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


 
                    THE RECENTLY ANNOUNCED REVISIONS 
                         TO THE HOME AFFORDABLE 
                      MODIFICATION PROGRAM (HAMP) 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 14, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-122

                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

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

                 MAXINE WATERS, California, Chairwoman

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














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 14, 2010...............................................     1
Appendix:
    April 14, 2010...............................................    43

                               WITNESSES
                       Wednesday, April 14, 2010

Baker, Dean, Co-Director, Center for Economic and Policy Research    22
Caldwell, Phyllis, Chief Homeownership Preservation Officer, U.S. 
  Department of the Treasury.....................................     5
Cohen, Alys, Staff Attorney, National Consumer Law Center........    24
Fiorillo, Vincent, Trading/Portfolio Manager, Doubleline Capital 
  LP, on behalf of the Association of Mortgage Investors (AMI)...    26
Jakabovics, Andrew, Associate Director, Housing and Economics, 
  Center for American Progress Action Fund.......................    28
Kling, Arnold, member, Mercatus Center Working group on Financial 
  Markets, George Mason University...............................    30
Stevens, Hon. David H., Assistant Secretary for Housing/FHA 
  Commissioner, U.S. Department of Housing and Urban Development.     4
Story, Robert E., Jr., CMB, Chairman, Mortgage Bankers 
  Association (MBA)..............................................    32
White, Alan M., Assistant Professor, Valparaiso University School 
  of Law.........................................................    33

                                APPENDIX

Prepared statements:
    Baker, Dean..................................................    44
    Caldwell, Phyllis............................................    51
    Cohen, Alys..................................................    61
    Fiorillo, Vincent............................................    90
    Jakabovics, Andrew...........................................    97
    Kling, Arnold................................................   105
    Stevens, Hon. David H........................................   108
    Story, Robert E., Jr.........................................   118
    White, Alan M................................................   128


                    THE RECENTLY ANNOUNCED REVISIONS
                         TO THE HOME AFFORDABLE
                      MODIFICATION PROGRAM (HAMP)

                              ----------                              


                       Wednesday, April 14, 2010

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:08 p.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Waters, Cleaver, Green, 
Donnelly, Driehaus, Himes; Capito and Jenkins.
    Also present: Representatives Watt and Bean.
    Chairwoman Waters. This hearing of the Subcommittee on 
Housing and Community Opportunity will come to order. Good 
afternoon, ladies and gentlemen. I would like to thank the 
ranking member and other members of the Subcommittee on Housing 
and Community Opportunity for joining me today for this hearing 
on the recently announced revisions to the Home Affordable 
Modification Program, commonly referred to as HAMP.
    Today's hearing will again revisit the Administration's 
program to prevent foreclosures. This is the third subcommittee 
hearing on the topic since the Administration announced the 
program just over a year ago. In that time, we have seen about 
1.4 million trial loan modifications take place, but only 
230,000 modifications have been made permanent.
    At the same time, performance on home mortgages serviced by 
the largest national banks and thrifts continued to decline 
through the end of 2009. While foreclosure activity decreased 
from January to February of this year, the February 2010 
numbers are still 6 percent higher than the numbers from 
February 2009.
    So, I am pleased that the Administration addressed 
something that had long been clear to me and many of us in 
Congress: the original HAMP program was not doing enough to 
address the foreclosure crisis as it exists today. While the 
original program helped borrowers get lower interest rates, it 
did nothing to address the concerns of unemployed homeowners or 
underwater borrowers.
    In my hearings, my conversations with agency and bank 
officials, and my discussions with homeowners impacted by these 
policies, I have advocated for stronger foreclosure 
intervention programs. In December of last year, the Wall 
Street Reform and Consumer Protection Act included a provision 
I authored to provide $3 billion in assistance to unemployed 
borrowers nearing foreclosure, a much more robust program than 
what the Treasury Department has proposed.
    I hope that a provision similar to what I authored will be 
included in the Senate's Wall Street Reform bill. And I have 
likewise been a strong proponent for principal reduction 
programs, seeing the devastation in Los Angeles.
    A recent study by First American CoreLogic estimated that 
the average borrower in Southern California would not get out 
from being underwater until 2016. So I'm curious today to hear 
from the Administration and from advocates about how these new 
initiatives will address these pressing issues.
    Though I am concerned that these programs won't be 
operational until the fall, I am also interested to hear the 
Commissioner elaborate on how these policy changes will impact 
FHA's capital reserve level, given the important legislation I 
am crafting to address that issue. And I am also interested in 
hearing from advocates about what we should expect from these 
new initiatives. Will it be enough? Or do we need to mandate 
that these banks take steps to more seriously assist 
homeowners?
    Increasingly, I am unconvinced that these voluntary 
programs are going to provide the assistance that homeowners 
desperately need. I find it curious that some major banking 
institutions have said publicly that principal reductions for 
struggling homeowners are unfair, and cause market distortions. 
However, when these financial institutions find themselves 
underwater on their own real estate investments, they 
themselves often stop making payments.
    For example, Morgan Stanley recently decided to stop paying 
on five underwater office buildings in San Francisco. And when 
the Mortgage Bankers Association found itself underwater on its 
headquarters, they were able to rely on other lenders to get 
out from under this unsustainable mortgage. Unfortunately, it 
seems that many of their members oppose giving homeowners the 
right to do the same.
    And I also remain troubled by the behavior of servicers who 
continue to construct barriers for some in search of loan 
modifications. I will continue to demand more accountability 
for servicers, and I will work with Chairman Frank to enact 
mandatory loss mitigation legislation.
    I would now like to recognize our subcommittee's ranking 
member, Mrs. Capito, for 5 minutes to make an opening 
statement.
    Mrs. Capito. Thank you. I would like to thank the 
chairwoman for holding this hearing today.
    Last month, the Treasury and the Department of Housing and 
Urban Development announced another round of revisions to the 
Administration's Home Affordable Modification Program, commonly 
referred to as HAMP. Rolled out with the fanfare of promising 
to help nine million struggling homeowners, the HAMP program 
has fallen woefully short. As of March 12, 2010, Treasury 
disclosed that only 170,000 homeowners had received permanent 
modifications.
    From the beginning, I have had significant concerns about 
the over-promising of assistance by these programs from this 
Administration. For families who are struggling, all this 
fanfare accomplishes is raised expectations about a program 
that is providing assistance to a fraction of the population 
that it is supposed to help.
    I also have concerns about the precedents set by the 
changes of this program. There is no doubt that some homeowners 
were victims of mortgage fraud in the years running up to the 
housing bubble. However, the problems we are now seeing in the 
housing markets are less related to exotic mortgage products.
    Are we creating a moral hazard here for future home buyers 
that will give them less incentive to pay their mortgages on 
time, and purchase a home that is well within their means? Is 
it fair to the vast majority of Americans who rent, own their 
home outright, or are current on their mortgage, that some 
Americans who are not as responsible with their financial 
decisions are now receiving these benefits?
    The newest revisions allow borrowers to refinance into the 
FHA program, which is already struggling with their capital 
reserve fund below the mandated 2 percent level. We are in the 
process of crafting legislation to address the issues facing 
the FHA, but it concerns me that we are utilizing a program 
with significant challenges as part of foreclosure mitigation. 
It is tough to predict the effect these additional refinances 
will have on FHA.
    I look forward to hearing from our witnesses and, again, I 
would like to thank the chairwoman for holding this important 
hearing.
    Chairwoman Waters. Thank you very much. Mr. Green, for 2 
minutes.
    Mr. Green. Thank you, Madam Chairwoman. I thank the 
witnesses for appearing, and would like to assure you that I am 
very much interested in hearing about principal reduction 
programs that are being made available. My understanding is 
that on March 26th, Treasury and FHA announced a program, and 
on March 26th, the HAMP program was also reconstructed, or it 
was modified such that it would emphasize principal reductions, 
as well.
    So, principal reductions are being implemented currently, 
as I understand it, by Bank of America. And I will be 
interested in knowing if you have some knowledge or empirical 
evidence as to how Bank of America is doing this, and doing it 
effectively. My belief is that at some point, we will have such 
a large number of persons who are underwater that principal 
reduction would become more appealing to private enterprise.
    Initially, the servicers had concerns with no incentives. 
We provided incentives. Then, one of the concerns was too much 
liability. We passed some measures to help with liabilities. We 
have gone through tranche warfare. Any number of reasons why we 
can't do what they say can be done but does not get done on a 
large scale.
    So, I am interested very much in hearing what you have to 
say about these things. And I thank you, Madam Chairwoman, for 
hosting this hearing today. I yield back.
    Chairwoman Waters. Thank you very much. Mr. Donnelly, for 2 
minutes.
    [No response.]
    Chairwoman Waters. Mr. Donnelly does not wish to speak. We 
will go right to our witnesses.
    I am pleased to welcome our distinguished first panel. Our 
first witness will be the Honorable David Stevens, Assistant 
Secretary for Housing/FHA Commissioner, U.S. Department of 
Housing and Urban Development.
    Our second witness will be Ms. Phyllis Caldwell, Chief 
Homeownership Preservation Officer, U.S. Department of the 
Treasury.
    Thank you for appearing before the subcommittee today. And, 
without objection, your written statements will be made a part 
of the record. You will now be recognized for a 5-minute 
summary of your testimony.

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

    Mr. Stevens. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, thank you for the opportunity to 
testify today on the Administration's recently announced 
adjustments to FHA and HAMP to prevent more avoidable 
foreclosures, and to better assist homeowners who owe more than 
their home is worth.
    The Obama Administration's goal is to promote stability for 
both the housing market and homeowners. To meet the objectives, 
we have developed a comprehensive approach, using State and 
local housing agency initiatives, tax credits for home buyers, 
neighborhood stabilization and community development programs, 
mortgage modifications and refinancings, support of Fannie Mae 
and Freddie Mac to stabilize mortgage and securities markets, 
and several reforms to restore confidence in FHA.
    With this past year's record low mortgage rates, thanks in 
large part to these initiatives, more than four million 
homeowners have refinanced their mortgages to more affordable 
levels. This helped save homeowners more than $7 billion last 
year, and more than 1 million families are saving an average of 
$500 per month through the Administration's mortgage 
modification program.
    Home equity increased, on average, by more than $13,000 for 
homeowners in the last 3 quarters of 2009. These efforts have 
begun to restore the confidence we need to get our economy 
moving, creating 162,000 jobs last month, the best job report 
in 3 years.
    Even with the success, we continue to see challenges. Our 
strategy to address the housing crisis must evolve, because our 
challenges have also evolved. In addition to housing 
affordability, the recently announced FHA and HAMP initiatives 
are designed to tackle two of the biggest threats to our 
housing recovery: unemployment; and underwater borrowers.
    Our housing initiatives must balance the need to help 
responsible homeowners struggling to stay in their homes, with 
the recognition that we cannot stop every foreclosure. Some 
people simply cannot afford to stay in their homes. The Home 
Affordable Foreclosure Alternatives program includes a variety 
of options to help homeowners transition to more affordable 
housing, including incentives for expanded use of short sales 
and deeds in lieu, as well as relocation assistance.
    For those homeowners who can be helped, the Administration 
has also expanded efforts to prevent avoidable foreclosures by 
providing responsible borrowers with opportunities to 
sustainably modify or refinance their loan. Last month, we 
announced the FHA refinance option, which will provide more 
opportunities for lenders to restructure loans for families who 
owe more on their home than it is now worth, due to price 
declines in their communities. This option is voluntary for the 
lender and borrower. To qualify for a new FHA loan, a borrower 
must meet FHA's fully documented underwriting requirements, 
must be current on their mortgage, and the lender must reduce 
the amount owed on the original loan by at least 10 percent.
    We have also included incentives to encourage the private 
sector to write down second liens. Total mortgage debt after 
refinancing cannot be greater than 115 percent of the current 
value of the home, giving homeowners a path to regain equity in 
their homes, and an affordable monthly payment. These 
adjustments support principal reduction efforts already under 
way in the private market, and offer incentives to expand their 
reach. The vast majority of the burden of writing down these 
loans will fall where it belongs: on lenders and investors, not 
the taxpayer.
    I have appeared before this committee several times to 
discuss the reforms we have made to strengthen FHA. It is 
because we are in a strong position today that we are able to 
facilitate these efforts to assist more struggling homeowners.
    Furthermore, the Administration has designated $14 billion 
of TARP funds allocated to supporting the housing recovery, to 
provide incentives to write down second liens, and to mitigate 
risk to the FHA fund. This FHA refinance option, in addition to 
changes to the Home Affordable Modification Program which Chief 
Homeownership Preservation Officer Phyllis Caldwell is here to 
discuss, will help the Administration meet its goal of 
assisting three to four million homeowners avoid foreclosure.
    I have submitted more detailed testimony about these 
efforts for the record. Madam Chairwoman, taken together, the 
Administration's broad housing initiatives and these newly 
announced flexibilities will offer a second chance for millions 
of responsible American families to stay in their homes. These 
expanded efforts build upon the substantial progress that has 
already been made, and will further help stabilize our 
neighborhoods and communities, and contribute to economic 
recovery. Thank you.
    [The prepared statement of Commissioner Stevens can be 
found on page 108 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Caldwell?

STATEMENT OF PHYLLIS CALDWELL, CHIEF HOMEOWNERSHIP PRESERVATION 
            OFFICER, U.S. DEPARTMENT OF THE TREASURY

    Ms. Caldwell. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, thank you for the opportunity to 
testify today on the recently announced enhancements to the 
Home Affordable Modification Program, or HAMP, a key component 
of the Administration's Making Home Affordable initiative.
    These program enhancements will better assist responsible 
homeowners who have been affected by the economic crisis. The 
program modifications will provide greater protections for 
borrowers at risk of foreclosure, expand the program's 
flexibility to assist more unemployed homeowners, and help more 
people who owe more on their mortgage than their home is worth. 
Costs will be shared between the private sector and the Federal 
Government. Funding from the Troubled Asset Relief Program, 
TARP, will not exceed the $50 billion originally allocated for 
housing programs.
    At the time we launched HAMP in March 2009, President Obama 
said that the program would enable as many as 3 million to 4 
million homeowners to modify the terms of their mortgages. 
Through March, over one million homeowners were in active trial 
or permanent modifications, and nearly 230,000 homeowners are 
in active permanent modifications.
    An additional 108,000 permanent modifications have been 
offered and are waiting only for the borrower's signature. 
Borrowers and permanent modifications are saving a median of 36 
percent or more than $500 each month. And HAMP has proven it is 
helping borrowers who have faced real financial hardship. 
Nearly 60 percent of borrowers in permanent modifications have 
faced a reduction in income, including loss of wages, hours, or 
unemployment of a spouse.
    HAMP has demonstrated real progress in the first year of 
the program, and we continue to improve it, based on lessons 
learned and feedback from homeowners, investors, servicers, and 
borrower advocates. Despite the progress, however, we have 
encountered a number of policy and operational issues that have 
been challenging to address. These include difficulties 
converting trial modifications to permanent status, confusion 
surrounding the concurrent foreclosure and modification 
process, and significant economic challenges posed by 
unemployment and severe negative equity.
    After working with stakeholders at nearly every stage of 
the housing finance process, we have moved aggressively to 
implement program changes and expansions to help at-risk 
homeowners. To ensure that borrowers will not be caught in a 
long trial period, we have increased up-front document 
requirements for a trial modification, and established concrete 
time frames for servicer response.
    We have made improvements around borrower solicitation and 
communication that will take effect in June, ensuring that 
homeowners are evaluated for HAMP prior to foreclosure 
proceedings, and requiring servicers to consider borrowers and 
bankruptcy upon request.
    To further assist certain unemployed homeowners, servicers 
will be required to reduce their mortgage payments temporarily 
to an affordable level for a minimum of 3 months while they 
look for a job. If a homeowner does not find a job before the 
assistance period is over, the homeowner will be evaluated for 
permanent HAMP or possibly may be eligible for a short sale 
program.
    To expand the use of principal write-downs, servicers will 
soon be required to consider an alternative modification 
approach that emphasizes principal relief. Under the 
alternative approach, servicers will be asked to consider 
principal write-down balances above 115 percent current loan-
to-value, and eligible homeowners will earn this forgiveness on 
a pay-for-success basis, with principal forgiven in three equal 
steps over time, as long as the borrower remains current.
    And lastly, four servicers, representing over half of the 
second lien mortgage market, have signed on to participate in 
the second lien program, or 2MP, which provides for concurrent 
modification or extinguishment of a second lien when the first 
is modified in HAMP.
    We believe these changes will better enable us to reach our 
goal of preventing avoidable foreclosures. Thank you.
    [The prepared statement of Ms. Caldwell can be found on 
page 51 of the appendix.]
    Chairwoman Waters. Thank you very much. I will now 
recognize myself for questions to our first panelists.
    First of all, let me thank you for being here. Mr. Stevens, 
as you know, we are working on legislation to empower FHA to 
increase its capital reserves. Please elaborate on how the 
Administration's proposed refinance program will interact with 
FHA's capital reserves. Should we be worried that this creates 
more risk for FHA?
    Mr. Stevens. So let me start by making one point very clear 
about the FHA refinance option. The option that we announced 
utilizes the existing FHA program as it stands today with no 
changes to policy within the FHA program to utilize it. So all 
we are doing is using existing resources currently available 
within the FHA guidelines.
    Furthermore, to protect any unknown risk--and I want to 
emphasize that we do not expect--we have looked at a lot of 
modeling on this particular option, and do not expect 
necessarily to use these funds. However--these funds to be 
needed--TARP funds will be made available, $14 billion of TARP 
funds will be made available, to offset lender claims on 
defaulted loans, and will reduce a portion of the FHA risk on 
these loans.
    That, combined with the fact that these are existing 
policies, leads us to the conclusion, based on our analytics, 
that this should not expose FHA to further risk and their own 
MMI funding the portfolio.
    Chairwoman Waters. That's good, and that helps me to 
understand how you are going to do this. But when does the new 
refinance program begin? In the fall, is it?
    Mr. Stevens. The new--I'm sorry, Madam Chairwoman, when--
    Chairwoman Waters. The program that you announced for 
refinance--
    Mr. Stevens. Yes.
    Chairwoman Waters. --does not begin right away. It starts 
some time in the fall?
    Mr. Stevens. That's correct. We have to issue a mortgagee 
letter, some guidance to the industry. We have to pull together 
the industry participants so that the dialogue can begin to 
occur.
    One of the fundamental challenges we have had with many of 
these modification efforts is that the industry is very 
fragmented between servicers, originators, investors, and the 
borrower, who all have to come together in order to form this 
union that can result in the principal write-down. For this 
program, this option under the refinance guideline, to be 
effective, we need to pull those components together and give 
clear guidance to the industry, not only how to make the 
operations work, but, as well, to ensure that the fundamentals 
associated with the TARP execution related to this for the 
lenders when they submit claims down the road is also effective 
and available at that time.
    So, for that reason, we do not expect this to be 
operational until the fall--late summer, at best.
    Chairwoman Waters. I'm a little bit worried about many 
homeowners who have paid their bills on time for the length of 
the mortgage that they are holding. They have gotten into 
trouble, they have missed payments, they are trying to get loan 
modifications, they are trying to get refinanced, they are 
trying to do whatever they can.
    But under your program, for example, if you use the same 
criteria that you use for your FHA mortgages, are they going to 
be eligible?
    Mr. Stevens. The FHA program, FHA refinance option, is 
merely one of a variety of options that's provided by this 
Administration, particularly with the recent announcements that 
we just made a couple of weeks ago that helps provide a series 
of alternatives to help affect responsible homeowners who we 
are able to effectively reach.
    We do need to be clear, and the President has said that not 
everybody will avoid foreclosure. And to that extent, there 
will be some borrowers who cannot qualify. However, given the 
FHA guidelines, we believe that there will be a significant 
opportunity for homeowners who are in distress, underwater in 
their homes, who can afford a mortgage if it was written down 
to an appropriate level, who will be able to make their 
payments for the long term. And that is who this particular 
portion of the Administration's programs are designed to reach.
    Chairwoman Waters. Thank you very much. Mrs. Capito?
    Mrs. Capito. Thank you. Let me make sure I get how this is 
going to work. If you're in an underwater mortgage, and let's 
say you have a second lien, like a lot of people do, you are 
going to extinguish that. Who pays for that?
    Mr. Stevens. Let me just walk--I will give you the full 
scenario. What will happen is--let's assume there is a second 
lien in the case you are using as an example. The first lien 
investor will most likely have an underwater loan to begin 
with. They have to do at least a 10 percent principal write-
down, and the borrower has to benefit from that transaction and 
write down the principal to our maximum loan-to-value available 
in FHA, which is roughly 97 percent.
    Mrs. Capito. Okay. Let me stop you there. When they write 
it down, is that what Ms. Caldwell--I think in her testimony--
said the cost is shared by the private sector and TARP?
    Mr. Stevens. No, this--the entire cost for the first lien 
write-down by the investor is borne by the investor. There are 
no TARP funds associated whatsoever with the investor--
    Mrs. Capito. What's the incentive--
    Mr. Stevens. --portion of the write-down in the FHA 
program.
    Mrs. Capito. Is the $1,500 increased fee for the lender to 
do this, is that what they're--
    Mr. Stevens. No. The motivation for the investors--and we 
have had a multitude of investors come visit a variety of the 
agencies in Washington, and talk about their concern about some 
of the at-risk borrowers in the population--is that by writing 
down a portion of the loan, they are willing to take that loss 
for the benefit of ultimately having a loan that gets 
refinanced out of their portfolio, rather than risking it to 
potentially go into default at a deeply underwater level, 
simply because that borrower may be at risk for strategically 
defaulting, or have had income reductions that no longer allow 
them to support the loan as it stands today, and have no other 
alternative but to refinance out.
    So, again, the lender will take a portion of that write-
down for the security of knowing that the underlying loan that 
ultimately gets restructured will perform. And that's in 
their--that, in many cases--
    Mrs. Capito. But then it goes off their books, because it 
goes into the FHA--
    Mr. Stevens. It goes into an FHA.
    Mrs. Capito. Okay. So the hit to the lender, really, is the 
write-down in the--say if it goes to the FHA for 100 and they 
have it at 200, they take $100,000--
    Mr. Stevens. That's correct. And that's one of the unique 
attributes--
    Mrs. Capito. But what's going to prevent the lender--excuse 
me for interrupting--
    Mr. Stevens. Go ahead.
    Mrs. Capito. --but I only have a little bit of time--what's 
going to prevent the lender from saying, ``Well, now, we 
started out with this, and then we moved to that, and 
refinancing, and remodifications, and now it's going to be 
this. You know what? I might just wait another 6 months. There 
might be another program coming down the road that's going to 
be better for me.''
    Mr. Stevens. Look, the key about this program is it's 
entirely optional. It does require these participants in the 
market to make this decision on their own. If investors want to 
take the gamble and delay, thinking that some new option is 
going to be available, that's a risk that they have the 
opportunity to take. I think--
    Mrs. Capito. Or--
    Mr. Stevens. I think that's a very high-risk--
    Mrs. Capito. Or they could force the borrower into 
foreclosure, correct?
    Mr. Stevens. Yes, the alternative--they have the 
traditional alternatives they have today. One is the borrower 
may go into foreclosure, at which point most of these loans 
would ultimately be complete losses to their balance sheet.
    They could delay, hoping--to your point--that something new 
down the road is coming. I think that's a fairly high-risk 
option, given the realities of the market together.
    Mrs. Capito. Well, they have had several options, so I 
don't think it's that high risk.
    Mr. Stevens. Well, they have--except as we all know, they 
all had effectiveness at relative levels. So they--there is no 
single solution here that has been provided that gives mass 
relief, particularly to these mortgage investors who are very 
concerned about broad-based impacts to the capital levels and 
their balance sheet.
    So, there is no question that they will look through their 
portfolio, they will look at borrowers who are most at risk for 
default, based on negative equity, perhaps income reductions, 
who are stressed. And they will recognize that a portion of 
these borrowers, if they were re-underwritten to their actual 
new income levels that have been adjusted during this 
recession, and a new appraisal, based on the actual property 
value, that this borrower would actually qualify for a new 
loan.
    So, they will take that proportional write-down for the 
benefit of not incurring the complete loss in the event of that 
loan going to foreclosure.
    Mrs. Capito. Well, a complete loss would be--it wouldn't be 
a complete loss, because they--wouldn't they become owners of 
the property? It has some value.
    Mr. Stevens. That's correct. It would be the net difference 
of the post-foreclosure expense against the resale price of 
that real estate--to your point, that's why we do not believe 
these numbers will be of the magnitude to solve the housing 
crisis.
    We think this is another solution that can be combined with 
the variety of solutions offered by this Administration--which, 
again, have just been enhanced a little bit further--to help 
provide more alternatives for investors, servicers, and 
borrowers to deal with this particular climate. But it will not 
be a fix-all solution, by any means.
    Mrs. Capito. Okay. Let me just ask Ms. Caldwell, in the 
part of your statement where you said the cost will be borne by 
the private sector and by the TARP, what cost are you referring 
to there?
    Ms. Caldwell. Thank you. In the HAMP modification, to get 
to affordability, a homeowner comes into HAMP because they are 
having trouble paying their mortgage. And so, the HAMP modifies 
the mortgage to 31 percent of the homeowner's debt to income. 
To the extent--for the--
    Mrs. Capito. So--but that could be through extending the 
life of the loan, or--
    Ms. Caldwell. Correct.
    Mrs. Capito. --lowering the interest payment. It's not 
necessarily a write-down, correct?
    Ms. Caldwell. But the--not a write-down on the principal 
balance.
    Mrs. Capito. Right.
    Ms. Caldwell. But a write-down on the monthly payment.
    Mrs. Capito. Right.
    Ms. Caldwell. And so, the difference between that write-
down from 38 to 31 percent debt-to-income is shared through 
incentives from the Treasury and incentives--and reduced 
payment from the investors. On the--
    Mrs. Capito. And how does that split out, like half and 
half or--
    Ms. Caldwell. Half and half. On the short sale deed in lieu 
program, for example, if a homeowner goes to short sale, there 
are incentives for the servicer for doing that, yet the second 
lien holder must release the lien. There is some compensation, 
but not full. And the second lien holder has to discharge 
future obligation from that borrower. So the--
    Mrs. Capito. So the second lien holder is compensated by 
the Treasury? Or is it split?
    Ms. Caldwell. It's partially--it would depend on the amount 
of the lien split.
    There is incentive available to pay up to $6,000 for 
release of the second lien, but that lien could be $20,000, it 
could be $30,000, or it could be some other amount.
    Mrs. Capito. Well, my time is up, but I will say this: all 
of this is so darn confusing. I don't see how people could plan 
into the future when the programs keep changing. And I 
understand the motivation here is to try to stem the tide and 
you find the bottom, I guess, for want of a better term.
    But if we keep moving the boundaries around here, 
increasing the program--I went around to my district in the 
last 2 weeks and tried to explain this program that we're going 
to have forbearance for people who have lost their jobs. This 
is not selling in the American public, the ones who have been 
sitting there paying their bills, doing what they want to do, 
cutting back on all of their daily expenses to try to make sure 
they meet that one big thing in their life, which is their 
mortgage payment, I just have concerns about the changes, the 
confusion, who is taking the hit. Is it just another hit to the 
taxpayer? Thank you.
    Chairwoman Waters. Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman. Is it fair to say 
that homeowners who are playing by the rules, who made all of 
their payments timely, and been blessed to keep their jobs, 
that they have a stake in this, as well?
    Is it fair to say that because property values decline when 
we have foreclosures in a community, that those who have played 
by the rules are impacted by the foreclosures that take place?
    I have some evidence that property values decline on an 
average of about $150,000-plus in some communities. So we all 
have a stake in this. Whether it is a direct impact or 
indirect, we still have an impact upon us. Is that a fair 
statement, Mr. Stevens?
    Mr. Stevens. Absolutely. And I think it relates a bit to 
the previous statement, in that even homeowners who have been 
able to pay responsibly get impacted when a home goes to 
foreclosure in their neighborhood and drives down home values.
    So, that is a key component to making sure this program is 
managed responsibly.
    The thing I would absolutely highlight, to your point, is 
that the issue of negative equity, for example, is heavily 
concentrated in a select number of States in this country. And 
in those States--take Nevada as an example, where the average 
loan-to-value is over 100 percent--any event that impacts a 
family living in a home--loss of job, something that impacts a 
family--would make it literally impossible for them to get out 
from that home or afford that mortgage without some other 
solution. And that is a result of no fault of their own, 
necessarily, it's a fault of the depression of the entire 
market.
    Mr. Green. And my suspicion is that there is empirical 
evidence to support the notion that the prices receding, being 
devalued, will impact homes on the market, which will impact 
housing starts, which will impact employment, which impacts 
employment, by the way, in housing but also in people who lay 
carpet, people who manufacture carpet, people who sell 
appliances, people who make appliances. The domino impact is 
one that is felt throughout the economy. So we have to do 
something to stop this slide in housing prices and 
foreclosures, because of the impact that it has on the economy, 
as a whole. So, we all have a stake in it.
    And I understand the moral hazard argument, but there is 
also what I call an immoral hazard argument. It is immoral to 
do nothing, and just watch as the economy slides into some sort 
of abyss from which it may be difficult to extricate itself.
    Now, let's talk for just a moment about empirical evidence 
necessary to evaluate these programs. The servicers are key. Do 
we have in place a requirement of some sort that servicers 
provide evidence of rejections, number of rejections, why the 
rejections took place? And are there sanctions available, in 
the event the servicers don't provide the empirical evidence 
necessary to evaluate the programs?
    Ms. Caldwell. I will take that question. It's a very 
important question, something that we spend a lot of time 
thinking about.
    And the short answer is yes. Servicers that are part of the 
HAMP program have signed a servicer participation agreement 
that specifically spells out their obligations under the 
program, including fair lending, including reporting of 
denials, and including modifying according to HAMP guidelines.
    I think it's also important, though, to remember that this 
is a voluntary program. And so, at the beginning, as we try to 
get servicers, investors, and homeowners together at the table, 
this is fundamentally shifting how the servicing business is 
done. And so, some of the challenges that we have seen in the 
first year, as servicers have ramped up, has been a result of a 
rapid growth in the program and adjusting to the program.
    But yes, absolutely, we do. We publish a monthly servicer 
performance report, and we released our most recent one today, 
that highlights, by servicer, their delinquencies, the number 
of homeowners they have on trial modifications, and the numbers 
they have converted to.
    Mr. Green. Will the raw empirical evidence be made 
available to the public for those organizations that take this 
information and massage it in such a way as to come to 
conclusions about how efficacious the program is?
    Ms. Caldwell. At this point, part of the program is very 
committed to transparency. We began collecting denial codes, as 
well as race and gender information in December. At this point, 
we are beginning to get those first collections in. But our 
intention is to make that data available to the public as soon 
as it is scrubbed and ready.
    Mr. Green. [presiding] I yield back. Thank you. Ms. Jenkins 
is now recognized for 5 minutes.
    Ms. Jenkins. Thank you, Mr. Chairman. Some analysts are 
predicting losses as great as $30 billion between the 4 banks 
currently participating in the 2MP program associated with home 
equity lines. Are these estimates within the projections 
Treasury anticipates, and are banks prepared for this much 
damage to their revenues?
    Ms. Caldwell. I think the question of second liens and 
valuation--I will let the respective institutions speak to the 
estimates for on their balance sheet. But I do think it is 
important, in the context of 2MP, to know that we worked very 
closely with the second--with these second lien investors. It 
was a voluntary program to sign up for, and we got the four 
largest servicers to sign up in February. And that was after 
each of them looked at their second lien portfolio, understood 
what it meant, and made a commitment to modify those second 
liens that were behind a first mortgage that had been modified 
in HAMP.
    And so, it is our expectation that they will do that in 
accordance with the program guidelines. But I can't speak to 
the accounting treatment on their own balance sheets, as a 
result of their participation.
    Ms. Jenkins. Okay. And the roll-out of the Treasury 
Department's second lien modification program will not be 
effective until September of this year, under the--
    Ms. Caldwell. The--oh, sorry, go ahead.
    Ms. Jenkins. Under the HAMP program, a servicer cannot 
execute a foreclosure until all available modification options 
have been tried. Does the September 2010 start date for the 2MP 
initiative amount to a 6-month foreclosure moratorium?
    Ms. Caldwell. Let me clarify two things. The September date 
for 2MP is actually the date that the Treasury systems will be 
up and running to report on the second lien program. As with 
all things in HAMP, servicers may implement the program when 
they are ready.
    At this point, those servicers that have a second mortgage 
behind a first mortgage that they service--meaning they know 
when they have the first being modified and they hold a 
second--they have indicated that they will begin modifying 
those loans immediately.
    One of the key components of the second lien program is a 
matching system that notifies a second lien holder when the 
first lien has been modified, even if that first mortgage is 
done by another servicer. And so, that matching system should 
be in place within the next month. And then, second lien 
holders will know when they have a junior lien on a mortgage 
that has been modified.
    And again, our expectation is they will begin making those 
modifications, even though they will not be able to report them 
and receive incentives, they will just accrue them.
    To your second point regarding the borrower notice and 
outreach and solicitation, that takes effect in June. And that 
is specifically about those trial modifications where a 
homeowner has provided up-front documentation to get into a 
trial. That guidance clarifies that if a homeowner is in a 
trial modification and making payments, they may not be 
referred to foreclosure. So I would not characterize the 2MP 
timing as related to anything on the foreclosure process.
    Ms. Jenkins. Okay, thank you. I yield back, Madam 
Chairwoman.
    Chairwoman Waters. Thank you very much. Mr. Driehaus?
    Mr. Driehaus. Thank you, Madam Chairwoman. Just to follow 
up, if Ms. Caldwell or Mr. Stevens could provide clarification, 
because this remains a problem in Cincinnati for folks that we 
are dealing with, in terms of folks who are seeking 
modification--and it might be--it's usually the huge entities. 
It's dealing with one of these--Deutsche Bank, or one of these 
massive entities, where at the same time they're dealing with a 
modification, someone else at the institution is proceeding 
with a foreclosure.
    And I apologize if I'm asking you to repeat yourself. But 
if you could, help me better understand specifically what 
you're doing to prevent that from happening, and what type of 
clarification we are requiring of the financial institutions, 
so that this isn't occurring.
    Ms. Caldwell. Absolutely. And that's a very important issue 
in the HAMP program.
    When the program was originally announced, servicers were 
allowed to have dual track foreclosure, meaning they could go 
down the modification process, but could also continue along 
the foreclosure. That has been a standard practice in the 
industry. And very often, it was a practice used to get 
homeowners' attention.
    That was--HAMP guidelines have always prohibited a home 
from going to foreclosure sale while a homeowner was in HAMP. 
But there was confusion between what is a foreclosure process, 
meaning actions leading up to sale, and actual sale. And so, 
what the new guidance did is require servicers to clarify the 
difference between process and sale in those cases where there 
might be homeowners already in a simultaneous foreclosure.
    But for new homeowners coming into the program, servicers 
must provide outreach to the homeowner, and try to contact them 
before initiating a foreclosure action. And to the extent that 
homeowner has been evaluated for HAMP and is in HAMP, they 
cannot refer the loan to a simultaneous foreclosure, as long as 
that homeowner is making the three trial payments.
    Mr. Driehaus. So, if they're being evaluated for HAMP, they 
still are provided those protections. This isn't--because there 
was a distinction being made between the evaluation process and 
the actual, in the program, being modified, and having been 
approved for modification and they're in the program, and 
therefore we would stop the foreclosure proceedings.
    But now, if they're being evaluated, we can no longer 
proceed with the foreclosure proceedings?
    Ms. Caldwell. That is correct. For those homeowners who are 
being evaluated effective June 1st, in those evaluations where 
the homeowner has provided up-front documentation, the loan may 
not be referred to foreclosure until a decision has been made 
that they are not in HAMP. And if they are in a HAMP trial and 
they are making payments, they may not be referred.
    There are some circumstances where there are homeowners 
where the foreclosure process has already started, and they are 
already in the trial process. In that, servicers will be 
required to send notice to explain that they are already in a 
simultaneous foreclosure process, but that their house will not 
go to sale until they are declined from HAMP.
    Mr. Driehaus. And we aren't able to put a freeze on that 
process? Why are we doing this prospectively, beginning in 
June, rather than saying, ``Hey, look, this is a problem right 
now with folks who are experiencing this.'' We are sending a 
lot of mixed messages, especially to people who are getting 
confused about the information that is coming to them.
    They are doing everything they can. They understand that 
the government is on their side, trying to help them stay in 
their home, yet they are getting a notice from the same bank, 
telling them they're being foreclosed on, and they're 
proceeding with the foreclosure action.
    So, what we're saying is that, well, in June we are going 
to change the process. But if you're already there, you're 
already there. Is there any way for us to prohibit them from 
proceeding with the foreclosure process for those who are 
already in the system?
    Ms. Caldwell. That's a good question. For those who are in 
the process, it's sometimes very difficult and often more 
expensive to stop and start a foreclosure action. And so, based 
on feedback from multiple stakeholders, we made the decision, 
from a process standpoint, with the number of changes coming 
out we should do something prospectively, but just aggressively 
communicate what has been happening to address the confusion 
that had been in the program.
    But in terms of going back and retroactively changing 
process for one million homeowners in trial modifications, we 
focused on going forward.
    Mr. Driehaus. I guess my concern is that is one million 
problems in terms of, if we aren't going back and trying to 
address--because there are so many people who are experiencing 
this right now, and if we are not addressing it right now--
that's great, that we're fixing the problem prospectively. But 
there are a lot of people stuck in that situation right now. 
And I hope that the communication is enough. But my fear is 
that it's not. Thank you, Madam Chairwoman.
    Chairwoman Waters. You're welcome. Representative Bean is 
in attendance. Without objection, Representative Melissa Bean 
will be considered a member of the subcommittee for the 
duration of this hearing.
    Ms. Bean. Thank you, Madam Chairwoman. My question is, why 
is the FHA rolling out a new FHA refinance plan, instead of 
working with the existing HOPE for Homeowners program that has 
been ready to go?
    And now that the new guidelines are finalized, how many 
refinances do you expect would be done through HOPE for 
Homeowners this year?
    Mr. Stevens. Just to be clear, we look at the HOPE for 
Homeowners as a complementary program to the FHA refinance 
option. As--HOPE for Homeowners was, obviously, created 
legislatively. That program still exists today. It has not had 
the volume that was originally anticipated. That's clear. We 
have just--we made some recent adjustments to it in the fall, 
and have re-added those to the roll-out.
    While we have seen some increase, it has still been 
extremely moderate, in terms of take-up. And while I'm not 
passing--come to the point where I can draw conclusions as to 
why, it is a very different program in terms of documentation 
standards, requirements for servicers, etc. And so, that 
program exists and we are hoping that it does sort of pick up 
steam, in terms of success.
    The refinance option that FHA has announced is really 
utilizing an existing FHA refinance option that already was 
available. It just adds some additional advancements to it, in 
combination with our partnership with Treasury to help 
facilitate that relationship between the servicer, the 
investor, and the originator, to make it utilized as well.
    So, we're hoping, between the two, we can reach a broader 
segment of the distressed homeownership population.
    Ms. Bean. So you are expecting some increase in HOPE for 
Homeowners participation?
    Mr. Stevens. Yes, we have already seen some increase. It is 
extremely moderate.
    Ms. Bean. My other question is for Ms. Caldwell. On 
average, how many hours are spent modifying a loan through the 
HAMP program? And how does this compare to when it first 
started?
    And besides delays caused by the borrowers themselves, 
what's the biggest internal delay mortgage servicers face in 
completing a loan mod?
    Ms. Caldwell. The--I think it's--as we think about the 
delays and modifications, we have seen three things. The first 
has been the servicer capacity to overhaul the business that 
had been a payment collection and processing business to what 
looks much more like an origination business, and an 
origination business for homeowners facing real distress. So, 
first would be servicer capacity.
    The second one would be understanding the changes and the 
requirements of the program. As homeowners, investors, and 
servicers have had to come together and learn a program that 
was started from scratch to address a problem at huge scale, 
just the understanding and ramp-up and learning and 
coordinating among all those parties has taken a lot of time.
    And then third would be the documentation issue. Last year, 
Treasury made a decision to open up trial modifications to 
homeowners, based on stated income in an effort to get more 
people into the program, and more immediate savings into 
American homeowners.
    What we underestimated was the challenge that would result 
in getting the documentation in, getting it reconciled, and 
getting those homeowners and trials converted. And that has 
really been the bulk of the focus of the last few months, is 
getting that backlog of trial modifications that came in, where 
people are saving on their mortgage, decisioned and converted.
    Ms. Bean. We know that also contributed, the fact that 
people got into trial mods without documents, and then later it 
turned out they didn't have enough unemployment to justify a 
permanent mod, that we sort of set some people up to think they 
were on track to get a permanent modification, only to find out 
later that they were never going to be eligible. So we are glad 
to see some changes in that regard.
    What specific changes have been instituted as a result of 
the auditing on servicers by HAMP compliance officers?
    Ms. Caldwell. From the compliance we have done a number of 
things. The first has been the institution of the temporary 
review period that we announced at the end of December, where 
we said servicers could not decline anyone from HAMP until they 
did a thorough review--or decline anyone from HAMP unless the 
property was ineligible.
    That was done, in part, because our compliance showed that 
the servicers had not yet put--were not yet understanding all 
of the rules of the program. So we had servicers go back and do 
a temporary review.
    In addition, there have been some servicers that have been 
instructed to re-run the net present value test, as we have 
also learned that the net present value test coming in and 
coming out has been confusing.
    And so, we have really focused the compliance effort on 
making sure the homeowners are not inappropriately denied a 
HAMP modification. And that's why we have kept people in trial 
modifications longer than many would have liked, but it's 
really to make sure that when someone is declined a HAMP mod, 
it is really for the right reason.
    Ms. Bean. Thank you. I see my time has expired. I yield 
back.
    Chairwoman Waters. Thank you. Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairwoman. I have one 
question.
    I am a little bewildered by the fact that I think it's a 
generally accepted fact that minorities were targeted for 
subprime loans and all the exotic products were made available 
to minorities at a much, much higher level.
    And so, I am concerned, if that is a fact--which I believe 
it is--I can't understand why Treasury has not released the 
data that they have been collecting, and pledging to make it 
public. And we have no data on the applications for HAMP based 
on race, sex, or national origin. Can you give me some 
indication, either, as to when Treasury is going to release 
that data?
    Ms. Caldwell. Absolutely. At Treasury, we are very focused 
on the impact on low and moderate income and ethnic minority 
communities, in terms of mortgage modifications. And we partner 
with NeighborWorks and housing counselors, and have targeted 
outreach events to try and reach all populations in HAMP.
    In terms of the data, we began collecting it in December of 
2009. And we will begin reporting it, making it publicly 
available in raw form as soon as it has been scrubbed and is 
ready.
    I will say a few things. One, it is--in terms of the 
modification program, the servicers can only report what people 
self-identify on their modification documents. And the early 
results are coming in that many people are opting not to 
identify. So we are a bit concerned. I don't want to set 
expectations that the data will be complete.
    Second, we are also finding that many of the low and 
moderate income and ethnic minority communities are adversely 
impacted by other conditions, such as unemployment, that are 
also making it very difficult to qualify for a HAMP 
modification. But we are very, very focused on the program.
    And all servicers that are part of HAMP are required to 
comply with fair lending guidelines.
    Mr. Cleaver. Yes. But even if we get partial data, it will 
still give us, I think, some indication as to who the 
applicants are, and it can even provide much clearer 
information about the people who were steered into these 
subprime loans.
    So, do you have any indication of when maybe the Chair can 
receive that?
    Ms. Caldwell. The target date for release has been by the 
end of June. And that's assuming we have collected--we should 
have it collected in, and it allows some time for scrubbing of 
the data and removing of all personally-identifying information 
and compliance with all privacy guidelines to make sure that 
it's in a format that can be released. But we are certainly on 
track, to get that made public.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Chairwoman Waters. You're welcome. Without objection, the 
Chair is going to have a second round with this panel.
    Mr. Himes just came in. Mr. Himes, for 5 minutes.
    [No response.]
    Chairwoman Waters. Not yet? The Chair is going to initiate 
a second round with this panel. It is so important, because we 
are all confused. The public gets confused. We are not getting 
the modifications that are being represented. And let me just 
quote you Elizabeth Warren, who released an Oversight Panel 
report strongly criticizing HAMP today, saying in the end it 
will only prevent 276,000 foreclosures. As you know, we have 
listened to you, and you have told us that the Administration 
claimed it would prevent three to four million foreclosures.
    Now, the reason that I am going to go a second round with 
you is this: I think it's very important for you to share 
everything that you can with us, and for us to be very honest 
with you about what we're feeling about the Administration's 
foreclosure programs.
    I know that, as you start your testimony with us, and as we 
see your representations in the press, you talk about progress, 
and you talk about things are better, etc. But the fact of the 
matter is our constituents are unhappy, and they are constantly 
bombarding us with the problems of your voluntary modification 
programs.
    For example, your document requirements are awesome. And 
many of the folks who are in foreclosure--and some are 
elderly--who are attempting to comply--I say ``your document;'' 
the document request of the various institutions--we don't know 
how much you monitor the servicers. We know that the servicers 
have been slow. We know that some of them appear not to be as 
well-trained, or to understand the program as well as they 
should. And now the program is changing, and so we're going to 
have to go through another period of time where servicers are 
not fully informed about what the Administration's program is.
    And so, voluntary, not enough oversight with servicers, a 
complete misunderstanding of the HAMP program, as it relates to 
the--what is it, the 3-month period that you allow the 
homeowner to be in a program based on their income, prior to 
determining whether or not they get a loan modification? Is it 
3 months? What is it?
    Ms. Caldwell. Correct, a 3-month trial modification period.
    Chairwoman Waters. Trial modification. We have complaints 
that people are going into foreclosure while in trial 
modification. We have many of those complaints. And it goes on 
and on and on.
    We are going to have to make some decisions about what we 
must do. And it seems to me there must be a combination of 
something mandatory and voluntary, and there must be a way by 
which to speed up these modifications. And despite the fact--we 
are working very closely with FHA to make sure that program is 
solid--we get a little bit worried. Even when you talk about 
using some of the TARP resources, we get a little bit worried 
about a lot of refis being thrown into FHA.
    And so, I want to make sure that I use my period of time to 
say to you that on both sides of the aisle, we're not happy, 
and that we're really concerned about the inability to really, 
really move something substantially.
    For example, let me ask you about unemployed individuals. 
You just referred to maybe you're finding with some of the 
minority populations that it's a little bit harder, because 
maybe the unemployment is higher. It is higher. But as you 
know, the Administration, I think the President, came up with 
an Executive Order based on my bill about dealing with 
unemployed homeowners, and making it possible for them to stay 
in their homes that's patterned after the program in 
Pennsylvania. Is that working yet in the--is that program 
working yet for the unemployed?
    Ms. Caldwell. There is a--the program I believe you're 
referring to is the hardest-hit fund that President Obama 
announced to target five States. And one of the options they 
could use to address unemployment or negative equity are 
programs similar to the Pennsylvania--
    Chairwoman Waters. The program is in the Wall Street Reform 
bill that we passed out of this committee and off the Floor. 
That's the one. He targeted five States.
    Ms. Caldwell. Five States?
    Chairwoman Waters. Is that working yet?
    Ms. Caldwell. The proposals for the program from the 
various States are due Friday, for how they would like to use 
those funds. And we expect funding to go out the door in June. 
So it is operating.
    Chairwoman Waters. Thank you very much. Mrs. Capito?
    Mrs. Capito. I have no further questions for the panel, 
Madam Chairwoman. Thank you.
    Chairwoman Waters. Thank you. Mr. Cleaver.
    Mr. Cleaver. Are there some adjustments that you would 
recommend that we make, legislatively, to empower the Treasury 
to respond more favorably and quickly?
    As soon as I turned on the television this morning, the 
first news story was the failure of this program. Diane 
Sawyer--did you hear a report? Does anybody tell you about it?
    Ms. Caldwell. I did not see Diane Sawyer's report this 
morning, but I am familiar with the Congressional Oversight 
Panel report that was released.
    Mr. Cleaver. Right, that's what she used to start out by 
saying--which some of us would like--would rather not hear--the 
President's housing program is a failure.
    What can we do? We have people who are angry with us 
because they don't know that we don't go out and actually do 
the modifications, although all of us will probably have to get 
involved on the telephone with some of the lending 
institutions, mortgage companies. Is there anything we can do 
to help you do a lot more than is being done?
    Ms. Caldwell. I think the most important thing is to make 
sure that homeowners understand that there is help available, 
and they should not be paying a cost or paying scammers for any 
of that help.
    Mr. Cleaver. Is that the number one problem we have?
    Ms. Caldwell. It is a big problem. Mortgage fraud scams in 
the modification business are a huge problem.
    But we do have a number, a call center number, 888-995-
HOPE. And what we do is we--when we hear from homeowners, it 
helps us understand where servicers are failing, it enables us 
to go back and intervene on their behalf, and it enables 
homeowners to be in touch with a homeownership counselor to 
help guide them through the process.
    So, I think the most important thing is to make sure that 
we do outreach to the homeowners, that we do continue to follow 
up on all those reports that we understand, and keep the 
pressure on for modifications.
    Mr. Cleaver. Yes. Do we need to try to meet with the FBI to 
ask for more agents? If fraud is the number one inhibitor, then 
we need to hire more FBI agents or Lassie, Rin Tin Tin, 
whatever. I don't know.
    Ms. Caldwell. I don't know that it's the number one 
inhibitor, but it is an inhibitor. But this is a crisis at a 
scale that we have not seen before. And as we try to pull 
together multiple parties, including homeowners, servicers, 
investors, and counselors, to come together and address this 
program, I do think we have a lot of very complex issues and a 
lot of different sides, and scams are one of them. 
Understanding the program is another one. And the fact that it 
is a program where we have a lot of people who are in distress, 
but it's not a program that is designed to help everyone.
    And so, we do have to make sure that we don't set the 
expectation that everyone is going to be helped. This is for 
people who live in their homes, own their homes, have an 
ability to stay in their homes, but have a hardship. And so 
there are many people with second homes or jumbo mortgages who 
are also facing hardship.
    Mr. Cleaver. Yes, okay. You're actually frustrating me, but 
I will--that's what the program was designed to do, all the 
people you just--I don't know of anybody who is trying to help 
somebody who is not in their home. Everything you said, that's 
what we're trying to--
    And I admit, Madam Chairwoman, that this is a difficult 
program to do, and I don't want to suggest, even lightly, that 
it's not. Maybe this is self-defense because of the pressure 
that's being applied to us. And then I'm sure that after this 
latest report hits, and the pressure will increase. So out of 
my frustration, I am raising these issues. I yield back.
    Chairwoman Waters. Thank you. Mr. Green.
    Mr. Green. Thank you. The number of persons who don't 
qualify for the program, my assumption is that this is 
something that is quantifiable perhaps after the fact, if not 
before. You can get some notion of it.
    And my assumption is that the program, having been designed 
specifically for persons who do qualify--my question is, do we 
over-emphasize that line of--remember now, we have a lot of 
people who won't be able to qualify, and that's understandable, 
but is that being overly emphasized, do you think?
    Ms. Caldwell. I don't think it's being overly emphasized. 
But one of the reasons that we made the changes that are moving 
the program to up-front documentation is to make sure that the 
program is focused on those homeowners who are qualified for 
the program and can stay in the program. One of the things that 
we did learn from opening the program up based on stated income 
is that many times the stated income versus the verified income 
didn't match. And so someone may have thought they were 
eligible for the program, and they weren't.
    So, as we go through this trial period, we are going to 
have some people who thought they were eligible and they were 
not. And the importance of this change is to make sure that 
homeowners going into trial modifications have been screened 
and determined to be eligible. And the only responsibility that 
homeowner will have is to make the three trial payments on 
time.
    But, yes, you're correct. In the trial population we do 
have to focus on making sure that people understand whether or 
not they are eligible.
    Mr. Green. You mentioned second homes, and that persons who 
have second homes, maybe third, that they are not eligible, 
correct?
    Ms. Caldwell. Correct.
    Mr. Stevens. Correct.
    Mr. Green. They do have something that they are eligible 
for, a bankruptcy. Not that anybody wants to go into 
bankruptcy. It's a horrible thing. But they are eligible for 
bankruptcy, as a means of preserving those second and third 
homes, true? Or do you know? Maybe that's something you're not 
familiar with.
    Ms. Caldwell. Yes, I can't speak to the full range of 
bankruptcy on primary and secondary residences.
    Mr. Green. All right. Thank you, Madam Chairwoman.
    Chairwoman Waters. You're welcome. Ms. Melissa Bean, you 
have about 8 minutes left before we go to the Floor. We will 
recess after your questions.
    Ms. Bean. Thank you, Madam Chairwoman. I just have one very 
specific question. How many HAMP compliance officers are there 
in the field, and what's the ratio of those officers to 
servicers? How does that compare to, say, bank examiners to 
banks?
    Ms. Caldwell. In terms of the HAMP compliance officers, 
Freddie Mac has a separate organization, a Making Home 
Affordable compliance that has been set up to do the compliance 
on HAMP. I don't know the exact head count of how they staff 
it, and how it would compare to bank examiners, but it is set 
up to provide an audit-like function. So it is designed to do 
random sampling across all of the servicers. They have been 
out, they have done second looks at each of the servicers. They 
have done test audits of declines, and they have also done 
testing around outreach. So it is--and they do have the ability 
to staff up and contract as needed to get the job done.
    Ms. Bean. And can I ask you to just provide that in follow-
up?
    Ms. Caldwell. Yes.
    Ms. Bean. Thank you. I yield back.
    Chairwoman Waters. This committee will stand in recess. We 
have to go and take some votes. The Chair notes that some 
members may have additional questions for this panel, which 
they may wish to submit in writing. Without objection, the 
hearing record will remain open for 30 days for members to 
submit written questions to these witnesses, and to place their 
responses in the record.
    This panel is now dismissed. And thank you so very much. We 
will call the second panel upon our return.
    [recess]
    Chairwoman Waters. The Subcommittee on Housing and 
Community Opportunity will come to order. I thank all of the 
witnesses for remaining. This is quite unfortunate, that we had 
to spend the time on the Floor. It was unavoidable. But I do 
appreciate your patience, and I am going to introduce the 
second panel.
    I am pleased to welcome my distinguished second panel. Our 
first witness will be Dr. Dean Baker, co-director, Center for 
Economic and Policy Research.
    Our second witness will be Ms. Alys Cohen, staff attorney, 
National Consumer Law Center.
    Our third witness will be Mr. Vincent Fiorillo, trading/
portfolio manager, Doubleline Capital LP.
    Our fourth witness will be Mr. Andrew Jakabovics, associate 
director for housing and economics, Center for American 
Progress Action Fund.
    Our fifth witness will be Dr. Arnold Kling, member, 
Mercatus Center Working Group on Financial Markets, George 
Mason University.
    Our sixth witness will be Mr. Robert E. Story, Jr. 
chairman, Mortgage Bankers Association.
    And our seventh witness will be Mr. Alan White, assistant 
professor, Valparaiso University School of Law.
    Thank you. We will start with our first witness, Dr. Dean 
Baker.

 STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND 
                        POLICY RESEARCH

    Mr. Baker. Thank you, Chairwoman Waters. I appreciate the 
opportunity to address the committee today.
    The main point I would like to raise is the fact that I 
think, in considering the various mortgage modification 
programs, and certainly the new ones being put forward by the 
Administration last week, there has been a failure to consider 
the underlying state of the housing market. And I think this 
has been a real tragedy, not just in these modification 
programs, but this is really the problem that got us here to 
begin with.
    Specifically, we had a hugely overvalued housing market. By 
my calculations, we had an $8 trillion housing bubble which is 
in the process of deflating. That is the underlying cause of 
the problems facing homeowners today. And as much as these 
programs might be well-intentioned, I have to say that even in 
a best case scenario, it's very unlikely that you're going to 
benefit more than 15 or 20 percent of homeowners with permanent 
modifications.
    And, perhaps even more seriously, I think because of the 
state of the housing market, many of those homeowners will not 
end up benefitting at the end of the day. And what I mean by 
that is we should care at the end of the day whether we have 
actually helped homeowners in terms of saving them money on 
housing costs, and also providing equity for them in their 
home.
    And what I would argue is that because in many markets the 
bubble has yet to deflate, we are going to still be in a 
situation where homeowners are likely paying much more in 
ownership costs than they would pay to rent a comparable unit. 
And secondly, because house prices are going to fall further, 
even if we are able to negotiate a permanent modification that 
leaves them at least temporarily with a little equity in their 
home, because prices are going to fall further they will end up 
again underwater in 2 or 3 years, and likely end up in a 
similar situation, when they're prepared to sell their home.
    Very quickly, what I just would point to is if you look at 
the long-term trend in house prices, we have a 100-year-long 
trend, 1895 to 1995, where house prices had just kept even with 
the overall rate of inflation. That's a nationwide average. 
There are, of course, huge variations around the country. You 
have markets like California, Manhattan, and other markets 
where home prices rose more rapidly. But it's a nationwide 
average. We have 100-year-long data, which should be pretty 
compelling evidence as to what you should expect to see in 
housing prices.
    In the period from 1996 until the peak of the bubble in 
2006, house prices rose by more than 70 percent in excess of 
the rate of inflation. There was no explanation for this in the 
fundamentals of the housing market, nothing on either the 
supply side or the demand side. And also, for those who need 
further confirmation, nothing in the rental market that was 
remotely corresponding to that.
    Now, since the housing bubble began to decline, began to 
deflate in 2006, house prices have fallen back, but they still 
are somewhere between 15 to 20 percent above their trend 
levels. What happened was that Congress put in--or I should say 
government put in several policies last year to slow the 
decline in house prices, and it at least temporarily had that 
effect.
    The three obvious ones are, first off, the first-time 
buyers tax credit, the $8,000 tax credit is about 5 percent--a 
little less than 5 percent--of the median house price. Second, 
the Fed's policy of quantitative easing that pushed mortgage 
rates to 50-year lows. And the third part of the story was the 
huge expansion of the Federal Housing Authority in the housing 
market, guaranteeing 30 percent of purchased mortgages in 2009.
    All three of these supports are gradually being retracted 
from the housing market. The Fed ended its policy of 
quantitative easing last month. First-time buyer's credit, the 
extended credit, ends at the end of this month. And, of course, 
the FHA is being forced to cut back its role in the market, as 
a result of the fact that it's now below its minimum capital 
requirements.
    For these reasons, I expect house prices to resume their 
fall, and there is some data that already suggests that. Other 
factors that would suggest house prices are going to continue 
to fall are record vacancy rates--these are the highest vacancy 
rates we have seen since the Commerce Department kept data in 
the early 1950's--and also, we know that rents are now falling 
for the first time that--at least the Consumer Price Index 
measure of rent is falling. Other measures of rent are falling 
more rapidly.
    This leads to a situation where, as I say, I think it's 
virtually certain that in many, if not most markets, house 
prices will fall further. And any program that's not designed 
to take that into account will lead to serious problems.
    What I would advocate, just very quickly, as an 
alternative, is a proposal, the Right to Rent proposal that's 
being introduced as a bill in Congress tomorrow by 
Representatives Grijalva and Kaptur, which would give people 
the right to stay in their home, as renters, paying the market 
rent for--I believe it's a 5-year period of time. This 
addresses the problem of giving homeowners who are underwater 
housing security, which I think is the most important thing we 
could do. It prevents the blight of vacancies that are 
afflicting many neighborhoods. And, thirdly, it does give banks 
incentive to act on their own to try to prevent foreclosure. 
And this costs no taxpayer money, requires no bureaucracy, and 
the day it goes into law, it immediately affects all underwater 
homeowners.
    So, I will cut off there and end my time.
    [The prepared statement of Mr. Baker can be found on page 
44 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Cohen?

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

    Ms. Cohen. Thank you, Chairwoman Waters. Thank you for 
inviting me to testify today regarding HAMP and its effect on 
foreclosures. I am a staff attorney at the National Consumer 
Law Center, and I am also testifying today on behalf of the 
National Association of Consumer Advocates.
    HAMP has sought to change the dynamic that leads servicers 
to refuse even loan modifications that would be in the 
investor's best interests by providing both servicers and 
investors with payments to support successful loan 
modifications.
    Yet, an entire year into the program, only a little over 
200,000 modifications have been provided, and homeowners and 
their advocates still report a stunning degree of noncompliance 
with the program rules. Both SIGTARP and GAO have been critical 
of implementation and transparency issues. And to date, 
Treasury has not levied any penalties on servicers for 
noncompliance, and no loan level data have been released to the 
public.
    While the Administration's recently-announced changes to 
HAMP acknowledge that no foreclosure prevention program can do 
its job without principal reduction, assistance for the 
unemployed, and stopping the foreclosure process during 
consideration for a modification, even these enhanced measures 
threaten to be an empty promise without meaningful 
transparency, accountability, and enforcement.
    Moreover, until the HAMP program or legislation addresses 
servicers' incentives to foreclose rather than modify loans, 
and mandates program compliance, new initiatives are unlikely 
to dampen the country's economic distress.
    I just want to pause here for a moment and respond to a 
couple of points in the MBA's testimony. One is that the 
foreclosure stops themselves are costly and should be 
reconsidered. If a loan is not referred to foreclosure, there 
are no costs on behalf of the servicer. And if the servicer 
gets their job done quickly, and the person qualifies, and it's 
NPV-positive, the investor is in a better situation. And if 
it's done quickly, and it's not NPV-positive, then they can 
move to foreclosure so the investor doesn't lose too much 
money.
    Second, there is a claim in the MBA testimony that 
mandating principal reductions is a violation of the takings 
clause of the Constitution. We have looked at that question and 
we don't think there is any basis for that.
    Back to the other measures that Treasury has passed, the 
unemployed measure itself offers short-term payment relief 
without any debt relief, and for a period far shorter than the 
current average period of unemployment. A Federal bridge loan 
program, or broadly available funding for State bridge loan 
programs would provide the type of relief needed.
    The principal reduction program is based on voluntary 
principal write-downs, an approach that heretofore has not 
produced significant results, and that adds complexity without 
providing transparency or accountability. The proposal 
introduces a second net present value test, when even the 
simple one-step NPV analysis has been the subject of criticism 
for lack of transparency and poor implementation.
    Because the principal reduction will result in a hit to the 
servicer's largest source of income, the monthly servicing fee, 
servicers have a strong incentive to avoid principal 
reductions. Modest incentives are unlikely to change this 
picture. Even the most promising initiatives--the mandatory 
stop of foreclosures and the access to HAMP for homeowners in 
bankruptcy--will not succeed without transparency and 
accountability.
    Servicers' interests often do not align with those of 
investors or homeowners. Servicers, unlike investors or 
homeowners, do not necessarily lose money on a foreclosure. The 
result is that servicers are often indifferent, at best, as to 
whether a delinquency ends in a modification or in a 
foreclosure. Until this situation is addressed more directly, 
loss mitigation will favor the interests of servicers over 
those of homeowners and investors.
    In addition to improving the program's transparency, 
accountability, and enforcement, several core program elements 
must be reformed. Trial modifications are leaving many 
homeowners in limbo, while increasing their principal balances 
and damaging their credit ratings. The Administration must 
mandate automatic conversions for homeowners who make the 
required payments, and apply all payments as specified under 
the permanent modification.
    The program should also better meet the needs of homeowners 
with negative amortization loans, folks who re-default for a 
second time, including for unemployment, and those with debt 
below 31 percent of income, but who have high fixed expenses.
    In order to overcome the misalignment of incentives between 
servicers and the other stakeholders, mortgage servicing needs 
to be regulated by Congress. That's why we support your bill. 
We also recommend that Congress take other additional steps to 
ensure that the current crisis is not repeated. That includes 
legislation to require loan modification offers to qualified 
homeowners, funding quality, foreclosure mediation, allowing 
bankruptcy judges to modify home loans, removing negative tax 
consequences of principal reduction, and ensuring that 
predatory lending is not legal in our country.
    Finally, Congress should establish an independent consumer 
financial protection agency that can pass strong rules to 
govern the market.
    Thank you for the opportunity to testify today.
    [The prepared statement of Ms. Cohen can be found on page 
61 of the appendix.]
    Chairwoman Waters. Thank you. We will call on our next 
witness. How do you pronounce your name?
    Mr. Fiorillo. ``Fiorillo.''
    Chairwoman Waters. ``Fiorillo?''
    Mr. Fiorillo. Yes, ma'am.
    Chairwoman Waters. Mr. Vincent Fiorillo. Thank you.

   STATEMENT OF VINCENT FIORILLO, TRADING/PORTFOLIO MANAGER, 
DOUBLELINE CAPITAL LP, ON BEHALF OF THE ASSOCIATION OF MORTGAGE 
                        INVESTORS (AMI)

    Mr. Fiorillo. Thank you, Madam Chairwoman, and thank you 
for inviting me to testify today. My name is Vincent Fiorillo, 
and I am testifying on behalf of the Association of Mortgage 
Investors, or AMI, a trade group organized to develop investor 
consensus on current public policy initiatives. I have spent 
nearly 35 years working in the mortgage finance industry, and 
have seen the mortgage market from the perspective of 
investors, and from the perspective of brokers and issuers.
    In general, mortgage investors include charitable 
institutions, endowments, foundations, universities, mutual 
funds, and sovereign wealth funds. My testimony today 
represents the views of the AMI. AMI supports a mortgage 
solution that will help homeowners stay in their homes, rebuild 
equity, address affordability, and provide a new and fully 
vetted and underwritten FHA mortgage.
    The recent crisis demonstrates that the process of 
originating mortgages and securitizing those mortgages into 
marketable securities can and must be reformed to ensure 
greater transparency and integrity. In fact, the fact remains 
that, without a responsible and viable mortgage securities 
market, homeownership will be an unfulfilled dream.
    The delayed implementation of HAMP resulted in a lower-
than-projected number of permanent loan modifications. 
Investors and first leads have experienced a degradation of 
their position, while subordinate liens have been enriched in 
recent months. This has happened without benefitting the 
troubled homeowner who is still saddled with the excessive 
debt, and a mortgage far in excess of the home's value.
    Based on our expertise in the mortgage finance industry, 
and our experiences with recent foreclosures avoidance 
programs, I would like to make two important points today 
regarding the current HAMP program.
    First, there is a high risk of re-default, because 
calculations used to evaluate a borrower's application do not 
factor in the borrower's total debt obligation. Of the nearly 
170,000 HAMP permanent modifications, half of them are saddled 
with extraordinary amounts of total debt, which leaves very 
little income to pay for necessities, such as food and 
clothing.
    Second, the current mortgage modification program permits 
trial loan modifications on the HAMP without any income 
verification. The AMI endorses the changes in June that will 
require income verification prior to qualifying for a trial 
modification.
    In our view, the most important impediment to the success 
of any program is the conflict that exists when bank-owned 
servicers hold second-lien mortgages. The four biggest banks 
service approximately 40 percent of our Nation's mortgages, and 
hold roughly $419 billion of second liens on their balance 
sheet as of December 31, 2009. Under temporary loan 
modification programs, banks have been able to defer the 
recognition of losses on the second lien portfolios. In fact, 
the current program actually improves the cash flow available 
to the second mortgage, at the expense of the first.
    For over a year, mortgage investors have advocated that any 
successful solution to our housing crisis must address two key 
components: affordability; and negative equity. Everyone must 
share the burden.
    Madam Chairwoman, we mortgage investors are willing to 
forgive principal at their expense, allowing borrowers to re-
establish themselves and stabilize their housing situation. But 
solutions cannot be a windfall for certain stakeholders at the 
expense of others. Relief must come from significant principal 
forgiveness on both the first and the second lien, in 
connection with the refinancing of the overextended homeowner 
into a new low-interest mortgage.
    AMI supports the framework of the FHA's new short 
refinancing program for homeowners who owe more on their 
mortgages than their home is currently worth. Taxpayers are 
protected, because investors are using their money to reduce 
principal, while homeowners must qualify for a fully 
underwritten FHA refinanced mortgage.
    In order for the program to work, Treasury and FHA must 
specify its details and hold all parties accountable for its 
implementation. Our fear is that these details could easily be 
overlooked.
    For example, it is unclear whether a servicer can approve a 
reduction in the first lien, and then have the holder of the 
second lien opt out, avoiding principal reduction. This is 
problematic because it is completely counter to the needs and 
the interest of the homeowner, ignores the priority of liens, 
and results in an unjust enrichment of the bank's second liens 
position.
    This situation is not only bad for investors now, but 
projecting forward, investors in the mortgage finance 
marketplace will be reluctant to invest in mortgages because of 
this additional risk. This risk will ultimately result in 
increased borrowing costs for future home buyers.
    In conclusion, mortgage investors believe that the 
Administration's newly announced program for principal 
reduction leading to an FHA refinance program is an important 
step forward, and can be a permanent solution to the 
homeowner's problem. The Nation's foreclosure crisis must be 
solved by addressing both the problem of ability to pay and 
willingness to pay. With the current lack of detail, investors 
are extremely worried there are significant execution risks to 
the program.
    Madam Chairwoman, in order to ensure the program's success, 
the participation of both first and second lien holders is 
critical. Rebuilding the mortgage market of the future will 
only be more difficult, as long as the priority of liens is not 
respected. Investors will hesitate before investing the capital 
necessary to jumpstart consumer lending.
    Thank you for the opportunity to share our views.
    [The prepared statement of Mr. Fiorillo can be found on 
page 90 of the appendix.]
    Chairwoman Waters. Thank you very much. Mr. Andrew--is it 
``Jakabovics?''
    Mr. Jakabovics. ``Jakabovics.''
    Chairwoman Waters. ``Jakabovics?''
    Mr. Jakabovics. Yes.
    Chairwoman Waters. Okay, thank you.

STATEMENT OF ANDREW JAKABOVICS, ASSOCIATE DIRECTOR FOR HOUSING 
    AND ECONOMICS, CENTER FOR AMERICAN PROGRESS ACTION FUND

    Mr. Jakabovics. Thank you very much, Madam Chairwoman, and 
Ranking Member Capito. It's an honor to be here today to 
discuss with you the recently-announced changes to the Home 
Affordable Modification Program, as well as the program's 
successes and failures to date. I will share my analysis of 
those changes, as well as recommendations for further action.
    Through the end of March, approximately 1.2 million 
homeowners have been offered trial modifications under HAMP, 
but only 230,000 have successfully negotiated the seemingly 
Byzantine process for getting into a permanent modification. 
While there remain significant operational barriers to HAMP's 
full-fledged success, the Administration's new initiatives are 
likely to bring relief to an additional subset of homeowners 
struggling to pay their mortgages.
    In moving to offer underwater but otherwise creditworthy 
borrowers an FHA refinancing, and in bringing principal write-
downs into the HAMP modification process, the Administration is 
attempting to tailor its response to address the current 
problem of prime loans going bad. There are nearly a million 
more prime loans that are seriously delinquent or in 
foreclosure than subprime loans.
    Writing down the amount of outstanding mortgages to bring 
them in line with the current values of the properties provides 
an opportunity to create the conditions for homeowners to keep 
paying their mortgages over the long term, while minimizing the 
walk-away risk that threatens their neighbors' financial 
health. Since the housing crisis began, we have argued that the 
best solution has been to restructure mortgages to reflect the 
current property values. And, indeed, the new FHA program is 
essentially a modern version of the New Deal's Home Owners Loan 
Corporation, which helped homeowners in the 1930's weather the 
Great Depression.
    Commissioner Stevens, in his testimony, laid out the 
details of the FHA program, so I just want to touch on a few 
reasons why I believe it is an important step forward.
    Given the much larger losses that lenders and investors 
face if borrowers in these underwater properties defaulted, 
cash in hand equal to 97.75 percent of value may be 
sufficiently attractive to allow these short refinancings to 
proceed. I would also note that this is actually a sweeter deal 
than they got under the Home Owners Loan Corporation, when they 
only got paid out $.80 on the dollar.
    The new FHA refinance program will allow existing 
mortgagees to retain almost a fifth of the property's current 
value as a junior lien on the property, effectively giving them 
some upside beyond the cash in hand. Realistically, this 
program will likely help borrowers with a first lien only, 
given the challenges that we have already heard about--around 
extinguishing seconds.
    In addition to the short refinances through FHA, principal 
reductions will be promoted in the HAMP waterfall. While 
current HAMP allows for principal reductions, the NPV test will 
now be run a second time to calculate the value of a 
modification that includes the principal write-down. The 
results of two NPV tests will be compared so that servicers 
will see the value of doing a write-down where appropriate. 
Principal write-downs will remain optional, even when the NPV 
results show it to be more valuable.
    But servicers' existing legal obligations to lenders and 
investors to get the best possible returns from modifications 
should--and I emphasize should--make it difficult for servicers 
to choose the standard HAMP modification, when the principal 
write-down alternative yields better returns under the same NPV 
run. Unfortunately, the lack of transparency around servicers' 
activities makes it difficult, if not impossible, for investors 
to know if servicers are leaving money on the table by not 
doing the write-downs.
    Principal write-downs will probably actually be more 
valuable, compared to the current HAMP modifications, because 
of the reduced re-default risk from a lower LTV, compared to 
the standard waterfall. Moreover, the program incentivizes 
borrowers to remain current in the modified loans, because the 
forgiveness will be phased in over 3 years, as long as the 
borrower does remain current.
    As with the FHA short refinancing, this policy's success 
will also likely be determined with the ability to modify 
second liens or eliminate them. And if 2MP proves ineffective 
at eliminating those liens, it is unlikely that the first liens 
will be written down.
    Crucially, neither Fannie Mae nor Freddie Mac has issued 
guidance to their servicers indicating that they are going to 
participate in the principal reductions when the NPV test shows 
them to be more valuable. But nearly 60 percent of all 
modifications to date have been made for GSE loans. Adopting a 
preference for principal reduction by the GSEs would ultimately 
benefit the enterprise's bottoms lines, and by the extension of 
taxpayers. And Treasury and FHA must direct the GSEs to 
participate, and certainly congressional pressure in that 
direction would be welcomed.
    Another facet of the changes to HAMP is assistance for 
unemployed borrowers. But in the interest of time, I will refer 
you to my written testimony for my comments on that element.
    But looking at HAMP in total, the biggest barrier to the 
program's success has been servicers' ability to quickly and 
accurately modify loans. And while Alys's testimony was focused 
on many of the outstanding issues, I want to use the remaining 
time that I have to strongly urge Treasury, with congressional 
support, to adopt or develop a Web portal as a single point of 
contact for borrowers and their advocates, as well as 
servicers. This will speed the rate of implementation of 
changes to the program, which has been a frustration for 
everyone, as well as implementing changes to the NPV model, and 
would dramatically improve the overall throughput of the 
program.
    Compliance would also be much easier if Treasury developed 
and maintained a single point of contact for borrowers and 
participating servicers. Specifically, it would allow borrowers 
and their advocates to submit applications for modifications 
and allow people to know what their status is in the process. 
Servicers would securely access the applications for loans they 
control and would be able to quickly provide borrowers with a 
response. There are relatively few variables that servicers can 
change. So even the NPV tests could be run on this central 
platform, once borrowers and servicers have submitted their 
respective information. This also sidesteps the issue of 
servicer capacity.
    In the interest of time--I am actually out of time--I will 
look forward to any questions that you might have.
    [The prepared statement of Mr. Jakabovics can be found on 
page 97 of the appendix.]
    Chairwoman Waters. Thank you.
    Dr. Arnold Kling?

  STATEMENT OF ARNOLD KLING, MEMBER, MERCATUS CENTER WORKING 
      GROUP ON FINANCIAL MARKETS, GEORGE MASON UNIVERSITY

    Mr. Kling. Thank you, Chairwoman Waters, for the 
opportunity to testify. With your permission, I would like to 
submit my written testimony for the record, and speak to some 
questions that you and your colleagues raised this morning.
    One of the--both you and Mr. Cleaver expressed some 
frustrations with how this program is working. And my comment 
on that is keep in mind that this program is taking two 
business processes--loan servicing and loan origination--
combining them in a way that they have never been combined 
before, and redesigning them on the fly. So these are two well-
developed business processes that you are attempting to 
redesign on the fly from Washington, when they have 
historically been done at a very local level. Particularly the 
loan servicing; it's done on a case-by-case local level.
    I just don't think it's possible to do that effectively, 
and it doesn't surprise me that we are having frustrations and 
complaints. I think what we are trying to do is just too 
difficult to do from Washington. And that--it needs to be 
rethought, if for no other reason than that.
    Representative Capito, you mentioned the issue of finding a 
housing market bottom, and I think that is an important issue. 
Dean Baker referred to that. If we modify loans and we have not 
yet reached a bottom, what we are doing is setting borrowers 
and lenders up to fail, once again. And I would guess that 
approximately half of them will. A very large percentage will 
fail again.
    And so that--and I think we would be better off if we would 
put this housing crisis behind us. Trying to modify loans and 
keep the same borrowers in their homes means that the crisis is 
going to still be in front of us, and we may have another 
hearing like this in 5 years. Putting it behind us may be 
difficult and painful for some people. But I think, overall, we 
would be better to have it behind us, and allow the market to 
reach a natural balance of supply and demand, rather than have 
to guess where the bottom is.
    And that finally brings me to Mr. Green's question--isn't 
there a benefit to this program for other homeowners, the 
people who are not receiving modifications? And my answer to 
that is that's very questionable.
    Let's say I am in a neighborhood--and actually, my 
neighborhood does have a number of foreclosures--suppose that 
preventing foreclosures means that home values stay up for a 
while. That doesn't benefit me unless I happen to sell my home 
over the next couple of years. Because, presumably, in the long 
run, the market will reach its natural level whether there are 
modifications or not. So if I'm going to wait in my home for 8 
to 10 years, then it doesn't matter to me whether house prices 
are temporarily above their natural level or not.
    But if they temporarily raise prices by putting off 
foreclosures, at best what that means is that the people who 
happen to sell over the next 2 years will be lucky. And the 
people who happen to buy over the next couple of years will be 
unlucky. So I am thinking also of the people who would like to 
buy homes right now. And they deserve a chance to buy homes at 
the appropriate price. They shouldn't have to face prices that 
are artificially raised by these sorts of programs--or they 
certainly don't benefit from those programs.
    So, I think, overall, there--it's not clear that there are 
benefits for other people from these mortgage modifications. 
And keep in mind that people who have been paying their 
mortgages every month, it's not just that they have been paying 
their mortgages every month. They are taking the same capital 
losses that the HAMP borrowers took. In fact, they are taking 
more, because since they have paid their mortgages, they take 
the full capital loss, whereas somebody somebody whose mortgage 
is underwater can walk away from it, and the bank takes most of 
the loss.
    So, in dollar terms, the biggest losers are the people who 
have held on to their homes and made their mortgage payments. 
They have lost more in dollar terms than the people who have to 
go through foreclosure. So I think it's a pretty hard sell to 
say that they are the big beneficiaries of this program. And I 
will stop there. Thank you very much.
    [The prepared statement of Dr. Kling can be found on page 
105 of the appendix.]
    Chairwoman Waters. Thank you.
    Mr. Robert Story?

  STATEMENT OF ROBERT E. STORY, JR., CMB, CHAIRMAN, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Story. Chairwoman Waters, Ranking Member Capito, thank 
you for the opportunity to testify this afternoon. MBA members 
are committed to helping financially troubled borrowers retain 
homeownership and avoid foreclosure. Many are participating in 
the Administration's Home Affordable Modification Program, and 
all servicers for Fannie Mae and Freddie Mac loans are 
participating in HAMP.
    As we speak, servicers are working hard to implement the 
recent changes announced by the Administration. We are also 
working with Treasury to suggest improvements to HAMP, in order 
to increase efficiency and ensure better outcomes.
    During these trying times, servicers continue to hire 
staff, reach out to borrowers, and employ new strategies to 
keep people in their homes. According to Treasury, more than 
1.4 million borrowers have been offered trial modifications 
under HAMP, 1 million borrowers are in active modifications, of 
which almost 230,000 represent permanent modifications. An 
additional 100,000 permanent modifications are pending borrower 
acceptance. And servicers have substantially increased the pace 
in which the permanent modifications are being done.
    In addition to HAMP, servicers are providing their own home 
retention solutions. Since July 2007, HOPE NOW data shows that 
the industry completed an estimated 2.7 million propriety 
modifications. During the month of February 2010, nearly 96,000 
families received loan modification outside of HAMP. Combined 
with HAMP, a total of 148 permanent modifications were granted 
in February.
    Servicers are also engaged in modification and loss 
mitigation activities through FHA and VA. These are additional 
and important efforts by the industry and the government to 
help distressed borrowers.
    I would now like to turn to HAMP changes announced by the 
Administration. With the jobless rate near 10 percent, 
assisting unemployed borrowers must take priority. MBA fully 
supports the creation of a temporary forbearance program to 
address the unique circumstances of unemployed borrowers. 
Features outlined in the Administration's program are 
consistent with MBA's own recommendations represented to 
Treasury in February. That includes the recognition that 
borrowers should continue to pay a portion of their income 
toward their mortgage.
    We also support allowing different periods of forbearance 
to help ease financial institutions' concerns with the 
accounting and regulatory treatment of assets that remain 
delinquent for 6 months or longer.
    MBA recommendations have other important features that we 
hope are considered, as the Administration designs the details 
of the program. For example, there should be a source of loans 
to allow financial institutions to carry delinquent mortgages 
during the forbearance program. Servicers advance principal and 
interest payments to investors during this time, despite not 
receiving such payments from borrowers. They also advance funds 
to pay for the borrowers' taxes and insurance premiums.
    While the servicer ultimately gets reimbursed for most of 
these advances, the carry time and cost is substantial. This is 
especially true for non-bank institutions that must borrow the 
funds. Servicers should be given the tools to succeed, and a 
loan program that is repaid with interest would not cost 
taxpayers.
    MBA also recommends applying a cost sharing feature to 
offset the investor's risk of delaying foreclosure when a 
forbearance plan fails.
    Treasury announced an optional principal write-down 
component to HAMP. While MBA is concerned that this may 
increase delinquencies, we are not opposed to it, provided it 
remains voluntary. We urge the Treasury to monitor the program 
to gauge whether it is causing strategic defaults, and to make 
adjustments if necessary.
    One area of substantial concern is the announcement that 
servicers must re-underwrite all borrowers with modifications 
using the alternative net present value test. Given all the 
concerns about server capacity, this is a burden that will not 
yield the results anticipated. We suggest limiting such reviews 
only to borrowers and loan products that lien holders deem 
eligible for principal reduction.
    With respect to FHA refinance and modification 
enhancements, the new rules will make it more attractive for 
underwater borrowers to refinance into affordable mortgages. 
MBA also supports the incentive payments proposed by Treasury.
    Finally, on the important subject of second liens, the 
Administration's changes are likely to make modifications more 
attractive. The fact that the largest servicers are 
participating will have a positive impact on the number of 
borrowers receiving help. The 4 largest banks hold or service 
$427 billion in second liens, representing approximately 60 
percent of outstanding second mortgages.
    Chairwoman Waters, HAMP is a critically important effort 
that is assisting hundreds of thousands of homeowners. We hope 
to continue working with the Administration and this 
subcommittee on successfully implementing the new programs so 
that we can help the maximum number of financially distressed 
homeowners. Thank you.
    [The prepared statement of Mr. Story can be found on page 
118 of the appendix.]
    Chairwoman Waters. Thank you.
    Mr. Alan White?

  STATEMENT OF ALAN M. WHITE, ASSISTANT PROFESSOR, VALPARAISO 
                    UNIVERSITY SCHOOL OF LAW

    Mr. White. Thank you, Chairwoman Waters, Ranking Member 
Capito, and members of the committee, for this opportunity to 
share some thoughts with you about the HAMP program and the 
foreclosure crisis more broadly.
    I think at this point, the HAMP program overall can only be 
judged a failure if we consider the two overarching goals that 
this program obviously should be serving. The national 
foreclosure crisis means that at this point we are looking at 
foreclosures that are approximately quadruple their historical 
level, in unprecedented historical levels. So the first goal of 
this program, obviously, is to reduce the number of 
foreclosures. And that has not been achieved.
    And the second--I think equally important--goal that we 
need to keep in mind is to bring down the overall level of 
mortgage debt that is hanging over the American consumer. 
Mortgage debt, in line with housing prices, experienced a huge 
bubble in the past 10 years, and went from something like $5 
trillion to almost $11 trillion, a level of debt that's just 
simply not sustainable for the American homeowner, and that has 
all sorts of consequences for the economic recovery that we're 
all hoping for.
    So, I think any intervention using taxpayer funds should be 
designed to achieve these two goals of reducing foreclosures 
and hopefully what I call the deleveraging of the American 
homeowner.
    If we look at the level of foreclosures and modification 
activity over the last year, as far as I can determine, the 
HAMP program thus far has been a negative. It's important to 
keep in mind that, prior to the announcement of HAMP last 
March, the mortgage industry, servicing industry, was 
voluntarily modifying about 100,000 to 120,000 mortgages each 
month. The largest number reported so far, the number reported 
for the last month, for March, of HAMP modifications has been 
about 60,000. Even if we combine HAMP modifications with the 
other modifications servicers are doing completely outside of 
HAMP--which raises some separate questions--I think we are just 
now returning roughly to the level of modification activity we 
saw a year ago that, as I say, was being done entirely without 
taxpayer subsidy or incentive. And this is troubling.
    Obviously, as other speakers have mentioned, setting up 
this program is a daunting task. It has involved huge 
administrative problems. But it still seems troubling that, at 
the end of a year, the overall level of modification activity 
has not risen. And I think it's also important to compare that 
number to the number of new foreclosures that are being filed 
every month. And that's about 200,000.
    So, at this point, we are trying to bail water out of a 
bathtub, when there is water pouring in at about twice the rate 
that we're getting the water out.
    And I think there are a number of reasons that HAMP has not 
produced an increase in modification activity and a reduction 
in foreclosures. I think, in hindsight, it may have been overly 
prescriptive in the types of modifications and exactly what was 
expected of servicers. It might make sense at this point to 
think about simply providing incentives and rewards for 
servicer performance, rather than specifying so prescriptively 
what type of modifications need to be done.
    And in that respect, I think it's interesting that we still 
have about half of all modifications being done outside of HAMP 
without HAMP subsidies, and, in many cases, better quality 
modifications.
    For example, when we look at principal reduction, so far I 
think only about one percent of all HAMP modifications have 
involved any actual write-down of principal. Meanwhile, 
something like 10 to 20 percent of propriety modifications done 
by lenders without HAMP subsidies have included principal 
write-downs. A lot of those may be option ARMs, they may be 
investor loans. There may be reasons for the differences. But I 
think it would be important, going forward, to look at why it 
is that servicers think that they can have greater success 
outside the HAMP program guidelines.
    I do also want to briefly mention what's mentioned at 
greater length in my written testimony, that there is a serious 
issue with servicer performance under the HAMP contracts. And 
while participation in HAMP is voluntary, once servicers 
participate, they have mandatory contractual obligations that I 
think it's pretty clear at this point they are falling very 
short of meeting.
    I cite, among other things in the testimony, the HAMP call 
center report that gives statistics on the number of borrower 
complaints about servicer activity, including such things as 
5,000 people reporting that their documents have been lost, and 
so forth. And I think there is more than anecdotal evidence at 
this point that servicers are not meeting their obligations, 
and Treasury really ought to be doing something about that. 
Thank you.
    [The prepared statement of Mr. White can be found on page 
128 of the appendix.]
    Chairwoman Waters. Thank you very much. I will yield myself 
5 minutes for a few questions.
    First to you, Mr. Baker. You talked about a rental program 
possibility allowing homeowners who are defaulting or who have 
defaulted on their loans to work out some agreement with the 
mortgage holder for rental possibility. Are you referring to 
the banks coming up with rental programs where they now have to 
set up a situation inside the bank or with a subsidiary or a 
contractor to manage rental properties for them until they can 
go back on the market? What are you referring to?
    Mr. Baker. Well, the idea would be that you would 
temporarily change the foreclosure process, so that homeowners 
who are facing foreclosure--and you could put a cap on the 
house price that applied to the bill put forward by 
Representatives Grijalva and Kaptur puts the cap at the median 
house price--that they would have the right to stay in the 
house as a renter, paying the market rent. It would be up to 
the bank, how they chose to do that.
    So, you would have--as part of the foreclosure process, you 
would have an appraisal where the appraiser would determine 
what the market rent is for a house at that point in time. And 
whether the bank opted to rent directly, whether they opted to 
contract with the management agency, that would be up to the 
bank. What would not be up to the bank is whether or not the 
person got to stay there as a renter. That would be a right 
given to them under the law for whatever period of time. Again, 
I believe it's 5 years--
    Chairwoman Waters. Who would be responsible for the upkeep 
of the property, for capital improvements, etc., etc.?
    Mr. Baker. That would be subject to the landlord-tenant 
laws that are in--it's the bank's property, the bank owns--the 
investor owns the property, so it is their property. But the 
specifics, in terms of have they done adequate maintenance, 
that would be dependent on the landlord-tenant laws in the 
jurisdiction.
    Chairwoman Waters. So your suggestion is that, with Mr. 
Grijalva's legislation--I have not seen it--that we would 
mandate a program that would cause the banks to have to allow 
the person to stay in their property under some kind of market 
rate rental agreement period.
    Mr. Baker. That's right, and the idea is this would be a 
temporary period, recognizing the extraordinary circumstances 
that we're faced with in the housing market today. And the idea 
is that, once that was in place, it immediately provides help 
for everyone in the situation, without having to go through a 
complex process.
    Chairwoman Waters. Ms. Cohen, you pointed out several 
weaknesses in the HAMP program, and talked about alternatives, 
and talked about support to my bill dealing with servicers--a 
number of issues involved with this mess that we're all in.
    I agree with you, certainly, that we need to regulate the 
servicers. There is a lot that we have all learned, as we have 
had this meltdown, about the servicers, who they are and what 
they do, etc.
    But what would be your basic foremost recommendation for 
dealing with this foreclosure problem? Mr. Baker just talked 
about rental agreements that would be mandated on the lenders, 
the mortgage holders. Do you agree with that? Or do you think 
that perhaps principal write-down would be more effective? What 
would be your one big recommendation that you would have to 
deal with this issue?
    Ms. Cohen. First of all, I read Mr. Baker's testimony, and 
I think his proposal is very interesting. It is important to 
consider it, and for Congress to take a close look at it. That 
proposal may have an effect on people who are staying in their 
homes. It is, to some extent, focused more on people who are 
unable to stay in their homes.
    One question is, what directly can we do to help people 
stay in their homes? Principal reduction is an issue that is 
focused on folks who can and cannot afford their mortgages. And 
the foreclosure crisis is primarily being fueled by people who 
cannot afford their mortgages. And so, I think it's interesting 
to think about what Professor White said, which is in the end 
what we care about is the result and not the details.
    And so, the reason that requiring loan mod offers and 
allowing cram-downs in bankruptcy matters, is because it's the 
result. And we don't necessarily need to say it looks like this 
or it looks like that. HAMP is well-intentioned in looking at 
DTIs and at other things. But in the end, what we really want 
is for people to be given a chance to stay in their house 
before they're put in foreclosure. And right now, that isn't 
happening.
    Chairwoman Waters. Thank you. I think it was you, Mr. 
Story, who gave recognition to our frustration and some of the 
comments that were made by Mr. Green, myself, and others. Was 
that you, Mr. Story?
    Mr. Story. That wasn't me.
    Chairwoman Waters. Was it Mr. Kling? Who was it?
    Mr. Kling. That was me.
    Chairwoman Waters. Oh, okay. Thank you very much. Mr. 
Kling, you correctly identified the frustration that we have 
obviously exhibited here today. If we were to come up with a 
way of dealing with this that was simpler, that would help to 
take care of more of the mortgage holders out--more of the 
homeowners out there who were in trouble, etc., do you think we 
should scrap all of this, the HAMP program and the changes that 
are made to the HAMP program with the refinance possibilities 
with FHA and the five cities that--five States that now have 
available to them a program for unemployed people, and on and 
on and on?
    Do you think that somehow we need to get a handle on a 
program that is clear, concise, and more helpful to more 
people, and scrap all of what we have been attempting?
    Mr. Kling. Thank you, Congresswoman Waters. I guess that 
would be my instinct, because again, loan servicing and loan 
origination are complex business processes that are very 
difficult to redesign on the fly. And there--you are constantly 
going to run into things that you didn't expect, issues that 
you didn't have. And every time you change something to fix one 
problem, some new problem will crop up.
    So, searching for simplicity, I think, is a good idea. It 
could be that Dean Baker's idea simplifies things for lots of 
people. It could be that just writing a check to troubled 
homeowners for a certain amount, which they could use for 
moving expenses, if they have to move, for making up their 
payments if they're only a little bit behind, that's a much 
simpler task than trying to build a whole new servicing 
origination process on the fly. That's just my opinion.
    Chairwoman Waters. Thank you very much. Mrs. Capito?
    Mrs. Capito. Thank you. Mr. Kling, I would like to follow 
up with you. One of the issues that I think--when we had Mr. 
Stevens in before, and Mr. Donovan--was trying to find the time 
and when there is going to be less Federal involvement through 
Fannie, Freddie, or FHA in the housing market.
    And I am curious to know if you think that the next 
iteration of this program obviously involves FHA more. And 
between the three of them, they continue to dominate the 
market, I don't know, 90 percent, or something of that nature. 
How do we inject and get more private capital back into the 
housing market?
    Mr. Kling. So your question is, how do we get more private 
capital back into the housing market?
    Well, certainly, if you have Freddie Mac and Fannie Mae 
using the government's borrowing rate to set rates, there is no 
way that there will be private capital in the market. So 
something has to be done to phase Fannie Mae and Freddie Mac 
out of the market to give room for private capital to come in. 
And this is one of those things that I am sure everyone wants 
to do, but not now. And now is never the time when you're going 
to want to do it.
    But if you--one approach would be to take the loan limits 
for Freddie Mac and Fannie Mae, and over, let's say, a period 
of 3 years, bring them down by a couple hundred thousand a year 
and get to the point where they're no longer originating loans. 
You eventually bring the loan limits down to zero. And then 
you--that would allow private capital to work its way into the 
housing market.
    Mrs. Capito. Thank you. Mr. Story, in your testimony you 
mentioned that servicers are offering their own modification 
and home retention solutions to borrowers who might not qualify 
for Federal programs. What do you think some of the reasons are 
why a borrower might not qualify for some of these Federal 
programs, but still qualify for a servicer program?
    Mr. Story. Some of the reasons are that the debt-to-income 
ratios are more flexible in the non-HAMP programs. I think 
that's probably one of the biggest reasons why they are going 
outside that program.
    Mrs. Capito. Do you have any--
    Mr. Story. We have some more flexibility, in terms of what 
the payments may be.
    Mrs. Capito. Do you have any sense of how it's breaking 
out, in terms of percentages, people going to the Federal--the 
numbers that we heard are pretty--I think maybe that was--I 
can't remember who it was--it's the end of the day here, but 
somebody had said the numbers being serviced by HAMP, and then 
the numbers being serviced by servicers outside of these 
programs is exponentially larger. Was that you, Mr. White, who 
had those figures?
    Mr. White. Yes, I think it is actually about half and half.
    Mrs. Capito. Half and half?
    Mr. Story. We can probably get you better numbers. We will 
check to see what we have, in terms of the numbers.
    Also, FHA and VA aren't included in HAMP, either. So that 
sometimes makes a difference there, as well.
    Mrs. Capito. Until HAMP part two--
    Mr. Story. Yes.
    Mrs. Capito. --then FHA is in that, which brings me to 
another--I will make a comment. If anybody wants to comment on 
it--and I think both the chairwoman and I mentioned this in our 
opening statements, that the capital reserve issue with FHA--
and here we are, creating another avenue for access to FHA when 
we have a time when FHA is facing some problems financially, 
even though there have been some reactions to that by the 
Administration to try to help that, and we are trying to work 
on our own solutions. But at the same time, to me, that's 
another red flag of why we really need to scrutinize this 
particular effort.
    Does anybody have a comment on that, on the FHA involvement 
with this? Yes? We will go with Mr.--if I can say his name--
    Mr. Fiorillo. It's not that hard. We had a mayor in New 
York--
    Mrs. Capito. Okay. Both of them.
    Mr. Jakabovics. Okay.
    Mrs. Capito. So I will go with Mr. Jakabovics first.
    Mr. Jakabovics. Close enough. So, I think that you have to 
recognize that the piece that FHA would be responsible for 
under the short refinancings that are being allowed under the 
program are actually potentially less costly to FHA than their 
standard activities, because the first loss position would be 
held by TARP. So, my understanding--
    Mrs. Capito. Wait a minute. That's the taxpayer.
    Mr. Jakabovics. Right, but--
    Mrs. Capito. TARP is the taxpayer.
    Mr. Jakabovics. But it's a separate piece, and that money 
has already been set aside, so you're not further risking the 
capital. You asked about the capital ratios and capital--
    Mrs. Capito. Right, on--
    Mr. Jakabovics. No, I understand. But the other thing 
that's important is you're bringing these loans back down below 
100 percent loan to value. And all the evidence that's out 
there is that the risk of walkaway exists when the loan is 
worth a lot more than the home.
    So, I think that under the program, if you qualify, so 
you're creditworthy, you have to have been current on your 
mortgage to get into the FHA refinancing, so it's not people 
who have been delinquent. So if people can still qualify for 
the refinancing, they are choosing to refinance into a more 
affordable option.
    So, if they are otherwise going to re-default, or default, 
I think that by allowing them to refinance into FHA, it's 
similar to the HARP program, in terms of allowing the Fannie/
Freddie, but without the write-down in loan-to-value. So I 
think there is a lot of benefit for the FHA component.
    Mrs. Capito. Okay. Mr. Fiorillo?
    Mr. Fiorillo. Similar theme. What you're doing is basically 
taking a homeowner who is above 115, taking him down to 115, 
but only asking FHA to guarantee the 96.5 percent. So the loan 
has been performing, the loan has been under-written, all of 
the documentation has been filled out. They are actually 
getting a better loan than what they have had.
    And, to be perfectly honest, after--
    Mrs. Capito. Who is getting a better loan?
    Mr. Fiorillo. FHA.
    Mrs. Capito. Well, they didn't have the loan before.
    Mr. Fiorillo. Well--but they are getting a loan that's 
probably better than one walking in off the street.
    And, more importantly, in 35 years there have been enough 
FHA loans to understand and to know what the rules are. So if 
you can qualify--they're very stringent. So if you can qualify 
at 96.5 percent, which is what the goal is, it's probably a 
better loan than what, again, somebody who would be walking in.
    And to answer your question about is there one simple way 
to handle this problem, over a year ago several investors sat 
around Treasury and said HAMP, help for homeowners can work, 
and help for homeowners is one loss, one time. The problem with 
the program was you had to extinguish seconds, and there was 
nobody willing to do that. But that's a simple way to handle 
it. But the losses could be pretty dramatic on the bank balance 
sheets.
    Mrs. Capito. Thank you.
    Chairwoman Waters. Thank you. Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairwoman. I just have one 
question, actually. Home prices have been devalued in my 
community in Missouri 30 percent in some areas and higher. I am 
just wondering, Mr. Kling, if we let the market determine who 
goes into foreclosure and eventually loses their home, do you 
have any view of what would happen to neighborhoods that are 
already devastated? And when you have a large number of 
foreclosures, does that not reduce the value of everyone's 
home, including the people who make their payments on time 
every month?
    So, while we may say, you were bad, you have a bad loan, 
you're not a good person, and so you deserve to lose your home, 
what about the next door neighbor, and the neighbor on the 
other side, and on down the street? I live in a--our church is 
in a neighborhood where there are probably five foreclosures. 
Everybody is in trouble in the neighborhood, even the people 
who go to work every day. What is the solution to that?
    Mr. Kling. Well, I don't think the solution is to say that 
people are bad because they go into foreclosure and they're not 
because they don't. I think--I don't know if you're from St. 
Louis, I'm from the St. Louis area, originally, myself.
    Mr. Cleaver. No, I'm from the largest city.
    [laughter]
    Mr. Kling. But I now live in Silver Spring, and there are a 
lot of foreclosures in our neighborhood.
    I think it's possible that having loans in foreclosure--
that keeping people out of foreclosure would temporarily keep 
home prices above what they would be. And, as I said before, 
that would certainly benefit anyone who needs to sell a house 
right now.
    So, let's say I have made good on my mortgage, but I got a 
new job somewhere and I want to sell right now. And there are a 
bunch of foreclosures in my neighborhood. And, because of those 
foreclosures, when I sell I'm not going to get such a good 
price. And if you could prevent those foreclosures, I will get 
a good price.
    But that means that somebody who buys my house when I sell 
it, because I have a new job in a new city, is actually 
overpaying for it. And so, at some point they are going to pay 
the price for that. And I have seen that. I saw it in my 
neighborhood, some neighbors had sold at a peak that--probably 
the house sold for $200,000 more than what it's worth now, and 
I feel very sorry for those borrowers. So we are--
    Mr. Cleaver. I do, too, because I have a 3 year old who 
would not take that deal.
    Mr. Kling. Yes.
    Mr. Cleaver. That is not happening where we--
    Mr. Kling. Well, but--
    Mr. Cleaver. That's not happening in Kansas City.
    Mr. Kling. Right. The--I guess my point is it's a 
redistribution from people who have to sell now to people who 
are anxious to buy now. Or from--sorry, the--
    Mr. Cleaver. But you do understand that people are not 
selling because they can't even get their investment out of it.
    Mr. Kling. Yes, that's true. And they--in the short run, 
those people would be helped by anything that artificially 
raises house prices. But the people--but eventually the price 
is going to hit a market level.
    And if you--so, if I am somebody with more of a long-term 
horizon, that I'm in this neighborhood for 6 or 8 years, then I 
think what I would like is for my neighborhood to have people 
who genuinely own the home, who are not at risk of defaulting, 
I'm willing to have new immigrant families, other families, 
other people trying to climb the ladder come in and buy these 
foreclosed houses and live in them, and try to make their 
living, rather than tell those people, ``No, we need to keep 
these original home buyers in, and we need to artificially 
boost prices and keep them out of reach for you, in order to 
temporarily boost my house price.''
    There is no way we can make this all good, and make house 
prices go back up to what they were 2 years ago.
    Mr. Cleaver. But are you suggesting that it's not--if we 
just allow everybody who is on the precipice of foreclosure to 
go into foreclosure, that is not as bad as somehow trying to go 
through this very difficult, complicated process of trying to 
save homes?
    Mr. Kling. Again, there is no perfect solution. You can't 
bring those home prices back up to where they were.
    Mr. Cleaver. They will eventually get there, don't you--
    Mr. Kling. Eventually, they will go back to where they 
belong. And in the meantime, I do think the least bad option is 
to get the foreclosures behind us, get the crisis behind us, 
get people in those neighborhoods who can afford the payments 
because they're buying them at lower prices, and to have 
everybody in the neighborhood know that this isn't hanging over 
us, that there aren't these people who are on the precipice--
because they will stay on the precipice, if you keep them in 
there--but that everyone in our neighborhood is here for the 
long term. I think, ultimately, that actually could be better 
for the neighborhood.
    Mr. Cleaver. Okay. Mr. Baker?
    Mr. Baker. Yes. If I could just speak to that very quickly, 
because I think there is an important point to distinguish 
here, because I am sympathetic with this idea that prices have 
to adjust. I don't think you can keep a bubble inflated, and I 
don't think it's desirable.
    But I think there is a second point here, that the fact 
that you have a neighborhood that's subject to a lot of 
foreclosures, that fact itself lowers the prices. You have 
vacant homes that are havens for crime; they can be drug 
houses. That lowers the price. That's an artificial lowering of 
the price. I think we have every reason in the world to try to 
prevent that.
    So, I don't think we could maintain bubble prices 
indefinitely. I don't see any social value in trying to do 
that. There absolutely is a social value in trying to prevent a 
neighborhood from being run down because you have a lot of 
houses that are in this foreclosure process, where they are 
abandoned, boarded up, not properly maintained. And that, I 
think, is very much what Congress and this committee should be 
focused on.
    Mr. Cleaver. Yes. We are not doing it at the optimum level 
of success. But that's what we are trying to do. Thank you, 
Madam Chairwoman.
    Chairwoman Waters. Thank you very much. If I may, what Mr. 
Cleaver is referring to is what we are trying to do with the 
NSP program, neighborhood stabilization, where we have now 
funneled in about $6 billion. We're into a second round of 
funding.
    Unfortunately, most of the cities don't know how to use the 
money. They have not been able to implement the program very 
well. And we are going to hold some hearings on that, and we 
are going to try and get some technical assistance. Because 
you're right, we are too interested in maintaining some kind of 
stability and not driving down the prices further because of 
the foreclosures and the abandonment and all of the problems 
that go with that.
    Let me thank all of you for your patience today. It has 
been a long day. And I am very appreciative for the time that 
you have given to us. If I had my way, I would put all of you 
on this panel in a room, because I think you could come out 
with something that makes good sense. I have appreciated your 
testimony very much here today, and you obviously have given a 
lot of thought to this, and you understand very well what is 
and what is not happening with the HAMP program.
    I feel if we continue to go in the way that we are going, 
that we are simply going to further complicate the process and 
we are not going to be able to forestall foreclosures, or to 
maintain people in their homes in the way that we are going.
    So, I am hopeful that you will allow us to call on you. My 
staff has been here, listening very carefully and taking a lot 
of notes. And some of you traveled from afar, I know, and we 
can't ask you to keep doing that. But we can conference call 
with you and talk with you by telephone. And I think that we 
will continue to do that.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses, and to place their responses in the record.
    The panel is now dismissed. Do we have any written 
submissions for the record?
    [No response.]
    Chairwoman Waters. If not, the hearing is adjourned, and I 
thank you very much.
    [Whereupon, at 5:49 p.m., the hearing was adjourned.]























                            A P P E N D I X



                             April 14, 2010

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