marks, and I thank all
of the witnesses for their testimony here today. I will start
with you, Ms. Sheehan, representing Chase.
You just heard Mr. Marks's testimony. Would you have any
response or any reply to some of his comments, ma'am?
Ms. Sheehan. We have been working with Mr. Marks's
organization for quite a while. We think they do a great job in
their outreach events and bringing homeowners out to talk to
us. We have a process that we have established in terms of how
we do our intake for our events. It is a slightly different
process, perhaps, than Bank of America. And I'm sure each of us
has different processes, but we have worked very, very hard to
make sure that we get the documents in. We have a dedicated
portal. We image documents. We put them together and then they
go through our prequalification process.
I know there have been bumps along the road, absolutely,
particularly in building-up capacity to manage the outreach
process with Mr. Marks, but we continue to work very, very hard
and we will certainly follow-up with him after this hearing and
talk further about how we can do better.
Mr. Moore of Kansas. Thank you. Do any other witnesses have
a comment on my question? Anybody else?
When it comes to foreclosures, I continue to be troubled by
stories of mortgage fraud and individuals who are trying to
make a quick buck by scamming innocent people. To any of our
witnesses, what steps, Ms. Sheehan, or others, is Chase or
others taking to ensure your customers are not taken advantage
of? Is there enough information being provided to the general
public about what a legitimate mortgage foreclosure mitigation
plan is compared to a scam? Is there more education that needs
to be done so innocent people are not taken advantage of? Any
of the witnesses, Ms. Sheehan or others?
Ms. Sheehan. Certainly, there is a lot of work that needs
to be done in the scam process. I think we have made a lot of
progress. We have worked with the FTC making sure that we are
getting information to them when we learn about scams that are
going on. We have put together booklets with the FTC that we
include in all of our conversations with our customers. We
continually remind them that they don't need to pay for a
modification.
Mr. Moore of Kansas. Thank you. Do any other witnesses want
to answer that question? Mr. Marks?
Mr. Marks. Yes. The answer is, if you consider those
servicers out there who are doing the fraudulent activity, you
have to reconsider them as roaches out there. You can't kill
off all the roaches by stomping them all out; you have to cut
off their food source. And the food source is the lack of the
ability where some homeowner goes to the servicer to get a real
solution right then and there. So, the focus should be on
really requiring the servicers to get the job done, because if
you do that, then you're going to prevent all these frauds.
Clearly, it should be outlawed that no one should charge
anybody to save their home because they should be working with
the servicers and the nonprofits who don't charge to do that.
But, we have to focus 100 percent on getting the job done.
Everybody who comes to an NACA Save the Dream event has tried
to work with a servicer and has failed. So, we have to really
put these players out of business, and frankly, put the
nonprofits, the NACA's and the like, out of business because
our job should become irrelevant if the servicers are required
to do these restructures and the forebearances. Thank you.
Mr. Moore of Kansas. Do any other witnesses care to
comment?
Mr. Sanders. I just want to add to what he what he was
saying. I disagree with, in part, what he's saying because,
again, supposing a borrower doesn't like what they're hearing
from the servicer. They may want to get legal representation or
an organization to try to push the envelope. You have to be
very careful about trying to regulate people out of these
industries. It sounds good, but I think there might be people
who want additional representation, although I really don't
like the scammers, either.
Mr. Marks. And we shouldn't agree with that because at
these events, we also do a forensic audit of the loan, so on
the pick and pay and all that, you find that 80 percent of all
the pick and pays in the country that, you know, that there's
something that was done illegally, so that when we do a
forensic audit, we find the violations and that gives the
borrower a better opportunity to get a long term solution, so
absolutely.
Mr. Moore of Kansas. Thank you to my witnesses. My time has
just about expired. I'm going to next recognize Mrs. Capito,
please.
Mrs. Capito. Yes, thank you. There are two things that are
troubling me here. First of all is the, I guess the conflicting
information, but the information that once people, well, when I
learned at the last hearing that in order to go into a trial
modification, you don't have to have your documentation before
you. You can go ahead and go into the trial modification for 3
months without the documentation. But, according to what Ms.
Sheehan is saying, and then after you're requesting these
documents, that they're not forthcoming with a large percentage
of the folks who are trying to modify their loans.
What is the principal reason that people aren't coming
forward? Is it as the gentleman just said, they don't like what
they're seeing, or they're just postponing the inevitable, or
what is the reason for this?
Ms. Sheehan. Certainly, a lot of the situations that we see
are where they have submitted some of the documents but not all
of the documents. And--
Mrs. Capito. Exactly. They have to have income tax--
Ms. Sheehan. Right. So--
Mrs. Capito. Proof of employment.
Ms. Sheehan. Yes, and it could be, but frequently it may be
documents that they don't have easy access to--
Mrs. Capito. Like?
Ms. Sheehan. For example, a supporting death certificate or
divorce decree. Mr. Marks made the point that this is a true
origination process, it's really, truly underwriting a new loan
and so what we are looking at, as you said, all of the
different financial aspects of their situation. And so it is a
challenge for borrowers and we're trying to help them, we're
trying to help them overcome that challenge.
Mrs. Capito. Mr. Schakett, do you have the same situation
at Bank of America?
Mr. Schakett. Yes. That's definitely true. I think that one
thing that when they were first setting up HAMP, there was a
lot of discussion around whether or not we should require full
documentation, partial documentation, or no documentation to
start the trial mod period. Obviously, at that time, I think
there was a general consensus that we supported that we have a
lot of pent-up demand right now, we need to get the customer
started as soon as possible, so people erred on the easy side
in the beginning of the program, they said, make it no
documentation, oral commitment to what you make, start the
trial period, use that trial period to gather the
documentation, hopefully that you would actually then solve the
documentation problem, at the same time and parallel with the 3
months' trial payments.
Clearly, what we're now looking at, we're at a pretty high
fall-out ratio. We think it's time probably to maybe change the
process slightly. We would advocate up-front now to require
some documentation, at least two documents: the hardship
affidavit, which is fundamental to the program, to prove what
kind of hardship, and it also has language about making sure
everything you're saying is truthful; and then assign the 4506-
T, which lets them know that we'll be pulling a tax return at
some point in the future. So, if there are customers who
potentially were trying to game the system, that might root out
those customers up-front and eliminate, maybe, some of the
conversion problems we have today, so this at least is our
view, it may be a good time to challenge what documentation
we're requiring up-front to make it a little bit tougher to get
into the program, still allowing the time to finish processing
the loan, this added on to the end of the trial because that
parallel processing still, I think, is a good idea, because
there are a lot of documents to get and trying to get them all
up-front would maybe unnecessarily delay the start of the
process.
Mr. Marks. And if I can add just one thing to what they're
saying is that, it's not a difficult process. It's really a
simple process. If we can do it in the same day, get same-day
solutions, all you need is three documents: the hardship
affidavit; the 4506-T authorization; and verification of
income. So, we don't believe that you should do the no-docs. We
believe in the trial mods, but you should underwrite it on day
one, end it, get it done, after 3 months of making on-time
payments, it gets done.
The other problem is that homeowners have lost confidence
in the servicers. And so, if the process doesn't work, people
don't trust the servicers out there, and somehow, we have to
re-establish the trust between the homeowners and the
servicers. But, just get it done at the beginning, get the
verification. I think that the fact of the matter is, they
required more documentation at the beginning of the process.
The Administration has made it a simpler process so--
Mrs. Capito. Well, I would certainly say that, to have some
up-front documentation, like I said, I was astounded to hear
there was no documentation in the beginning. This is the
problem that we had when we started. And I am talking way back
here.
The other thing, I think that Ms. Goodman brought up, was
that the negative equity situation when challenged whether it
was unemployment driving a lot of this now. Well no, not
really, it's more negative equity or people are underwater. I
don't see how you solve that problem. Luckily, I am from a
State, West Virginia, where we don't really have that problem,
but these States like California, Florida, and Nevada, they are
so far underwater. They are underwater by amounts that are more
than the median home price where I live. And, people have to
feel just desperate, that there's no way that they can get out
from under. So, I think that is a huge hurdle to overcome here
and it's one that you can't do overnight. It's not like, you
have lost your job, you have a new job. It's like, you have
time here, and I think my time's up, but anyway, that's just a
comment I wanted to make. Thanks.
Mr. Marks. Is it possible to respond to that? Do you mind?
If I can do that quickly?
Mr. Moore of Kansas. We do have other people who want to
ask questions. You can respond in writing. In fact, the Chair
encourages anybody who would like to provide additional
testimony, to give us written testimony that will be provided
to the members up here. Thank you, sir. The Chair next
recognizes Ms. Waters of California for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. And I
apologize for not being able to get here earlier today. Let me
just say that I have spent a lot of time trying to understand
why we can't get loans modified quicker. I don't buy the White
House's latest attempt to prod servicers into doing loan
modifications. I don't think the jawboning and trying to
embarrass these servicers into doing the right thing works.
I think that we have to have stronger legislation. I think
I understand a lot about loan servicing, and Mr. Marks, you're
absolutely correct. I see no reason why you cannot do a loan
modification in the same day that you're contacted, with
limited documentation. I'm not saying no documentation. But you
know, this business of the trial for 3 months and then the
request for 6 months' worth of bank statements and on and on
and on.
In my office, we're helping people 75- and 80-years-old try
to put together requests from servicers that professionals
working every day can't put together very easily.
And the other thing is, these many servicers, why do you
lose so much? Most of the time, I'm getting calls about people
having to submit papers a second and a third time. Also, I get
the feeling that some of our companies have just brought in
servicers and they gave them a 2\1/2\ hour training session and
put them out there to try to do loan servicing, and then they
tell my constituents they can't take into account certain kinds
of income that are not valid.
I don't care where the money comes from. Child support,
unemployment, Social Security, all of that should be taken into
consideration. But, I'm talking to servicers, because I get on
the phone with them, and I get on the phone with my
constituent, I get a waiver for my constituents to talk
directly to the servicers, to assist them.
I'm just amazed at what appears to be incompetence. I'm
amazed at the requests for all of this documentation: the bank
statements; the tax filings; and on and on and on. It is not
necessary and they're not getting it done. We know that they
are not getting it done. The White House is embarrassed about
this and people are losing their homes who could remain in
their homes.
In the Recovery Bill that is going to be on the Floor
tomorrow, we're going to try and do something for the
unemployed because we have reverse mortgages where people get
reverse mortgages, get money up-front, and then when the house
is sold, or what have you, the money is paid back. We could do
that with the unemployed, you know, when the house is sold, we
could lend money up-front and they could pay it back when the
house is sold.
But, I tell you, there is not a real effort by the mortgage
companies or the banks or the servicers, or whomever, the banks
own most of these servicers and operations, to really do loan
modifications. That's the bottom line. You don't want to do
them. And so, not wanting to do them, you don't care about HAMP
or anything else, you just don't want to do them, so I am
looking for stronger legislation to force these modifications.
I'm looking for ways to expedite, as Mr. Marks explained, and I
didn't hear some of the other testimony.
But, it's not a lot that can be told to me about the
``can't be done,'' that people are not getting their paperwork
in, that somehow people signed on the dotted line and now they
don't want to take responsibility.
I have been looking at, if I may, I have been looking at
some of these mortgages where they readjust in perpetuity. They
readjust every year for the rest of the loan up through 2034,
2035, and on and on and on. Those should be modified on the
spot. It has nothing to do with anything except that's a
predatory loan.
And for those servicers and those companies who have those
bad products that are out on the market and they have people
who are in trouble and they're saying they can't modify those
loans, I'm coming after them with some real legislation to do
so. Some of the loans are predatory. Some of them are, people
have been defrauded and I want those loans modified even if
they work every day and they can afford to pay the loan, those
loans have to be modified along with people who don't have the
money because they have lost their jobs, etc. I yield back the
balance of my time. There is not a lot else to be said about
this mess, Mr. Chairman.
Mr. Moore of Kansas. I thank the gentlelady for her
questions and her comments. Next the Chair recognizes--
Mr. Marks. If I can just comment--
Mr. Royce. I think we're into my time now.
Mr. Moore of Kansas. It's Mr. Royce's time. The Chair will
recognize Mr. Royce for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Moore of Kansas. And I want to say--excuse me--to the
witnesses, that they have an opportunity to submit written
statements, as well. Mr. Royce?
Mr. Royce. I appreciate that, Mr. Chairman. I just make
mention here, Ms. Sheehan in her testimony said that JPMorgan
Chase had successfully prevented 730,000 foreclosures and Mr.
Schakett mentioned that the Bank of America assisted 615,000
customers in the first 6 months of 2009 to refinance into more
affordable mortgages at a lower interest rate. Now, the
Administration and some of the Members of Congress here would
like to change the Bankruptcy Code so that bankruptcy judges
could write down principal. This doesn't just have to do with
writing down an interest rate; it has to do with reducing
principal on a loan. And if the borrower understands that if
they wait and don't renegotiate because we might do these huge
write-downs of principal, why would the borrower continue to
work at the table to try to stay, try to work out an
arrangement for a lower interest rate? That would be one of the
questions that I would ask.
Mr. Schakett, do you have any thoughts on that? What would
happen, in other words, to your efforts to restructure, to
continue to restructure these loans, should that kind of
legislation pass?
Mr. Schakett. Well, certainly there is risk if the customer
believes he has two outlets to restructure his loan. One, to
work with the mortgage company in existing programs like HAMP
to modify or seek judicial process to modify, and if he
believes he could get a better deal judicially, you're right,
there is some risk it actually would undermine the HAMP
program.
You know, our view is if the Congress and the
Administration determines we should do more in principal
reductions for certain borrower segments, we have to work that
into some leg of HAMP, okay? And I think there could be some
borrower segments, very high LTV's, the late stage
delinquencies, that because there's a large unwillingness
problem, maybe there should be some sort of a principal
forgiveness program that the government participates in. But,
it would be best served, I believe, by putting that through a
process that works for everybody and is actually sponsored by
the Administration itself versus through a judicial process.
Mr. Royce. You see, one of the concerns I have here is
having fought in the past against some of the policies that
encourage Fannie Mae and Freddie Mac to do some of the types of
lending they did with zero downpayment loans, subprime loans,
half of their portfolio being subprime, my concern is that we
now go to a situation where if this cram-down concept goes
through, it's going to have an effect in the future on mortgage
rates. And I want to ask Professor Sanders about this.
What's going to be the effect going forward on the
secondary market? Are lenders going to have to reprice their
consumer mortgage products in order to adjust for the risk to
investors presented by something like bankruptcy cram down? Is
that the likely consequence of legislation like this?
I remember a Justice, Supreme Court Justice John Paul
Stevens' comment that there's a reason the Bankruptcy Code does
not treat residential mortgages like it treats credit cards or
auto loans. And basically, what he said was, we want to ensure
investment certainty and encourage the flow of capital into
this market. If Congress keeps making mistakes, errors in
judgment, that balloons the market, like what was done with
Fannie Mae and Freddie Mac, and then comes back with cram-down,
or legislation like that, do we drive the private capital out
of the market?
At the end of the day, I don't think Congress did any
favors for disadvantaged people by pushing Fannie Mae and
Freddie Mac and mandating that half of their goals, mandated
that half of that be subprime and Alt-A loans. That was a huge
mistake for Congress to make. Zero downpayment loans, frankly,
by Fannie and Freddie, that was a huge mistake. We're now
living with the fact that people took advantage of that,
obviously, as everybody would. If you could capital at those
rates and with no money down, if you could flip homes, 30
percent of the homes in 2005 were flipped in this country.
So, we knew what was going on. Let me ask you, Professor,
your observation on that.
Mr. Sanders. Well, first of all, I think you were spot-on
at the beginning that the write-down of principal, while it is
desired by anyone who is in that position, has serious moral
hazard implications about waiting and actually going to the
default if you know you're going to get a principal write-down.
But secondly, on the secondary markets, Andy Davidson and I
wrote a paper for the MacArthur Foundation called,
``Securitization After the Fall.'' And what we said was, if we
want to get the whole securitization market, which is really,
really important for the mortgage market and the housing market
to recover, we have to establish trust so investors around the
world, the United States pension funds, have to trust that the
securities market is going to work, etc.
And the problem is, if we go to cram-downs, cram-downs, I
think, will send a shock wave through the international markets
that, oh, my gosh, we're going to allow judicial intervention,
and they're probably not going to be consistent, they're going
to vary by jurisdiction, it's just a terrible signal we're
sending to the capital markets around the world, if we pursue
that.
Mr. Royce. As nobly intended as it is. Thank you,
Professor. Thank you, Mr. Chairman.
Mr. Moore of Kansas. Thank you. The Chair will next
recognize Mr. Clay of Missouri for 5 minutes.
Mr. Clay. Thank you so much, Mr. Chairman. Along the same
lines as Ms. Waters, some of the strategy that we see now
deployed by mortgage holders and banks does not make good
economic sense. Why haven't we seen an effort to keep people in
their homes instead of removing them? And then leaving the home
vacant and reducing the value of the surrounding property in
the neighborhood. If it is about the bottom line and profit
motive, would it not be a better business strategy to keep
people in homes? Doesn't the mortgage holder or the bank have
to maintain utilities and to keep the water on in those
facilities?
Let me ask someone on the panel, and maybe Ms. Sheehan or
Mr. Schakett could take a stab at this. What is more cost-
effective for banks and mortgage holders, to evict and/or
foreclose on a home, is that more cost-effective, or would it
be better to work out some arrangement, even if the homeowner
is reduced to paying rent in order to keep them in that house?
What would be more cost-effective to the banks or the mortgage
holders?
Ms. Sheehan. I would say that, obviously, when we look at
our distressed borrowers, the first thing we do is make a
consideration about whether or not we can achieve an affordable
and sustainable monthly payment for their housing under a
modification program. That's what we're trying to do because
generally speaking, that is going to be more cost-effective
from an investor or lender perspective than a foreclosure. So,
absolutely, that is part of the process that we follow.
Mr. Clay. Well, but think about the difficulty when you
remove a family from a home, then it's vacant, then you drop
the overall value of the homes in that neighborhood. Then, your
profit is reduced when, even if you're able to sell that home.
It is just a strategy. Mr. Schakett, you may--
Mr. Schakett. Well, you're right. There's no question. When
we make the calculation, is it better to try to make an
affordable payment for the customer versus take the home away
from the customer, part of the calculation of taking the home
away recognizes that if we take it away, we do have to pay the
bills while he's not there, there are eviction costs, it does
take a while to market the property, the property could decline
in value further which makes it even worse for us. So, all of
those calculations are part of the math which weighs heavily in
the favor of the consumer that says as long as he can make some
kind of reasonable payment, it is almost always better to keep
the customer in the home. That's exactly right.
Mr. Clay. But we are not seeing that trend now among
mortgage holders who are saying, let's make every effort to
keep people in their homes. We're not seeing that.
Mr. Marks. Sir, if I can respond?
Mr. Clay. Yes.
Mr. Marks. Because there are two separate pieces. One is
the servicer. If the servicer does nothing, and it goes to
foreclosure, they lose nothing. The other is the investor. And
then we always hear from the servicer that says, you know, we
would love to do it, but the investor says, no. The fact of the
matter is, they virtually never, ever contact the investor.
What they do is they go to the trustee who tends to be the same
entity the servicer is and says, what does the pooling and
servicing agreement say? That's the contract between the
servicer and the investor. So, while they say it's the
investor's problem, it's not. When you talk to PEMCO and the
biggest investors out there, they say, we want to do these
modifications, we actually want to do the principal reductions.
But we're not seeing that. So, the fact of the matter is, the
servicers lose very little if it goes to foreclosure. It's the
investor who loses. And they very seldom ever talk to the
investor and then the lawyers for the servicers says, well,
they take the conservative approach. So, they find a reason to
say no, as a reason to say yes, but reading the pooling and
servicing agreement, the PSA, in a very conservative manner,
which hurts everybody, as you say, sir.
Mr. Clay. Well, don't the servicers have a fiduciary
responsibility to the investor?
Mr. Marks. That's right, and you know, from our opinion, we
think that they're in violation of their fiduciary
responsibility because they find a reason to say no when their
approach has been the opposite, where they should be saying yes
in a lot of cases.
Mr. Clay. Thank you.
Ms. Goodman. Let me just make one more point and that is
that many borrowers are so far underwater that they don't want
the modification; the current modification program doesn't work
for them. You need to go to some sort of a principal reduction
program. They still legally owe the money even if they're
making a lower payment.
Mr. Moore of Kansas. The gentleman's time has expired. Any
other witnesses who with to make a comment are certainly
invited to do so in writing, please, for the record, because
that is helpful. The Chair next recognizes the gentleman from
California, Mr. Baca, for 5 minutes, sir.
Mr. Baca. Thank you, Mr. Chairman, and thank you for
holding this hearing. In my area, we probably have the third or
the fourth highest foreclosure rate in the Nation, so it has
really impacted the Inland Empire, and in my neighborhood, I
have homes that are basically vacant or have just been rented.
And it seems like many individuals who have lost their homes or
are in the process of losing their homes are stating, why
should I continue to pay the high rates that are currently
there right now when the property value has even gone down so
much, so they end up vacating their home and then renting,
which is a problem that we have.
But my question pertains to the HAMP program. A lot has
been made about the HAMP program and its inability to help
families whose breadwinners have become recently unemployed
because of the current economy. In many of these situations, it
is actually better for the lender to foreclose on the property
and I state, it is better for the lender to foreclose on the
property.
Moreover, there is evidence showing that permanent
modifications for unemployed individuals actually end up
hurting the taxpayers because of the government ownership of
Fannie and Freddie. Because of this, there have been plans that
actually called for limited modification for unemployment and
actually called for use of housing vouchers or grants to be
used. Could you comment on the feasibility of such an approach,
addressing what's possible, pros and cons that may be, and I
address this question to Mr. Marks.
Mr. Marks. Sure. Thank you. One is that, with someone who
is really unemployed, servicers have done this for many years,
there's a standard practice where they do a forebearance for 3
to 6 months. And, you know, they should be doing that. So, you
don't need MHA, frankly, you don't need the government
subsidies to help the servicers to do that. So, it's really an
enforcement part.
The other problem, and I think it's a very good point, is
that we are getting people locked in at a 2 percent interest
rate for life. Well, that's a nice piece, but that shouldn't be
the answer across-the-board. What should be the answer is,
let's put someone on affordable payment at a market rate and
reduce the outstanding principal because that's better for the
economy, it's better for the homeowner, it's better for the
community.
And under MHA and under HAMP, you see virtually no
solutions when there's a principal reduction or forebearance.
Everything is interest rate reduction. We don't think that's
the right answer across-the-board. We agree with the investors
out there who say that is not the right answer across the
board. They would rather have a significant principal reduction
closer to the current value of the property and keep the
interest rate at the market rate and we think that, you know,
MHA and HAMP, should be reconfigured to re-encourage that,
please.
Mr. Baca. Thank you. And you're saying that the current
rate of the market today, not what it was before they
foreclose, is that correct?
Mr. Marks. Absolutely. It's all about the affordable
payments, how you get to the affordable payment, so once you
look at 31 percent of the gross income or you take the net cash
flow to determine an affordable payment, which is less, then
how you get there is up to the servicers and the investors. And
while you can reduce the interest rate to 2 percent or 3
percent, like you have heard here, to get to that, maybe you
could keep it at a 5 percent interest rate and reduce the
outstanding principal by $50,000 or $100,000 to get closer to
the current value of the property.
Mr. Baca. Mr. Sanders, would you like to tackle this?
Mr. Sanders. The whole issue of the interest rates is a
fascinating one. I think we are price stressing it too much and
the one thing I want to add to that, though, is that I'm hoping
everyone considers the fact that if we do, in fact, move to 2
percent loans for a large segment of the population who are in
financial difficulty, etc., which again, is very noble
sounding. So, I want to point out that somebody's going to be
holding those notes, and when high inflation and high interest
rates suddenly go ka-boom in a few years, which they will,
whoever's sitting on that paper is going to have catastrophic
losses. Right now, the Fed is sitting on that, but Freddie is
insuring this and we have to again, be, I think, very careful
of the long-run implications of what we're doing here.
Mr. Baca. Yes, but the people who are holding those notes
really have been the greedy ones who took advantage of those
individuals, right? So why not make them lose? If those are the
ones holding the notes, hey, I don't mind them losing because
they got greedy in the first place.
Mr. Sanders. Well, if pension funds and the Federal Reserve
are the greedy ones, then I don't think so. This is going to
hurt a lot of people and it's just not what you call the greedy
folk, it's going to be folks around the world who are going to
suffer when we get inflation and interest rates going up.
Mr. Baca. Okay, thank you. Thank you, Mr. Chairman.
Mr. Moore of Kansas. Next, the Chair recognizes the
gentleman from North Carolina, Mr. Miller, for 5 minutes.
Mr. Miller of North Carolina. My impression from that
period is that the voluntary modifications took a huge spike,
and that the total number of modifications by courts was a
relatively small percentage. But it provided a template for
other modifications.
Ms. Gordon, are you aware of what went on during that
period? Was there a dip in voluntary modifications?
Ms. Gordon. No. There was not a dip in voluntary
modifications. And to add to what you just said, in a number of
States around the country--until the Supreme Court decision on
this topic, many States permitted bankruptcy judges to ``cram-
down'' principal residence mortgage debt in bankruptcy court,
and those States didn't have any different situation with
respect to the cost or availability of credit than the States
that didn't have it.
Bankruptcy is a very difficult process for an individual or
a family. Chapter 13 bankruptcy is onerous. You have to live
under a very strict plan. You're monitored by the court for 5
years. This is not a choice that anybody chooses lightly.
We have two situations now. We have the situation in that
the voluntary modifications are not happening, and it is all
utterly out of control of the homeowner. They have no last
resort that they can initiate themselves which would serve as a
backstop to the servicer's responsibility to help them try to
address whatever problems they're facing with the mortgage. So,
on the one hand, the ability of the bankruptcy judge to help a
homeowner out gives a homeowner a last resort.
We have another situation in that many of these distressed
homeowners are financially distressed generally, and already
are filing for bankruptcy. They're already in bankruptcy court.
It's just that the judge doesn't have the power to do the main
thing that will actually ultimately make them successful in
Chapter 13, and able to continue to pay back all of their other
consumer debt that they owe, which is that the judge doesn't
have control over their principal residence mortgages.
For those homeowners, one thing that is especially
important is right now most participating servicers aren't
permitting folks who are already in bankruptcy to do a HAMP
modification. So they're really stuck. They can't get the
voluntary modification because the servicers don't want to do
it for people in bankruptcy. But the bankruptcy judge can't
help them out, either. So those people are really locked out of
the process.
Mr. Miller of North Carolina. Ms. Gordon, you mentioned
studies based upon the differences from jurisdiction to
jurisdiction between, I guess, 1978 and 1994. There was a study
I know by a fellow named Leviton at Georgetown, and I think he
had a co-author who was, I think, at Columbia. I think they
were both economists and lawyers, bankruptcy lawyers, who
looked at the differences and found no difference in the
availability or terms of credit. Is that what you're--are there
other studies, or--
Ms. Gordon. There are not that many studies on this
particular issue. But there are a number of studies, some of
which we have done at the Center for Responsible Lending, some
of which have been done at UNC and other research institutions
on related issues.
You know, the fact is, every time there is a program--there
is an idea to help homeowners--
Mr. Miller of North Carolina. Okay.
Ms. Gordon. --the mortgage industry will come back and say,
``Well, this program is going to impact the cost and
availability of credit.''
Mr. Miller of North Carolina. Right.
Ms. Gordon. And for every one of those--every time that has
been asserted, studies have demonstrated that it's not the
case.
Mr. Miller of North Carolina. In an 8th grade math class,
we had to show our work. We just couldn't give an answer, we
had to show how we got there. And I understand at the graduate
level that's referred to as peer review. You have to set forth
what your assumptions are, what your methodology was, what
facts you relied upon, and then your analysis, and walk through
the analysis. And then other scholars in the same field can
look at it and test those assumptions.
Mr. Sanders, are you--can you give me a citation to a
published, peer-reviewed study that shows that judicial
modification makes voluntary modifications more difficult?
Mr. Sanders. That's a very good question. And I will send
it back to you, saying that we are--as Laurie has testified
to--we are in such unchartered waters that all that matters is,
with a 50 percent decline in house prices, we will see how this
works.
No, I have no evidence that--Ms. Gordon was referring to--
that this was going to be terrible. However, when we're this--
with high unemployment and this far upside down in many--or 10
States, at least, in the United States--I will believe that
when I see it.
Mr. Miller of North Carolina. Professor Sanders, isn't it
true that under the bankruptcy laws, every other kind of secure
debt can be modified in exactly the same way that the
legislation we talked about last year would modify home
mortgages? Every other kind of secure debt?
Mr. Sanders. That is true.
Mr. Miller of North Carolina. Okay. Thank you.
Mr. Sanders. But there is a reason why they're not.
Mr. Miller of North Carolina. I'm sorry. What?
Mr. Sanders. There is a reason why mortgages were not
included in that--
Mr. Miller of North Carolina. That's the only reason?
Mr. Sanders. No, I didn't say that is the reason. I am
saying mortgages are not included. And that was a statement.
Mr. Miller of North Carolina. Okay.
Mr. Sanders. Not a reason.
The Chairman. The gentleman from Georgia.
Mr. Scott. Thank you, Mr. Chairman. Let me start with this,
because we're in a terrible situation here and I have had
difficulty since we have been in this crisis of understanding
why there has not been a sense of urgency.
Now, we have moved in good measure to save Wall Street. I
had no argument with that. The credits were frozen up; we had
to do that. But we did it with urgency. We did it with
abundance. We did it $700 billion first. The Fed came in with
another $1.2 trillion. But when we get down to the homeowner,
we crunch and we worry about these things.
We went outside the box to save the American economy
focusing on Wall Street, and did a good job with that. No
question. But when it comes down to rescuing the homeowner,
which, in large measure, was the core cause of the problem, we
stay in this box. Why is it that we can't intelligently look at
what I think is the foremost issue here? And that is reducing
the principal. Why is it--what is it about this?
Here we are, at the end of this year, we will lose 2.5
million homes to foreclosure. Right now, two out of every nine
homes are in foreclosure or default. This is a problem of
catastrophic means. Why can't we do that? Why can't we stop the
foreclosure procedures while the modification process is going
on?
These are simple things. I just have a problem
understanding why we can't do this. Why can't we look at this
home modification program, affordability program, and
understand that maybe that 31 percent is too high, especially
when people are losing levels of income?
Can somebody help me with this? Let us start with the
reduction of the principal. I would like to know, from each of
you, why we can't do that. What is the problem here?
Mr. Marks. Can I just ask one thing? I think one question
to the servicers is, in their model, when they look at the
affordable payment, do they have the process in place to do the
principal reduction, as well as the interest rate reduction?
And then, when it comes to the MHA program, or HAMP, why
don't they encourage the principal reduction versus just the
interest rate reduction? Because we agree--and we see very few
of those out there.
Ms. Gordon. Well, there are a few structural reasons of
conflict of interest why servicers may not do this. One is that
the biggest servicers, and the ones that service the vast
majority of the loans out there right now are owned by the same
banks that hold many of the second liens on these loans, so
they have a conflict of interest, in terms of writing down the
principal.
Servicers generally make most of their money from their
monthly servicing fee, which is a percentage of the outstanding
loan principal balance, so they don't want to write down the
principal balance. There are a number of other financial
conflicts, too, that have to do with right to residuals or buy-
backs or any number of structural things in the servicing
industry that push against this.
And so, the real question is, why have we not been willing
to require that this happens? If we just leave it up to the
banks' interests, the banks have different interests. Congress
is going to need to require that this happens, and you are
completely right, that we have not put the energy into this
issue. You know, the foreclosure crisis has basically been
something of a--
Mr. Scott. Right.
Ms. Gordon. --50-State Katrina, sucking money out of
communities, particularly minority communities, and just
leaving husks of neighborhoods in its wake.
Mr. Scott. Ms. Goodman?
Ms. Goodman. I will actually second what Julia Gordon said.
The conflict of interest between the borrower and the second
lien-holder is huge, in terms of writing down principal.
And before you can have a successful principal reduction
program, you have to explicitly address the second lien. There
seems to be no other option, other than extinguishment. You may
want to pay the bank to extinguish the second lien, you may
want to let them take the loss over a period of time, but that
simply has to be done.
Another problem that has often come up in terms of
principal reduction is the moral hazard, or strategic default
problem. How do you keep borrowers who otherwise could afford
to pay their mortgage from strategically defaulting, or trying
to take advantage of a principal reduction plan? There is no
single option here. But, as you mentioned, we have to think
outside the box. We have to think in terms of shared
appreciation features, requiring all reduced principal
mortgages to be made with recourse, introducing an impact on
credit scores, limiting future access to credit or limiting the
ability to borrow against the property. We have to consider a
wide range of ideas, but certainly the strategic default issue
plays a very prominent role in people's minds.
Mr. Scott. Thank you. My time has expired. Thank you, Mr.
Chairman.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing.
The 3/27s and 2/28s, are we still having a significant
number of them come through the process?
Ms. Goodman. The bulk of those payment shocks are behind
us. It's the pay option ARM payment shocks that are left to
come.
Mr. Green. And are we now finding that persons who had
conventional loans, reasonable rates, are also starting to
default?
Ms. Goodman. Absolutely. Negative equity is just a huge
problem at this point.
Mr. Green. And is the problem one that you can, with some
degree of anecdotal evidence, indicate that certain communities
have experienced to a greater extent than others?
Mr. Marks. Absolutely. When you go to the--
Mr. Green. Let me just take your ``absolutely'' as the
answer--
Mr. Marks. Yes.
Mr. Green. --and ask another question if I may, please?
Mr. Marks. Yes.
Mr. Green. Can you identify communities by way of empirical
and anecdotal evidence that have had a greater shock than some
others?
Mr. Marks. Yes. But I would also add that this has become
more across-the-board in virtually every community and in every
State.
Mr. Green. Given that it has embraced every community and
every State, but some more so than others--
Mr. Marks. Yes.
Mr. Green. --kindly identify communities that have
ostensibly been hit harder than others?
Mr. Marks. You certainly see the minority communities, and
you see--
Mr. Green. Define ``minority communities.''
Mr. Marks. The communities where the majority of the
population are African American, Hispanic, and other ethnic
minorities, and low- and moderate-income communities,
communities where the median income is less than 80 percent of
the median.
Mr. Green. Whether by accident or design, this impact on
these communities that seem to have been hit harder than
others, what will happen, in terms of recovery, for these
communities without some intervention?
Mr. Marks. Absolutely devastating. You see the
foreclosures, you see--
Mr. Green. Tell me about the loss of wealth for these
communities.
Mr. Marks. It is massive. I think there are other people on
the panel who can actually empirically identify that, and they
should--
Mr. Green. Is there anyone who can give some empirical
evidence?
Ms. Gordon. Yes. Our research reports show what we call
spillover effects of the foreclosures, really, in the hundreds
of billions of dollars. And, there are two types of spillover
effects. There is the general reduction in everybody's property
value, and--
Mr. Green. Are you talking now specifically about the
communities that were referenced by Mr. Marks?
Ms. Gordon. Yes.
Mr. Green. Identify--
Ms. Gordon. The more foreclosures there are, the worse
the--
Mr. Green. For the record, I need--
Ms. Gordon. --spillover effects.
Mr. Green. --for you to identify the communities that you
are talking about.
Ms. Gordon. Largely communities that are African-American
or Latino communities, or lower income--you know, the more
lower, middle-income--
Mr. Green. Will these communities--
Ms. Gordon. --homeowner communities--
Mr. Green. Will these communities recover without some
specific intervention?
Ms. Gordon. Absolutely not.
Mr. Green. Does someone else have an opinion that you would
like to give, with reference to this?
[No response.]
Mr. Green. Anyone else?
[No response.]
Mr. Green. This is the moment. This is the moment to speak
truth to power. You hear that phrase used quite a bit. People
fear speaking truth to power. Somebody has to tell the truth
about what's happening to certain communities in this country.
This is your moment.
Ms. Sheehan? Speak truth to power.
Ms. Sheehan. We have established our Chase homeownership
centers in the most hard-hit communities. We are there to help
people through those centers in person, and address their
needs. And that is the process we have used to think about how
we can best be useful.
Mr. Green. Do you agree that certain communities are being
devastated, if not obliterated, by virtue of what happened,
whether it was by accident or design that this is happening?
Ms. Sheehan. I don't have that kind of data here.
Mr. Green. Without data, you do have anecdotal evidence.
You are involved in this process, true?
Ms. Sheehan. We are involved in the process. And as I
said--
Mr. Green. What does your anecdotal evidence connote?
Ms. Sheehan. What our evidence, what our experience has
told us, is that there are communities where we have--
Mr. Green. Are you afraid to say it, Ms. Sheehan? Are
minority communities being devastated more?
Ms. Sheehan. Minority communities are definitely having
problems, we know that, as well as--
Mr. Green. Are they having more problems, Ms. Sheehan?
The Chairman. Let me just say--I haven't used my 5 minutes.
I'm not going to take the whole 5 minutes, so I'm going to
yield 3 minutes of my time to the gentleman from Texas, so he
can continue.
Mr. Green. Thank you, Mr. Chairman. Ms. Sheehan, let us not
be euphemistic about this. Let us not let our inhibitions
prevent us from telling the truth. This is a moment in time
when people need to hear the truth, because we have people who
are suffering. Some are suffering more than others.
Is the minority community suffering more than some other
communities?
Ms. Sheehan. We know that we have an obligation to all of
our communities, including our minority communities, and we are
working--
Mr. Green. So you subscribe to the notion that a rising
tide raises all boats?
Ms. Sheehan. We have an accountability to help our
customers, and--
Mr. Green. I assume that is true. Let me ask you this: If a
rising tide raises all boats--and I am putting these words in
your mouth; you can extract them if you so choose--why is the
Titanic still on the floor of the ocean?
A rising tide--see, I'm bringing this up because this seems
to be a prevailing theory, that if we do, across-the-board, the
right thing, we will help everybody. And we don't seem to
understand that some are being left behind, even with the best
of intentions. We are leaving people behind.
And this is something for which I thank God that CNN has
decided that they are going to monitor and report on. Because
if we wait on persons to come before us with these panels and
tell the truth, we may not get the entirety of the truth. For
whatever reasons, we don't want to face a fact. Whether by
accident or design, some communities are suffering more. And
they are not going to recover without some sort of specific
intervention. That's the truth. Anybody differing with that
truth, raise your hand. Let the record reflect that no one has
raised a hand.
My final comment, Mr. Chairman, if I may, is this. I beg
you, friends. Let's get beyond splitting hairs, and let's talk
about how we are going to save this country. It's really bigger
than any one group of people. It's about this country. And we
have to do better. We have to do better.
All of these banks have to do better. If you don't do
better at some point, you're going to force Congress to take
drastic action that some would call a moral hazard, because we
have to have some means of having these servicers take the
responsibility and do something to help people who deserve and
merit help.
Thank you, Mr. Chairman, I yield--
The Chairman. I will just take my last 10 seconds here on
this to give a different variant to the gentleman's metaphor.
It has always been my view that while the rising tide may lift
all boats, for those people who can't afford a boat and are
standing on tiptoe in the water, the rising tide is very bad
news, in fact.
The gentleman from Missouri?
Mr. Cleaver. Thank you, Mr. Chairman. Thank you, Mr. Green.
I am interested in--in order that I can read it and become
more familiar with it, Professor Sanders, was there an
administrative order or some kind of congressional vote that
directed Fannie and Freddie to make bad loans?
Mr. Sanders. No, I don't believe there was any
administrative order asking them or requiring them to make bad
loans.
Mr. Cleaver. The only reason I ask that is because earlier
you, in responding to one of my colleagues, accepted in your
comments that it had happened, and went on to describe how
troublesome it was.
We can try to get it read back. It was a question from, I
think, Mr. Royce. You don't remember?
Mr. Sanders. I don't believe I would say that, because I
don't think Fannie and Freddie purposely went out and made bad
loans, or were ordered to do so. Is that what your question is?
Mr. Cleaver. Yes.
Mr. Sanders. No, I didn't--wouldn't have--said that.
Mr. Cleaver. So that hasn't come up today since you've been
here?
Mr. Sanders. No. In fact, Fannie and Freddie were only
mentioned, I think, by me. And that's not what I said.
Mr. Schakett. Well, I think the comment was that Mr. Royce
said something like, ``Fannie and Freddie had an obligation to
do 50 percent of their product in subprime or alt-A,'' and he
viewed that as a problem, okay, a mandate to do that. So that's
the comment, I believe, that was said.
So you can imply that was to make bad loans, but I think it
was to use 50 percent of their volume for subprime and alt-A is
what Mr. Royce said, if I remember right.
Ms. Gordon. And we did not have a chance to rebut the
ongoing incorrect assertion that has been rebutted by everyone
from the Board of Governors of the Federal Reserve on down. The
toxic loans that caused this housing crisis were primarily
private loans that were securitized into the private securities
market.
Mr. Cleaver. Yes, I understand that. You know, I just hear
over and over and over again that, somehow, either Congress or
President Bush or somebody forced Fannie and Freddie to, you
know, to bundle and securitize some bad mortgages. And I--
Mr. Marks. Actually, sir, we had testified on September 12,
2000, in front of Congress right here, saying that Fannie and
Freddie should not be allowed to get into those types of
products out there.
But no one forced them to do it. You're exactly correct. No
one forced them to do it. And certainly, the entities we don't
see up here are the New Centuries, the Fremonts, the First
Franklins, and all those who have been in the forefront of
predatory lending, because, clearly, they're out of business
now.
Mr. Cleaver. So I guess it doesn't matter how many times or
how many people dethrone that notion, people are going to
continue to say it. Is that what you hear, Ms. Gordon, is it
what you believe?
Ms. Gordon. Yes, it's hard to know how to stop that from
coming up over and over, when it has just been clearly debunked
as a reason.
Mr. Cleaver. Okay. Mr. Schakett, you know, this whole term
``hell,'' you know, the word ``hell,'' it actually originated
because on the west side of Jerusalem, where they--the land
field where they burned the trash was called ``sheol,'' and the
interpretation comes down as ``hell.'' That was the first view
of what humans thought hell would be, you know, burning,
constant burning of the trash.
And there are people who tell me they go to phone tree hell
when they are trying to talk with someone about their mortgage,
and trying to get some kind of modification, that they actually
go to phone tree hell, and that they are being--their concerns,
their interests, their desires, their frustration of being
burned, sitting on the phone.
Do you believe that we have been able to put out the fire
in hell?
Mr. Schakett. No, I don't think we put out the fire yet.
I agree that certainly we have frustrated our customers.
But volume is sometimes--we haven't had the ability to handle
the volume necessary, and not always provided the right answers
to the customers, or moved them around from one person to
another, and not given them the right answers as we try to
staff-up and train people.
So, I could appreciate, you know, your constituents, okay,
being frustrated with that process. We obviously continue to
add resources and training and try to improve. We are not--
Mr. Cleaver. But do you think that--
The Chairman. I am going to give the gentleman an
additional minute-and-a-half for biblical exegesis.
[laughter]
Mr. Cleaver. Thank you, Rabbi.
[laughter]
Mr. Cleaver. I am just concerned--
The Chairman. If you stuck with the right Testament for
me--
[laughter]
Mr. Cleaver. You know, I am wondering if the phone tree
from hell is one of the reasons for the fact that 25 percent of
the borrowers who come in for modification end up losing their
homes. They can't even go through the three-payment trial
period. They lose their home right off.
And is there a reason for that, or can the phone tree hell
be part of the reason? Either you or Ms. Sheehan?
Mr. Schakett. Okay, and I certainly believe that the phone
tree problems clearly frustrate our customers. The only good
news about that is that we clearly have not taken customers
through foreclosure while we worked within the trial period.
So, although we may not answer the phone in a timely
manner, although we may have frustrated them, all those people
are in foreclosure hold. So I assure you that nobody is getting
foreclosed on because of it. That doesn't undermine that, you
know, there is not huge frustration, and that we need to
improve that.
Our more recent mailing, we mentioned earlier, we actually
sent out 50,000 letters to try to say exactly what we were
still missing from these customers, and what it took to comply.
It was our attempt, somewhat of our attempt, to make sure the
customers that we didn't handle right in the past now knew
exactly what we needed from them, and give them an easy way to
respond back to us to try to get these modifications complete.
So, again, I appreciate that we have frustrated our
customers. But we haven't foreclosed on them in the meantime.
The Chairman. The gentleman from Florida.
[No response.]
The Chairman. Then I will just take my last minute-and-a-
half to say this: We are terribly frustrated by what's
happening.
We are going to move forward on the unemployed. I
understand that doesn't solve all of the problems, but I do
think this is helpful. And the bill that has come to the Floor
will have $3 billion to be advanced to people who are
unemployed, to help them avoid it. It's a program that has
worked well in Philadelphia. We will continue to push for other
things.
But the most important thing, I think, is a point that the
gentleman from California has consistently made. Going forward,
this committee will make a very high priority passing
legislation early next year that will prevent us from being
entrapped in this again. There will have to be, for any
residential mortgage, one party that is solely, fully, legally
responsible for these decisions.
And people who want to invest in mortgages, people who want
to make second lien loans, people who want to invest in the
securitization will do so, going forward, knowing that those
rights are subject, whatever they have, to the responsibility
of one individual to make those decisions, because it is a
terrible example of our violating an important principle that
ought to exist in the law: You should not have important
decisions be made in this society that cannot be easily made by
somebody.
And so, that is something the gentleman from California
identified early. And that doesn't get us out of this current
thing, but we do--and we will work with many of you, going
forward, to make sure that we have that, so that we will not
have this shifting of the blame back and forth.
Beyond that, we appreciate this hearing, and we will
continue to press people in the Administration, as we will do
in this next panel, to act on some of the suggestions.
I also have a package of statements to put into the record
without objection. The ranking Republican asked me to put in
the statement from the HOPE NOW Alliance, and we also have,
from the Home Ownership Preservation Foundation, the National
Council of La Raza, the Brennan Center for Justice, and the
PICO Network of faith-based community improvement
organizations. And I note that one of those--that one--comes
from people in Massachusetts, in New Bedford, Fall River, and
Brockton.
So, without objection, they are all part of the record.
And the panel is dismissed with our thanks for a very
useful discussion.
We have to get people to get out and people to set up.
Please take the conversations outside so we can get the panel
going. No one should be standing still. They should either be
walking or sitting.
We will now turn to our second panel. We appreciate the
attendance of the public officials who are responsible. And I
did not follow the usual procedure of asking the public
officials to testify first. It is not out of any lack of
respect for their commitment and integrity, of which we are
appreciative. But it did seem to me that today, it would be
very useful if we heard some of the questions and criticisms
first, and could then have them respond to them.
I ask people at the door to please leave.
And we will now begin with Herbert Allison, who is the
Assistant Secretary for Financial Stability at the Department
of the Treasury.
Mr. Allison?
STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY FOR
FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY
Mr. Allison. Chairman Frank and members of the committee,
thank you for the opportunity to testify today about the
Treasury Department's comprehensive initiatives to stabilize
the U.S. housing market and support homeowners.
The Administration has made strong progress ramping-up the
Making Home Affordable Program. But even though the number of
homeowners being helped continues to grow, we recognize that
the Home Affordable Modification Program, or HAMP, faces
challenges in converting borrowers to permanent mortgage
modifications, and in fostering effective communications
between servicers and borrowers.
Our most immediate challenge is converting trial mortgage
modifications into permanent modifications. Servicers report
that about 375,000 trial modifications will be more than 3
months old, and due to be decisioned before December 31st.
Treasury has launched an aggressive conversion campaign to
increase the number of permanent modifications. We have
streamlined the modification process, and required conversion
plans from the seven largest servicers. Treasury and Fannie Mae
have assigned teams to work with each servicer, and to report
daily on their progress. We are engaging all 81 HUD field
offices and hundreds of State and local governments in this
effort.
We have enhanced our Web site to provide borrowers with a
simplified way to navigate the modification process, using
instructional videos, downloadable forms, and an income
verification checklist. Next week, we will hold our 20 borrower
event, connecting servicers, housing counselors, and
homeowners. In addition, we have brought in executives from the
services 4 times to Washington, including just yesterday, to
discuss ways of accelerating conversions.
Another challenge is helping unemployed homeowners. HAMP is
designed to enable many unemployed homeowners to participate.
Borrowers with 9 months or more of unemployment insurance
remaining are eligible to include that income for consideration
in their modification request.
We recognize, however, that some unemployed borrowers will
have trouble qualifying. Treasury is actively reviewing various
ideas to improve program effectiveness in this area, while
remaining focused on helping borrowers as quickly as possible
under the current program.
A third challenge is preventing foreclosures of homeowners
eligible for HAMP. During the modification trial period, any
pending foreclosure sale must be suspended. And no new
foreclosure proceedings may be initiated. We prohibit
foreclosure proceedings until the borrower has failed the trial
period, and has been considered and found ineligible for other
foreclosure prevention options. We are working with
stakeholders to review, improve, and monitor compliance with
our rules, so no borrower being evaluated for HAMP is subject
to foreclosure during that process.
A fourth challenge is transparency. On August 4th, our
public monthly report began including trial modifications by
each servicer. October's report added data on trial
modifications by State. Upcoming reports will show permanent
modifications by servicer, and measures of servicer's
responsiveness to borrowers. We are requiring servicers to send
notices that clearly explain to borrowers why they did not
qualify for a HAMP modification, and how they can ask for a
second look at their application.
We will also provide additional transparency of the net
present value, or NPV model, a key component of the eligibility
test. We are increasing public access to the NPV White Paper,
which explains the model's methodology. We are also working to
increase transparency of the NPV model, itself, so counselors
and borrowers can better understand how the model works.
HAMP is on track to provide a second chance for up to 3 to
4 million borrowers by the end of 2012. Based on a recent
survey of servicers, we estimate that, as of the beginning of
November, up to 1.5 million homeowners were eligible for the
program, meaning they were both 60-plus days delinquent, and
likely to meet the HAMP requirements.
To put the current stage of HAMP in context, we should
compare the 1.5 million eligible homeowners to the more than
680,000 borrowers who are in active modifications, and are
included among the 900,000 borrowers who have received offers
to begin trial modifications. On average, borrowers and trial
modifications have had their payments reduced by over $550 per
month, down roughly 35 percent from their prior payments. HAMP
has made great strides since modifications began in May. But we
have a long way to go. We will continue to work closely with
housing counselors, State and local governments, servicers,
homeowners, investors, and Congress to enhance the program's
performance, and to help keep Americans in their homes. Thank
you.
[The prepared statement of Assistant Secretary Allison can
be found on page 58 of the appendix.]
The Chairman. Next is Mr. Krimminger.
STATEMENT OF MICHAEL H. KRIMMINGER, SPECIAL ADVISOR FOR POLICY,
OFFICE OF THE CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION
(FDIC)
Mr. Krimminger. Chairman Frank and members of the
committee, thank you for the opportunity to testify on behalf
of the FDIC about the private sector and government response to
the mortgage foreclosure crisis.
Mortgage credit distress and declining home prices have
been fundamental causes of uncertainty. Structurally unsound
mortgages and historic home price declines, which precluded
refinancing, have led to unprecedented increases in mortgage
defaults and foreclosures.
Chairman Bair recognized the problem early on, and strongly
advocated for a program of systematic modifications in 2007.
Her proposal rested on a central premise. Simply, foreclosing
on defaulted loans would only add to the excess supply of
housing, push down home prices, and make the mortgage credit
problem worse. Where a sustainable modification can be achieved
that reduces losses compared to foreclosure, it is only good
business to modify the loan.
Unfortunately, the crisis has shown that the large-scale
modification effort that we need is hampered by contradictory
incentives in securitization, inadequate resources, and, far
too often, a failure to take action with new approaches to
working with borrowers.
In 2008, the FDIC needed to implement these principles
advocated by Chairman Bair when it was named conservator for
IndyMac Federal Bank, which had tens of thousands of delinquent
mortgages on its books. The goal of the FDIC's loan
modification program was to achieve the best recoveries
possible by converting distressed mortgages into performing
loans that were affordable and sustainable over the long term.
To date, almost 24,000 borrowers have received a modification
through this program.
The problem nationwide, however, is immense. While some
servicers have been effective, much more must be done. Last
fall, the FDIC issued a guide to implementing streamlined loan
modification programs which we call ``Mod in a Box,'' to spur
servicers in applying similar modification programs.
Earlier this year, the FDIC applied its practical
experience in loan modifications in working with Treasury and
other agencies on recommendations for the Home Affordable
Modification Program, or HAMP. The FDIC supports HAMP as part
of the solution.
In addition, we continue to remain open to new approaches
that may be necessary to respond to the scope and changing
character of the mortgage problem.
Our loss sharing agreements for failed banks require either
the FDIC mod program or HAMP. Here, too, we have continued to
push for innovative responses. For example, we have urged
temporary forbearance for borrowers who lose their jobs in the
recession. We also will provide loss share incentives to
support principal write-downs to maximize net values.
The FDIC's experience has provided a number of lessons
learned that we would like to share with the committee, and I
would like to emphasize one key point: mods make good business
sense, and help consumers where they maximize recoveries on
troubled loan mortgages.
First and foremost, early communication in modification
efforts give the best chance of success. Success is much more
likely if you contact the borrower early, give a specific mod
offer, and complete the mod before an extended delinquency.
Effective communication with borrowers requires an effective
information technology infrastructure, thorough staff training,
and a consumer support or consumer service focus.
Second, the more affordable the modification, the lower the
redefault rate. Until recently, far too many mods actually
increased the monthly payments. No wonder they often failed. We
also must address second liens as part of the affordability
question.
Third, close working relationships with HUD-approved
counseling groups improve borrower response and modification
success. Nor surprisingly, counselors have much more
credibility with borrowers.
Fourth, lenders and servicers must be flexible to address
new challenges. Problems caused by job loss or deeply
underwater loans will require lenders and servicers to employ
new approaches.
Finally, modification programs should be kept as simple as
possible, so that servicers can apply a streamlined approach,
and borrowers can understand their options.
Throughout the financial crisis, the FDIC has worked
closely with consumers and many others to reduce unnecessary
foreclosures and the devastating consequences they impose on
our communities. Loan modifications, refinancing, temporary
forbearance for out-of-work borrowers, and principal reductions
are all tools to achieve these goals.
We continue to support Treasury's HAMP as a major part of
the solution. But we all know that we must remain open to new
approaches to respond to growing unemployment and increasing
numbers of underwater loans. Above all, the FDIC remains
committed to achieving our core mission: protecting depositors
and maintaining public confidence in our financial system.
Thank you for the opportunity to testify today. And I would be
happy to take any questions.
[The prepared statement of Mr. Krimminger can be found on
page 95 of the appendix.]
The Chairman. And finally, Mr. Douglas Roeder.
STATEMENT OF DOUGLAS W. ROEDER, SENIOR DEPUTY COMPTROLLER FOR
LARGE BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE
CURRENCY (OCC)
Mr. Roeder. Chairman Frank, and members of the committee,
on behalf of the Comptroller of the Currency, I appreciate the
opportunity to discuss the state of national bank residential
mortgage modification efforts.
I am the Senior Deputy Comptroller for Large Bank
Supervision at the OCC. Many of the large banks supervised by
the OCC are major mortgage servicers, so we have direct
supervisory experience with the actions they have taken, and
the issues that present challenges to sustainable mortgage
modifications.
In 2008, as part of our oversight, we initiated the
mortgage metrics project to gain comprehensive, reliable, and
comparable data on the performance of mortgages serviced by
national banks. Our mortgage metrics report, which is based on
validated data from 34 million loans, assesses the performance
of mortgages and various foreclosure mitigation strategies,
including detailed information regarding loan modification
efforts. It is a valuable tool that helps us focus our
supervisory actions based on validated data.
For example, in March 2009, in response to high redefault
rates on modifications, we directed the largest national bank
servicers to review their modifications and policies for future
modifications to improve their sustainability. Subsequent to
that direction, we have seen both the volume and quality of
loan modifications and payment plans improve.
During the second quarter, home retention actions--payment
plans and loan modifications--increased by more than 20
percent. We are still finalizing our next report, but we expect
an even greater increase of nearly 70 percent in the third
quarter.
Actions taken under the Administration's Home Affordable
Modification Program represent a portion of homeowner
assistance provided today. National banks also help homeowners
through programs that do not require taxpayer-supported
incentives. Between January 1, 2008, and June 30, 2009,
national banks and thrifts implemented more than 1.8 million
home retention actions. Of these, less than 115,000 were made
under HAMP. HAMP numbers increased in the summer and fall of
2009, but still represent only a portion of national banks'
homeowner assistance efforts.
In addition to the increasing volume, the character of home
retention actions is changing. More than 78 percent of
modifications made in the second quarter of 2009 reduced
borrowers' monthly principal and interest payments. As a
result, delinquency rates subsequent to modification are
improving in more recent vintages. Improving sustainability of
modifications and returning borrowers to a positive cash flow
reduce eventual foreclosures, provide homeowners an opportunity
to keep their homes, and minimize losses to banks and
investors.
The OCC fully supports servicer participation in HAMP and
the Administration's second lien modification program. But
regardless of the types of programs implemented, national banks
have an obligation to ensure that their regulatory reports and
financial statements accurately and fairly represent their
financial condition.
On Monday, we issued guidance to our examiners stating that
we expect banks to follow generally accepted accounting
principles, and maintain adequate allowance for loan and lease
losses, regardless of whether a loan is modified. Adherence to
sound underwriting practices, including adequate documentation
of borrower's qualifications for and ability to repay a
modified mortgage is also essential.
While home retention actions are improving, we hear too
many consumer complaints of lost paperwork, bad guidance, long
waits, and difficulty in simply contacting servicers. The
volume of complaints is unacceptable. We have directed national
banks to improve operational efficiency to keep up with volume,
improve their internal processes, and answer their customers'
concerns accurately and promptly.
As a part of our ongoing supervision, our examiners assess
banks' complaint resolution processes, and require corrective
action for identified deficiencies. At the same time servicers
need to improve operations, other factors contribute to the low
number of HAMP trial plans being converted to permanent
modifications.
Servicers report consumers often fail to provide necessary
and verifiable documentation of ability and willingness to
repay their debt. In some cases, loans are already considered
affordable under HAMP's 31 percent debt-to-income guideline. In
other cases, borrowers cannot demonstrate a valid financial
hardship. Increasingly, the financial condition of many
borrowers has deteriorated so far that it is not possible to
modify a loan and meet HAMP's net present value requirement.
While HAMP and other programs show progress, we must be
realistic about the continuing effects of high unemployment and
depreciated home values. These macroeconomic factors weigh on
the performance of the residential mortgage portfolio, and they
drive delinquencies and foreclosures. In these difficult
economic conditions, effective loan modifications will be an
important tool to help responsible homeowners avoid preventable
foreclosures.
But they will not help everyone. As a result, we will see
further deterioration in loan performance in the months ahead.
My written testimony provides additional detail on these
issues.
Again, I appreciate the opportunity.
[The prepared statement of Mr. Roeder can be found on page
119 of the appendix.]
The Chairman. All right. We will now take a recess and
return. And then, the gentlewoman from California will be
presiding, and we will have a chance to ask some questions. I
appreciate your staying with us.
[recess]
Ms. Waters. [presiding] The committee will come to order.
Having heard from our witnesses, I will recognize myself for 5
minutes for questions.
Mr. Allison, the Honorable Herbert M. Allison, Jr.,
Assistant Secretary for Financial Stability, U.S. Department of
the Treasury, I did have an opportunity to hear your testimony.
And I heard you describe the efforts that have been put forth
by the Treasury to talk with the servicers, and to encourage
them to do better.
Mr. Secretary, don't you think that's a waste of time?
Mr. Allison. Well, Congresswoman Waters, thank you very
much for your question, and for your tremendous interest in
this program.
And, no, we don't think it's a waste of time. We have
seen--first of all, let me say again, as I said in my
testimony, we are not satisfied yet with how this program is
unfolding. We still have a lot of work to do. The servicers
have a lot of work to do. And we are holding them accountable
for their performance.
I think we have to look at this program in stages. In the
early stages, our main emphasis was on bringing in as many
people as possible to this program to help keep people in their
homes. Now, the real challenge is to migrate them from trial
modifications to permanent modifications. And--
Ms. Waters. Excuse me, if I may--
Mr. Allison. Yes, ma'am.
Ms. Waters. But you have not been doing that. We have
people who have been in trial modifications, and somehow we
can't get them into permanent modifications. It doesn't appear
to be working very well.
Mr. Allison. And to date--you're absolutely right. We are
not satisfied with that, either. We have a relatively low
number who are in permanent modifications. That's why we
brought the servicers--
Ms. Waters. And, again--
Mr. Allison. Yes, ma'am.
Ms. Waters. --if I may interrupt--
Mr. Allison. Yes.
Ms. Waters. --because, you know, I just have to get this
out of my head--
Mr. Allison. Please.
Ms. Waters. --you have modifications going on. You have
foreclosures going on while people are supposedly in
modifications. What are you doing about that?
Mr. Allison. Well, actually, as I mentioned, these
servicers are prohibited under this program from foreclosing on
people--
Ms. Waters. But it's a voluntary program. So if they don't
do it, what do you do?
Mr. Allison. We can take actions, such as--
Ms. Waters. Such as?
Mr. Allison. Such as not paying them, such as clawing back
prior payments, such as--
Ms. Waters. You think that $1,000 is going to be a
deterrent?
Mr. Allison. Well, I think what also helps here,
Congresswoman Waters--and we totally agree with you, that we
have to take whatever actions we can to assure that they are
going to make these modifications permanent. So we have, right
now, a program where we're in with the servicers in their
offices where they're doing the modifications, to watch exactly
what they're doing.
We have Freddie Mac, who is auditing this process. We are
publishing monthly reports on each servicer's performance. We
are going to be expanding those reports to deal with how
rapidly they are achieving modifications. We have targets for
every one of them, which we outlined again yesterday, to make
sure that, where they have all documentation, they will
complete those modifications, or at least the decisions on the
modifications, by the end of this month.
And about a third of these trial modifications are ones
where the servicers already have all the documentation.
Ms. Waters. Okay.
Mr. Allison. So there is no excuse for them not to
complete--
Ms. Waters. Well, we appreciate that. However, these
foreclosures have been going on for a long time now.
Mr. Allison. Yes.
Ms. Waters. An awful lot of people have lost their homes.
And while we appreciate the stages of--people are out of their
homes.
Mr. Allison. Yes.
Ms. Waters. And so, we are concerned about principal
reduction, for example. What have you done about--
Mr. Allison. Yes.
Ms. Waters. --principal reduction?
Mr. Allison. Well, you know, what is not widely
understood--and I think we have to do a better job of
communicating this--is that from day one, last March, in our
guidance for the servicers, we allow them to reduce principal
as the first step in a mortgage modification--
Ms. Waters. But they don't do it.
Mr. Allison. Well, we are dealing with that now. And we are
talking with the servicers about the need to take a broader
view of what is the best solution for each homeowner. And for
some, it can be a principal modification at the outset, or a
combination of principal modification and interest reduction.
So, that's another area that we're going to be looking at,
is are the servicers looking broadly enough at what the
potential solutions are for each homeowner.
Ms. Waters. Quickly, let me just say to FDIC, Mr.
Krimminger, we--Barney Frank and I--signed a letter to the
Administration, because we were very pleased when you took over
IndyMac, and the way that you did loan modifications. And we
thought, at that time, somehow it should be organized in ways
that you guys should be in charge of the loan modification
program.
Can you identify for us what you have discovered that
really works? Don't you have some ideas about how we could do
this better? I hope all of the agencies are talking to each
other, and you have had some opportunity for input. But it's
not evident. What would you advise? What have you done to make
these loan modifications real? What should be done?
Mr. Krimminger. Well, thank you, Chairwoman Waters. We
appreciate your support on this. We do support Treasury's
following up with the HAMP program to make sure that it works.
Certainly, there are times--and I think this is clearly one of
them, and I think Treasury agrees--for innovations and
innovative thinking. We have provided recommendations to
Treasury in the development of HAMP. As you may know, the HAMP
itself includes a waterfall of options which were really
modeled on the ones that we used at IndyMac.
I think the lessons that we learned at IndyMac--and are
working to implement even more so in HAMP--include things like,
early on, getting a dollar amount of the modification into the
borrower's hands, making sure that, if possible, you're able to
get the information to begin the verification of income
immediately, the first payment from the borrower, as well as a
signed agreement, so that the borrower knows what their
obligations are. We think it's very important to have very
continuous and very early contact with the borrowers to really
make these programs work.
One of the things I think that servicers are learning now
that they may not have understood fully is the need for a real
refocus of the servicer's whole loss mitigation process away
from collections, much more to a consumer-oriented type of
process, so that you reach out to borrowers. Also, servicers
should be utilizing much more the counseling groups, HUD-
approved counselors. We found that to be a very effective tool
at IndyMac.
Ms. Waters. Let me just interrupt you for a moment. As I
understand it, one of the things that you did was you sent out
notices to the borrowers, and you showed them in the notice
what you could do for them.
Mr. Krimminger. Right.
Ms. Waters. For example, when some of the servicers--when
the notices went out early on, when we first started doing the
modifications, it would ask people to come in. ``We want to
talk to you.'' And people said, ``Uh-uh, I'm not going in,
because I know they want to tell me they're going to take my
home.''
But when you send out a notice that says, ``You owe X
amount of dollars on your loan, and we have a loan modification
program that could help you reduce that loan by some
percentage, and this is how it works,'' or something, that you
get more people responding. Is that true?
Mr. Krimminger. That is absolutely true. We have had a
response rate with providing those types of notices to people
with an actual dollar amount of the new modification amount of
around 70 percent, which is very high for the industry. That
was one of the biggest lessons we learned at IndyMac.
Ms. Waters. Well, has that been adopted by the
Administration, or the banks, or the servicers, or anybody as a
way by which to get people coming in to talk to you about a
loan modification, and not being afraid that this notice is
only simply to take away their homes?
Mr. Krimminger. I will have to defer to Secretary Allison,
but I believe a number of servicers have begun to adopt that
approach. But some have not.
Ms. Waters. Well, Mr. Secretary, why haven't you included
something like that?
Mr. Allison. Well, actually, the servicers are reaching out
in a much more effective way today. The--
Ms. Waters. No, I asked something specific. This notice
that they learned to use at FDIC that said, ``This is what we
can do for you,'' has that been adopted as a practice, as a way
of encouraging participation?
Mr. Allison. Well, they have sent out more than 900,000
offers to homeowners with the terms, in many cases, indicated.
And, therefore, people have an opportunity to see what the
benefit for them will be from participating in the
modifications. I think that the outreach is going much better
than it was.
The challenge now, as I mentioned, is to convert these
trial modifications, where people are benefitting. We have
almost 700,000 people who have received reductions in their
monthly mortgages, on average, of $550. So we have all those
people benefitting today. The issue now is to convert them to
permanent modifications, so those benefits continue.
Ms. Waters. Well, you're right. That's a big issue, a huge
issue.
Mr. Allison. It is.
Ms. Waters. And I want to thank you. I have more than used
up my time. And I am now going to yield to the gentlelady
from--
Mrs. Capito. West Virginia.
Ms. Waters. West Virginia, I have been there, I should know
that. Ms. Capito?
Mrs. Capito. Thank you. I would like to thank the panel.
I'm sorry if I missed your testimony, but I have certainly read
through most of it.
One of the questions that I think is complicating this
issue that we haven't really--and I'm interested to see what
kind of innovations you're working on, how you're addressing
the issue of a second lien. Most people who are in danger of
being foreclosed upon have probably run their credit cards up
as high as they can to keep the payments going. They have a
home equity loan going. They have other issues with their
finances. And I know the second lien issue has been
complicating these loan modifications.
Could Secretary Allison talk about that? Or any of the rest
of you? I would be interested to hear your ideas on how we get
through that issue.
Mr. Allison. Thank you very much, Congresswoman Capito.
Yes, that is a real concern. And I know that this week--and
perhaps Mr. Roeder could talk to this--the OCC is issuing
guidance to the banks on how to deal with the accounting for
second liens. And that's a major step, we think, toward coming
up with a more comprehensive solution for homeowners who have
both a first and second lien.
And, obviously, there is going to be a need, too, in cases
where one bank may hold the first, and another hold the second,
for some type of a clearinghouse, so that banks can find out
who has the other mortgage on a particular homeowner's house.
Mrs. Capito. Wouldn't they--
Mr. Allison. So that they can come up with a unified
solution for that particular homeowner.
Mrs. Capito. Is that--is the borrower--when the documents
that they're required to bring in to get the permanent
modifications, do they bring in the documentations for what
other liens they would have on that property? Certainly that
would be a part of that. Is that correct?
Mr. Allison. I don't know that in all cases they are, at
least initially. The requirements for HAMP are to provide
information about income, about residence, the hardship
affidavit, and so forth.
But I think that servicers that are doing a thorough job
are inquiring about the overall financial position of the
homeowner.
Mrs. Capito. Mr. Roeder, did you have a--
Mr. Allison. But--
Mrs. Capito. I'm sorry.
Mr. Roeder. Yes, a couple of points dealing with your
question.
First, on the examiner guidance, we sent the guidance to
examiners. We didn't send it to the industry. The reason is,
with this modification effort being so significant, we many
times will go to our examiners with guidance. We have asked the
examiners to share it with their banks. But it's not a broad
distribution. We're dealing with a fairly focused group of
institutions.
So, it was examiner guidance, not banker guidance. But we
did share it with the bankers, so they are aware of our
expectations. And that guidance was simply to remind and
clarify for our examiners that GAAP and existing supervisory
policies should be followed in working with bankers to ensure
that the accounting and the asset quality assessments being
done are done in accordance with safe and sound banking. So
that's one piece.
On the second lien issue, one of the things we don't hear
from the servicers is that there is an inhibition to modify the
first mortgage when there is an existence of a second. Early on
in the crisis, that was more of a prevalent comment. We don't
hear that from the servicers directly. The focus in most cases
is getting that first mortgage modification done, and not
worrying about the second.
To Mr. Allison's point, there is a complication here.
Sometimes the servicer who is doing the mod on the first, and
the bank that's holding the second may be different parties.
And--unless it's surfaced by the borrower or some other means--
there is not a good mechanism to clearly know that servicer
``A'' has a mortgage and servicer ``B'' has a second lien, and
they should hook up.
What we have asked examiners to be mindful of is that
everything they should do--if they're holding that second lien,
and they're not in a position where the bank is also the first
lien holder doing the mod, they have to do their best in their
process to ensure that they have done diligence to seek the
existence of that first lien, and appropriately account for
that second lien and the risk in that, assuming that there was
a mod done on the first.
If there is not a mod done, they still have the
responsibility to make sure that the accounting and the reserve
and provisioning is accurate, given potential risk in that
portfolio, alone.
We don't see the servicers complaining that they're
inhibited to do a first when there is an existence of a second.
Ms. Waters. Thank you very much. Mr. Green?
Mr. Green. Thank you, Madam Chairwoman. I thank the
witnesses for appearing.
Friends, I sincerely believe that Dr. King was right when
he said, ``knowing that the arc of the moral universe is long
but it bends toward justice.'' And I believe that President
Kennedy was right when he said, ``here on earth, God's work
must truly be our own.''
You three fine men, in my opinion, are doing God's work
today. And, as such, you have an opportunity to make a
difference in the lives of people that you will never meet and
greet.
So, I start by asking you this: Are you familiar with the
term, disparate impact? You are. And I will ask you, Mr.
Allison, just for the record, tell us what this term means.
Mr. Allison. It impacts more on some segments of society
than on others, for example.
Mr. Green. All right. That's an acceptable definition, I
believe.
Now, with reference to the foreclosure crisis, is there a
disparate impact?
Mr. Allison. Yes, sir. There is.
Mr. Green. Tell us the sector or segment of society that is
experiencing the disparate impact, please.
Mr. Allison. People who are in lower-income communities, I
think, have been more devastated by this crisis, even than the
average American.
Mr. Green. Define for me who these people are who are most
likely to be in the lower-income communities.
Mr. Allison. Most often they are minorities, African
American, Latinos--
Mr. Green. Define minorities, please. Say again.
Mr. Allison. African Americans and Latinos, for example.
Mr. Green. Hold your point for just a moment.
Mr. Allison. Yes, sir.
Mr. Green. Let's go to our next person who is going to bend
the arc of the moral universe toward justice. Do you agree with
what Mr. Allison said?
Mr. Krimminger. Absolutely. There is clearly evidence that
there is a disparate impact upon lower-income and minority
communities.
Mr. Green. Define minorities.
Mr. Krimminger. I would define it in terms of ethnic
minorities, such as African Americans.
Mr. Green. Define ethnic minorities.
Mr. Krimminger. African Americans, Latinos, and other
ethnic minorities, in particular.
Mr. Green. Let's go to our next forger of justice. Do you
agree with your two colleagues?
Mr. Roeder. Yes, I agree there is a problem.
Mr. Green. Now, assuming that we do 100 percent of what has
been called to our attention, that we are as efficacious as
humanly possible, will this negate the disparate impact that we
are discussing currently?
Mr. Allison. I don't believe that these programs, by
themselves, are going to negate the disparate impact on those
communities.
Mr. Green. Thank you.
Mr. Krimminger. No, because when we were doing work at
IndyMac, I have seen communities throughout southern California
that are already dramatically impacted. So, even what we do in
the future won't affect those who have already been affected.
Mr. Green. Thank you.
Mr. Roeder. And I would agree with that. There is much more
work that needs to be done. We are not anywhere near the
solution.
Mr. Green. If we are going to bend the arc of the moral
universe toward justice, and if, here on earth, God's work must
truly be our own, would you agree that we must and should do
more to negate the negative disparate impact, the invidious
impact that is being felt on some communities? Do you agree
that we should do more?
Mr. Allison. I fully agree.
Mr. Green. Yes, sir?
Mr. Krimminger. I would concur.
Mr. Green. Yes, sir?
Mr. Roeder. And I agree.
Mr. Green. Do you agree that a way can be forged if we have
the will to do it, that a way can be found to negate this
disparate impact? Mr. Allison?
Mr. Allison. Yes, sir, I do.
Mr. Krimminger. I do, yes. There are difficulties, but
there are ways to overcome difficulties.
Mr. Green. Mr.--
Mr. Roeder. And I agree. There are challenges, but you have
to keep going after it.
Mr. Green. Now, the ultimate question becomes this. Given
that we acknowledge the condition, if we use a scientific
approach, given that we acknowledge the condition, and given
that we know that a solution can be forged, what are we going
to do about it?
What will we do, beyond using the rising tide raising all
boats theory, which we find fatally flawed, as it relates to
some who don't have boats, and who have boats that are not
seaworthy? What will we do? Mr. Allison?
Mr. Allison. Congressman Green, I think, first of all, we
have to recognize that this is a real problem.
Mr. Green. Yes, sir.
Mr. Allison. And we have to focus on it.
Mr. Green. Yes, sir.
Mr. Allison. And devote ingenuity, and I think--
Mr. Green. Do this for me.
Mr. Allison. Yes, sir.
Mr. Green. My time is almost--listen, you're excellent, and
I appreciate what you have said, all three of you. But when you
say ``we,'' define we. You said, ``We have to focus.'' Not
putting you on the spot, but we need, for the record, to define
these things. Who is the ``we'' that should focus, please?
Mr. Allison. Well, Congressman Green, I would first start
with the American people as a whole. Also, there are government
representatives and people in the Administration, for example,
who are working very hard to make sure that, with this program,
we are reaching people who need it the most. And that's why
we're working with State and local officials, and also
community groups, as well as counselors, to reach the areas
most affected. And many of those, of course, are minority
communities.
Mr. Green. My time has expired, and I thank you, Madam
Chairwoman. I will not be impolite and encroach on the time.
Thank you.
Ms. Waters. Thank you very much. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. To Mr. Allison
and Mr. Krimminger, I don't think either one of you are the--
none of the people at the table are the villains here. I think
you represent agencies that are probably not fulfilling their
responsibilities.
Do you believe that the mortgage companies and the banks
are doing the best they can?
Mr. Allison. Congressman Cleaver, I think the banks have a
long way to go to get up to their full potential to help
alleviate this problem. They have been making progress, to be
fair.
We have people from Treasury and from Fannie Mae in the
offices of the top seven servicers right now. They are
stationed there, working with them, finding the facts about why
this program isn't working even better. We are not satisfied,
by any means. They are on notice that we are not.
We intend to publish more and more information, as fast as
we can, reliable information about their performance, so the
public and the Congress can judge for themselves.
Mr. Cleaver. Well, your--
Mr. Allison. Much more has to be done.
Mr. Cleaver. Well, yes. We have, legislatively and
administratively, forced them to work with homeowners who are
in trouble. We forced the lion to lie with the lamb. But if you
look closely, when the lion gets up, the lamb is missing. And
we are saying, ``Here, kitty, kitty.''
What I think needs to happen is something needs to happen
to the lion. I wrote down a quote one of you said, ``We are
reaching out to the banks.'' You are reaching out--most of us
are outraged.
If a homeowner does not comply with the requirements of the
mortgage company, they lose their home. If the mortgage
companies don't comply with the requirements of Congress, what
do they lose? Any of you?
Mr. Allison. If I may try to respond to your question,
Congressman Cleaver, first of all, we do have some financial
remedies that we can apply to these servicers. One is we can
deny them payments. We can claw back prior payments if they are
not seen to be following the rules of the program.
I think what's extremely important is to shine a light on
the performance of each one of these banks, and that's exactly
what we are doing.
I think that one has to also recognize that the servicers,
until this year, were in the business of collecting payments
and foreclosing on people. They are having to change their
entire business model. They have to engage with homeowners.
They have to help homeowners. This has required them to change
their systems, to retrain their people, to hire more people.
They have moved in that direction. They have to do much
more. And we are constantly pushing them in every way possible
to do the best possible job.
Mr. Cleaver. Yes, but maybe the system of pushing is not
working. I have twin boys. And I found out early on that if I
spanked one of them when they were doing something, the other
would straighten up. The other one--you know, it had an impact
on the other. I just think in this situation, we haven't
spanked anybody. So I think they have come to the conclusion
that spankings are not on the agenda.
I don't miss hearings. I am here. We are here.
Mr. Allison. Yes.
Mr. Cleaver. I have been to a lot of these hearings. We
have asked a lot of these questions over and over and over
again. We have had that table packed with witnesses, and
witnesses sitting behind them. We go through this over and over
again. And I have to tell you that, as we move through this
holiday season, this will be the second holiday season that I
have been asking these questions, that we have been asking
these questions. Nothing has happened.
Why can't something happen to these lending institutions
who took taxpayer money? They took our money. And they are--and
we are talking about, well, we are--you know, we're issuing
guidance, and we are reaching out to them, we are giving them
some Coke and some water, and why can't we do something to one
of them? And I think everybody--excuse me.
You know, I was approached last night by somebody who is
about to lose his business because the bank is now requiring
more of him. And I am frustrated. And I get even more
frustrated because you guys can't say, ``The next time we find
somebody who is not doing their job, we're going to come back
and recommend that the money be taken from them, the TARP
money.'' Thank you, Madam Chairwoman.
Mr. Allison. May I answer you, Congressman Cleaver? Let me
talk very straight about this. We have worked with them to try
to get them up-to-speed. We have Freddie Mac auditing their
performance. Are they following the rules? Are people being
denied a mortgage modification who should get one under the
plan?
And, as we move forward, we are putting them on notice. And
then we will exact penalties of them, and be publicly outspoken
about who is performing well and who is not. And you're
absolutely right. We have to--we are going to move to the point
where we are disciplining the banks if they don't perform
better than they are today. While they are getting better, it's
not nearly good enough, and it's not fast enough.
We have given them clear targets for how many mods they
have to make permanent by the end of this year. And in every
case where they have existing documentation, there is no excuse
for not getting that mod done by the end of the year--at least
from their standpoint, deciding whether to make the mod or not.
Ms. Waters. Mr. Scott?
Mr. Scott. Yes. Let me ask a couple of questions. In the
program, why can't we stop foreclosure proceedings while the
modification is going on?
Mr. Allison. Congressman Scott, the way the program works
today is that the servicers are prohibited from foreclosing
during the process. And we are enforcing that, and we are
auditing that, to make sure that they do comply.
The question you're asking, though, I think goes beyond
that, which is, why don't we simply stop the entire foreclosure
process? We have formed a group, a council, composed of
foreclosure attorneys, as well as government officials and
others with an interest in this problem, to try to see what
more we can do to help avoid people being frightened by a
foreclosure process underway, at the same time that they're
being considered for a modification. And there is no doubt that
this is confusing people, and scaring them unnecessarily.
So, I think we have to find a better way of dealing with
the problem that you are rightly pointing out.
Mr. Scott. To be clear now, my information says to me that
the foreclosure proceedings are continuing to go ahead, even
while the modification is going forward. That's not an accurate
statement?
Ms. Waters. It is.
Mr. Allison. I think that is the case--
Mr. Scott. Yes.
Mr. Allison. --that there may be a procedure underway at
the same time as a person is being considered for a mod. That
is the issue that we need to engage further about. Right? And
to see whether more can be done to provide assurance to the
homeowner that the first priority is to modify that loan.
Mr. Scott. All right. Here are the major complaints with
the program.
First of all, it includes, one, a lack of transparency
about the criterion, the net present value test used to
evaluate borrowers' eligibility, the lack of capacity of
servicers to process loan modification requests on a timely
basis. There is nobody there to respond in the person of a live
person. There is no--in this most critical, this most essential
of needs, a family going through the process of losing their
home, even at the extent of calling, they get a computer.
And the people most affected are the people at the middle
to lower economic--and lower economic extreme. And they get a
recording, no live person, and in cases where the foreclosure
action is taking place while the homeowner is going through the
HAMP approval process.
So, Mr. Allison, I think we have to come to the conclusion
that that is an area that we need to address, that we need to
address that area in at least stopping the whole foreclosure
procedure until we're going through. Does that require
legislative action on our part? Is it something that you all
can do? This program, in order to be effective, should do that.
Now, my other question. Another area. We use the 31
percent. Now, how did we arrive at 31 percent? Thirty-one
percent of a monthly income is the criterion for this program.
In these tough economic times of soaring unemployment where, in
fact, that monthly income, in many cases, goes to zero, is it
practical not to be able to have an adjustment factor in there,
where we can lower that 31 percent threshold?
Mr. Allison. Thank you, sir. Thank you for those questions,
Congressman Scott. Let me try to go down the list, one by one.
In terms of lack of transparency of the program, we are
making more information every available every month in our
monthly reports. We are also publishing information on
makinghomeaffordable.gov.
With regard to the NPV tests, we intend to make the NPV
model available to counselors in the first quarter of next
year, and--which is coming up very soon, so that they can see
how the model works, and work with homeowners to see whether
they would qualify. Now, this is a complex issue, and we want
to make sure that people are properly acquainted with how to
use the model. But we intend to make that model available to
them. And I think that will be a big step forward.
In terms of the capacity of the servicers, we are looking
at the relative capacities of the different servicers,
comparing them, seeing who is doing the better jobs, what their
capacity is, how many people they have devoted per eligible
mortgagee, so that we can work with them on best practices to
ramp up their capacity, and to have standards for what their
capacity needs to be.
In terms of no live person answering the phone, I think
that has been a real problem. People can go to
makinghomeaffordable.gov, they can look at our hotline. They
can call our hotline if they need to get a person on the phone
to work with them. And we can work with the servicers to make
sure that they are being heard.
In terms of facilitating--of foreclosure actions taking
place while the person is still up in the air about whether
they're going to have a mod or not, as I mentioned before, we
have convened a group to work on that issue.
Now, foreclosures can't take place before people have a
decision about their MHA modification. Nonetheless, they're
concerned that the process may be going forward while they're
being considered. That is the issue where we want to work with
servicers, and see what more can be done to provide more
assurance to people that they are going to be considered.
And lastly, and very quickly, on the 31 percent debt to
income ratio, and the fact that many people now are unemployed,
they don't have income, the program today provides that if they
have at least 9 months of unemployment insurance coming their
way, they can qualify for a mod if all the other qualifications
are met.
Nonetheless, as I said in my testimony, there are many
people who won't be able to qualify because they have lost
their jobs. So what can we do, and what can the servicers do
for them? That's something we are looking at now, and we are
exploring different alternatives, such as the Pennsylvania
model and others, to see whether there is more that might be
done. Some of this might require legislation, however.
Mr. Scott. All right. Thank you.
Ms. Waters. Thank you very much. I request unanimous
consent for 1 minute for a closing on this, because I think
it's very important that you gentlemen at the table understand
that we are very unhappy. Our constituents are in pain. Our
communities are at great risk.
Treasury, you're just too slow. You talk about all of the
things that you are going to do, how you are going to improve.
We have been listening too long.
FDIC, we are appreciative for what you have shown can be
done. I don't know who is talking to whom, but it appears to me
that some of the advice that the FDIC should be giving to
others who are involved in trying to deal with this foreclosure
issue is advice that needs to be shared. It doesn't appear that
it's being looked at.
And for OCC, I don't get a real sense of what you do. You
do advisories. You look at what has or has not been done, and
then you issue information that says what should be done, or
what could be done. This is not good enough.
And we did not hear a lot--do you know about the
legislation tomorrow that we have, H.R. 4173, the Wall Street
Reform and Consumer Protection Act? Do you know about what we
have in there for the unemployed? Do you support that,
Treasury, Mr. Allison?
Mr. Allison. Yes, ma'am. In fact, we are working closely
with staffs of the various leadership Members in the Congress
on that legislation and others.
Ms. Waters. What about you, Mr. Krimminger, do you support
that--
Mr. Krimminger. I--
Ms. Waters. --legislation that deals with the--that portion
that deals with the unemployed?
Mr. Krimminger. I have to apologize to you, Madam
Chairwoman. I will have to get back to you on that, because I
am not familiar with that specific provision of the bill.
Ms. Waters. Mr. Roeder?
Mr. Roeder. Nor am I familiar with that bill, so I cannot
comment.
Ms. Waters. Okay. Well, this is--we are taking a strong
look at what we do for people with emergency medical problems,
the unemployed.
But what we want to hear from you is what you are going to
do to penalize. We want some specifics. We want to know what
you are doing to encourage face-to-face involvement with the
borrowers and the servicers. We want to know what you are doing
about principal write-down. We really do need some creative
proposals. We did not hear that.
What we do hear is a lot of talk about how you are going to
encourage the banks. The banks thumb their noses at all of us.
They don't care about what you're saying. We bailed them out,
and they turned around and reduced the credit limits, increased
the interest rates, and said, ``We will pay you your money
back, don't tell us what to do about our bonuses and our
payment practices.'' And so, we are not encouraged at all when
you talk about working with them and the servicers to make them
do the right thing.
Having said that, 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 thank you, and this hearing is adjourned.
[Whereupon, at 1:59 p.m., the hearing was adjourned.]
A P P E N D I X
December 8, 2009
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