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