[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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                 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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