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




 
                   SECOND LIENS AND OTHER BARRIERS TO 
                  PRINCIPAL REDUCTION AS AN EFFECTIVE 
                     FORECLOSURE MITIGATION PROGRAM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 13, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-120




                  U.S. GOVERNMENT PRINTING OFFICE
57-738                    WASHINGTON : 2010
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

                 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:
    April 13, 2010...............................................     1
Appendix:
    April 13, 2010...............................................    33

                               WITNESSES
                        Tuesday, April 13, 2010

Das, Sanjiv, President and Chief Executive Officer, CitiMortgage, 
  Inc., accompanied by Steve Hemperly, Executive Vice President..     7
Desoer, Barbara, President, Bank of America Home Loans, 
  accompanied by Jack Schakett, Credit Loss Mitigation Strategies 
  Executive......................................................     5
Heid, Michael J., Co-President, Wells Fargo Home Mortgage, 
  accompanied by Kevin Moss, Executive Vice President, Wells 
  Fargo Home Equity Group........................................    10
Lowman, David, Chief Executive Officer, JPMorgan Chase Home 
  Lending, accompanied by Molly Sheehan, Senior Vice President, 
  Housing Policy.................................................     8

                                APPENDIX

Prepared statements:
    Das, Sanjiv..................................................    34
    Desoer, Barbara..............................................    39
    Heid, Michael J..............................................    47
    Lowman, David................................................    52

              Additional Material Submitted for the Record

Moss, Kevin:
    Additional information provided for the record in response to 
      a question asked by Chairman Frank during the hearing......    64


                   SECOND LIENS AND OTHER BARRIERS TO
                  PRINCIPAL REDUCTION AS AN EFFECTIVE
                     FORECLOSURE MITIGATION PROGRAM

                              ----------                              


                        Tuesday, April 13, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 12 p.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Moore of 
Kansas, Hinojosa, Miller of North Carolina, Green, Cleaver, 
Bean, Perlmutter, Carson, Adler; Bachus, Biggert, Hensarling, 
and Neugebauer.
    The Chairman. The hearing will come to order. I apologize 
for the slight delay. The ongoing question of how do we deal 
with the foreclosure crisis is before us. And I should be 
clear: Our major motivation here is the extent to which the 
ongoing problem of mortgage foreclosure damages the national 
economy. This is a fundamental problem that we have, and it is 
a consensus that one of the obstacles through the fullest 
recovery that is possible is the overhanging in the housing 
area. We have no magic wands to wave or buttons to push. There 
are a series of efforts.
    One of the things that became clear to us as we talked 
about it is the question of the interrelationship of first 
mortgages and second mortgages. And we have been talking to 
investors who hold first mortgages to servicers. The 
institutions here have a significant number of second mortgages 
that they own. And we would like to find out what can be done 
to help resolve this crisis with regard to second mortgages, 
and in particular, we are interested to know what people plan 
to do about them, and if there are obstacles to doing 
something, how can we be either helpful or maybe persuade 
people to do more?
    I will now reserve the balance of my time, and recognize 
the gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    I thank you for holding this important hearing on the issue 
of modifying mortgages on properties having multiple debt 
obligations or second liens. I would also like to thank our 
witnesses for being here today. We look forward to hearing your 
testimony.
    Preventing avoidable foreclosures is a serious issue for 
homeowners that has a great impact on our economy and on the 
communities in which those homes are located. A leading credit 
research provider estimates that the 4 institutions testifying 
before the committee today hold $423 billion in home equity 
loans, including $151 billion in loans to borrowers, who are 
either underwater or close to it. Further research shows that 
at least 51 percent of first liens also have a second or 
subsequent liens. This presents real problems for homeowners 
with multiple liens on their property, as well as for bank 
balance sheets and securitization markets. It also impacts our 
prospects for housing market recovery, as the chairman 
mentioned.
    Mr. Chairman, many of the well intentioned foreclosure 
mitigation programs have already failed to accomplish their 
mission. And many believe that this latest attempt by the 
Administration to ``fix'' the HAMP program will do little to 
stem foreclosures and help troubled homeowners. Constant shifts 
in policy directions have created uncertainty in the market and 
encouraged homeowners and servicers to wait for the next best 
offer rather than take action to address problems related to 
distressed mortgages.
    Additionally, many Americans continue to be concerned about 
the inherent moral hazards of these foreclosure mitigation 
programs. Is it fair to provide taxpayer funds to overextended 
homeowners who have fallen behind on their mortgages while 
homeowners who have been struggling to stay current and meet 
their commitments receive no help? I think not. Also, I think 
that ignores the problem that many homeowners do not even have 
a mortgage or second liens. Most do not have second liens. And 
it is inherently unfair to ask them to guarantee or participate 
in programs to help others.
    Critics of the HAMP program argue that mocks the hard work 
and foresight of those who have made larger downpayments or 
took out smaller mortgages to buy more affordable homes and now 
struggle to make their monthly payments. Now these responsible 
homeowners are forced as taxpayers to foot the bill for 
rescuing their less prudent neighbors. And once again, the 
Administration intends to use TARP funds to pay for these newly 
announced initiatives designed to pressure banks to modify 
troubling loans.
    Unending government interference, intervention, and 
bailouts must end. It is particularly troubling to me that 
banks are being told to forgive principal when many of them 
have said they would rather reduce the interest rates. And when 
the government gets into that detail of trying to force banks 
or coerce them into forgiving principal, I think that is a 
slippery slope.
    Instead of new programs and new bailouts, Congress should 
focus on job creation policies as the best way to help 
homeowners make their payments, prevent more foreclosures, and 
get our economy back on track. That includes reducing our debt, 
which will keep interest rates low. The market needs to find 
its own footing, free of government intervention and 
manipulation, so we can revive our economy and get on with a 
full housing market recovery. And I know it won't be easy.
    I thank, again, the witness for being here, and I yield 
back the balance of my time.
    The Chairman. The gentleman from North Carolina is 
recognized for 3 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    The 4 banks represented today service about two-thirds of 
all distressed home mortgage loans. The same 4 banks own 
between $400 billion and $500 billion in second mortgages 
secured by the same distressed assets, the value of which will 
be directly affected by decisions to modify the first mortgage 
or to foreclose or to extend and pretend.
    It is hard to understand why servicing a first mortgage on 
behalf of investors while holding a second lien on the same 
property is not an irreconcilable conflict of interest between 
servicers and investors. Why is this not a breach of fiduciary 
duty, which is fraud under the common law?
    It makes no sense, as the testimony today will tell us, 
that second mortgages are performing better than first 
mortgages. That makes no sense for the homeowner. Are servicers 
telling homeowners to pay the second mortgage before they pay 
the first if they can only pay one?
    Congress and the industry investors should begin by asking 
whether there is any plausible reason to continue to permit 
servicers to own debts secured by a home that secures a 
mortgage that they also service.
    Hearing none so far, I have introduced with Mr. Ellison 
legislation to prohibit one bank, one entity, from doing both. 
Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Today, we will examine the 5th or 6th iteration of the same 
failed foreclosure mitigation plan offered by the Obama 
Administration and Congress. It is a policy that still throws 
mud on the wall to see what sticks. It is very expensive mud. 
It belongs to someone else. And by the way, none of it is 
sticking.
    We still have one of the highest default rates in our 
Nation's history. By the Administration's own admission, the 
HAMP and HARP program have now restructured 169,000 permanent 
modifications out of their stated goal of 3 to 4 million. Most 
studies and empirical evidence show that at least 50 percent of 
those who have their mortgages modified will again redefault.
    Besides being a highly ineffective program, it is an unfair 
program. It is yet another chapter in ``America the Bailout 
Nation,'' as co-authored by the President and by Speaker 
Pelosi. It takes $50 billion from the taxpayer or borrows the 
money from the Chinese to bail out banks that made bad loans 
and to bail out many who bought more home than they could 
afford, speculated in residential real estate, or used their 
home equity as an ATM machine.
    We must remember that 94 percent of Americans own their 
home outright; they rent or they are current on their mortgage; 
and they are being asked to bail out the other 6 percent. It is 
a policy that says to the citizens who work hard, who live 
within their means, who save for a rainy day, ``You are a 
sucker.'' When you are struggling to pay your own mortgage, you 
shouldn't be forced to pay your neighbor's as well.
    The program is unfair to taxpayers. According to the 
Congressional Budget Office and the Government Accountability 
Office, they say that HAMP and the TARP $50 billion program 
will lose 100 percent of the taxpayer investment. Although I 
curiously note under the Majority memo for this hearing, under 
the subchapter entitled, ``Who Will Absorb Losses,'' curiously 
the word ``taxpayer'' is never mentioned.
    Finally, the program hurts our economy. It fails to 
recognize that the only effective foreclosure mitigation plan 
is a good job with a steady paycheck and a bright future. 
Unfortunately, under the policies of this Administration and of 
this Congress, over 7 million of these jobs have now been lost. 
By creating an unpredictable artificial market, investment 
capital remains on the sidelines; thus, HAMP is hampering 
economic recovery.
    Finally, as our Nation drowns in a sea of debt, I think we 
can better use the $50 billion to put forth a plan to pay down 
the debt and put the Nation on the road to fiscal sanity. That 
would create jobs and thus have effective foreclosure 
mitigation for the Nation.
    I yield back the balance of my time.
    The Chairman. I will yield myself 30 seconds, and then 
yield for his final statement the gentleman from Texas.
    I would just say that when the gentleman from Texas talked 
about the bailout partnership between the President and Nancy 
Pelosi, I gather he was chronicling a George Bush/Nancy Pelosi 
cooperative arrangement since every single bailout as it is 
described now began, of course, at the request of President 
Bush; although they are being continued by President Obama.
    Mr. Hensarling. Will the gentleman yield?
    The Chairman. Yes.
    Mr. Hensarling. Has not the President continued these 
policies?
    The Chairman. Excuse me, I just said continued by President 
Obama. I apologize. The gentleman was apparently preparing his 
response without listening to what he was going to respond to, 
so I will repeat it, and give myself another 15 seconds. Every 
single bailout in America that is undergoing now was begun at 
the request of and, in some cases, the unilateral decision of 
President Bush. What we then have is President Obama continuing 
those bailouts, that is what I was saying.
    Mr. Bachus. Mr. Chairman, could I have 30 seconds?
    The Chairman. I will yield to the gentleman.
    Mr. Bachus. Mr. Chairman, I think the American people, at 
this time, are really not interested in whether it was 
President Bush, whether it was President Obama, whether it was 
Democrats, whether it was Republicans, whether it was the 
Congress, whether it was the Administration, or even whether it 
was Wall Street. I think their main concern is, where do we go 
from here? And so I think we ought to focus--
    The Chairman. I will yield myself some time to say, I would 
have been more impressed with that if the gentleman had said it 
after the gentleman from Texas blamed the President, meaning 
President Obama and Speaker Pelosi. Yes, I agree. I did not get 
into it until the gentleman from Texas said, this is the 
President, I assumed meaning President Obama and Speaker 
Pelosi. So I appreciate the gentleman's comments. It came just 
a little bit too late.
    Mr. Bachus. I believe the reason he did that--
    The Chairman. I am sorry, the gentleman's time has expired.
    The gentleman from Texas.
    Mr. Green. Having been here, Mr. Chairman, when the request 
was made for a toxic assets program to be implemented and 
having seen the Capital Purchase Program implemented, I do have 
some degree of institutional knowledge in terms of what 
actually occurred. And my hope is that we can get beyond the 
finger pointing, but my sincerest thought is that we will not, 
hence the truth has to be told.
    And it is only by telling the truth that we will make it 
clear to future generations what exactly occurred. Two points: 
One, we do have to concern ourselves with what we call moral 
hazard, but we also have to concern ourselves with the immoral 
hazard. The moral hazard has to do with the possibility of 
persons taking advantage of a program specifically designed to 
help persons in times of need. The immoral hazard has to do 
with doing nothing after having seen millions, more than six, 
go into foreclosure, do nothing and watch millions more go into 
foreclosure. That is an immoral hazard.
    We have a great challenge before us. If we do nothing, the 
impact on the economy can be devastating. If we do nothing, the 
moral hazard will be secondary to the immoral hazard of having 
done nothing at a time when we are called upon to do much. I 
think we have to simply understand that we are here for a 
purpose. We are here to make sure that moral hazards are 
avoided and to make sure that we don't engage in the immoral 
hazard of doing nothing.
    I will yield back the balance of my time.
    The Chairman. All time has expired.
    We will begin with the statements. And we begin here with 
Barbara Desoer, who is president of Bank of America Home Loans.

 STATEMENT OF BARBARA DESOER, PRESIDENT, BANK OF AMERICA HOME 
  LOANS, ACCOMPANIED BY JACK SCHAKETT, CREDIT LOSS MITIGATION 
                      STRATEGIES EXECUTIVE

    Ms. Desoer. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. Thank you for the 
opportunity to discuss Bank of America's loan modification 
performance.
    Providing solutions to distressed borrowers remains a 
critical focus, and in the past 2 years, we have helped more 
than 560,000 customers with a permanent modification, including 
33,000 under the Home Affordable Modification Program. 
Modification efforts have been successful in helping many 
customers stay in their homes, but there is a limit to what the 
current programs can accomplish.
    Today, I would like to discuss the number of customers that 
we believe we can still assist with HAMP, as well as focus on 
the role of principal reduction and second liens. In our total 
portfolio of 14 million loans, Bank of America has 1.4 million 
first mortgage customers who are more than 60 days delinquent. 
Of that number, 621,000 customers are eligible for mortgage 
modification through HAMP. We arrive at that number by 
subtracting customers for whom HAMP was not intended. This 
includes non-owner-occupied or vacant homes, the unemployed, 
and customers with a debt-to-income ratio less than 31 percent. 
For those customers who fall outside the scope of HAMP, Bank of 
America continues to offer proprietary modification solutions.
    To date, we have made HAMP trial offers to 391,000 
customers. However, despite aggressive outreach, including 
face-to-face visits to customers' homes, we have not 
experienced the kind of response rate we anticipated. In 
addition, a significant number of customers in the trial 
modification period are not completing the requirements to 
obtain permanent modifications.
    We continue to look at ways to evolve the programs to 
achieve higher customer acceptance rates. Recent efforts on 
principal reduction and second liens are examples of those. 
Bank of America is supportive of principal reduction for 
customers who are experiencing hardship and have extremely high 
loan-to-value ratios. We recently announced enhancements to our 
own proprietary national homeownership retention program that 
includes an innovative earned principal forgiveness approach 
which strikes, we believe, the necessary balance between 
customer and investor interests.
    We understand that there are questions about the impact of 
second liens on loan modifications and the use of principal 
reduction. Second liens need to be a part of the modification 
process. However, we believe broad-scale extinguishment is not 
the solution because the majority of seconds do in fact have 
value. Out of 2.2 million second loans in Bank of America's 
held-for-investment portfolio, only 91,000 are delinquent, and 
also behind a delinquent first and not supported by any equity. 
It is important to note that in our first mortgage held for 
investment portfolio, we have already been modifying firsts 
including principal reduction, regardless of whether or not 
there is a second lien behind it. We have also modified many 
second lien loans and written down a significant number of 
second lien loans as well.
    We recognize that more needs to be done, particularly when 
the first lien is held by a different investor. And we believe 
a solution is contained within the Treasury's second lien 
program, known as 2MP. With 2MP, the holder of the second lien 
is required to forebear a similar percentage as the first 
lienholder. We would advocate working on a similar industry-
wide process that would require the second lienholder to take a 
principal balance reduction proportionate to the first 
lienholder. Bank of America is a proud participant in 2MP and, 
on April 1st, became the first major loan servicer to begin 
mailing trial modification offers to home equity customers 
under the program.
    Despite these considerable efforts, not everyone will be 
able to afford to stay in their homes. Given the depth of the 
Nation's recession, a considerable number of customers will 
need to move from homeownership to rental and other housing 
solutions. Bank of America is committed to passionately and 
responsibly helping our customers make this transition. We 
recently launched the Treasury's Home Affordable Foreclosure 
Alternatives program on April 5th and have implemented our own 
expanded short-sale program to help customers avoid the stigma 
of foreclosure and reduce the damage done to their credit.
    For those not interested in the short-sale process as an 
alternative, we are stepping up efforts to provide incremental 
funding for our Cash for Keys program and Deed in Lieu program. 
We will continue to partner with public policy officials, 
community groups, and, most importantly, our customers to 
provide a dignified transition where required.
    At Bank of America, we are working to balance the needs of 
customers, investors, shareholders, and the communities we 
serve. We take very seriously our role in helping customers, as 
well as restoring confidence in the U.S. housing market. We 
appreciate the leadership of this committee and will continue 
to work with you to develop solutions on these critical issues. 
Thank you.
    [The prepared statement of Ms. Desoer can be found on page 
39 of the appendix.]
    The Chairman. Thank you.
    I should explain that we have asked the four large banks 
here to send a high-ranking official and, if they wish, to 
bring with them someone who can do technical back-up. We in 
this committee are well aware of the importance of--I was just 
explaining that we are going to be calling on every other 
witness because we have high-ranking executives, and they are 
accompanied by other executives who have the kind of knowledge 
that will be helpful together in answering the questions.
    So our next witness is Mr. Sanjiv Das, who is president and 
chief executive officer of CitiMortgage.

STATEMENT OF SANJIV DAS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
 CITIMORTGAGE, INC., ACCOMPANIED BY STEVE HEMPERLY, EXECUTIVE 
                         VICE PRESIDENT

    Mr. Das. Chairman Frank, Ranking Member Bachus, and members 
of the committee, thank you for the opportunity to discuss 
Citi's efforts to help families stay in their homes.
    I am Sanjiv Das, CEO of CitiMortgage. Joining me is Steve 
Hemperly, head of Citi's default servicing operations, and I am 
honored to be given the chance today to describe our efforts.
    As Citi CEO Vikram Pandit has said, we owe a debt of 
gratitude to the American taxpayer, and we believe it is our 
responsibility to help American families in financial distress 
and, in particular, to help families stay in their homes. We 
are committed to modifying loans to borrowers facing hardship, 
while providing new loans to help Americans in this difficult 
time.
    I joined Citi in July of 2008, and in my role as head of 
CitiMortgage, I manage Citi's efforts to help families pursue 
their dreams of buying a home, making their homes more 
affordable, or assisting those families who may be facing 
financial hardship.
    CitiMortgage has a long history of helping homeowners. Just 
last year, we originated mortgages to approximately 336,000 
homeowners, totalling $80.5 billion. Also, last year, we helped 
approximately 270,000 borrowers refinance their primary 
mortgages. And in the midst of this housing crisis, we have put 
considerable resources towards helping our customers who are 
facing financial challenges remain in their homes.
    We describe our lending and foreclosure prevention efforts 
in detail in a quarterly report that we release publicly and 
post on our Web site. Citi has worked closely with the U.S. 
Treasury in developing and executing their Making Home 
Affordable programs. Since 2007, we have helped more than 
825,000 families in their efforts to avoid foreclosure. We now 
have over 1,400 new employees dedicated to supporting our 
foreclosure prevention efforts and have trained more than 4,000 
employees to assist borrowers.
    Our focus has paid off. We are pleased to be ranked 
consistently among the top, if not at the top, of Treasury's 
rankings for HAMP, and in the fourth quarter of 2009, we were 
able to help families in their efforts to avoid foreclosure by 
a ratio of 15 to 1. Our goal is to work with our customers to 
find the most affordable solution and to assist those who are 
in need.
    At Citi, we have addressed affordability with programs 
which go beyond HAMP. We believe these programs are 
responsible, timely and, most importantly, effective. Our 
programs address core issues which borrowers face, such as 
unemployment, imminent risk of default, and the need for 
alternatives to foreclosure for those not able to afford owning 
a home.
    We have used and continue to use principal reduction as a 
solution. To date, we have been able to address the needs of 
our borrowers on a case-by-case basis, tailoring solutions for 
a family's unique needs and to deliver an outcome that is 
affordable and lasting. We do not believe there is a one-size-
fits-all approach to affordability. The proof of this is in our 
low default rates, which continue to rank significantly lower 
than industry averages.
    We caution that applying principal reductions on a broad 
scale could raise issues of fairness among consumers. We have 
also signed for the Treasury's second lien program and support 
recent changes to HAMP's first lien program. We expect these 
changes to result in more principal reductions going forward, 
and we will continue to be thoughtful in how we implement these 
programs.
    Just as HAMP is not the only solution for all consumers, we 
believe principal reduction is not the only solution for those 
who are experiencing financial hardship. While we have made 
progress, I fully appreciate there is more work to be done. We 
are staunch supporters of the Treasury's programs to help 
consumers because we believe that action among all banks will 
prove to be more powerful and ultimately more effective than 
individual bank actions in addressing consumer financial 
hardship.
    Let me conclude by restating our unwavering commitment to 
helping American families during these challenging times. All 
of us at Citi remain focused on achieving affordability in a 
responsible manner while helping families stay in their homes. 
Thank you, Mr. Chairman and Ranking Member Bachus, for the 
opportunity to speak before you and the members of the 
committee. I would be happy to answer any questions you might 
have.
    [The prepared statement of Mr. Das can be found on page 34 
of the appendix.]
    The Chairman. Next, we have Mr. David Lowman, who is the 
chief executive officer of JPMorgan Chase Home Lending.

 STATEMENT OF DAVID LOWMAN, CHIEF EXECUTIVE OFFICER, JPMORGAN 
 CHASE HOME LENDING, ACCOMPANIED BY MOLLY SHEEHAN, SENIOR VICE 
                   PRESIDENT, HOUSING POLICY

    Mr. Lowman. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
appear before you today.
    My name is Dave Lowman, and I am the chief executive 
officer of the home lending businesses of JPMorgan Chase. I am 
joined today by my colleague, Molly Sheehan.
    JPMorgan Chase shares your commitment to helping homeowners 
and stabilizing our Nation's housing market. At Chase, we are 
working hard to help families meet their mortgage obligations 
and keep them in their homes by making their home payments 
affordable. To date, we have helped to prevent over 965,000 
foreclosures through HAMP, our own proprietary modification 
programs, and other programs. In addition, we have refinanced 
nearly $16 billion of loans under HARP. HAMP modification 
performance has been strong, helping hundreds of thousands of 
homeowners achieve affordable mortgage payments.
    At Chase, we are now completing more than 10,000 permanent 
modifications per month, and on average, homeowners are 
receiving a monthly payment reduction of $548 through their 
HAMP modification. That represents, on average, a payment 
reduction of 29 percent.
    In addition, we are adopting and implementing the Home 
Affordable Foreclosure Alternative Program and a second lien 
modification program to help more borrowers. We actively use 
temporary forbearance agreements for unemployed borrowers, 
similar to the program being contemplated by the 
Administration.
    You have asked us to focus our testimony on second liens 
and principal forgiveness, and I would like to make a few 
points on these topics. We have given these issues a great deal 
of thought, and my written testimony contains the results of 
our extensive analysis. There have been many questions about 
the role of second liens in the process of helping borrowers. 
We estimate that 70 percent of the first liens in our servicing 
portfolio are unencumbered by a junior lien; 95 percent of our 
second lien borrowers continue to pay as agreed. Even among 
loans that are underwater, 95 percent continue to pay as 
agreed. More than 90 percent of customers with loan to values 
greater than 125 percent continue to pay as agreed.
    In our experience, second liens are not an impediment to 
first lien modifications. Our HAMP first lien modification 
completion rate is virtually the same, whether or not we are 
aware of the existence of a second lien.
    It is important to distinguish between payment priority and 
lien priority. In almost all scenarios, second lienholders have 
rights equal to a first lienholder with respect to a borrower's 
cash flow. The same is true with respect to other secured or 
unsecured debt, such as credit cards or car loans. Generally, 
consumers can decide how they want to manage their monthly 
payments. It is only at liquidation or property disposition 
that the first lien investors have priority.
    We routinely modify our second liens, whether or not we own 
the first mortgage. We have offered almost 54,000 second lien 
modifications over the last 14 months, 12,000 of which have 
been made permanent. Approximately 45 percent of these were on 
loans where we did not service the first lien.
    On the topic of principal reduction, there are certainly 
individual cases or even segments of borrowers where principal 
reduction may be appropriate. Last year, we began testing 
targeted principal reduction programs for certain high-risk 
borrowers to see if a principal reduction program could be 
effective. Once we see the results of these tests, we will be 
able to better evaluate the effectiveness of a broader 
principal reduction program.
    But we are concerned about large-scale, broadbased 
principal reduction programs for both first and second lien 
mortgage loans and particularly for current borrowers with an 
ability to repay their obligations. Our first concern is that 
such programs could be harmful to consumers, investors, and 
future mortgage market conditions, and should not be undertaken 
without first attempting other solutions, including more 
targeted modification efforts.
    Broadbased principal reduction could result in decreased 
access to credit and higher cost for consumers because lenders 
will price for principal forgiveness risk. Less affluent 
borrowers will likely be harmed disproportionately.
    There is also an important issue of cost. A broadbased 
principal reduction program could have an industry-wide cost of 
$700 billion to $900 billion, by our estimates. The cost of 
Fannie Mae, Freddie Mac, and FHA alone would be in the 
neighborhood of $150 billion.
    In addition, let me emphasize that we have contractual 
obligations to investors, including Fannie Mae and Freddie Mac, 
that generally do not permit principal reductions. Responsible 
lenders and major servicers are offering programs that 
incorporate principal reduction features for borrowers who most 
need that type of assistance, based on the characteristics of 
the particular portfolio of loans. We believe these types of 
targeted solutions are more appropriate.
    Thank you for your attention, and I would be happy to 
answer any questions you may have.
    [The prepared statement of Mr. Lowman can be found on page 
52 of the appendix.]
    The Chairman. Next, we will hear from Mr. Mike Heid, who is 
co-president of Wells Fargo Home Mortgage.

 STATEMENT OF MICHAEL J. HEID, CO-PRESIDENT, WELLS FARGO HOME 
MORTGAGE, ACCOMPANIED BY KEVIN MOSS, EXECUTIVE VICE PRESIDENT, 
                 WELLS FARGO HOME EQUITY GROUP

    Mr. Heid. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I am Mike Heid, co-president of Wells 
Fargo Home Mortgage,and I am here today with Kevin Moss, 
executive vice president of the Wells Fargo Home Equity Group.
    I would like to begin by stating what we, Wells Fargo, 
believe is an overarching issue that requires constant 
consideration. While very difficult to achieve, the needs and 
interests of homeowners in financial distress must be balanced 
with those who have remained current in their mortgage 
payments. While much focus deservedly is directed to consumers 
behind on payments, we cannot lose sight of the 91 percent of 
our mortgage customers current on their loans and the fact that 
just 3 percent of our home equity customers were 2 or more 
payments past due as of the end of 2009.
    With that perspective in mind, let me address the 
assistance programs already under way and the program announced 
in concept on March 26th. First, for years, we have offered a 
short-term relief option that, since January of 2009, has 
helped more than 100,000 customers who have experienced 
unemployment or underemployment. It appears that Treasury's new 
temporary assistance program is consistent with our own. If 
that proves to be true when the details are released, we could 
put this enhancement into practice in a matter of weeks.
    Second, more than a year ago, we began using principal 
forgiveness as an element of our Wells Fargo loan modification 
program for certain portfolio assets. In 2009, we completed 
more than 50,000 such modifications, with a total reduction of 
principal of more than $2.6 billion granting immediate and 
permanent principal forgiveness, not an earnout over time. On 
average, customers received a 15 percent principal reduction 
amounting to more than $50,000 and, when combined with rate 
reductions and term extensions, dropped their monthly payments 
by 25 percent.
    Principal forgiveness is not an across-the-board solution. 
Not every homeowner with a loan balance that exceeds the value 
of their home falls behind on their payments. Most homeowners 
are doing what is necessary to stay current on their payment 
obligations and, in so doing, protecting their credit standing.
    For this reason, principal forgiveness needs to be used in 
a very careful and focused manner. Through experience, we have 
found that it is best to use to assist customers in areas with 
severe price declines where there is little prospect for full 
recovery of home values. Further, they have suffered financial 
hardships, but continue to have sufficient incomes to afford a 
lower modified home payment and want to remain in the home.
    In 2009, the redefault rates on these loans were less than 
half the rate for similar loans in our industry. In 2010, we 
expect to use principal forgiveness on the same basic tenants. 
In addition, when available, we will review the new HAMP 
program details to confirm our conceptual understanding. Absent 
any unexpected legal, regulatory, or accounting issues, we plan 
to implement the HAMP enhancements for first and second lien 
modifications as rapidly as possible.
    With respect to HAMP in general, from the very beginning, 
we have said it is only part of the story when it comes to 
helping homeowners. Since the beginning of 2009, we have 
initiated or completed more than half a million mortgage 
modifications, three-quarters of which were done outside of the 
HAMP program. Wells Fargo is now doing three modifications for 
every completed foreclosure. As a standing practice, before we 
move a home to foreclosure sale, we ensure all other options 
are exhausted.
    With respect to HUD's new FHA refinance program, also 
announced in concept on March 26th, implementation will require 
significant work. As one of the two largest FHA lenders, we 
intend to offer these refinance opportunities and plan to 
closely follow the guidelines set by first lien investors, 
including Fannie Mae and Freddie Mac. In our home equity 
portfolio, we stand committed to ensuring second liens do not 
prevent such refinances from occurring.
    In closing, our efforts to assist customers today are very 
different than they were a year ago. For instance, we have 
assigned one person to manage a loan modification, so by June, 
a customer will know who he or she is dealing with from start 
to finish. We have hired 10,000 home preservation staff for a 
total of 17,400. We have expanded 2,700 preservation centers to 
provide face-to-face help, and we have instituted a 5-day 
credit decision turnaround for customers who provide all of the 
required documents.
    Wells Fargo remains committed to working with this 
committee and others on balanced initiatives that consider the 
needs of all customers, our investors, and our country. Thank 
you and I look forward to your questions.
    [The prepared statement of Mr. Heid can be found on page 47 
of the appendix.]
    The Chairman. Thank you.
    Mr. Bachus. Mr. Chairman?
    The Chairman. Yes.
    Mr. Bachus. Prior to the 5 minutes each, I want to say 
this, and I want to compliment you. I am not sure it was an 
intentional thing, but we had this hearing at 12:00 instead of 
10:00. The testimony usually comes in at night or late 
afternoon, as it did yesterday. We were able, many of us, to 
read the testimony this morning prior to the hearing, which was 
a great help, and I think it makes for a better hearing.
    The Chairman. Well, I appreciate that. And I don't know if 
we want to set the precedent of members having to read the 
testimony. But I was able to--that clearly was something 
intentional. We were able to do it, in part, and look, we have 
a lot of requests for hearings. We have a hard time 
accommodating them all, and they put a lot of strain on the 
people who work for us.
    What I did today was, we are not voting until 6:30, so that 
is one reason we were able to do this at noon; we are not going 
to be interrupted. As members know, I feel terribly guilty when 
very busy people, private sector or public sector, nonprofit, 
profit, volunteers, when they sit for an hour while we 
commemorate the winning of some baseball game over on the Floor 
of the House. And so I was able to move it to that time, which 
I agree is a better time. And we will work together, as we have 
done, maybe to pick some other days when members are coming, 
and we start a little early. But that was made possible on the 
fact that we wouldn't have any votes.
    Let me just begin with an agreement that, yes, not 
everybody who is in default is going to get help or should be 
helped. There are people who made mistakes and misjudgments. 
And I have long felt that we were pushing too many people into 
homeownership and not doing enough for rental housing, so that 
was no favor to anybody.
    I also believe, yes, when you are talking about people who 
had a loan and then took out a home equity loan and enjoyed the 
fruits of that, those are not great objects of sympathy in 
every case where people cashed out the ability. On the other 
hand, there are some categories of people whom I very much want 
to help.
    Let me talk in particular, do any of you differentiate 
based on the unemployed? That is one of the things I think that 
we should do, which is, yes, you can talk about people who 
were, either because they were persuaded to or they made 
misjudgments or some combination of fault, that is one thing, 
but there are people who are unemployed, and you can't pay your 
mortgage out of unemployment. Those are the people who seem to 
me no one should be arguing would be, I don't think it is moral 
hazard. I don't think anybody is going to get unemployed just 
so he can get a mortgage reduction.
    Let me go down the list, starting with Ms. Desoer. Do you 
differentiate at all based on whether or not people have been 
unemployed through no fault of their own?
    Ms. Desoer. Yes, we do. And, as you know, under the new 
Treasury guidelines as well, there is a standard of 3 to 6 
months of forbearance of payments.
    The Chairman. Three months does not--I wish I could say 
that unemployment was so transitory that 3 months made a 
difference. I am disappointed in the Obama Administration here. 
I think that is insufficient. Do you go beyond that? In your 
own judgments, do you take that into account?
    Ms. Desoer. Each one is really a very customized solution, 
so it depends on the state of delinquency when the request was 
initiated and that sort of thing. So occasionally, we do. But 
usually, it is within that timeframe.
    The Chairman. I understand some of what you said, but I 
don't see any reason for not being very sympathetic to people 
who are unemployed.
    Mr. Das?
    Mr. Das. Chairman Frank, I think you raise a very important 
point. The unemployed group of people are essentially the ones 
who are getting hit by a double whammy here, not only with 
house prices coming down but also losing their jobs. Citi had 
the perspective of a year's advantage, because we launched an 
unemployment assist last March. So we learned a few more things 
prior to the Administration's new program.
    What we learned, sir, was that 3 months, between 3 months 
and 6 months, to the point that you made earlier, we didn't 
want a program to be so long that it would change people's 
employment-seeking behaviors and so what we learned is it 
actually doesn't change their employment behavior.
    The Chairman. It is very hard to find that someone is going 
to just not try and get back to work.
    Mr. Das. Correct. And that was our experience as well. We 
found that people looked for work, and many of them found work. 
But more importantly, many of them found an alternative 
solution in terms of HAMP with us. And so I would strongly 
recommend that we look at that.
    The Chairman. Mr. Lowman?
    Mr. Lowman. Chairman Frank, as I mentioned in my testimony, 
we have had a program that provided forbearance to unemployed 
borrowers. It has been a part of our practices for a while. And 
we, obviously, embrace new changes in the HAMP program that 
provide the same.
    The Chairman. Mr. Heid?
    Mr. Heid. Yes, we have done this for years. And I think in 
addition to what has been said, the key is to make sure the 
customer has the desire to remain in the home.
    The Chairman. I agree. And I would think the question of 
fairness to people paying their mortgages and the question of 
moral hazard, it would seem to me, substantially to recede when 
you are talking about people who are unemployed. And I also 
agree, with regard to public money, we do give money to people 
who are unemployed, called unemployment insurance. We do other 
things. I would hope we would be forthcoming about that.
    Let me ask quickly. As in a lot of circumstances, if the 
holder of the first mortgage is ready to do some principal 
reduction and you hold the second mortgage separately from 
that, are you prepared to do a proportional reduction? Let me 
start with Mr. Heid.
    Mr. Heid. Yes, especially under the 2MP program, which has 
been mentioned earlier.
    The Chairman. You would do proportional reductions?
    Mr. Heid. That would be required. The other thing I would 
say is, in the 50,000 principal forgiveness modifications that 
we did as a first lienholder, we did not condition that based 
upon what any second lienholder might--
    The Chairman. But as second lien, not everybody is as nice 
as you, maybe. So you would accept a proportional on the second 
if there was going to be a reduction on the first?
    Mr. Heid. Yes.
    The Chairman. Mr. Lowman?
    Mr. Lowman. Yes, as a part of the 2MP program, we would 
consider the same.
    The Chairman. Mr. Das?
    Mr. Das. Actually, we were using the FDIC program prior to 
the 2MP program, so, obviously, with the 2MP program, we will. 
But in the FDIC program, when we modified a first that was on 
our books, we automatically modified a second.
    The Chairman. Sir, I know Bank of America is doing that, 
you have informed me, but my time is expiring.
    I would ask you all in writing to let me know of any 
circumstances in which there was a reduction that was going to 
be made on the first but you would not accept a proportional 
reduction on the second because that becomes an obstacle. I 
would like to know if there is any category of cases where--
obviously, if you are the owner of both, it is not as much of 
an issue--but where there is separate ownership of the first 
and the second, where you own the second and don't own the 
first, are there cases or categories where you would resist a 
proportional reduction? Because I will be honest, if there 
were, that would trouble me.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, and I will say this to the panelists, what we 
are talking about is forgiveness, or what we are talking about 
is a benefit or really a modification of the contract. And I 
think it is important for all of us to know that any time you 
create a benefit or an entitlement, whatever you call it, you 
create a need.
    Mr. Hensarling, Congressman Hensarling, often says, if you 
build it, they will come. And that is one of my concerns here.
    Mr. Lowman said 95 percent of borrowers are current. So my 
first concern is the social cost. Are people going to say, it 
is not fair to me, somewhere down the line I have to pay for 
this? So that would be one of my concerns, equal treatment, or 
is it going to create more really late payments and things of 
that nature?
    The second is, the cost of mortgages going forward are 
going to be greater. It is impossible to start modifying 
contracts without that showing up in subsequent contracts 
because people are going to protect themselves from the risk 
that wasn't there before.
    And a lot of this, actually, JPMorgan Chase's testimony, 
Ms. Sheehan and Mr. Lowman, was very good, and I think it was a 
thoughtful analysis. There is going to be a cost to everyone 
else in this.
    The third one, and this is something that we ought to all 
be concerned about, I think the greatest cost is going to fall 
on those with less than perfect credit in the future because it 
is going to raise their downpayment. Some of that may be good, 
but some of it may make it very hard for them. It is going to 
increase cost to those with less than perfect credit going 
forward because, sooner or later, they are going to have to 
shoulder the benefit. And these are people who probably would 
not have defaulted.
    So my questions are going to kind of concern those things. 
First, Mr. Lowman, you talked about an industry-wide cost of 
$700 billion to $900 billion, and that is a large cost. How 
will the industry work through its underwater borrowers in the 
near term? Or really maybe a better question, will this cost 
necessarily be incurred or passed down to other borrowers in 
the future? How will it be made up?
    Mr. Lowman. Well, I think the cost obviously is great for 
everybody that holds loans, right, every type of investor, 
whether banks or private investors or what have you. To the 
extent we were required to forgive those loans, it certainly 
would be a hazard and a risk that we would have to bear in the 
future, and as a result, we would either do one of two things. 
We would increase the downpayment requirements to protect 
ourselves from that in the future or raise the prices or both. 
So I think the cost of homeownership in the future would be 
greatly increased as a result.
    Mr. Bachus. Do the other three institutions agree with that 
analysis?
    Ms. Desoer. Yes, I would agree if there were wholesale 
reductions, but I think that is the total amount, and I view 
that as hypothetical because of constraints that exist that I 
believe would stand in the way of ever reaching the number of 
making 100 percent of the borrowers whole.
    Mr. Das. I would agree with that. I would say that the only 
other issue, I agree with Barbara, that it is in fact 
hypothetical, but I would expect it to increase. I think in 
trying to solve low redefaults, it might actually increase the 
number of defaults if we do things like this. The costs could 
actually be higher.
    Mr. Heid. All the risks described are very real and need to 
be taken into account.
    Mr. Bachus. Thank you.
    I also would like to hear from the regulators. I don't know 
that bank regulators would want lenders to take such risks, 
some of the risks that may be associated with this type of 
program. It certainly will have an impact on the finances of 
the company.
    Let me ask all of you this in conclusion. The rollout of 
this 2MP program will not be effective until September of this 
year. But under this program, a servicer cannot execute a 
foreclosure until all available modification options have been 
tried. And I know the chairman has asked you all to write a 
letter basically saying that you will agree to that. Does this 
cause, particularly with the September intent rollout, does 
this basically really operate almost like a 6-month mortgage 
foreclosure moratorium?
    Ms. Desoer. I will take that one. The 2MP operates as a 
modification of the second deed of trust after the first 
mortgage has been modified to a permanent modification. So the 
foreclosure event is passed as long as that first mortgage 
modification continues to perform. And then it is just a 
difference in timing between the modification of the first and 
the second, but there--
    Mr. Bachus. As a practical matter, do you think that this 
will be sort of viewed as a mortgage foreclosure moratorium?
    Ms. Desoer. I don't believe so, no.
    Mr. Bachus. How about the other institutions?
    Mr. Heid. I think the one piece that is getting lost in 
some of these broad sweeping delays on foreclosures is that 
there are a number of vacant properties that are also getting 
swept up in that. So communities are being harmed by the fact 
that there is a vacant property sitting there, can't move the 
process forward. And I don't believe that was the intent, but 
that is one of the casualties of the process that is now 
unfolding.
    Mr. Bachus. So it does have a tendency to slow the 
foreclosures?
    Mr. Heid. Yes.
    The Chairman. Will the gentleman yield to me because I just 
want to make clear. I wasn't calling for any over--mine was 
contingent. I want to know, in cases where the first is 
modified, if they were also modifying the second. That doesn't 
impose a requirement to modify the first where someone is in--
they can do that in or out of the 2MP program. There is nothing 
stopping it.
    Mr. Bachus. So it would still be voluntary on everyone's 
part, is that correct?
    The Chairman. Well, as I understand it, unless we change 
the law, yes, it is voluntary. I voted for bankruptcy, but it 
didn't win.
    Mr. Bachus. We have a tendency to all of a sudden say, you 
have made a commitment to do something, and I didn't know 
whether these letters would--when you say assurances, I don't 
know what that means going forward.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I am sitting here asking myself the question of, why are we 
here today? It seems you all are very happy with what is 
happening in 64 percent of the market that you control, and I 
have not heard anybody make a suggestion that you have a plan 
or you are able to put a plan together better than what is 
presently being implemented. Is that a correct hearing of what 
your testimony is?
    Ms. Desoer. Sir, I would disagree with that. And the kinds 
of recommendations are to embrace the programs that have just 
recently been announced and launch 2MP. We started mailing our 
first trial modifications under that program April 1st. The 
home affordable foreclosure alternative short sale program just 
went into effect April 5th, so there is new performance that 
will indicate whether in fact there is further impact that can 
have. And then, finally, the principal reduction and things 
like the FHA refinance that has been recommended won't go into 
effect in the fall. So I think there is certainly more that 
needs to be done. I think in our testimony what we--
    Mr. Kanjorski. Well, that is the question. If I may, I am 
limited on my time, do we have to do the extra work here in the 
Congress, or is the private sector able to come up with the 
solutions to this? It seems to me that if just the four 
institutions at that table cannot get together and conspire, 
but you came up with good ideas and implemented them, it would 
not require the Congress to take any action.
    Mr. Heid. I would say much of that is already occurring. 
Each of us have stated the number of loan modifications that 
are happening outside of the various government programs. So I 
would say the private sector is already stepping forward.
    Mr. Kanjorski. Very good.
    In listening to the testimony, it does not seem that the 
numbers are very high with what is being done as of this 
present time. There are a lot more potential foreclosures out 
there that may be caused or may come about because we have not 
quite arranged things. Is that a correct impression on my part, 
or do you think you are at the absolute optimum level, and we 
have nothing more to do? Is what you are doing going to satisfy 
the market? I want to make the observation--you know that we 
have talked about the fact that certainly, we want to help 
homeowners stay in their homes if they want to and are disposed 
to do so.
    However, let us not miss the fact that we are trying to get 
the economy stimulated. If we can get homes being sold again 
and financed again, we can change the recession to a recovery, 
and we can be on our way to some good times. However, I am 
getting the impression from the testimony of the witnesses thus 
far that everything is hunky dory, and we do not have to really 
do anything; therefore, I am wondering why the chairman got me 
back so early today for this hearing.
    The Chairman. If the gentleman would yield. It is because I 
sometimes find that having called a hearing, things get hunkier 
and dorier between the time that the hearing is called and the 
time that we hear the testimony.
    Mr. Kanjorski. Good observation, Mr. Chairman.
    I heard one part that does disturb me. Mr. Miller, in his 
introduction, talked about the internal conflict between a 
servicer and an owner of a lien position. Quite frankly, maybe 
you are marvelous in your approach in the private sector that 
that conflict never arises, but I have a hard time believing 
that, and I am wondering, do you see a need for us to address 
the issue of separating and taking away that conflict of 
interest that either you can be an owner of a lien or you can 
be a servicer of a mortgage, but you cannot be both? Can I just 
have your expressions on that?
    Ms. Desoer. I do not believe that is required. When you 
look at our portfolio of first mortgages, about 30 percent of 
them have a second lien behind them. About half of those are on 
us; half of that is other investors. And I think I heard 
another competitor saying a similar statistic. But as I 
mentioned in my oral testimony and our written testimony, we 
are doing modifications. But the issue is that a holder of a 
first, an investor, would not want to make a principal 
reduction that could benefit the cash flow of the borrower if 
that borrower turned around and used that cash flow to pay a 
second. And that is why our recommendation in the testimony is 
to further advance 2MP from principal forbearance on a shared 
percentage basis across the first and the second to principal 
forgiveness across the first and the second, and a similar 
percentage would help resolve that.
    Mr. Heid. I would add that we all have requirements on us 
to service the first mortgage appropriately, so that I think 
that topic and that issue is getting lost in the mix. I would 
not--I do not believe it is appropriate to legislate this 
matter. And I think the customer choice is really the missing 
piece in terms of where the cash is being sent. It is not 
because there is a shifting of cash between first and second 
lien portfolios or anything of the sort.
    Mr. Kanjorski. Mr. Heid, do you really think the customer 
has anything to do with who is servicing his mortgage?
    Mr. Heid. No. What I am saying is the customer is choosing 
which bills to pay.
    Mr. Kanjorski. Oh, on paying the bill, but that is not 
under the advice from the servicer or not with any coercion or 
any thought process?
    Mr. Heid. That is my belief.
    Mr. Das. Congressman, I would attest to that. I would say 
that the modification on the first mortgage, which happens to 
be the single biggest debt for most consumers, has been the one 
that we have led with, as opposed to what the investors might 
want in this case. But I think that what we have really tried 
to solve for here is solving the greatest source of distress 
for people and so help keep them in their own homes.
    The issue in separating the two is that, as we know, there 
is about $440-odd billion that is there in second mortgages and 
there just wouldn't be enough liquidity if we didn't have the 
same servicers service both the first and the second. So I 
think there is a certain amount of liquidity and capacity that 
really also needs to be looked at. But there is no conflict.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. So when I listened to your testimony, as 
you went down the line there, I heard you talk about how some 
of you participated in the HAMP program, and then others have 
done things in-house, and I think you used the word 
proprietary. What I also heard was, the HAMP program has not 
been overwhelmingly received or effective up to this point. So 
I guess the question, just to kind of go down the road there 
is, why isn't the HAMP program working, and are your 
proprietary solutions better than the HAMP program?
    Ms. Desoer. It very much depends on the circumstances of 
the borrowers. I think the advantages of the HAMP program and 
what it has done for the industry in establishing standards 
that enable us to apply programs across the portfolio has been 
a real advantage.
    But there is no question that there are certain borrowers, 
a jumbo mortgage as an example for that, a non-owner-occupied 
property, an FHA loan, where HAMP was not built to modify those 
loans, and that determines the need for special FHA programs or 
special proprietary programs. So the two work in complement. 
And I think as an industry, we are just trying to get the 
message across that both are effective for whom they are 
targeted.
    We agree that we are disappointed in the pull through rates 
for permanent modifications under HAMP for our performance so 
far, and that is what we have been working on fixing. But both 
are required because the portfolio is broad.
    Mr. Neugebauer. Mr. Das?
    Mr. Das. Congressman, I have a different view on HAMP. If 
you recall, at this time last year, there were a lot of 
proprietary programs that all of us banks had, and consumers 
were very confused. This is a large-scale problem, and 
consumers needed to know what options were available to them, 
and so I think HAMP provided the standard view of what a 
consumer could expect when they called their bank.
    And so we took it very seriously and so when we walked out 
of the Treasury offices after designing the program, we decided 
that we would adopt it in spirit and ended up with 52 percent 
of our eligible portfolio on an active HAMP trial. And what we 
are finding is that we now compare to 20 percent for the rest 
of the industry so it really depends on how you adopt it.
    I will give you an example. Thirty-three percent of all the 
portfolio loans have been HAMP'd by Citi compared to a 4\1/2\ 
percent share of portfolio loans that we have and our 
experience on booking mods are actually pretty good. We have 
been constantly contacting our customers to make sure that they 
understood what they were signing up for and the documents 
needed to come in. And I will say that with respect to 
unoccupied is that is our number one priority; we need to keep 
people in their homes, and I think that HAMP's focus was good. 
So I think it gets an unfair share of negative publicity, but I 
think I actually applaud the Treasury for having come up with 
it.
    Mr. Neugebauer. Mr. Lowman?
    Mr. Lowman. We believe HAMP is a good program. I think one 
thing that we just need to remind ourselves of, we put a 
program in, in lightning speed from the time it was announced 
to the time we implemented, it took a lot of systems, 
processes, new sites for people to sit in, and thousands of 
people. We learned a lot along the way, and I think we continue 
to be able to shape the future of HAMP. I think the new 
requirements that were just announced that require the 
documentation of the borrower's situation prior to the 
commencement of the trial will prove to be really effective.
    Mr. Neugebauer. Mr. Heid?
    Mr. Heid. I think what the discussion around HAMP has also 
done is encouraged consumers to reach out, make contact with 
their servicer for assistance. I think that has been a very 
positive development in addition to the standardization. If 
anything is getting lost in the discussion, I think the piece 
that is getting lost is the fact that the industry is doing a 
substantially greater number of loan modifications and outreach 
efforts and providing assistance in ways that go well beyond 
the HAMP program itself.
    Mr. Neugebauer. I think that was part of my point. My final 
point is, my time is going to run out, here is the whole 
scenario, I don't know that the government needs to be sending 
the signal out there when politicians get up and say, no one 
should lose their home and so that raises an expectation level 
that, gosh, all I have to do is call my lender because I heard 
the President say last night no one should lose their home. 
Here is the thing I want you to think about. When that customer 
calls you, and he and his neighbor bought the house at the same 
time, paid the same amount, and that neighbor started saving 
money, put some money behind and now their neighbor has 
leveraged up their house, bought a boat, charged up a bunch of 
stuff, put a second loan on their home, and now they are going 
to get a participation from at a reduction in equity, created 
equity by either a Federal program or your lending and the guy 
next door is out of a job as well, but he is using his savings 
to make his payment.
    And again, we are going down this road where we keep having 
the government pick winners and losers, and unfortunately in 
this case, the people who are making their mortgage payment are 
going to be the losers and there is something wrong with the 
system that supports that.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. I understand 
some are concerned about the ``moral hazard'' of reducing 
principal on a mortgage, but it also seems unfair to blame 
millions of homeowners for a housing bubble they didn't create 
that artificially inflated home values. Many recent 
foreclosures are due to unemployment, but we wouldn't have 
millions of unemployed Americans in the first place if it 
weren't for the subprime lending crisis that was at the center 
of the financial crisis.
    I offered an amendment to H.R. 1728, which was later 
incorporated into the House-passed regulatory reform bill to 
strengthen our mortgage underwriting practices. My amendment 
requires a borrower's income to be verified so we can put an 
end to the dangerous products like no-doc loans that created so 
much damage in our housing market. For each of the four banks 
represented here, do you support income verification 
requirements, and instead of depending on housing prices to go 
up forever, how have your firms changed your underwriting 
practices to focus more on a borrower's ability to repay? Ms. 
Desoer?
    Ms. Desoer. Yes, we do believe in income verification as 
part of the full documentation process, and as you know, most 
of the production being done in the market today is with the 
GSEs or FHA which have those requirements as well but we also 
do it for our own portfolio.
    Mr. Moore of Kansas. Mr. Das?
    Mr. Das. We do the same, verify income, and we continue to 
do that for all new originations.
    Mr. Lowman. We began requiring full documentation in late 
2008, so we have no programs that don't require it. We fully 
support it.
    Mr. Heid. We published our responsible lending principles 
on our Web site back in 2004. We believe very strongly in 
ability to repay and fully support documented cases.
    Mr. Moore of Kansas. Thank you. In an article in American 
Banker last week, Bank of America's spokesman said, ``We 
support the idea of a consumer protection entity, consistent 
with the principles of Federal preemption, and believe that any 
new regulations should focus on activities that would apply 
evenly to all, rather than be focused on particular entities.''
    I share that view, which is why I support an independent 
CFPA and worked with Representative Mel Watt and others in our 
committee to return us to a pre-2004 preemption standard, 
balancing the need for State support in enforcing consumer 
protection laws and a fair, uniform standard that provides some 
clarity across the country. Representative Melissa Bean further 
clarified that standard before the full House approved the 
bill. To confirm your spokesman's statement, Ms. Desoer, does 
Bank of America support the House-passed and Senate Banking-
approved consumer protection provisions coupled with a pre-2004 
Federal preemption standard? And will stronger consumer 
protections help mitigate against a future wave of foreclosures 
and tamp down housing bubbles?
    Ms. Desoer. I agree with the statement that our 
spokesperson made from Bank of America about the support, and I 
do believe that a level playing field of regulation in the 
consumer space would help avoid problems in the future, yes.
    Mr. Moore of Kansas. Any other comments?
    Mr. Das. Congressman, we feel the same way at Citi. We 
believe the concept of a central authority with national 
standards is very important, however, we also feel it is very 
important for us as an institution as every institution should 
do, to take our responsibilities very carefully, which has been 
laid out by our CEO, Mr. Pandit, as in the context of 
responsible finance theme within the company.
    Mr. Moore of Kansas. Thank you, sir.
    Mr. Lowman. Our chairman has also spoken extensively on the 
need for regulatory reform. And so we would support 
comprehensive reform. Obviously, he has also reiterated the 
details or what are key.
    Mr. Heid. We believe that national access to financial 
products is critical. We think the best way to achieve that is 
through national standards and relative to the regulation, I 
think the key needs to be to make sure that the regulation 
applies to what is today unregulated entities.
    Mr. Moore of Kansas. Finally, one of my ongoing concerns is 
some homeowners may not be aware of foreclosure mitigation 
opportunities either offered voluntarily by financial 
institutions or through government programs like HAMP. And I 
think maybe some of you have spoken to this before, but to the 
four banks represented here, what steps has your bank taken, 
anything you can add to what you have already said to make 
people aware of this opportunity? Please?
    Ms. Desoer. Extensive contact and creative ways to go to 
establish that contact, using local community nonprofit 
organizations where someone might be more familiar and feel 
more comfortable in responding to someone, participating in 
housing events across the country, we have participated in over 
250 last year as ways to attract consumers and borrowers to a 
place where we have representation to support those. Telephone 
contact, e-mail contact, texting contact. We are trying to be 
as creative as we possibly can.
    Mr. Moore of Kansas. Thank you, Mr. Chairman, I see my time 
has expired.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman. I have two 
questions. First of all, I would like to know what, we are 
hearing about the regulators coming in and saying to the banks 
that you have to write down certain loans because they will not 
be good in a year or two. And I wondered how this affects the--
or if you are hearing from regulators, about the potential 
write-downs associated with the second lien program? Is there 
concern to your bank about how this will affect your balance 
sheet in the near term? Would anybody like to answer that?
    Mr. Das. I can take that, Congresswoman. I think the 
concept of writing down or extinguishing second mortgages needs 
to be re-examined. And I believe it has been. I would say that 
when we do a modification, we should look at the potential loss 
of income, and that is the piece that we should really be 
accounting for. I think that we may be going too far to the 
extreme in saying that the second mortgages are worth nothing 
but, in fact, all of us across this table have said that by and 
large, the second mortgages are performing really well and the 
reason they are performing really well is because borrowers 
tend to look at them as an important source of cash flow and 
tend not to think about them as in terms of how much collateral 
they have or the equity in their home. They are almost behaving 
like an unsecured line of credit, and I think that needs to be 
taken into account.
    Mrs. Biggert. Do you think that will affect your 
availability of credit for consumers then? Will this have any 
effect?
    Mr. Das. No. I think the way it is structured right now is 
we are lending prudently to prudent customers. But I think that 
taking it too far to the extreme could have the potential of 
limiting the number of second mortgages that are available to 
consumers.
    Mrs. Biggert. Anybody else? Mr. Heid?
    Mr. Heid. I would simply add that I think the totality of 
all the programs and all the changes that are happening and yet 
to happen, I think all of that will certainly be factored into 
credit decisions in the future.
    Mrs. Biggert. Then just another question, with the FHA 
refinance program, tends to write down the total debt 
obligation, the primary mortgages and the second liens to 115 
percent of the current value, do you have any concerns about 
the appraisal of these properties, how are they going to 
determine what the current value, it seems like this is kind of 
an unknown right now, particularly if they use comps. Will this 
require an up-to-date appraisal? And what is going to happen 
with that?
    Ms. Desoer. This would be under standards of FHA financing 
that exists today which requires an FHA appraisal to do an 
updated appraisal and the industry is, we did $378 billion of 
new originations on mortgages last year, all of which had an 
appraisal associated with them. So we are finding our way 
through what is a difficult period of time to establish comps 
and that sort of thing, but it is happening day in and day out 
and that would be required under FHA refinances as well.
    Mrs. Biggert. Is there kind of a percentage of lowering 
the, what was originally the appraisal on a house?
    Ms. Desoer. No, it would be whatever the independent 
appraisal thought the appraised value of that home is today.
    Mrs. Biggert. Does anybody else have anything to add?
    Mr. Heid. The details of that refinance program haven't 
been provided. The concepts have. But to the extent the 
ultimate program details follow the standard FHA program as it 
now exists, there is an established mechanism for getting 
property values using designated appraisers and that type of 
thing, so I wouldn't anticipate that being a problem as long as 
the ultimate rollout of the new FHA refinanced program follows 
as closely as it can the standard requirements of FHA today.
    Mrs. Biggert. Thank you. I yield back.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I 
know that the idea of taking a pro rata reduction in principal 
in the second to any reduction principal in the second was 
supposed to sound generous, but first lien holders and second 
lien holders don't have a equal claim to the home as 
collateral. The way the law is supposed to work is that first 
mortgage holders get paid everything before second mortgage 
holders get paid anything. Second mortgage holders lose 
everything before first mortgage holders lose anything. So 
suggesting that a servicer agree to a pro rata reduction in 
principal in the second that they hold, that they own, to go 
with a reduction in principal that they agree to on behalf of 
investors strikes me as evidence of a conflict of interest not 
an absence of a conflict of interest.
    In Mr. Lowman's testimony, he said that pooling and 
servicing agreements for private label securitization of 
mortgages as well as Fannies and Freddies to a large extent 
would require a change in the agreement to make it legal to 
modify to reduce principal. And it is very difficult to agree 
to get to that kind of amendment. It took agreement basically 
by everybody and everybody's interest, the different tranches 
or different, there have been a lot of proposals of how to cut 
through that kind of legal problem, and I have thought that 
there had to be something involuntary to do it, whether it was 
purchasing, having the government purchase mortgage interest 
through eminent domain and then modifying ourselves which is 
similar to what the homeowners loan corporation did in the 
Great Depression or modification in bankruptcy.
    Citigroup supported that 2 years ago, which I appreciated; 
Bank of America went to the brink but never quite got there. 
What is your current position, Ms. Desoer?
    Ms. Desoer. Thank you. Our current position is, as we have 
gone through the lessons that we have learned with 
modifications and other programs, there probably is some 
segment of borrowers for whom that would be an appropriate 
alternative. So that is our position at this point in time.
    Mr. Miller of North Carolina. So you would support that in 
some circumstances?
    Ms. Desoer. In some circumstances, yes. Thank you.
    The Chairman. If the gentleman would yield, obviously the 
law would have to be modified to allow that circumstance. We 
should make clear we can't change the bankruptcy law obviously 
case-by-case, so it would have to be adjusted.
    Mr. Miller of North Carolina. You would support a change in 
the bankruptcy law to allow the modification of home mortgages 
in bankruptcy?
    Mr. Das. Yes. And I believe that there is a segment of 
borrowers for whom that is the appropriate alternative and 
subject to them having gone through qualification for HAMP or 
something like that and failed that there is a segment of 
borrowers for whom that might be an appropriate alternative. 
Yes.
    Mr. Heid. There is also, though, a much easier and less 
costly way that customers are already getting assistance in 
terms of this program, so ask yourself whether a change in 
bankruptcy law is really the best way and the fastest way to 
achieve assistance for homeowners. I think there are other 
alternatives.
    Mr. Miller of North Carolina. We are trying to go to other 
alternatives now, and have been for 3 years without much to 
show for it.
    The stress test of a year ago assumed that second mortgages 
held by the 19 banks were worth 85 cents on the dollar. Other 
analysts have said that a 40 to 60 percent loss is a more 
realistic number. How are you valuing your second mortgage 
portfolios now? And was the stress test an accurate estimation 
at the time and should there be a second stress test?
    Mr. Das. I can take that. The evaluation or the value of a 
particular asset is based on the expected losses in that book, 
and it stressed under economic situations to see what the 
expected losses might be in that stressful situation and 
revaluate based on what our models tell us the expected losses 
would be. The market is valid and there is a disconnect in the 
sense that the market is valuing it not on the basis of the 
performance of the seconds but on the basis of the equity that 
is in people's homes. We believe that there is a disconnect 
between the market and what value is in our books. And if these 
things happen from time to time, the markets disconnect with 
what is on the books, as we saw in the case of nonperforming 
loans last year.
    Nonperforming loans were at one end and we had valued them 
at another end and they converged at the end of the year to a 
point where it was very similar to what it was on the books.
    Mr. Miller of North Carolina. A 15 percent loss off par for 
second mortgages you think was an accurate valuation?
    Mr. Das. Yes.
    Mr. Miller of North Carolina. My time has expired, Mr. 
Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. I have no doubt 
that in this economy, there is a lot of pain and misery that 
has taken place throughout. I am sort of curious why we are 
examining a program that seemingly will bail out banks who made 
bad loans, people who may have purchased more home than they 
could afford, yet someone who invested $100,000, saw their 
401(k) decrease by $100,000, there is no plan for them, 
somebody who decided to rent their primary residence, invest 
money perhaps in a Real Estate Investment Trust saw a $100,000 
loss there, there is no program for them. So I question the 
fairness of this particular approach, again noting that 94 
percent of Americans either own their home outright, rent, or 
are current on their mortgage.
    Be that as it may, I believe I have heard the chairman say 
and others have said that they want to persuade you to modify 
more mortgages, I know in that regard, there are a number of 
carrots and sticks floating around here, particularly one 
carrot is having FHA insure these mortgages so that the 
taxpayer takes the risk instead of you. Surely we are all aware 
that assuming it makes conference, a capital markets reform 
bill that could have a lot to do with your bottom line, so I 
suppose there are sticks floating around there as well, but I 
want to talk a little bit about the continue on with this 
particular metaphor about the organic carrots that are already 
out there. I previously served on a Congressional Oversight 
Panel for the TARP program, and in testimony that we received 
before that panel in November, I believe it was, a number of 
different academics and people from familiar with market said, 
typically, the average foreclosure could cost you anywhere in 
the neighborhood of $60,000 to $80,000. Is there anybody on the 
panel who wishes to disagree with that assessment? Are those 
good numbers? Is that a ballpark range? I see at least some 
heads shaking in the affirmative. Does anybody care to shake 
their head?
    The Chairman. We have very good recorders, but head shakes 
don't make their way into the transcript.
    Mr. Hensarling. Mr. Chairman, I will note that this 
particular member at least observed some affirmative head 
shakes. I guess that begs the question again, so you have a 
built-in incentive to modify a number of these, I am not sure 
how much more taxpayer incentive you ought to have, much less 
need. Clearly, there is a large concentration, I suppose, in 
your banks, of second liens, I assume there is a fear of 
impairment of your regulatory capital. But I also question why, 
is there a legal impairment or a practical impairment from the 
homeowner, the first lien holder contracting with the second 
lien holder, in order for writing down some principal for them 
to receive some contractual equity participation in any 
potential upside appreciation of the fair market value of the 
residential collateral? I think the gentleman from Pennsylvania 
noted, aren't there a number of market solutions? Is that not a 
market solution? Is there a legal and practical impairment 
there that this member ought to be aware of? Anybody care to 
handle the question?
    Mr. Heid. I think your point is a very good one, in that 
there are significant incentives already that exist for all of 
us to do what is right for our customers.
    Mr. Hensarling. Thank you. Recently, there was a article in 
The Wall Street Journal that I will quote from; it speaks to 
the moral hazard question, ``Treasury Department officials have 
warned that if some borrowers get their principal reduced, even 
borrowers who aren't behind will stop paying unless they get 
the same break.''
    For argument's sake, let's assume The Wall Street Journal 
got it right. We have kind of touched on the moral hazard 
question. And I don't think I have heard you address it 
specifically. Does anybody care to comment on this particular 
article?
    Mr. Das. Congressman, the only thing I would say there is 
while it is quite likely, a lot depends on how a principal 
reduction or a particular form of modification is affected. I 
will give you an example. You could have a principal reduction 
where the principal is taken straight off or you could have a 
principal reduction where it is taken off over 3 decades.
    Mr. Hensarling. The point is, if not done properly, you 
could provide incentives for people to default who have--
    Mr. Das. If it is not done properly, it can absolutely lead 
to that. But if there is some form of shared appreciation, then 
perhaps that could be mitigated to some extent, but there is no 
doubt it will lead to some issues.
    Mr. Hensarling. My time has expired.
    The Chairman. We may have a second round. I have a couple, 
actually, institution-specific questions I was going to ask, so 
we may take a little more time. The gentleman from Texas.
    Mr. Green. Mr. Chairman, I would like to ask all the 
witnesses a question and the question is, was it appropriate 
and necessary for the government to intercede with the $700 
billion bailout? If you don't think so or you think we should 
have done nothing, would you just simply raise your hand. I am 
going to take it from the absence of hands that there is a 
belief among the witnesses that there was a need for a bailout. 
That is the terminology we are using nowadays, so I will be 
consistent so we communicate. Mr. Heid, I believe it is, sir, 
you indicated that there is enough incentive to I believe you 
said to do the right thing for your customers. Mr. Heid is 
there enough incentive for you to do the right thing for the 
economy?
    Mr. Heid. The way I think of it is, if we do right with our 
customers, we are doing what is right for the economy.
    Mr. Green. And if you find that it is not necessary to make 
modifications, and you have customers who go into foreclosure 
and that impacts the economy in an adverse way, have you done 
the right thing?
    Mr. Heid. I think the fact that we have done a substantial 
number of loan modifications, the fact that we have done a 
substantial number of principal forgiveness loan modifications 
says we are doing everything we possibly can to stabilize.
    Mr. Green. What percentage would you consider is 
substantial?
    Mr. Heid. About 2 percent of the overall portfolio on an 
annual basis is what ultimately works it through foreclosure.
    Mr. Green. Have you reached the 2 percent plateau?
    Mr. Heid. It has been pretty consistent somewhere on an 
annual basis.
    Mr. Green. Two percent of those in foreclosure?
    Mr. Heid. Two percent of the entire portfolio of Americans 
who have homes tend to go through the foreclosure process.
    Mr. Green. I understand, but what percentage of your homes 
that are in foreclosure have you modified?
    Mr. Heid. There are a couple of ways to answer that. If you 
look at the HAMP--
    Mr. Green. I would like, no disrespect, and time is of the 
essence, I would like you to give a percentage, if you would, 
of the many ways.
    Mr. Heid. I don't have a specific answer to your specific 
question. I don't have an answer to that right now.
    Mr. Green. I think most who examine these numbers have 
concluded that we have not significantly impacted the number of 
homes in foreclosure. Do you agree with this contention?
    Mr. Heid. No.
    Mr. Green. You think you have significantly impacted? Well, 
if you had, it would seem to me you would be prepared to talk 
to us about how you have performed this significant feat.
    Mr. Heid. Let me answer it this way: Certainly there is no 
question more needs to be done. When I look--
    Mr. Green. Sir, more needs to be done? You say it as though 
if we do something else, we will make a great difference. A lot 
more appears to me should be done because we are facing a lot 
more foreclosures. What are we going to do about them? Let me 
just excuse myself from you just for just a moment if I may, 
please. No disrespect. But I do have to go to Bank of America. 
Let me compliment you on this principal reduction program. I 
think that when businesses do well, we have that knowledge it 
and you should be complimented.
    Ms. Desoer. Thank you.
    The Chairman. There shall be no demonstrations.
    Mr. Green. Tell us briefly why you see principal reduction 
as personally as you can as a significant means by which we can 
impact foreclosure?
    Ms. Desoer. Because there are some borrowers for whom the 
offers that we have extended so far have not been generous 
enough, and in order to enable owners who truly want to stay in 
their home--
    Mr. Green. Let me move one step further, because I am about 
to lose my time, would this also impact the overall economy, 
what you are doing?
    Ms. Desoer. We believe that bringing stability to 
neighborhoods by ensuring that homeowners who want to stay in 
their homes can get to an affordable payment and have sort of a 
vision for the future of that homeownership as important. At 
the same time, we do believe that there are some borrowers for 
whom being able to afford staying in that home is not a viable 
alternative, and so we need to work with them to transition 
them out of that home in as dignified a way as possible, 
ideally without having to go through foreclosure but a short 
sale or some other alternative into an alternative housing 
arrangement.
    Mr. Green. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Illinois.
    Ms. Bean. Thank you Mr. Chairman. Thank you to our 
witnesses for your testimony today.
    It was almost 2 years ago that we had a hearing about what 
was then the looming foreclosure crisis in this committee. We 
were concerned about debt to income ratios, loan to value 
ratios which were unsustainable, and at that time, what we 
produced at the committee level was the HOPE for Homeowners 
Program, which I thought provided a proper balance between 
providing release to those who found themselves upside down, 
while also protecting taxpayers against moral hazard by 
requiring those who received relief to pay back taxpayers by 
sharing any upside in equity appreciation back with the 
government.
    Clearly, the HOPE for Homeowners Program has had little to 
zero participation from organizations like yourselves.
    So my question is why, recognizing that there were some 
compliance issues that we later addressed about a year into the 
program, does that include the second lien treatment in how it 
is different than in the HAMP program?
    And my other question would be, would you agree that a 
shared equity approach does tackle moral hazard by discouraging 
homeowners from intentionally defaulting because they think 
they are going to get a deal if they are going to have to share 
equity later that would discourage them but also encourages 
those who are in a troubled situation to stay in their home 
because they have a more realistic potential at some equity 
appreciation in some realistic future than just adding all 
their debt down at the end of the day.
    Is there anything precluding you as servicers from already 
working out their own shared equity arrangements with 
borrowers, and is there something we should do in the HAMP 
program relative to that? Can we start with Ms. Desoer?
    Ms. Desoer. I am going to ask Jack Schakett to answer that.
    Mr. Schakett. Yes. The HOPE for Homeowners Program 
definitely had some appealing pieces to it.
    The Chairman. Would you please identify yourself for the 
record.
    Mr. Schakett. Yes, I am Jack Schakett with Bank of America 
home loans. The HOPE for Homeowners Program, the shared 
appreciation piece on a theoretical point of view looks very 
nice because the idea of sharing appreciation feature, giving 
both the homeowner a chance for appreciation and the investor a 
chance to share in that is appealing, but every program kind of 
has operational concerns. And what probably hurt HOPE for 
Homeowners the most was because it was a significant deviation 
from the standard FHA program requiring pieces like shared 
appreciation, the operational hurdles to put in place have been 
very difficult. So we have been working on rolling out for HOPE 
for Homeowners for quite some time. We are still not quite 
there yet. If you look at the new program put out at FHA which 
actually on some points is much simpler, like eliminating 
shared appreciation will be much more operationally easier to 
roll out and more effective from that point of view.
    Ms. Bean. Thank you. Mr. Das?
    Mr. Das. Congresswoman, I would say that while HOPE for 
Homeowners was a complicated program in terms of being 
executed, I generally tend to be a little bit more in favor of 
shared appreciation because I believe that there is some 
sharing of the upside that the whole notion of sharing on the 
downside doesn't seem fair. I will defer to my colleague, Steve 
Hemperly, if he has any additional comments.
    Mr. Hemperly. I am Steve Hemperly, CitiMortgage, for the 
record. I would tend to agree with Mr. Schakett's comments. We 
look forward to introducing the new FHA program as well as HOPE 
for Homeowners.
    Mr. Lowman. Congresswoman, this is a very complex program 
and one that we have wrestled with. We are in the process of 
doing the necessary changes to our system to be able to allow 
it, and we plan to launch it some time this summer.
    Mr. Heid. The new FHA refinance program has some real 
advantages over the HOPE for Homeowners. It is a simpler 
program. What we know of it so far it appears to be using 
standard FHA requirements. The approach between first liens and 
second liens is a more equitable sharing under the new program, 
so it has some real advantages to it. And as I said in my 
testimony, we intend to make sure that our second liens do not 
prevent this from happening.
    Ms. Bean. Can I also ask, by maybe a nod, is there anything 
precluding servicers from working out shared equity 
arrangements with borrowers now? On your own? So you can? Are 
you doing those in some situations?
    The Chairman. We really do need oral responses.
    Ms. Bean. If you could say whether you are doing them or 
whether you are allowed to?
    The Chairman. Marcel Marceau never served here.
    Ms. Desoer. We are not doing that, but we have introduced 
the concept of earned principle forgiveness into our principal 
reduction program.
    Mr. Hermperly. We currently don't have any programs 
operational that include shared equity, but we are in the 
process of constructing some pilots.
    Mr. Lowman. We currently don't have a program.
    Mr. Heid. We have been using the principal forgiveness as 
part of the program starting in January 2009 as a way to get 
customers help.
    Ms. Bean. Thank you. I see my time has expired.
    The Chairman. The gentleman from Indiana.
    Mr. Carson. Thank you, Mr. Chairman. In yesterday's Wall 
Street Journal, a Bank of America spokesperson is quoted as 
saying, ``If efforts to avoid a foreclosure fail, then we do 
reserve the right to recover the unpaid balance of the second 
lien if permissible by State law. However, our practice has 
been to only pursue recovery in situations where we believe the 
customer has sufficient nonretirement assets to satisfy their 
debt obligation.''
    Ms. Desoer, could you expand upon the process your bank 
goes through in determining which customers they deem 
appropriate to collect on the second lien?
    Ms. Desoer. Yes, it is part of the evaluation of 
underwriting to determine the hardship where we look at the 
verification of income and other assets that the borrower might 
have, and in order to mitigate the risk of moral hazard, we try 
to draw that line to determine who is eligible for certain 
programs based on the hardship, and if they are not eligible 
for that hardship, then we might reserve the right to pursue 
other assets or income and their ability to afford the payment.
    Mr. Carson. I yield back.
    The Chairman. I am going to have a question, and also Mr. 
Hensarling and Ms. Bean.
    Let me ask Mr. Lowman. I was approached yesterday, I 
believe, in my office in Newton by an attorney who reported to 
me that he has people who are in modification programs with 
Chase who are still getting collection letters. I am wondering 
if you or Ms. Sheehan would know about that, and how do we 
solve that, I assume that is not appropriate.
    Mr. Lowman. We do make mistakes. We are dealing with a lot 
of customers and a lot of transactions. And I would be happy to 
address them.
    The Chairman. Let me also, along the same lines, I have 
also been told by a national organization that does a lot of 
work here, NACA, that they have had some difficulty in getting 
some answers on some pending requests for modifications. Is 
there a channel? What do people do when they don't get the 
answers that they thought they were going to get? Who do they 
talk to?
    Mr. Lowman. We have a special group that deals specifically 
with community groups including NACA and through those channels 
is how you would--
    The Chairman. Apparently some of those channels aren't 
working. Is there an appeal? What do they do if they are 
feeling frustrated?
    Mr. Lowman. Come to me.
    The Chairman. Or you, Ms. Sheehan. Ms. Sheehan, your first 
name is--
    Ms. Sheehan. Molly. Molly Sheehan from Chase.
    The Chairman. --indicated that she could be the one who 
could be talked to on this. And the gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. There have been a 
number of editorials written about the approach of the 
Administration on foreclosure mitigation. USA Today wrote on 
the first of this month, ``helps irresponsible lenders, 
borrowers.'' The Wall Street Journal, they wrote, ``Instead we 
are heading toward year 5 of the housing recession with 
Washington proposing even more ideas to prolong the agony. One 
senior banking regulator we talked to calls it `extending and 
pretending.'''
    The question I have, I spent part of the congressional 
recess over Easter speaking to a number of private equity 
funds, banks, within the Dallas metropolitan area, which I have 
the opportunity to represent a section of the City of Dallas in 
Congress. And there is a great concern that the government is 
artificially propping up values in the marketplace that create 
uncertainty and leave private pools of capital on the sideline.
    I admit most of my evidence is anecdotal, but I hear it 
over and over and over, that people are afraid to invest in 
pools of residential mortgages because: first, they don't know 
that the market has reached its true value; and second, they 
don't know what the next public policy shoe to drop may be.
    And so, at least in my mind, I am not sure that Washington 
is being helpful. At the moment, they may be more hurtful. I 
would like any comment on the validity of the observations made 
by a number of people in the investment and banking community 
in Dallas, Texas. Does anybody care to comment? Mr. Heid?
    Mr. Heid. I would say as a general statement, uncertainty 
is certainly not a good thing for the investor community.
    Mr. Das. Congressman, I would like to weigh in on that a 
little bit with your permission. I would say that is somewhat 
of a sanguine view of the world. We are actually seeing that in 
certain markets, there is, in fact, improvement in markets, 
genuine improvements in market, for example, markets in 
California are seeing some stabilization. I think we are at a 
point of inflection right now in the marketplace and that the 
government's role is welcome in terms of getting us all 
together, and I think don't believe it is interventionist in 
forcing us to create artificial pools of opportunity for 
capital. I believe it is important to, for example, in first 
and second mortgages, to get us all working together. That is 
an important set of actions that will make the market more 
efficient.
    Mr. Hensarling. This will be my last question.
    I guess I am looking to be persuaded as a Member of 
Congress that this is a good investment of the taxpayers' 
money. I know there is a $50 billion pool of money here and I 
know the chairman and I had this exchange earlier, I think at 
least is a matter of fact, the HAMP program was a creation of 
the Obama Administration, be that as it may, so there is a $50 
billion pool of money here.
    We know that we are a Nation that today is on an 
unsustainable fiscal path, not my language, I believe that 
comes from Dr. Elmendorf of the Congressional Budget Office. 
Chairman Bernanke has echoed that.
    I think economist Paul Samuelson has said we have a fiscal 
cancer that could threaten our Nation, that is a paraphrase, I 
don't have the quote in front of me, but already we are looking 
at levels of debt to GDP going from 40 percent of the economy 
to 90 percent, we are looking at a budget that is going to 
triple the national debt over the next 10 years. We are looking 
at almost $1 trillion of interest payments alone at the end of 
the decade. So the question I have, when everybody from the CBO 
to OMB, the President's own Director of OMB says we are on an 
unsustainable fiscal path, why do I want to use $50 billion to 
pay you guys to do something that you probably are already 
incented to do, as opposed to pay off the national debt?
    If I see no enthusiastic takers of the question, I will 
yield back my time.
    The Chairman. Thank you. The gentleman asked if he could be 
persuaded, on my whip list, you were leaning against. The 
gentlewoman from Illinois will have the final question.
    Ms. Bean. Thank you, Mr. Chairman. My last question was one 
of the things I hear from my constituent services folks in my 
district is that people who have been trying to get remods, a 
number of them have been approved for the temporary 
modifications while unemployed and on unemployment insurance, 
but then they are disapproved for permanent modification 
because they don't have employment.
    Can someone explain to me why you would be able to get into 
a temporary and not a full modification? And shouldn't we be 
using the same criteria?
    Ms. Desoer. Yes, and there is a change in the program, so 
the only way I believe that could potentially happen is if in 
establishing that customer into a trial modification, we ask 
what their income was, but maybe not the source of their income 
and we verbally verify that they could meet the requirements, 
put them in a trial modification and then once we got 
documentation of income and understood the length of time that 
it was going to be in place, because the intent of the program 
is to make a long term affordable payment, that that is when 
that disconnect would potentially happen.
    Ms. Bean. So does unemployment income qualify in either 
case, or neither case?
    Ms. Desoer. It is qualifying income, but it is only for 9 
months, so you have to see the path to either another member of 
the household having income that could be part of the equation. 
So I would have to understand the specific circumstance to give 
you something more specific but that is potentially it, and 
Jack, I don't know if you have anything to add?
    Mr. Schakett. The program allows for unemployment insurance 
to be considered but they have to have at least 9 months of 
unemployment insurance left so as Barbara said if potentially 
if they did a stated income in the first place because now we 
are required to do full documentation but we didn't before and 
we didn't know exactly the period, they may have thought they 
qualified, but when we determined they only had 6 months 
remaining at the time of the permanent mod, then they wouldn't 
have qualified under HAMP.
    Mr. Das. It would be the same issue, unless Steve, you want 
to add any more color to it, it will pretty much be the same 
issue and I think that issue is significantly mitigated with 
the new program, as Barbara mentioned.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 1:47 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             April 13, 2010


[GRAPHIC] [TIFF OMITTED] T7738.001

[GRAPHIC] [TIFF OMITTED] T7738.002

[GRAPHIC] [TIFF OMITTED] T7738.003

[GRAPHIC] [TIFF OMITTED] T7738.004

[GRAPHIC] [TIFF OMITTED] T7738.005

[GRAPHIC] [TIFF OMITTED] T7738.006

[GRAPHIC] [TIFF OMITTED] T7738.007

[GRAPHIC] [TIFF OMITTED] T7738.008

[GRAPHIC] [TIFF OMITTED] T7738.009

[GRAPHIC] [TIFF OMITTED] T7738.010

[GRAPHIC] [TIFF OMITTED] T7738.011

[GRAPHIC] [TIFF OMITTED] T7738.012

[GRAPHIC] [TIFF OMITTED] T7738.013

[GRAPHIC] [TIFF OMITTED] T7738.014

[GRAPHIC] [TIFF OMITTED] T7738.015

[GRAPHIC] [TIFF OMITTED] T7738.016

[GRAPHIC] [TIFF OMITTED] T7738.017

[GRAPHIC] [TIFF OMITTED] T7738.018

[GRAPHIC] [TIFF OMITTED] T7738.019

[GRAPHIC] [TIFF OMITTED] T7738.020

[GRAPHIC] [TIFF OMITTED] T7738.021

[GRAPHIC] [TIFF OMITTED] T7738.022

[GRAPHIC] [TIFF OMITTED] T7738.023

[GRAPHIC] [TIFF OMITTED] T7738.024

[GRAPHIC] [TIFF OMITTED] T7738.025

[GRAPHIC] [TIFF OMITTED] T7738.026

[GRAPHIC] [TIFF OMITTED] T7738.027

[GRAPHIC] [TIFF OMITTED] T7738.028

[GRAPHIC] [TIFF OMITTED] T7738.029

[GRAPHIC] [TIFF OMITTED] T7738.030

[GRAPHIC] [TIFF OMITTED] T7738.031

