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


 
       FORECLOSED JUSTICE: CAUSES AND EFFECTS OF THE FORECLOSURE CRISIS 
                                 (PART I & II) 

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                 DECEMBER 2, 2010 AND DECEMBER 15, 2010

                               ----------                              

                           Serial No. 111-158

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         Printed for the use of the Committee on the Judiciary


   Available via the World Wide Web: http://judiciary.house.govFOR 
                               SPINE deg.
















               FORECLOSED JUSTICE: CAUSES AND EFFECTS OF 
                  THE FORECLOSURE CRISIS (PART I & II)





















FORECLOSED JUSTICE: CAUSES AND EFFECTS OF THE FORECLOSURE CRISIS (PART 
                                I & II)

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

                                HEARING

                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                 DECEMBER 2, 2010 AND DECEMBER 15, 2010

                               __________

                           Serial No. 111-158

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

                               ----------
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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
MAXINE WATERS, California            DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
STEVE COHEN, Tennessee               STEVE KING, Iowa
HENRY C. ``HANK'' JOHNSON, Jr.,      TRENT FRANKS, Arizona
  Georgia                            LOUIE GOHMERT, Texas
PEDRO PIERLUISI, Puerto Rico         JIM JORDAN, Ohio
MIKE QUIGLEY, Illinois               TED POE, Texas
JUDY CHU, California                 JASON CHAFFETZ, Utah
TED DEUTCH, Florida                  TOM ROONEY, Florida
LUIS V. GUTIERREZ, Illinois          GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DANIEL MAFFEI, New York
JARED POLIS, Colorado

       Perry Apelbaum, Majority Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel

























                            C O N T E N T S

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                                                                   Page

                             HEARING DATES

Thursday, December 2, 2010
  Foreclosed Justice: Causes and Effects of the Foreclosure 
    Crisis (Part I)..............................................     1

Wednesday, December 15, 2010second date deg.
  Foreclosed Justice: Causes and Effects of the Foreclosure 
    Crisis (Part II).............................................   113

                                (PART I)
                December 2, 2010first date deg.

                           OPENING STATEMENTS

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Committee on the 
  Judiciary......................................................     2
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     4
The Honorable Steve Cohen, a Representative in Congress from the 
  State of Tennessee, and Member, Committee on the Judiciary.....     5
The Honorable Darrell Issa, a Representative in Congress from the 
  State of California, and Member, Committee on the Judiciary....     7
The Honorable Ted Deutch, a Representative in Congress from the 
  State of Florida, and Member, Committee on the Judiciary.......     8
The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Member, Committee on the Judiciary     9
The Honorable Mike Quigley, a Representative in Congress from the 
  State of Illinois, and Member, Committee on the Judiciary......    10
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Member, Committee on the Judiciary..    10
The Honorable Louie Gohmert, a Representative in Congress from 
  the State of Texas, and Member, Committee on the Judiciary.....    11

                               WITNESSES

Ms. Phyllis Caldwell, Chief, Homeownership Preservation Office, 
  United States Department of the Treasury
  Oral Testimony.................................................    13
  Prepared Statement.............................................    15
Mr. Edward J. DeMarco, Acting Director, Federal Housing Finance 
  Agency
  Oral Testimony.................................................    27
  Prepared Statement.............................................    29
Ms. Julie L. Williams, Chief Counsel, Office of the Comptroller 
  of the Currency, United States Department of the Treasury
  Oral Testimony.................................................    42
  Prepared Statement.............................................    44
The Honorable F. Dana Winslow, Supreme Court Justice, New York 
  State Supreme Court
  Oral Testimony.................................................    61
  Prepared Statement.............................................    63

                               (PART II)
               December 15, 2010second date deg.

                           OPENING STATEMENTS

The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Member, Committee on 
  the Judiciary..................................................   119
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.   120

                               WITNESSES

The Honorable Sheldon Whitehouse, a U.S. Senator from the State 
  of Rhode Island
  Oral Testimony.................................................   113
  Prepared Statement.............................................   117
James A. Kowalski, Jr., Esquire, Law Offices of James A. 
  Kowalski, Jr., PL, Jacksonville, FL
  Oral Testimony.................................................   122
  Prepared Statement.............................................   125
Thomas A. Cox, Esquire, Volunteer Program Coordinator, Maine 
  Attorneys Saving Homes Project, Portland, ME
  Oral Testimony.................................................   289
  Prepared Statement.............................................   292
Ms. Sandra D. Hines, former homeowner, Detroit, MI
  Oral Testimony.................................................   431
  Prepared Statement.............................................   434
Vanessa Fluker, Vanessa G. Fluker, Esquire, PLLC, Detroit, MI
  Oral Testimony.................................................   436
  Prepared Statement.............................................   438
Mr. Tom Deutsch, Executive Director, American Securitization 
  Forum, New York, NY
  Oral Testimony.................................................   443
  Prepared Statement.............................................   446
Mr. Christopher L. Peterson, Professor, S.J. Quinney College of 
  Law, University of Utah, Salt Lake City, UT
  Oral Testimony.................................................   499
  Prepared Statement.............................................   501

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement from Mortgage Electronic Registration Systems, 
  Inc. (MERS)....................................................   544


                          FORECLOSED JUSTICE:
                       CAUSES AND EFFECTS OF THE
                      FORECLOSURE CRISIS (PART I)

                              ----------                              


                       THURSDAY, DECEMBER 2, 2010

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:12 a.m., in 
room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Committee) presiding.
    Present: Representatives Conyers, Boucher, Jackson Lee, 
Waters, Cohen, Quigley, Chu, Deutch, Gonzalez, Sanchez, Smith, 
Coble, Goodlatte, Issa, Forbes, Franks, Gohmert, and Chaffetz.
    Staff Present: (Majority) Perry Apelbaum, Majority Staff 
Director and Chief Counsel; Susan Jensen, Counsel; James Park, 
Counsel; Reuben Goetzl, Clerk; and Zachary Somers, Minority 
Counsel.
    Mr. Conyers. Good morning. The Committee will come to 
order. We are going to begin by thanking our three colleagues 
who will not be returning to Congress next year for their fine 
and outstanding contributions to the Committee. The first is 
Rick Boucher who has been with us since he arrived in 1983. 
Actually, the third most senior Member on the Committee, who 
has served on Energy and Commerce simultaneously for most of 
that time. And he has always been able to be counted on for 
bringing to us a thoughtful perspective to many of the 
sensitive issues that are dealt with on the House Judiciary 
Committee.
    I have got a number of issues that he has championed: The 
Free Flow of Information Act, Satellite Home Viewers Act, he 
did a lot of work on the PATRIOT Act, and we have always been 
able to count on him for an honest evaluation of the many 
problems that we have dealt with. And his absence will be 
missed greatly. The next is Bill Delahunt from Massachusetts, a 
former prosecutor, who authored the Innocence Protection Act, 
has worked the last couple of congressional sessions on the 
Foreign Affairs Committee. He has championed equity state sales 
tax levies. And we remember him also for joining our other 
colleague, Mel Watt, who is not leaving, in creating the states 
rights caucus, and we had some interesting contributions there.
    And finally, Dan Maffei, who was only with us for one term, 
but he took the lead in saving hundreds of dealerships at 
General Motors and Chrysler, and he helped strengthen 
legislation to protect employees and retirees caught up in 
bankruptcies. Dan has a great opportunity, and he has clearly 
enjoyed being with us. We hope he can return. And I will yield 
to my Ranking Member, Mr. Smith, Lamar, for any comments he may 
want to make about departing Members.
    Mr. Smith. Thank you, Mr. Chairman. I really just want to 
echo your comments and sentiments, because I agree with you 100 
percent. Mr. Delahunt is not here and Mr. Maffei is not here, 
so I won't dwell on them to the extent that I might have 
otherwise. But I do want to single out Rick Boucher as someone 
who has been a friend over many years, someone who has worked 
with me, and I with him, on any number of issues, particularly 
those issues involving the subject of high tech and patent 
reform and telecommunications as well.
    He is an expert in many, many areas. And oftentimes to hear 
him speak about those issues is to hear an unwritten Ph.D 
thesis. And I often feel like it could be taken down and turned 
in as such. And we agree on so many issues. I won't mention the 
DMCA because there are so many other issues we agree on. But he 
will be missed as well, both his manner and his intelligence. 
But I do hope he stays in touch with this Committee and with 
you and me, Mr. Chairman, as well, because the friendship that 
we have with Mr. Boucher needs to continue and I am sure it 
will. And I will yield back.
    Mr. Conyers. Thank you very much, Lamar. Is there any other 
Member disposed to make a comment?
    Mr. Forbes. Mr. Chairman.
    Mr. Conyers. Yes, of course. The gentleman is recognized.
    Mr. Forbes. Mr. Chairman, I would just like to echo what 
both of you said about Rick Boucher, and that is with no slight 
to the other Members, but I have enjoyed serving with Rick over 
the years in the Virginia delegation. And everything the 
Ranking Member said about his demeanor and his expertise has 
been so true. We have had a great working relationship and a 
great friendship. And Rick, we just appreciate your service, 
not only to the country, but to the Commonwealth of Virginia.
    Mr. Conyers. Well, spoken like a true Virginian, Randy 
Forbes. If there are no other comments----
    Mr. Gonzalez. Mr. Chairman.
    Mr. Conyers. Yes, Judge Gonzalez, Texas.
    Mr. Gonzalez. And I will be brief. But I have had the great 
privilege of knowing Rick now and serving with him both on 
Judiciary and Energy and Commerce. It has been an incredible 
experience. One, he is such a good friend. But to have a friend 
who is also a mentor is just the most incredible combination 
you can have, especially a Member of Congress. You are going to 
be missed, Rick.
    But my sense is that hopefully we still will be in contact 
because we have so much to still learn from you on a continuing 
basis. Again, it has been great, and I just wish you were still 
coming back next year and standing with us as we all got sworn 
in, as we get sworn in in January. Thank you, Mr. Chairman. I 
yield back.
    Mr. Conyers. Thank you very much, Mr. Gonzalez. Today's 
hearing is entitled Foreclosed Justice: Causes and Effects of 
the Foreclosure Crisis. And I and Lamar Smith want to begin 
with some observations. You know, reports began to surface 
about fraudulent foreclosure documentation issues several 
months ago. In The Washington Post, the comment was, The 
Nation's Overburdened Foreclosure System is Riddled With Faked 
Documents, Forged Signatures and Lenders Who Take Shortcuts 
Reviewing Borrowers Files. We learned about the robo-signers 
that mortgage servicers utilize who sign off on thousands of 
foreclosure documents a month without ever verifying the 
accuracy of the information contained in those statements. And 
there have been other reports. Servicers seeking to foreclose 
on properties when they lacked proof of title to do so. 
Affidavits notarized outside the presence of the signer. 
Notarizations by individuals who had no legal authority to do 
so. Affidavits asserting conflicting facts signed by the same 
individual. Unfortunately, this problem is really not news to 
us.
    In 2007, the Commercial and Administrative Law Subcommittee 
of this Committee received testimony from one of the Nation's 
most respected consumer bankruptcy practitioners about the 
problems of mortgage lenders foreclosing without having 
documentation to support any entitlement to do so.
    So we are here today not just about faulty paperwork 
problems, and about the need to stop the flood of unnecessary 
foreclosures that is ravaging across this Nation, our 
neighborhoods, communities, towns and cities.
    And so we have three issues that are in the front of my 
mind as we proceed: What caused the current foreclosure 
problem? Initially, predatory lending practices and lax lending 
standards played a major role. Some lenders specifically 
targeted minority communities by pushing families into high 
interest rate mortgages that they could obviously not afford, a 
sort of form of reverse redlining.
    And so this practice devastated communities of color across 
the Nation and created a higher incidence of foreclosures. As a 
matter of fact, many economists have attributed the subprime 
mortgage practice as what triggered the whole bubble 
collapsing. For example, one out of every eight Wells Fargo 
loans in predominantly Black neighborhoods have gone into 
foreclosure compared with one in 59 such loans in White 
neighborhoods. As these subprime mortgages, of course with 
escalating interest rates, matured, homeowners couldn't any 
longer afford the mortgage payments and began to default. And 
as more homes fell into foreclosure, the prices of homes in 
surrounding areas obviously became more depressed.
    And what exacerbated all of this was, in some places, the 
massive loss of jobs. Take Detroit, for example, where with the 
collapse of the automobile industry this exaggerated and 
further emphasized home loss because a lot of people lost their 
homes because they lost their jobs and foreclosure was 
inevitable. But even prior to the recent recession, many 
working families found it difficult to meet their housing 
obligations. And after the latest recession, the bottom fell 
out of the housing market, the value of home prices fell even 
more precipitously in many areas of the U.S. Many families as a 
result are now struggling to repay mortgages for homes that are 
worth less than what they owe. They are under water. And the 
crisis has been compounded by the lending industry's steadfast 
refusal to modify home mortgages to save them from foreclosure.
    Ironically, many of the beneficiaries of the stimulus and 
TARP and bailout are still not lending money to small 
homeowners. As of last year, 2\1/2\ million homes were lost to 
foreclosure. Current projections estimate that by the time this 
foreclosure crisis abates, as many as 13 million homes will 
ultimately be lost to foreclosure. And yet on Wall Street, 
mortgage lenders and servicers and Fannie Mae and Freddie Mac, 
all of whom received taxpayer bailouts to the tune of billions 
of dollars over the last 2 years, have, in many instances, 
turned a blind eye toward homeowners in similar financial 
distress.
    Under every program established to date, homeowners must 
rely on the willingness of lenders to modify mortgage terms to 
save their homes. The HAMP, Home Affordable Mortgage--Home 
Affordable Modification Program, a $75 billion incentive 
program designed to encourage participating lenders to sign a 
contract with the United States Treasury to modify mortgages, 
has had few--well, I won't say they haven't had any result, but 
it is so modest it is hardly worth talking about. Out of many 
millions of homes lost or headed to foreclosure, half, less 
than half a million mortgages have been successfully modified 
under this program.
    We hear report after report that homeowners are drowning in 
bank bureaucracy with lost documents, unexplained rejections, 
and some of them just closed down, period, and vanished. You 
can't even get them on the phone, and they aren't even in their 
business location any longer. And so many homes are rushed 
through foreclosure without homeowners having a realistic 
opportunity to restructure the mortgage.
    Now, in light of these disclosures about inaccurate 
foreclosure documents, we have to ask, do these institutions 
legally have the right to foreclosure at all? And that has been 
answered by at least one Federal judge who will testify about 
the numerous documentation problems encountered at the trial 
court level.
    I will skip--let me conclude. The question that overrides 
the hearing is what can we do about the foreclosure problem and 
the continuing problem of high unemployment. And I will put 
some of those answers into the record. And thank you for your 
indulgence. And now I would like to yield to Lamar Smith of 
Texas, the Ranking Member of the House Judiciary Committee.
    Mr. Smith. Thank you, Mr. Chairman. The past few years have 
been a trying time for the U.S. housing market and American 
homeowners. The foreclosure crisis has had a devastating impact 
on the economy and regrettably has led to many Americans losing 
their homes. The crisis has its roots in poorly underwritten 
loans and unconventional mortgage products and has been 
compounded by high unemployment. Over the past few months, a 
new problem has emerged in the foreclosure crisis, the scandal 
that has erupted around the widespread mismanagement of 
foreclosure documents by lenders and mortgage servicers. The 
corners they have cut to keep up with the large and growing 
numbers of foreclosures are inexcusable.
    For many Americans, a house will be the biggest purchase 
they ever make and their single largest asset. Given the 
importance of the purchase of a home, only strict compliance 
with State foreclosure laws is acceptable. Accordingly, 
regardless of whether borrowers have defaulted on their 
obligations, they are entitled to due process in foreclosure. 
This scandal is about more than sloppy and careless foreclosure 
practices, it is about due process, private property rights and 
the rule of law.
    Fortunately, it appears the vast majority of defects and 
foreclosure documents that have been uncovered are technical in 
nature. The evidence indicates that despite the many 
unacceptable technical errors that have been made by and large 
foreclosures have only occurred in cases in which the 
homeowners were in default. In many instances, foreclosures 
take more than a year from start to finish giving the borrower 
ample time to discover any flaws in the documents supporting 
foreclosure. And in about one-third of all cases, borrowers 
have already abandoned their homes before their foreclosure 
process has even started. This does not minimize the 
seriousness of the industry wide mismanagement of foreclosure 
documents, but it does demonstrate that we must be careful in 
our response to the scandal.
    The housing market is showing some signs of recovery. We 
need to avoid setting the recovery back by overreacting. 
Foreclosure rules and requirements are determined under State 
law. For this reason, attorneys general in all 50 States and 
the District of Columbia have launched an investigation into 
the foreclosure documentation problems. And I thank the State 
AGs for their efforts. It appears that their investigations may 
result in a settlement with mortgage servicers leading to a 
nationwide fund to help any homeowners who did suffer wrongful 
foreclosures.
    However, the foreclosure document scandal has led some, 
including some Members of this Congress, to call for a 
nationwide moratorium on foreclosures. This approach, in my 
judgment, would be a mistake. All indications are that a 
nationwide moratorium would cause further harm to the already 
depressed U.S. housing market. Lenders and servicers must be 
held accountable for their mistakes, but we must also maintain 
the stability of the housing market. A moratorium on 
foreclosures will only serve to continue the significant 
uncertainty that this controversy has raised for potential home 
buyers and the housing market. At a time when purchases of 
foreclosed homes account for 25 percent of all sales, halting 
foreclosures could harm the economy and slow down the modest 
recovery further worsening unemployment.
    The current foreclosure crisis has been devastating. No one 
wants to see these people lose their homes. Foreclosures not 
only uproot families and cause hardship to borrowers, but they 
also depress community property values and result in severe 
losses for lenders and investors. But now is the not the time 
for a quick fix approach like foreclosure moratoriums or 
allowing modification of home mortgages in bankruptcy. These 
so-called solutions will only cause more harm to the country's 
economy, and, in fact, delay the recovery. We need to focus on 
restoring the integrity of the foreclosure process in a manner 
that protects homeowners and does not disrupt the functioning 
of the housing market. Thank you, Mr. Chairman. I yield back.
    Mr. Conyers. Thank you, Lamar Smith. Is there any Member 
that is inclined toward just a brief observation? Let's see. I 
will start off with Mr. Cohen of Memphis, Tennessee.
    Mr. Cohen. Thank you, Mr. Chairman. First of all, I want to 
say I appreciate your opening statement. And I concur on so 
many of your remarks and you have well gone through the history 
of the Committee and my Subcommittee, which I thank you for 
appointing me the Chair of, Commercial and Administrative Law, 
and the work we have done and we have looked at in this 
Congress. And I want to thank you for what you have done. I 
guess it is going to be the last Judiciary Committee for a 
while where you are Chairman. And you have been a great 
Chairman and shown great ability to work with both sides. And I 
have learned from you in my opportunity to be a Subcommittee 
Chair in doing that and trying to be fair to both sides and 
maintain. And I always think about how would Chairman Conyers 
handle this.
    And I am sure that Ranking Member Smith has done the same 
thing, and you prepared him well. With that said, the subject 
matter is one that is so important to the American people. And 
I think this subject matter is probably as much as anything 
else what caused the change in the elections that took place. 
The American public was angry that nobody worried about the 
integrity of the lending practices or the integrity of the 
bankers or the integrity of the Wall Street folks who bundled 
all these mortgages and securitized them and made them so 
complex that nobody knew where they originated and made the 
problem of dealing with these foreclosures so difficult.
    Rather than worry about the integrity of that process, we, 
and I did it too, because it was the right thing to do, and 
Chairman Frank said so appropriately, that it was what would be 
considered collateral benefit, that sometimes you have to help 
the people that caused the harm to help the whole system. And 
the collateral benefit went to Wall Street. But we put 700 and 
something billion dollars what was a bipartisan effort, 
President Bush's idea, and Secretary Paulson's, and a goodly 
number of Republicans and Democrats joined together to make a 
very difficult vote, but one that was necessary, but one that 
took care of keeping in place the people who perpetrated and 
were responsible for the foreclosure crisis, the unemployment 
situation in this country, and almost put this country and the 
world's economies under water.
    We took care of those people who got the major salaries and 
the major bonuses and are living just as well on Wall Street; 
we didn't put any of them in jail, none of them suffered in any 
way whatsoever for morally reprehensible conduct and who 
benefited financially, to a great extent, and whose lives are 
better than ever. And yet the homeowner and the unemployed who 
need unemployment insurance and who need help with their 
mortgages are considered to be detritus, they are considered to 
be collateral damage, and nobody has cared about them.
    But the fact is the Democratic Congress, and there probably 
were a few Republican votes with us, but predominately, this 
democratic Congress has cared and tried to help. I think that 
the modifications in bankruptcy is the answer, and it is so 
important, because nothing else has worked. And there needs to 
be somebody with a lever to help the homeowner, and nobody 
does. These people are the forgotten victims of all of this 
economic fallout. They are the purple hearts of this economy, 
and they are being forgotten about in terms of help with their 
foreclosures. And, yes, we might have to do some things that 
are unusual, but they have been put in this position by people 
who made subprime loans, who made deals that maybe they were 
too good to be true, but they made those offers and they were 
wrong and got people into loans and obligations greater than 
they could afford; they have lost their monies, their homes and 
a lot of excess cost that they otherwise would not have 
incurred if they were not lured into it.
    Many have lost their jobs. And now that they need 
unemployment benefits, there are people that don't want to give 
it to them. What you do onto the least of thee you do onto me, 
and for those who have given much, much is expected. And at 
this time when Christians and Jews and Muslims all should be 
thinking about what we are privileged to have and those that 
may not be privileged to have were not doing it. We are 
thinking about what this Congress has seen and this 
Administration has been seeing, wrongfully so, I believe, by 
the public, is caring about those that have much and taking 
care of those that caused the problem and keeping them in their 
high lofts in Wall Street, and not caring about the little 
fellow.
    And that is what we need to do. And we need to have 
modifications to mortgages and we need to act. And if we err, 
we need to err on the side of the people who have been injured 
and harmed. With that, I yield back the remainder of my time. 
And thank you, Mr. Chairman.
    Mr. Conyers. Thank you. Darrell Issa, would you care for a 
brief comment?
    Mr. Issa. I would, Chairman. Seldom do I get the 
opportunity to say to a Chairman of the other party how much I 
have enjoyed my tenure under your leadership, but today is one 
of those days. You have been fair, you have been firm and I am 
not going to miss you because I know you will be right there 
just one over. And I look forward to serving with you in the 
next Congress. With that, I will correct you on one thing in 
your opening statement, Mr. Chairman. You used the word 
billions for bailout, when, in fact, it is trillions. Freddie 
and Fannie, we took full faith obligation for those entities.
    So, in addition to the 140 or so billion that they have 
been handed permanently, we are on the hook for every penny, 
something that I hope in the legal terms here, in the financial 
terms that the Committee on Financial Services and on the 
money, follow the money terms of the Government Oversight 
Committee, we can bring that to an end and never again put full 
faith behind somebody else's profit taking.
    When we talk about Wall Street, let's remember Freddie and 
Fannie are Washington, D.C. Entities and not, in fact, Wall 
Street.
    Mr. Chairman, the Home Affordability--Affordable 
Modification Program, or HAMP, must be ended. In its 20 months 
it has proven to delay the inevitable, it has proven to raise 
hopes only to be dashed, it has proven to be able to 
renegotiate only to have foreclosure return at every bit as 
high a rate. Mr. Chairman, in the 20 or so months that HAMP has 
been actively negotiating, they have--of the nearly 3 million 
opportunities that would have been granted, about 1\1/2\ 
million have begun; 1,395 trials have started; 719,000 or 
roughly half have been rejected; and 483,000 have been made 
permanent, of which nearly 10 percent have already redefaulted 
and expect that to rise three to fourfold.
    During that period of time, the Obama administration, I 
believe in good faith, employed $22 billion in first time home 
buyer tax credits. Mr. Chairman, my Committee next door follows 
the money, this Committee follows the law. In this case, when 
you look at $22 billion in first time home buyer credits, 
without looking at what the true price of those homes should 
be, without those homes having reached their value, what we 
have done is had a new round of thousands or actually millions 
of new home buyers buy homes that are still sinking in value.
    We must not complain about the number of foreclosures or 
sales, we must, in fact, look at HAMP and other programs and 
say, what are they doing to increase, dramatically increase the 
number of foreclosures if appropriate and legally reviewed, 
which is certainly something that has not yet been proven that 
the banks are willing to do accurately at 100 percent level, 
but also the number of short sales, voluntary abandonments and 
the like.
    The truth is the sooner that a property is transferred to a 
new owner, able to make the payments, able to maintain the 
home, the sooner that the precipitous drop in value stops. 
Abandoned homes, homes in which a home has been rented to 
somebody who is no longer the owner and homes which are being 
stripped systemically because there is a profit taking even 
after the home is in foreclosure, all of this dramatically 
reduces the value of the home. Every neighborhood in my 
community in which a home is in foreclosure it can be seen from 
the outside that the maintenance has stopped, that the lawns 
have gone dry and the like.
    This is what we as Committees of jurisdiction must work on. 
The swift, accurate and legal execution of those mechanisms now 
existing or which may be created that will allow for the proper 
value of a home to be assessed, a homeowner able to meet that 
value, able to remain through some mechanism and those not able 
to quickly able to move on to appropriate housing, and that 
house, home, apartment, condo or the like, able to be put back 
into current maintenance.
    Mr. Chairman, the tragedy in America today are the homes 
that sit idle, abandoned or in foreclosure and in ruin. I hope 
that in the next Congress, we will continue to work on a 
bipartisan basis to recognize that is what is stopping 
America's value of homes from reaching bottom, reaching a point 
in which people can make sound investments and begin rising.
    I look forward to this hearing and to the next Congress of 
us working together to solve it. I thank the Chairman for his 
leadership, the Ranking Member for his leadership and yield 
back.
    Mr. Conyers. Thank you, Darrell Issa. The gentleman from 
Florida, Ted Deutch.
    Mr. Deutch. Thank you, Mr. Chairman. And Mr. Chairman, I 
would like to thank you first for the opportunity you have 
given me in the short time----
    Mr. Conyers. Excuse me. Mr. Quigley, do you mind if he goes 
ahead of you?
    Mr. Quigley. Yes.
    Mr. Deutch. Another opportunity that you and Mr. Quigley 
have provided in the short time that I have been here. I would 
also like to take time to recognize your tireless efforts on 
this issue. In reforming the foreclosure process and ensuring 
that it treats homeowners fairly and justly, this hearing has 
particular significance from my State of Florida with the 
second highest number of foreclosures in the country and where 
half of all borrowers owe more than their properties are worth.
    The collapse of our Nation's economy and the meltdown of 
the housing market have unveiled systemic problems in the 
mortgage foreclosure system. There is much blame to go around, 
but it is incumbent upon us to work on solutions so that 
foreclosures are processed in a fair and equitable manner. 
Railroading homeowners through foreclosure processes that are 
quickly cobbled together to relieve court dockets of mounting 
foreclosures can and, as we have seen, often do disregard due 
process rights of homeowners.
    In Florida, the State legislature has created foreclosure 
only in courts, meant to reduce the mounting backlog of more 
than 300,000 foreclosure cases by the end of 2011. In an effort 
to quickly relieve court dockets, however, evidentiary hearings 
are rarely provided to examine whether documents are correct or 
fraudulent. Hearing times are sometimes as short as 15 seconds; 
do you live in the home? Are you behind in your payments? And 
lawyers representing the banks often do not appear in court.
    In addition, while the foreclosure proceedings move forward 
a mediation process begins. The dual track system in Florida 
often confuses homeowners with court and mediation documents 
and creates confusion for the borrower, whether they need to 
have legal representation at the foreclosure process, in the 
mediation process or both. This is not limited to Florida, and 
I hope that we will have an opportunity to hear from the 
panelists today. This accelerated judicial review system is 
fraught with opportunities for fraud and for the due process 
rights of homeowners to be trampled.
    In addition, the Federal Government's loan modification 
programs fail to provide necessary incentives for banks to 
engage in the scope of large scale modifications that are 
necessary to fix the broken mortgage system. And with waves of 
foreclosures continuing to inundate the court system, Mr. 
Chairman, more needs to be done to keep people in their homes, 
to root out fraud and to protect the due process rights of 
people going through foreclosure.
    I think that is what we will have an opportunity to pursue 
here today. And I thank you for holding this hearing and giving 
me this opportunity, and I yield back. Thank you, Mr. Chairman.
    Mr. Conyers. The Chair recognizes a senior Member of the 
Committee, the gentleman from North Carolina, Howard Coble, who 
is a Ranking Member on at least one of the Subcommittees.
    Mr. Coble. Thank you, Mr. Chairman. And I will be very 
brief. I want to associate myself with the comments of the 
distinguished gentlemen from California when he used two four 
letter ``F'' words to describe you, and those words were firm 
and fair. And I reiterate what Darrell said about that. I also 
want to associate myself with Darrell's comments. He is still 
here. When he said----
    Mr. Issa. Keep talking.
    Mr. Coble. I am saying it favorably. When he said, Mr. 
Chairman, one of the problems, and we all know this, is 
abandoned or vacant houses. When houses lie vacant and/or 
abandoned crime inevitably follows. So we need to be aware of 
that. And I thank you again for your leadership, Mr. Chairman, 
and yield back.
    Mr. Conyers. The gentleman from Illinois, Michael Quigley.
    Mr. Quigley. Thank you, Mr. Chairman. Much has been said 
already, I won't add to that, except to, I guess, a message to 
the financial institutions. In my view, this recent round of 
mistakes only adds insult to injury. But like many Members, my 
office in Chicago, our district offices, try to help our 
constituents on a case-by-case basis, those who are dealing 
with foreclosure. And there are many not-for-profit 
organizations in my city of Chicago that try to help people as 
well.
    To sum up, how they have been treated by the financial 
institutions in their attempts to modify, they have been lied 
to, their information has been delayed, their information they 
received is inconsistent, incorrect and they have been abused a 
second time. This is often because of the trust involved here 
created an even worse situation for them because it has pushed 
the time clock well past their ability to catch up.
    So what I would try to suggest to those institutions, and 
they haven't even treated our staffs well, they haven't 
returned phone calls. My colleague, Jan Schakowsky, and I had 
to have a forced meeting in which we said to these banks you 
need to return our phone calls, you need to respect our 
constituents who are facing foreclosure. It has gotten that 
bad.
    So with all due respect, I would suggest that they need 
to--the respect that they get from the Members and the help 
they get from Congress, at the very least, ask them to treat 
our constituents, their clients, with that same respect. It has 
not happened, and I suggest that its time has come. Thank you.
    Mr. Conyers. Thank you. The Chair is pleased to recognize 
Bob Goodlatte, a senior Member of the Committee from Virginia.
    Mr. Goodlatte. Mr. Chairman, thank you very much, and thank 
you for holding this hearing on the Effect of Foreclosure, Its 
Causes and Effects in the Current Foreclosure Crisis. 
Currently, Federal, State and local law enforcement agencies 
are investigating the recently uncovered irregularities in the 
foreclosure processes used by some banks. These irregularities 
are very troubling and raise many questions about the validity 
of some foreclosures, as well as the validity of other chain of 
title transactions.
    Or it is important that we meticulously gather the actual 
facts so that we can best solve the problems, broad accusations 
not backed by the facts will do little to help those who have 
been harmed by these errors.
    In addition, any solutions to this problem should be 
tailored to the actual problem and not be so broad as to punish 
banks, including smaller community banks that likely play by 
the rules and completed the paperwork properly.
    And I would like to associate myself with the comments of 
the gentleman from North Carolina, Mr. Coble, who noted that 
there are ongoing problems. If we simply have this entire 
system break down, there are many related problems that occur 
in terms of vacant houses, in terms of disruption of our 
financial markets, in terms of other things, it is much more 
important that we get this focused on making sure that each 
individual who is the subject of a foreclosure is treated 
fairly than it is that we do something to put a halt, as has 
happened in some places, to the entire foreclosure process for 
any lengthy period of time. Because that is going to have a 
far-reaching impact, not just on the individuals directly 
affected, but by every homeowner in the country and everyone 
who desires to become a homeowner in the country.
    So I look forward to hearing from our expert witnesses 
today on this very important issue. And again I thank you, Mr. 
Chairman.
    Mr. Conyers. I thank you. We have with us on the panel, and 
we welcome them and commend them for their patience, Judge 
Winslow, Ms. Julie Williams, Mr. Ed DeMarco and Ms. Phyllis 
Caldwell, who is Chief of the Homeownership Preservation Office 
for the Department of Treasury. She is also a former president 
of the Washington area--the Washington Area Women's Foundation, 
President of Community Development Banking for Bank of America, 
and we welcome her as our first witness. And we would have--
without objection, we will have all the statements entered into 
the record. And we will start off Ms. Caldwell with you.
    Mr. Goodlatte. Mr. Chairman, I hate to interrupt, but it 
has been brought to my attention that your good friend and the 
gentleman from Texas, Louie Gohmert, wanted to say a few words.
    Mr. Conyers. Judge Gohmert, excuse me, I didn't--I wasn't 
aware. The gentleman from Texas is welcome and recognized 
before we begin our witnesses. Please, forgive me.
    Mr. Gohmert. Because of my warm feelings when I waved 
earlier, it may have been seen as a gesture of howdy. But also 
your recognizing me underscores what Darrell Issa had said, we 
have disagreed politically over many things, but you have never 
been anything but gracious as Chairman toward me personally, 
and I will always be grateful. Thank you, Chairman. I did want 
to address a couple of things. My friend from across the aisle, 
that, because there is more Democrats, actually sits right next 
to me on this side of the aisle, had commented about the Wall 
Street bailout. And I know that things were well intentioned, I 
know it was under the Bush administration and I know that 
President Bush was responding to the urgency pushed on him by 
Treasury Secretary Paulson as Paulson pushed for the Paulson 
poultice to solve his friends on Wall Street's problems, but 
what happens when this body steps in to interrupt the rules, to 
interrupt the laws and the system that has been put in place, 
it sends things spiraling.
    So I disagree with my friend from Tennessee, it was not 
necessary to spend $700 billion for a major green poultice to 
be placed on the problem on Wall Street. It arose because of 
greed. There were people taking advantage of the situation that 
had come up with a ridiculous way in which to gamble legally by 
putting together mortgages so you couldn't review the 
individual mortgages, you bought a package. And then you would 
buy insurance called credit default swaps. But we wouldn't 
require that you put anything aside in reserve to pay the 
insurance in the event the insurable event occurred. Those were 
all big mistakes. But you don't rush in and completely redesign 
the system by rewarding people's greed and say here is a green 
poultice to put on your hurt, you make them go through the 
system as it was set up called bankruptcy that was provided for 
in the Constitution and which was actually set in place when 
people realized the financier of the revolution, Mr. Morris, 
was in debtor's prison. And he was let out of prison once the 
bankruptcy laws were put in place.
    AIG should have gone through, most of their departments 
were making money, let them go through reorganize. Instead of 
rewarding Goldman Sachs for their greed, they should have gone 
through bankruptcy. We created a bigger problem when we rushed 
in and rewarded the greed there.
    Now, with foreclosure there are rules in place. And if 
people have not followed the rules in foreclosing, there need 
to be consequences that are set forth under the rules and in 
the court system. But by playing by the rules and not changing 
them after people have messed up, then we give certainty to the 
system and the economy heals much quicker than if we interrupt.
    And it brings me to what really drove me off the bench as a 
district judge into wanting to legislate. And knowing that 
legislating from the bench was improper, I left and ran for the 
opportunity. But I found myself sentencing more and more women 
who were single moms who were charged with felony welfare 
fraud. And when you look to the heart of every case, it seemed 
to arrive from the same thing, or derive from the same thing. 
And that was that the great society legislation was so well 
intentioned they saw single moms, deadbeat dads not 
contributing, so let's help these single moms, let's give them 
a check for these children they are having out of wedlock where 
the deadbeat dad doesn't help.
    What has happened over the last 45 years is we have lured 
young women out of high school into having babies only to find 
they can't live off that little check for one child, and then 
they would have another and another, the ones that would come 
before my court for welfare fraud. And they would finally 
realize, I am never going to get out of this rut, so maybe if I 
either sell drugs or if I get a job and don't tell the Federal 
authorities, maybe I can climb out of this hole. And it just 
seemed immoral that we, the well intentioned, as a Congress 
provided incentives to lure these young women away from their 
God-given potential into a rut from which there was no hope for 
most of them for getting out.
    We should not be satisfied with good intentions. We need to 
look at the bigger picture, give incentives to reach potential, 
not lure people into a rut of indentured servitude to this 
Congress and to this Washington. The same thing with 
unemployment. Given 99 weeks, my goodness, if you can't find a 
job in 26 weeks in the area in which you are trained, then the 
incentives ought to be to retrain for a place where there is 
jobs, not let you sit home dreading the consequences for a year 
and a half later where there is still no jobs. That seems 
immoral to me.
    And I am very concerned that we don't do something well 
intentioned with regard to foreclosures that end up doing more 
harm 40 years, 45 years from now, as I think we have done from 
the great society. We need to incentivize proper conduct, we 
need to enforce the fact that rules should be followed. And 
whether you are a foreclosure company, a mortgage company or a 
borrower, if you haven't played by the rules, then there is 
consequences.
    And close with this example. A stockbroker said, or a 
stockbroker friend of his from California told him he needs the 
government to step in because he is going to lose his home. He 
has a $700,000 home and he can't make the payments. He said, 
well, we make basically the same thing, how can you afford a 
$700,000 home? He said, well, we had bought one before on a 12-
month note, interest only at the end of the 12 months, and we 
could turn it and make a nice profit. So we did it with this 
one and now we can't make the interest payments and we are 
about to lose our home if the Federal Government doesn't step 
in.
    They should have bought a $300,000 or $400,000 home instead 
of overstepping, and I don't think Congress should step in and 
help this guy keep his $700,000 home. We need to buy within our 
means, this Congress needs to act within its means and I think 
the world will be a better place because of it. Thanks for 
indulging me, Chairman.
    Mr. Conyers. Ms. Caldwell, you are still the first witness 
at this panel. And we are pleased that you will start off our 
discussion.

      TESTIMONY OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP 
 PRESERVATION OFFICE, UNITED STATES DEPARTMENT OF THE TREASURY

    Ms. Caldwell. Thank you, Chairman Conyers, and Members of 
the Committee, again, as we discussed, the foreclosure problems 
that have recently come to light underscore the continued 
critical importance of the Making Home Affordable program 
launched by Treasury of which HAMP is a part. Preventing 
avoidable foreclosures through modifications and other 
alternatives to foreclosure continues to be a critical 
priority. Foreclosures dislocate families, disrupt the 
community and destabilize local housing markets. Over the last 
20 months, we have developed rules and procedures to facilitate 
meaningful modifications and other foreclosure alternatives. We 
have urged servicers to increase staffing and improve customer 
service. We have developed specific guidelines and 
certifications on how and when homeowners must be evaluated for 
HAMP.
    HAMP has strong compliance mechanisms in place to ensure 
that servicers follow program guidelines. Treasury has built 
procedural safeguards and appropriate communication standards 
within HAMP to minimize those instances where borrowers are 
dual-tracked, where they are being evaluated for HAMP at the 
same time they are being put through the foreclosure process.
    Specifically, program guidelines require participating 
mortgage servicers of nonagency loans to evaluate homeowners 
for HAMP modifications before referring those homeowners to 
foreclosure; suspend any foreclosure sales against homeowners 
who have applied for HAMP modifications while their 
applications are pending; freeze all pending foreclosure 
actions when a borrower makes the first payment on a fully 
verified income trial plan; evaluate whether homeowners who do 
not qualify for HAMP or who have fallen out of HAMP qualify for 
alternative home retention or private modification programs; 
evaluate whether homeowners may qualify for a short sale or 
deed in lieu of foreclosure and provide a written explanation 
to any homeowner who is not eligible for HAMP modification and 
to delay the foreclosure sale for at least 30 days afterwards 
to give the homeowner time to appeal.
    Servicers may not proceed to foreclosure sale until they 
have tried these alternatives. They must also issue a written 
certification to their foreclosure attorney or trustee stating, 
``All loss mitigation alternatives have been exhausted and a 
nonforeclosure option could not be reached.''
    On October 6th, Treasury clearly reminded servicers of this 
existing HAMP rule. And we have instructed our compliance team 
to review the ten largest servicers, processes and procedures 
for complying with these guidelines. If we find incidents of 
noncompliance, Treasury will direct servicers to take 
corrective action, which may include suspending those 
foreclosure proceedings and reevaluating the affected 
homeowners for HAMP.
    In terms of compliance, it is important to remember that 
although Treasury administers HAMP, it does so through a 
voluntary contract with the servicer versus regulatory or 
enforcement agency authority. Thus, our compliance efforts are 
focused on ensuring that servicers are following the 
contractual requirements of their servicer participation 
agreements. Compliance remedies have included reevaluating 
loans for HAMP eligibility, resoliciting borrowers, enhancing 
servicer processes and providing additional training to staff.
    To date, almost 1.4 million homeowners have started trial 
modifications and 520,000 have started permanent modifications. 
These homeowners have experienced a 36 percent median reduction 
in their mortgage payments or more than $500 a month. Consider 
that in the first quarter of 2009, nearly half mortgage 
modifications increased borrowers monthly payments or left 
payments unchanged. By the second quarter of 2010, 90 percent 
of mortgage modifications for the borrower lowered monthly 
payments. Homeowners today have access to more sustainable 
foreclosure prevention solutions. And HAMP uses taxpayer 
resources efficiently. Its pay-for-success design supports 
borrowers who are committed to staying in their homes and 
making monthly payments by paying out servicer, borrower and 
investor incentives over 5 years when the loan remains current. 
And the investor, not the taxpayer, retains the risk of 
borrower payment.
    In conclusion, we believe the foreclosure problems 
underscore the continued need for servicers to focus on 
evaluating homeowners for all home retention options starting 
with HAMP. We appreciate the efforts of both Members of this 
Committee and our partners in the housing community in holding 
servicers accountable and improving HAMP's design and 
performance. I look forward to taking your questions. Thank 
you.
    [The prepared statement of Ms. Caldwell follows:]
                 Prepared Statement of Phyllis Caldwell

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                               __________

    Mr. Conyers. Mr. Edward DeMarco has been called one of the 
50 most powerful men in real estate by Bloomberg BusinessWeek. 
He appears today as the acting director of the Federal Housing 
Finance Agency which is the conservator for both Fannie Mae and 
Freddie Mac. He also established the agenda for the Home 
Affordable Finance program. And we welcome you to this hearing 
today, sir.

   TESTIMONY OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Thank you, Mr. Chairman. Chairman Conyers, and 
Members of the Committee, thank you for inviting me here today. 
The recently identified deficiencies and the preparation and 
handling of legal documents to carry out foreclosures----
    Mr. Conyers. Could you pull your mic closer to you, we 
can't hear.
    Mr. DeMarco. Okay. Is this working? I will begin again. The 
recently identified deficiencies and the preparation and 
handling of legal documents to carry out foreclosures are 
unacceptable. Those deficiencies undoubtedly reflect strains on 
a system that is operating beyond capacity, but they also 
represent a breakdown in corporate internal controls and 
management oversight.
    FHFA's goals in this matter are twofold, to ensure that 
foreclosure processing is done in accordance with the servicer 
contract and applicable laws and to protect taxpayers from 
further losses on defaulted mortgages. Of course, before any 
foreclosure is completed, we expect servicers to exhaust all 
alternatives.
    My prepared statement reviews the actions that FHFA has 
taken to date, as well as those underway. It also provides 
context for understanding the problems that have arisen, 
including consideration of the role of servicers and a 
description of the diverse range of foreclosure processing 
requirements. As I have previously reported to Congress, the 
enterprises, Fannie Mae and Freddie Mac, minimize losses on 
delinquent mortgages by offering distressed borrowers loan 
modifications, repayment plans or forbearance. These loss 
mitigation tools reduce the enterprises losses on delinquent 
mortgages and help homeowners retain their homes. Servicers of 
enterprise mortgages know that these tools are the first 
response to a homeowner who falls behind on their mortgage 
payments. Yet for some delinquent borrowers, their mortgage 
payments are simply not affordable due to unemployment or other 
hardship, and a loan modification is not a workable solution.
    For these cases the enterprises offer foreclosure 
alternatives in the form of short sales and deeds in lieu of 
foreclosure. Despite these options for a graceful exit from a 
home, foreclosure remains the final and necessary option in 
many cases. As we know, foreclosure process deficiencies have 
emerged in several major servicers. Recently, FHFA provided the 
enterprises and servicers a four-point policy framework for 
handling these deficiencies. The four points are simply stated: 
First, verify that the foreclosure process is working properly; 
second, remediate any deficiencies identified in foreclosure 
processes; third, refer suspicions of fraudulent activity; and 
finally, avoid delay in processing foreclosures in the absence 
of identified problems. Pursuant to that guidance, the 
enterprises continue to gather information on the full nature 
and extent of the servicers problems. Only a small number of 
servicers have reported back to the enterprises has having some 
problem with their foreclosure processing that needs to be 
addressed. Still, these firms represent a sizable portion of 
the enterprises combined books of business. The enterprises are 
currently working directly with their servicers to ensure that 
all loans are handled properly and corrections and refiling of 
paperwork are completed where necessary and appropriate.
    To be clear, FHFA does not regulate mortgage servicers and 
the enterprises relationship with them is a contractual one. As 
conservator of Fannie Mae and Freddie Mac, FHFA expects all 
companies servicing enterprise mortgages to fulfill their 
contractual responsibilities which include compliance with both 
the enterprises' seller/servicer guides and applicable law. 
Also, FHFA remains committed to ensuring borrowers are 
presented with foreclosure alternatives.
    Still, it is important to remember that FHFA has a legal 
obligation as conservator to preserve and conserve enterprise 
assets. This means minimizing losses on delinquent mortgages. 
Clearly, foreclosure alternatives, including loan 
modifications, can reduce losses relative to foreclosure. But 
when these alternatives do not work timely and accurate 
foreclosure processing is critical for minimizing taxpayer 
losses.
    To conclude, regulatory agencies including FHFA, are 
carrying out important examination activities that will better 
inform the issue. Thus, identification of further actions or 
regulatory responses should await the results of these 
examinations and evaluation of the information being developed. 
Thank you.
    Mr. Conyers. Thank you.
    [The prepared statement of Mr. DeMarco follows:]
                Prepared Statement of Edward J. DeMarco

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                               __________

    Mr. Conyers. Attorney Julie Williams is the Chief Counsel 
of the Office of Comptroller of the Currency at the Department 
of Treasury. OCC supervises all national banks and their 
operating subsidiaries. Attorney Williams is the author of two 
books and numerous articles on financial servicers, securities 
and corporate law matters.
    We welcome you to the hearing this morning.

 TESTIMONY OF JULIE L. WILLIAMS, CHIEF COUNSEL, OFFICE OF THE 
 COMPTROLLER OF THE CURRENCY, UNITED STATES DEPARTMENT OF THE 
                            TREASURY

    Ms. Williams. Thank you.
    Chairman Conyers and Members of the Committee, I appreciate 
this opportunity to appear today to discuss recent events 
concerning the mortgage foreclosure process and the actions 
that the Office of the Comptroller of the Currency is taking in 
response.
    The occurrences of improperly executed documents and 
attestations that have come to light raise concerns about the 
overall integrity of the foreclosure process. Laws in each 
State establish the requirements and process by which that 
action may be taken. When that due process is not followed, it 
is not a technicality, it goes to the propriety of the 
foreclosure itself. The improprieties that have been identified 
in the past several months are unacceptable practices that 
warrant the thorough investigation that is now under way by the 
OCC and other agencies and appropriate and vigorous responses.
    The OCC supervises all national banks and their operating 
subsidiaries, including their mortgage-servicing operation. In 
recent years as problem loans surged, the OCC's primary focus 
was to prevent avoidable foreclosures by directing national 
banks to increase the volume and sustainability of loan 
modifications. When we saw, using data from our mortgage 
metrics system, that an inordinate number of modifications 
initiated in 2008 were redefaulting, we directed national bank 
mortgage servicers to take corrective action. Since then we 
have seen a sharp increase in modifications that lowered 
monthly payments and fewer defaults.
    While these efforts are preventing foreclosures, many 
families are still struggling and face the prospect of losing 
their homes. In this regard questions have arisen about the 
practice of continuing foreclosure proceedings, even when a 
trial modification has been negotiated and is in force. We 
agree that this dual track is unnecessarily confusing for 
distressed homeowners and risks them receiving mixed or 
contradictory information.
    HAMP requirements contain a model for suspending 
foreclosure proceedings when a borrower is successfully 
performing in a trial modification program; but most 
modifications today are not HAMP modifications. Therefore, 
yesterday, Acting Comptroller John Walsh announced that the OCC 
will direct national bank servicers to suspend foreclosure 
proceedings for borrowers in all types of successfully 
performing trial modifications where the servicer has the legal 
ability to do so. It is important to remember, however, that 
GSEs and private investors dictate the terms for non-HAMP 
modifications, so this flexibility may not always be available 
to the servicers.
    The OCC, as part of its supervisory processes, reviews a 
national bank's foreclosure governance process to determine if 
it has appropriate policies, procedures and internal controls 
necessary to ensure the accuracy of information relied upon in 
the foreclosure process and compliance with Federal and State 
laws. We expect banks to test these processes through their 
internal audit and ongoing quality-control functions. 
Unfortunately, neither banks' internal quality control tests, 
internal audits, nor the OCC's own consumer complaint data 
suggested foreclosure document processing was an area of 
systemic concern. However, when problems were identified at 
Ally Bank, which is not a national bank, we immediately 
directed the eight largest national bank mortgage servicers to 
review their operations and take corrective actions.
    In concert with other regulatory agencies, OCC examiners 
are now reviewing samples of individual loan files where 
foreclosures have either been initiated or completed to test 
the validity of banks' self-assessments and corrective actions; 
whether foreclosed borrowers were appropriately considered for 
loss-mitigation alternatives such as loan modification; and 
whether fees charged were appropriate, documents were accurate 
and appropriately reviewed, proper signatures were obtained, 
and documents necessary to support a legal foreclosure 
proceeding were provided.
    We have likewise instructed examiners to be alert to and 
document any practices such as misapplied payments, padded fees 
and inappropriate application of forced-placed insurance as 
part of these file reviews. Where we find errors or 
deficiencies, we are directing national banks to take immediate 
corrective action, and we will not hesitate to take an 
enforcement action or impose civil money penalties, removals 
from banking, and make criminal referrals if warranted.
    We expect to complete our examinations by mid to late 
December and to determine by the end of January what additional 
supervisory or enforcement actions are needed.
    Thank you again for the opportunity to appear today. I 
would be happy to answer your questions.
    Mr. Conyers. Thank you.
    [The prepared statement of Ms. Williams follows:]
                Prepared Statement of Julie L. Williams

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                               __________

    Mr. Conyers. Our next witness is Judge Dana Winslow, who 
has served as the justice in the New York Supreme Court for the 
past 14 years. He has been at the trial level of more than 
1,000 mortgage cases and has a wide experience of what actually 
happens during this foreclosure crisis.
    We welcome you this morning.

   TESTIMONY OF THE HONORABLE F. DANA WINSLOW, SUPREME COURT 
             JUSTICE, NEW YORK STATE SUPREME COURT

    Judge Winslow. I thank you very much and all of the members 
of the panel for affording me this opportunity.
    I have decided, based upon the presentations made and the 
comments delivered already, that the level of sophistication is 
such that I can proceed to certain areas without the need for 
what seems to be repetition.
    First, I do think that responsibility, not blame, has to be 
determined, and I think we will find that the responsibility 
lies with lenders, lenders' attorneys, the investment community 
including Wall Street, mortgage and real estate brokers, the 
business community, borrowers, and I say with no less the 
courts themselves, the judiciary, is responsible as well for 
this problem.
    The court has accepted foreclosure applications without 
scrutiny. An environment of trust has prevailed rather than an 
examination of the submissions and a requirement to submit the 
required proof. Recently title companies have been expressing 
reluctance to ensure foreclosed properties because of questions 
about the status of title.
    I am going to go basically to my conclusion so that I have 
sufficient time, and I think that it will also help to show why 
I am saying what I am about the particular problems within the 
industry.
    I think the ultimate resolution rests in a paradigm chain 
which focuses upon the defendant owners' ability to pay rather 
than the plaintiff mortgagees' artificial requirements. For 
example, if the defendant homeowners are able to pay $2,000 per 
month, having a present obligation of $3,500 per month, a loan 
modification for a period of 2 or more years at $2,000 per 
month would avoid the plaintiff mortgagee's costs as well as 
the mortgagor's costs of foreclose and property maintenance, 
avoid the potential loss of principle arising out of a forced 
sale in a depressed market, and allow the defendant homeowners 
to remain in their home. This approach could ultimately reduce 
the cost to lenders, borrowers, stabilize the real estate 
market, and do what I think is most important: promote 
equitable predictability. We must have predictability, but it 
cannot be unfair.
    Why this result? Because the examination has focused on the 
mortgagee all along. We look at what is wrong with the 
mortgagees' submissions, and we do not find that we are able to 
effect resolutions. All we are doing is forestalling or 
deferring the inevitable. If a prima facie case requirement to 
entitlement remains with the mortgagee and after the acceptance 
of such proof without refutation by the homeowner, then 
justified dialogue can commence without regard to 
considerations of possible deficiencies of the plaintiff 
mortgagee.
    What do we see on a regular basis? Well, what we see is 
that many of the affidavits attesting loss of note--and I am 
taking a step back--are inaccurate, clearly inaccurate on their 
face. Take a step back because in New York and in many States, 
a mortgage cannot be foreclosed without possession control of 
the note.
    We find gaps in the chain of title, and I refer you to my 
attachment B in which there are multiplicity of names contained 
within the caption; and to attachment A, which agonizingly, but 
I am afraid accurately, demonstrates the course that both a 
mortgage and note takes place in this mortgage climate.
    Assignment documents are frequently notarized several 
months after the assignment was purportedly effected and are 
notarized in blank.
    MERS, which needs to be mentioned, has, in fact, changed 
drastically over the years. I have seen them starting in 2003 
or 2004 and have received information from them.
    I also notice my red light. And though from my perspective 
I usually am not as aware of it as I am now, I will stop at 
this point to say that the necessity for an examination of 
precisely what MERS is allowed to do, whether MERS is permitted 
the opportunity to foreclose, foreclose on behalf of an 
assignee as opposed to the original lender.
    And I do ask you all to in closing consider one issue that 
wasn't mentioned, and that is that many people need to move 
from one community to another for a job. They can't. They can't 
move to get employment because they can't sell the house that 
they are in and move to another area. So that is another issue 
that I have not seen mentioned, and I ask for questions galore 
if the panel is so inclined. Thank you.
    Mr. Conyers. Thank you, Judge Winslow.
    [The prepared statement of Judge Winslow follows:]
          Prepared Statement of the Honorable F. Dana Winslow

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               __________

    Mr. Conyers. There will be questions as soon as we return 
from our obligation to cast votes on the floor. The Committee 
will stand in recess. Members of both panels are invited to 
join our staffs in the conference rooms, and the Committee will 
stand in recess.
    [Recess.]
    Mr. Conyers. The Committee will come to order, please.
    The question that I would like to pose to our distinguished 
panel, and I appreciate your forbearance, and I understand your 
schedules, is what can be done to reduce the number of 
foreclosures? I am going to start with Judge Winslow.
    Judge Winslow. All right. There are a number of things that 
can be done. One is to assure that the servicer, who I am 
afraid still is ill-defined, falling into various categories, 
one of being a collection agency, another of acting as a 
plaintiff in a foreclosure proceeding--to assure that the note 
is available, the note is in the control of the mortgagee, and 
that the entire package is complete and factually appropriate 
in order for the commencement of discussions to take place.
    Now, once they do, then it must go to the mortgagor. The 
mortgagor homeowner must then--if there is no contest or 
protestation of the prima facie case established by the 
plaintiff mortgagee, the mortgagor then must come forward and 
produce whatever response it has.
    For instance--and I have never seen it, I had nothing to do 
with the creation of this mortgage. A very good case in point 
is one that I recently decided, and that was a case in which 
the two homeowners, husband and wife, signed the mortgage. Only 
the husband signed the note. I determined without further 
explanation that that was insufficient for the case to proceed 
on the basis that that did not comport with the requirements of 
New York law.
    In the event that there is no refutation, then the next 
step must be justified negotiations between the mortgagee in 
foreclosure, whoever it is that is commencing that foreclosure 
action, has the authority and has the knowledge, with the 
mortgagor with counsel, if possible. In New York we have 
established under CPLR 3408(f) a process by which there will be 
an appointment of counsel for a poor person. That must be 
expanded.
    There must be some kind of overseeing of the mortgagor's 
rights, either through the courts or through counsel, and then 
there must be an ability for that homeowner to communicate with 
the lender or the lender's counsel. We have seen numerous 
instances where the legal back contains an address in upstate 
New York, the action is commenced in Nassau County, and the 
only way that anyone, including the court, can get in touch 
with that person in upstate New York, who shall remain nameless 
for the moment, is by leaving messages, which are not ever 
answered.
    The person who developed the answering service should have 
a coveted place in hell because it creates that barrier that 
prohibits the necessary dialogue between the two, the 
opportunity to engage in something that could lead to a loan 
modification. And the loan modification can occur, and has in 
my part, three times in the last month when there has been a 
third party stepping forward with sufficient funds to address 
the arrearage and sufficient income to address the income needs 
going forward.
    There is a 6-31 rule that is generally applicable with 
several banks, including Immigrant, which is utilized. And that 
6-31 rule means 6 percent interest, and there must be coverage 
of 31 percent of the total income that would be used to pay the 
mortgage on a monthly basis.
    So if we incorporate those concepts, ideas and issues, I 
think we have a much better chance to address the real problems 
of the mortgage crisis. Thank you, sir.
    Mr. Conyers. Thank you very much.
    Attorney Williams.
    Ms. Williams. Thank you, Mr. Chairman.
    If I understood your question, it was how to avoid getting 
into the foreclosure process, or how to produce a situation to 
reduce the number of foreclosures.
    I think there are three basic elements to improving what is 
happening right now. First, is making sure that troubled 
borrowers are effectively considered for loan modifications, 
and that these programs servicersuse to identify and to 
consider modifications for troubled borrowers are working.
    Second, as part of that is a continuation of improving the 
operations of the servicers so that they can deal effectively 
and promptly with troubled borrowers to answer the kinds of 
questions that the judge is referring to, ensuring that 
theydeal effectively with the paperwork that is being provided 
them, and that they are able to provide answers to those 
borrowers in a prompt fashion.
    And thirdly, I think the step that I talked about in my 
oral statement, which is trying to eliminate some of the 
confusion and potential mix-ups that may flow from this dual-
track process where you have a borrower that has been approved 
to get into a trial modification program, but yet the borrower 
is still getting notices or otherwise being treated as part of 
the foreclosure legal process; to suspend that so that the 
borrower has a clear path to work through the modification in 
accordance with the terms of the mod.
    We have evidence from our mortgage metrics system that when 
the servicers provide affordable, sustainable modifications, 
with payments that the borrowers can afford, it does 
significantly reduce the redefault rates and keep those 
borrowers out of foreclosure.
    Mr. Conyers. But, Attorney Williams, in the vast number of 
cases, that is not happening, the recommendations that you have 
just elicited.
    Ms. Williams. I think there are areas certainly to be 
improved in connection with all of the three areas that I 
noted, and the action that the OCC directed with respect to the 
dual-tracking concern was something that the Comptroller 
announced just yesterday. It is, unfortunately, a reality, 
though, that there are going to be situations where we have 
homeowners that cannot afford the homes that they are in. There 
are options available for what has been referred to as a 
graceful way to deal with that as well.
    Mr. Conyers. Mr. DeMarco
    Mr. DeMarco. Mr. Chairman, the most effective thing to 
reduce foreclosures in this country would be jobs, getting 
folks back to work. They don't have the income, or they have 
had reduced income, they are not going to be able to keep up 
with their mortgage. So the first thing and the biggest impact 
that could be had is to get our economy moving again where it 
needs to be and to be able to have enhanced employment 
opportunities for folks. And there are plenty of folks that 
still have jobs, but they have had reduced income as a result 
of those jobs. That is far and away, in my mind, the first.
    The other two are to continue to improve, as we have been 
working hard to do, on two things. One is communication of the 
opportunities that are being made available to troubled 
homeowners. There is actually a great deal of public 
information out there now, it continues to be developed and 
improved, about what to do if you are having trouble with your 
mortgage and that there are alternatives to foreclosure out 
there.
    I think continuing to make that clear to our citizens who 
are having trouble with their mortgage would be helpful. That 
is a responsibility we all share. Regulators share it, Members 
of Congress share it, banks and mortgage servicers share it, 
financial counselors share it. There are opportunities here, 
and we just need to continue to make that clear and to improve 
our communication.
    And the third is I do believe that there are some large 
mortgage servicers that have been very resource-strapped by 
this unprecedented volume of troubled mortgages, and these 
institutions need to continue to invest more of their 
resources, their capital, into educating, training and 
monitoring their employees and bringing in additional employees 
who are needed to implement the various programs that have been 
put in place over the last 2 years to give a wider range of 
opportunities to people with troubled mortgages.
    Mr. Conyers. Ms. Campbell--or Caldwell, excuse me.
    Ms. Caldwell. Thank you.
    Again, this may echo some of the statements by my fellow 
panel members, but I think, you know, first and foremost we 
have to expect servicers to follow the laws in the States in 
which they do business and to adhere to the contracts with the 
investors for whom they service. And the investors, including 
whether it is investor guidelines from Fannie Mae and Freddie 
Mac for the Federal housing agency, or even those that 
participate in HAMP, all have protocols in place to consider 
modifications before foreclosure, and we need to hold them 
accountable for that.
    The second is increased capacity across the servicing 
industry. Even though, you know, there has certainly been a 
tremendous addition of resources to modifications, loss 
mitigations, still at this point there needs to be more 
resources against this crisis. It is still huge in scale.
    Third, continued support for counseling and--because one of 
the things that we do know is that people do not go through a 
mortgage process enough times in their life to ever get good at 
it. And when you add to the stress of not being able to pay, we 
continue to support, and educate, and train counselors as part 
of our outreach.
    And then finally, some standard set of guidelines and 
protocols for servicing practices. And one of things that we 
have worked very, very hard in the HAMP program and will 
acknowledge has taken a long time to do is set up a system to 
try and align incentives among groups of people that only had 
aligned incentives when properties were rising forever. And as 
they started to decline, where those incentives have not been 
aligned, it becomes very apparent to us all. And we work very 
hard in the HAMP program to try to align those incentives, and 
when we have done it right, for those homeowners in permanent 
modifications, they have seen their payments reduced by, you 
know, 36 percent, $500 a month on average. The redefault rates 
are lower than for historical modifications, and the payments 
are affordable and sustainable and predictable for the 
homeowner. So while it hasn't been the volumes that we would 
have liked to have seen, for those who it has helped, it has 
been an effective use of taxpayer funds and a change in 
servicing practices.
    So those would be my recommendations.
    Mr. Conyers. Ms. Caldwell, in many, if not most, of the 
instances that you recommended, we are not up to speed on them, 
and I don't see how they are going to ever be utilized and 
brought into fruition.
    Ms. Caldwell. You know, again, this has taken a very long 
time, it has been a very difficult process to implement. And I 
think you have heard across this panel that there still needs 
to be more attention to this matter, but I thought it might be 
helpful just to share some statistics from our call center 
complaints.
    In October 2009, 18 percent of the complaints were they 
have submitted documents and had not gotten a response from 
their servicers. In October 2010, it is 5 percent. Now, 5 
percent is still unacceptably high for losing documents or not 
responding to homeowners, but it does show the effect of 
resource investments.
    You know, when we had servicers not participating in HAMP, 
a year ago folks that called in to complain heard 10 percent of 
the time they were not participating in HAMP. It is now down to 
2 percent in 2010. We are seeing year-over-year improvement, 
but it has been a very slow process to increase capacity given 
the scale and the changing nature of this real estate crisis.
    Mr. Conyers. Well, the projections that we have is that 
there will be a total of 13 million foreclosures in the United 
States of America before we come out of this downturn. So I 
don't know how I can take any great encouragement at the 
figures that more people are using HAMP that call you when the 
number of foreclosures is going up. My question was how do we 
reduce the extraordinary number of foreclosures?
    Ms. Caldwell. You know, I think, as we have heard, we need 
to continue to outreach to homeowners. You have heard from 
other panel members. We still at this point in time have 
homeowners for the first time they are having contact with 
their servicer is when the foreclosure notice is filed.
    And we recently launched a public service campaign to 
educate homeowners that help is available. We have worked with 
many of the nonprofits on stopping fraud and other scammers 
that go after homeowners, but it is very, very difficult. And 
one of the reasons why this program runs through 2012 is we are 
not out of the crisis. We still have a lot of work to do.
    Mr. Conyers. Well, does anyone here dispute the economic 
prediction that there will be 13 million foreclosures before we 
see any change?
    Judge Winslow. Yes, I disagree with it. I think it is going 
to be far more. Nassau County alone has now 40,000 foreclosures 
that have either been commenced or are in danger of being 
commenced.
    Mr. Conyers. How many?
    Judge Winslow. 3.12 percent actually commenced and another 
7 percent in which the homeowner, borrower, is 90 days or more 
in arrears. It is increasing; it is not decreasing, and it 
cannot change unless the paradigm changes. Unless we see what 
it is that the homeowner can do and, in doing so, allow the 
equilibrium, which is now a disequilibrium, to return to the 
real estate market because of surety regarding home sales, we 
will not effect any substantial change in this process. It will 
only get worse from this person's perspective.
    Mr. DeMarco. Mr. Chairman, I am not familiar with the 
particular study you are referring to. If you would like to 
have your staff provide it, I will be happy to have my team 
take a look and assess what are the underlying assumptions in a 
forecast like that.
    Mr. Conyers. Well, what do you have? What is your forecast? 

    Mr. DeMarco. I don't have a forecast, Mr. Chairman, but I 
can give you a couple of numbers. Fannie Mae and Freddie Mac 
currently own or guarantee about 30 million mortgages. That is 
out of about 55 million mortgages in this country. So for the 
first 8 months of this year, which, you know, one would expect 
this year to be, you know, one of the high points in terms of 
such action, the completed foreclosures on Fannie Mae and 
Freddie Mac loans through the first 8 months was a little less 
than 300,000. And I would add that for the 300,000 
foreclosures, there were more than double that number completed 
foreclosure-prevention actions.
    So while there may be a great deal of filing of 
foreclosure, initiation of foreclosure processes, we are all 
still working very hard on these alternatives to foreclosure. 
And at least I can only speak to the enterprise book of 
business that I am responsible for, but we are working 
diligently through these various foreclosure alternatives, 
whether that means a loan modification, a repayment plan, or a 
short sale or deed in lieu of foreclosure. And our rate through 
the first 8 months of 2010, as I said, Mr. Chairman, a little 
less than 300,000 completed foreclosures and more than double 
that number of foreclosure alternatives having been finalized. 
So the modification, the modification is not a trial mod, it is 
a completed permanent mod.
    Mr. Conyers. Are you telling me, Mr. DeMarco, that you have 
never heard of this prediction or projection of 13 million 
foreclosures before today?
    Mr. DeMarco. Mr. Chairman, I am not familiar with what the 
assumptions are behind that, so I am not confident of what is 
in this projection, and I would be happy to take a closer look 
at it.
    Mr. Conyers. All right. You have never heard of it before, 
or you don't know what--well, let me just get this straight. 
You have never heard of it before, or you have heard of it and 
you are not sure of its validity? Which?
    Mr. DeMarco. Mr. Chairman, I can't recall whether I have 
heard that particular prediction or not.
    Mr. Conyers. You can't.
    Mr. DeMarco. I cannot, I am sorry, sir.
    Mr. Conyers. Well, I am, too. But we are all sorry. But, 
you know, you have got a pretty big role in this, and to have 
never heard of this figure before. Now, maybe my staff pulled 
it up out of thin air, or maybe they have misunderstood it and 
I am not reporting it to you accurately. It would seem to me--
--
    Mr. DeMarco. If----
    Mr. Conyers. Wait a minute. It would seem to me that you 
would have some projection of your own if you don't accept or 
have never heard of this one.
    Mr. DeMarco. With respect to doing projections, Mr. 
Chairman, as a conservator and regulator of Fannie Mae and 
Freddie Mac, that is the focus of my agency. And we have 
recently published on our Web site a series of loss projections 
with regard to future draws from the Treasury Department due to 
losses by Fannie Mae and Freddie Mac. And so we have made 
available that report on our Web site that takes various 
possible house price paths. We applied a stress-test-like 
scenario modeled after what the bank regulators did last year, 
and that information--I would be happy to provide copies of 
that report to the Committee.
    Mr. Conyers. Well, would it help you, or will it have 
helped you, that you came before us today and you found out 
about the projection of 13 million foreclosures? Would that be 
of any assistance to your responsibility in the Federal 
Government?
    Mr. DeMarco. Mr. Chairman, I view my responsibility is to 
minimize----
    Mr. Conyers. Just answer the question. Would it or wouldn't 
it? 
    Mr. DeMarco. No, Mr. Chairman, it wouldn't.
    Mr. Conyers. It would not.
    Mr. DeMarco. Because I would not care whether the number 
was 13 million or 5 million or 20 million. I am working like 
the dickens to minimize----
    Mr. Conyers. Did you say that it would not affect you?
    Mr. DeMarco. Mr. Chairman, we are working to minimize that 
number.
    Mr. Conyers. I just wanted to get your response, sir. 
    Mr. DeMarco. Yes, sir.
    Mr. Conyers. Did you say it would not?
    Mr. DeMarco. No, I am misunderstood. It would be helpful to 
know what that projection was and see if there is information 
in that projection that could inform our decisionmaking. That 
is why I would be happy to have that from your staff, sir, so I 
could review the number and the basis behind it.
    Mr. Conyers. All right.
    Mr. DeMarco. If there is information in that sort of 
projection that could be helpful to inform our work, I would be 
most happy to have that.
    Mr. Conyers. Thank you. We will be happy to provide you 
with the background for that statistic.
    And I want to thank Mr. Goodlatte, Bob Goodlatte, for his 
forbearance here, because the only thing that I would like to 
raise now is the fact that no one on this panel has raised the 
question either for or against the temporary moratorium on 
foreclosures, which is probably the most obvious remedy that 
anybody in North America could come up with, especially in view 
of the fact that it has been employed during the era of 
Franklin Delano Roosevelt at not only the national level, but 
at the State levels as well, and that there are Governors who 
have resorted to this request at the State level. And I am now 
about to dismiss all of you afterward, and there hasn't been 
one solitary word mentioned about this procedure established in 
the 1930's.
    Judge Winslow. Then let me, if I may, sir. The answer is 
that a deferral or a moratorium may be appropriate if during 
that time there is an honest, justified attempt at working out 
the resolution that is only being forestalled.
    I would agree with a moratorium, but I don't believe that 
we are going to see a sudden rise in house values, home values, 
that is going to make a radical change in the way we approach 
the real estate market and the foreclosure market, and that has 
to happen over time. If we have--make it twofold for the 
moratorium, I would think that that would be a very appropriate 
consideration. Thank you, sir.
    Mr. DeMarco. Mr. Chairman, if I may, you are correct. I did 
not raise this issue in my oral remarks, but I do deal with it 
directly in my written statement submitted to the Committee. 
And I submitted my view that I am not in favor of a nationwide 
moratorium on foreclosures. I do not believe that that is 
either appropriate or necessary at this point in time. And I 
believe that the cost of such a moratorium would outweigh the 
potential benefits, and I go through that in my written 
statement, Mr. Chairman.
    Mr. Conyers. Well, do you still leave the door open 
slightly, Mr. DeMarco, for the possibility that temporary State 
foreclosure moratoriums could be, under circumstances, 
appropriate?
    Mr. DeMarco. I wouldn't rule it out, Mr. Chairman, but I am 
not aware of circumstances at this moment in which I would say 
that that is appropriate.
    I would say that where we have servicers that have 
identified problems in foreclosure processing that calls into 
question the validity of paperwork being submitted to courts or 
being submitted to State officials to effect a foreclosure, in 
those cases where there was an identified problem with the 
servicer, absolutely it would be dishonorable and it would be 
illegal to be submitting such documents when there was a known 
problem. I think in that case for the individual servicer where 
there is a problem identified, that is how we ought to be 
targeting stoppages of foreclosure actions until we are sure 
that the law is being properly followed.
    Mr. Conyers. Attorney Williams, I notice you nodding your 
head.
    Ms. Williams. I think we agree completely with the point 
that Mr. DeMarco just made, where there have been identified 
flaws and deficiencies in the foreclosure process or in the 
documentation. If there are questions about the accuracy of the 
information that is being relied on in connection with the 
foreclosure, those need to be fixed before foreclosure resume.
    Ms. Caldwell. I would just say the same for those servicers 
in those cases where their processes have showed they are not 
sufficient to follow the laws, they need to stop the 
foreclosures, fix the problems, and we supported those 
moratoriums.
    I would also say within the Making Home Affordable program, 
servicers are not permitted to file foreclosure until they have 
tried to solicit homeowners that are 60 days delinquent, and we 
set standards by how many times they have to attempt by mail 
and by phone before they can file foreclosure.
    But in terms of a national moratorium, we have a lot of 
concerns on neighborhoods and other things that can help folks 
that are waiting to buy a house out of foreclosure.
    Mr. Conyers. Ranking Member Bob Goodlatte of Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Ms. Caldwell, when did the Treasury Department first learn 
of the foreclosure document problems?
    Ms. Caldwell. Can you be more specific?
    Mr. Goodlatte. Well, you know, we have got this whole thing 
that has burst on the scene here in the last few months about 
problems with foreclosure documents not being properly 
processed, not being properly signed and so on. You are 
familiar with that, right?
    Ms. Caldwell. Correct.
    Mr. Goodlatte. When did the Department--when did the 
Treasury Department first become aware of that?
    Ms. Caldwell. Again, I don't want to speak for everyone in 
the Treasury Department, but certainly within our office we 
became familiar with at the time that the first major servicer, 
Ally, announced its foreclosure moratorium due to that 
documentation problem.
    Mr. Goodlatte. So was it from press accounts, in other 
words, that you first learned of this problem?
    Ms. Caldwell. From my office, yes.
    Mr. Goodlatte. With all the work that Treasury has done 
with loan modifications, and working with lenders and servicers 
through the Housing Affordable Modification Program, did the 
Treasury Department have any indication that there were such 
widespread documentation problems with foreclosures? Obviously 
some of the people coming in for the modification process must 
have reached a foreclosure stage of their circumstances.
    Ms. Caldwell. You know, I think it is important to keep in 
mind that the Making Home Affordable Program is focused on 
foreclosure prevention, doing everything to keep that homeowner 
from getting to foreclosure. Certainly as it relates to 
documentation problems, we saw many of them. And we have had 
servicers go back, we solicit homeowners, we track them on 
collecting documentation, and in January of 2010, we instituted 
a temporary review period where we asked all servicers to go 
back and make sure they notified homeowners as to the status of 
their documentation or their payment and gave them a chance to 
appeal.
    So we certainly saw documentation and capacity problems 
within modification, and we took steps to change behavior and 
correct that, but, again, HAMP is focused on foreclosure 
prevention, not the technical and State specifics on 
foreclosure.
    Mr. Goodlatte. Let me ask Ms. Williams, when did the OCC 
become aware of the foreclosure documentation problem?
    Ms. Williams. At the same time that Ms. Caldwell has 
mentioned.
    Mr. Goodlatte. And was it from press reports?
    Ms. Williams. It was from press reports in connection with 
the Ally matter.
    Mr. Goodlatte. And can you explain how the OCC, which 
regulates the large banks that are at the center of this 
controversy, failed to detect that there were foreclosure 
documentation issues well before this turned into a crisis that 
we find has gummed up the entire works here and caused problems 
for families, problems for people who want to buy homes, and 
has really altered the entire real estate market of the 
country?
    Ms. Williams. We were focusing our supervisory resources 
very intensively on the modification process, and directing the 
national bank servicers to make various improvements in their 
operations and in the structure of the modifications that they 
were offering. So our focus was on that aspect of their 
mortgage servicing operation. We were relying on internal audit 
and internal quality control procedures that these institutions 
had over what we regarded as sort of general business 
processes, how documents are signed, how documents are 
notarized.
    The OCC, and I think bank regulatory agencies in general, 
in terms of what our examiners do, when you are
    talking about the general business processes of a bank, we 
rely to a large extent on the quality control and the audit by 
the institution to get those processes right. And we also look 
for warning signs, for example, consumer complaints from the 
OCC's Consumer Assistance Group. There were no warning signs 
from internal audit, quality control, or even complaints 
relating to the foreclosure documentation aspect of mortgage 
servicing triggering red lights for us.
    In hindsight, as we think about the volume of transactions 
that were going through the process, we could have been more 
suspicious that the challenges that the servicers were 
encountering on the modification stages--which they had issues 
and they continue to have issues--that there may have been 
similar types of problems in handling the volume that were 
cropping up in the foreclosure stage. But that then raises a 
question. Does that mean that in order to oversee, you have to 
literally station bank examiners in the rooms where people are 
signing documents, to see if there is a notary sitting next to 
them?
    I think there are some very legitimate questions about how 
to effectively supervise this type of activity going forward. 
And one thing that I would note is the examinations that we 
have underway. We call them horizontal exams--across multiple 
banks and with the involvement of the other bank regulators and 
also the FHFA in certain respects, will produce not just 
findings particular to the individual banks to convey to those 
banks, but the regulators plan to do a public report of the 
basic problems that we find, sort of a lessons learned.
    And I think that lessons learned can translate into two 
things that are very relevant to your question. One is there 
has been discussion about the development of standards for 
mortgage servicers so that there is a set of more uniform 
standards and expectations.
    Mr. Goodlatte. Is that something the Federal Government 
should do or the State Government should do that?
    Ms. Williams. Well, the Federal bank regulators certainly 
have the ability to do that, to set more precise standards 
across the depository institutions that we regulate. We also 
need to use our findings,as a lessons learned on our 
supervisory processes to illuminate ways in which we can more 
effectively supervise. And the idea of developing new standards 
and looking at supervisory techniques I think go hand in hand.
    Mr. Goodlatte. Thank you. Mr. DeMarco, has the robo-signing 
scandal exposed the American taxpayers to any potential legal 
liability because of the Federal conservatorship of Freddie Mac 
and Fannie Mae?
    Mr. DeMarco. Congressman, I am unaware of legal liability 
it would pose. It does pose a risk of additional losses to 
those taxpayers, which troubles me. But those losses would 
arise principally from additional delays in the actual 
processing of a foreclosure so that the loss on that particular 
property goes up. The longer the foreclosure takes, the more 
the American taxpayer is paying for that mortgage to be carried 
by Fannie Mae and Freddie Mac and the greater risk that the 
property value continues to decline. And those two things, sir, 
increase the loss to the taxpayer.
    Mr. Goodlatte. What steps are Freddie Mac and Fannie Mae 
taking to ensure that foreclosure documentation scandals like 
this don't reoccur in the future?
    Mr. DeMarco. Several things. With the major servicers, they 
are literally on site to look at how their mortgages are being 
serviced. We have been sending out a great deal of reminders 
and communications to servicers about their contractual 
responsibility. And I will speak for FHFA and say that we are 
certainly, you know, working in coordination with Federal 
banking regulators and awaiting their examination activity that 
Julie Williams spoke of a moment ago.
    Mr. Goodlatte. Thank you. Justice Winslow, you are a State 
court judge and your testimony has detailed alleged abuses by 
servicers participating in State court foreclosure proceedings. 
Is your appeal to Congress for help today a suggestion that the 
New York State courts and Rules of Civil Procedure are not 
equipped to deal effectively with lawyers and parties who 
mislead the court?
    Judge Winslow. It is addressed to both. I think that it can 
be a Federal matter as well as a State matter. Insofar as 
sanctions are concerned, insofar as consideration of the action 
taken against a particular mortgagee, that does lie within the 
purview of the State legislature and the State court judges. 
However, HAMP and HAFA have the ability to address certain 
minimum requirements. This is a due process issue in many 
respects, which can be addressed by Congress to assure that 
each party is fairly treated, that the protections are 
afforded.
    Mr. Goodlatte. I agree with you that we can do that. But 
let me ask you as a follow-up.
    Judge Winslow. Certainly, please.
    Mr. Goodlatte. The attorneys general of all 50 States and 
the District of Columbia are investigating the foreclosure 
documentation scandal. Given that foreclosure is a State law 
issue, do you have any reason to believe that the State 
attorneys general are not in the best position to resolve the 
issue, at least initially?
    Judge Winslow. I have no reason to believe otherwise. I 
think that they are capable of addressing the particular issues 
that they have. But that doesn't mean solution of the problem. 
It means an examination, a reaction, rather than a proactive 
approach which can come on the Federal level.
    Mr. Goodlatte. It can come on the Federal level, but each 
State concerned about both people who may be wrongly subjected 
to foreclosure and to the fact that the delay in the 
foreclosure, as Mr. DeMarco has pointed out, has serious 
ramification beyond the individuals in that individual 
transaction; they also have the ability to make sure that they 
step in and see that attorneys and others who are responsible 
for following the law are indeed following the law.
    Judge Winslow. His comment is a very interesting one, 
because at this point I think it is well recognized that the 
mortgagee, the homeowner, who has had a foreclosure, and after 
sale there is a deficiency, is unable to pay it. So the 
mortgagee is the party that is most likely injured. That then 
creates the environment or the atmosphere in which Federal 
regulation can set certain minimum standards, as they have in 
HAMP and HAFA. So I see very little enforcement through the 
Federal Government standards now because they are not 
compulsory, they are not mandatory, they allow for the 
individual mortgagee to select.
    Mr. Goodlatte. One last question. What interest has the 
State bar association in ensuring that the attorneys who 
conduct it regulates--I am sorry, the bar association regulates 
the conduct of these attorneys, correct?
    Judge Winslow. In a grievance fashion, absolutely, yes.
    Mr. Goodlatte. Well, have there been in New York, to your 
knowledge, any ethics proceedings brought with regard to 
attorneys handling foreclosure cases?
    Judge Winslow. As of this moment, not to my knowledge.
    Mr. Goodlatte. Is that the bar association's failure to be 
paying attention to what is going on here as well?
    Judge Winslow. In many respects. But in deference to the 
New York State bar association, they are not acting within 
clearly defined rules. They are using the rules that they are 
developing themselves through a Committee process.
    Mr. Goodlatte. I mean, rules of ethical procedure regarding 
improper signatures to documents don't exist right now under 
the canons of ethics or the bar association in the State of New 
York?
    Judge Winslow. They clearly do. But the rules that would be 
applied have come to light in the context of the violations 
only within the last year. The association between the lender 
and the lender's attorney is not something that was considered 
in 2005 when virtually every single foreclosure, no matter how 
improper the submission was, ended up in a resolution because 
of the increasing value of real estate in the real estate 
market.
    Mr. Goodlatte. Well, you know, I understand----
    Judge Winslow. Does that answer or not answer your 
question?
    Mr. Goodlatte. I understand the desire on the part of many 
to have somebody wave a magic wand or come up with a silver 
bullet that will both cure all of the pending foreclosures that 
exist right now and prevent this kind of thing from happening 
in the future. I would argue that the silver bullet is to have 
people pay the penalty for not following the law as it exists 
right now. And I think you would see people clean up their act 
really quickly if that took place.
    Judge Winslow. And just one very fast statistic. In the 
appellate division first department alone, there are over 3,500 
grievances that have to be processed. Yes, there is underway a 
bar association committee investigation and approach to 
addressing your problem as you articulated it. It hasn't 
happened yet, it is on the horizon. And I don't think----
    Mr. Goodlatte. Do you think the sooner everybody who is 
affected by it got about doing what they need to do, and if 
they are charged by the law or the canons of ethics or by the 
contractual obligations that they have got about doing it, the 
sooner we would clean this up and the sooner we wouldn't see 
repetition of it. And the longer we wait for Congress or 
somebody else on high to say that we have some magic solution, 
whether it is 13 million or 300,000 or whatever the number is, 
it is a good number, but to think that we can set up some new 
regime that is going to take care of this problem I think is a 
mistake. We need to get about the business of taking each one 
of these mortgages and doing them correctly.
    And to the extent that Ms. Caldwell's Department can help 
people avoid foreclosure with a refinance intervention on their 
part, great, I am all for it. But it seems to me we are wasting 
a lot of time here saying we are not going to do anything 
because we have got so many of them, that we are just going to 
have a moratorium or a freeze or some other thing that delays 
justice occurring.
    Judge Winslow. Yes, sir. And you heard what I said about a 
moratorium or a freeze.
    The other aspect of this is the extent to which the lender 
participated in the lending process with the borrower. If in 
fact there is a conjunction of lender-borrower activity such 
that the lender directly or indirectly requested the borrower 
to place greater income on the financial statement is 
participation. Insofar as what the New York State Bar 
Association can do, they can do something, but it must be the 
grievance committee that is ultimately responsible for taking 
action against someone for suspension and a revocation of 
licensor.
    Mr. Goodlatte. Thank you. I want to thank all the members 
of the panel. It has been very helpful. Mr. Chairman, thank you 
very much.
    Mr. Conyers. Thank you very much, Mr. Goodlatte.
    Mr. Goodlatte. I appreciate your forbearance as well.
    Mr. Conyers. Well, I appreciate your steadfastness on this 
issue. I am now pleased to recognize the distinguished 
gentlelady from Los Angeles, California, Maxine Waters, a 
senior Member of the Committee.
    Ms. Waters. Thank you very much, Mr. Chairman. I appreciate 
the opportunity to continue the work that I have been involved 
with on the Financial Services Committee relative to these 
foreclosures and loan modifications. And I am familiar with 
some of the witnesses that are here today, had an opportunity 
to spend some time raising some questions, and if I may I want 
to start again with Ms. Caldwell, who is the Chief of 
Homeownership Preservation Office, Department of Treasury.
    We heard from the Congressional Budget Office this week 
that when all is said and done, the Treasurer will only spend 
$12 billion of the $50 billion originally targeted under TARP 
for homeowner assistance. Moreover, of the $12 billion only $4 
billion is for HAMP and sent to payments for services to modify 
loans. That is 8 percent of the total allocated to the program.
    At my hearing on November 18th, Governor Elizabeth Duke 
said we could expect more than 6 million more foreclosures 
through 2012. I guess my question today, Ms. Caldwell, is $4 
billion enough to deal with the scale of this problem?
    Ms. Caldwell. Congresswoman, I am not familiar with all of 
the assumptions behind the Congressional Budget Office 
analysis. But what I do know is that as we sit here today, we 
continue to have $45.6 billion allocated to the housing 
programs that include close to $30 billion for HAMP, plus the 
hardest hit--$7.6 billion for the hardest hit funds that 
support the State housing finance agencies, including in 
California, as well as the program we recently announced 
through the FHA.
    And what we--and I think it is important to remember that 
these programs run through 2012, and we continue, we continue 
to focus on outreach, because we don't think the crisis is 
behind us, and we think there is more work to do on mortgage 
modifications, and we are committed to doing that.
    Ms. Waters. Ms. Caldwell, if I may, I am concerned that 
with so much money left unspent--and you are describing that 
the program is scheduled to go through 2012--that we are on 
track to have $38 billion in HAMP funds remaining. Can the 
Treasury Department do anything to change HAMP so that this $38 
billion does not go unspent?
    Ms. Caldwell. Again, Congresswoman, that is something that 
we look at every day within the context of the programs that we 
have. I think it is important to remember that the funding is 
paid out over a period of 5 years as mortgages remain 
successful. As the crisis is changed, we moved to the hardest 
hit funds to get money out to the States. So we remain 
committed to helping as many homeowners avoid foreclosure as 
possible.
    Ms. Waters. Well, I am being advised that the CBO report 
takes all of that into account. And it looks as if the money is 
not going to be spent, can't be spent.
    Let me just get at why I think probably the moneys are not 
being spent as they could be spent. What percentage of 
borrowers are dropped from HAMP trial modifications simply 
because they didn't submit the requisite paperwork, even when 
they made all of their trial payments. I know this will be 
different for every servicer, so you don't have to disaggregate 
the information, just give me an average of what percentage of 
these borrowers are being dropped because of paperwork 
problems.
    Ms. Caldwell. In terms of trial modifications, again, it is 
hard to be very specific because there are some cases where 
their documentation--there are some cases where they didn't 
submit documentation and didn't make payment. But I would say 
approximately in that population that went into a trial based 
on their stated income, about 30 percent had a documentation 
issue.
    Ms. Waters. Well, the ones that I am referring to are the 
ones that made all of their trial payments and they wish to 
keep going, but they have not completed the paperwork. And a 
lot of times we are hearing that paperwork is lost, all kinds 
of problems with paperwork. So why are they dropped, why would 
they be dropped if they are up to date on their trial payments?
    Ms. Caldwell. Again, you know, we have heard from your 
office and we have worked closely with a number of offices on 
resolving the paperwork. In January, as you know, we said the 
servicers could not decline anyone for lack of paperwork. They 
had to go back, they had to send a letter to that homeowner 
saying what paperwork was missing and give that homeowner a 
chance to resubmit it again. If they are declined for paperwork 
again, they have a 30-day appeal. And so while there continues 
to be an unacceptable level of lost paperwork, we have 
continued to keep people in trials for an extraordinarily long 
time to get the paperwork done.
    Ms. Waters. Well, we believe that those persons who are in 
compliance, who have made all of their payments, should not be 
dropped because of paperwork problems. We don't know whether or 
not this problem is caused by the bank's failure to process 
paperwork, we don't know what is happening. But we believe that 
if these clients are keeping up with their payments that you 
should continue to keep them into the HAMP program in some way 
so that they can stay in their homes rather than facing 
foreclosure.
    Now, having said that, you mentioned the Keep Your Home 
program. Other than Bank of America, the major servicers are 
not participating in California's 790 million principal 
reduction component of the Keep Your Home program which uses 
money from the hardest hit fund. Now, Treasury oversees this 
California program. Why can't you get more banks to participate 
than just one?
    Ms. Caldwell. So let me just--I would like to address one 
more thing on the document issue, because you have
    raised a very important concern, and I just want to make 
sure your office knows that if anyone has been declined from 
HAMP and has a reason code, they have been told that they did 
not submit their paperwork and they can produce and appeal it, 
we force the servicer to look at it. In some cases if they have 
decided that the paperwork doesn't work or they can't produce 
it, the servicer must consider them for an alternative 
modification. So I just want to make sure your office and 
others know that we take it----
    Ms. Waters. Well, do all of the HUD counselors know this, 
all of those persons who are involved with assisting with loan 
modifications? Have you sent out any memorandum or notice to 
them that would explain this to them? Because they call us, and 
we are getting from the counselors in the HUD program that 
people are being dropped who are up to date on their payments 
in HAMP. So evidently they don't know. Has there been any 
communication with them?
    Ms. Caldwell. You know, on November 3rd we actually issued 
guidance to servicers on handling the homeowner complaints and 
making sure that inquiries were independently reviewed and that 
servicers had to suspend any foreclosure sale until it has been 
resolved. Because again, the capacity issue has been something 
that we want to make sure gets addressed.
    But again, I would like to answer your question on the 
hardest hit fund, and just say that in September we called in 
all of the large servicers and representatives from all of the 
18 housing finance agencies, along with representatives of 
Fannie Mae, Freddie Mac and FHFA, and talked to them about the 
importance of this program and putting together a model to get 
the servicers to work with all of the State FHFAs in this 
program.
    Ms. Waters. I am reminded that at our Subcommittee hearing, 
the banks basically admitted to dropping participants because 
of paperwork problems. So I don't know what you can do to be 
more forceful in getting their cooperation or what you can do 
to communicate better to the counselors how to follow up when 
they get these complaints. But the fact of the matter is, I 
suppose all of this is voluntary; is that right?
    Ms. Caldwell. Participation is voluntary, but once a 
servicer signs up, that servicer has to comply with the 
requirements of that contract, and we expect them to do so.
    Ms. Waters. But they don't have to sign up?
    Ms. Caldwell. Correct. Servicers do not have to 
participate. And in fact as of October 3rd, any servicer that 
is not in the program is not able to sign. So we have signed up 
the servicers that we have in there now.
    Ms. Waters. Okay. And I want to get back to something 
that--questions that I have started, without badgering you, I 
don't want to badger you. But I do want to know this. Since 
HAMP is not working--and I think there is a consensus that it 
really is not working--it is a voluntary program, and since 
there have been no sanctions, no fines, no real enforcement, I 
want to know what is Treasury's program to redo all of this, to 
reconstruct it, to come back with something that is really 
going to deal with these foreclosures and loan modifications? 
What are you offering that is different?
    Ms. Caldwell. Congresswoman, first let me just say it is 
not badgering. I really do appreciate the leadership you have 
provided on behalf of homeowners, not only in your State, but 
throughout the country. But while I will agree with you that 
HAMP has not helped as many people as we would have liked to 
have seen helped at this time last year, it has helped; it had 
tremendous growth when we started the year with 31,000 to 
500,000. We need to focus and do more, and so I will agree with 
you on that.
    But I think it is very important, we can't lose sight of 
the fact that those modifications done within HAMP are 
affordable and they are sustainable and they have changed the 
way the servicing industry has done business. So I just want to 
make sure that we follow that.
    In terms of the programs, I also want to just remind you 
that it is contractual, it is voluntary, but that is the way 
the program was set up. And as part of the TARP legislation, 
those programs that we have in place are the programs that we 
have. And we continue to try to work and revise those programs 
to the extent we can within the legislation that we have based 
on feedback from homeowners, from investors, and from servicers 
to make sure it is performing better.
    Ms. Waters. I appreciate what you are
    Saying, Ms. Caldwell, but I would like to know, given you 
have all the money that you need to deal with these problems in 
the HAMP program in the hardest hit fund, the Keep Your Home 
program, how would you suggest that that money be used to speed 
up loan modifications and to facilitate loan modifications and 
do principal write-down? Do you have any--I mean, I know that 
you are saying that you have seen some progress. And I must be 
very honest with you. Those of us who work very closely with 
this just don't see the progress. We are still bombarded with 
requests for help for these problems, for foreclosure problems 
in our districts. And we really do need to see more aggressive 
action. The more we hammer away at how to do it, we uncover 
more and more problems that the regulatory agencies should be 
uncovering, should be on top of, should know about. And it is 
just blowing my mind that we have all of these problems with 
the robo-signing and not having the notes, et cetera. So I mean 
it is not that we can be comfortable that things are getting 
better. How could you use this money to make it better?
    Ms. Caldwell. Again, while the programs that we have 
announced continue to be early, I just want to make sure on the 
record that we have made so many changes to this program in 
response to what we have heard. In fact, some would say that we 
have made too many changes, that the system can't absorb them. 
But within the first part of this year we announced the hardest 
hit fund to five States, to have those States that were hardest 
hit get money out the door. We got good response to that, that 
we increased it in June to add an additional five States.
    Ms. Waters. What banks are participating?
    Ms. Caldwell. Again, as I mentioned----
    Ms. Waters. In California we have one bank that is 
participating, Bank of America. Why can't you get more to 
participate?
    Ms. Caldwell. As I mentioned, you know, the programs are 
just continuing to be launched. The large servicers have said 
they will participate. We have called them all in, including 
the agencies, in September and more of them are participating 
right now in the unemployment programs because that has been 
faster to implement in a severe crisis to address, but we 
remain focused on encouraging the use and the consideration of 
principal reduction as much as possible, and we would like to 
see more servicers engaged in the California program. I think 
it is a good pilot for other FHFAs.
    Ms. Waters. Well, as I see it, whether we talk about the 
program that we funded for unemployed homeowners or whether we 
talk about the TARP money that you have, we have basically done 
everything possible to support keeping people in their homes. 
And it is a little bit mind-boggling to recognize that you have 
the money, you have the power, we have all of this so-called 
oversight, and we still are looking at 6 million more 
foreclosures through 2012.
    I know, Ms. Caldwell, there are some people that would have 
you believe that these are just irresponsible people who tried 
to game the system. But I have said over and over again, I 
don't believe that millions all of a sudden became bad people. 
Something happened, and we know what it was. The subprime 
crisis was created basically through predatory practices, 
really; I mean that is what it amounts to. And nobody has gone 
to jail, nobody has been fined, nobody has been penalized in 
any way. And we just feel as if, given all of the resources 
that we have made available to facilitate keeping people in 
their homes, that we are just not doing a good job of it. You 
are not doing a good job, our regulatory agencies are not 
weighing in in ways that could help us keep people in their 
homes.
    And we think that when we find things, like in the HAMP 
program, where people are up to date on their payments and they 
have kept, you know, good faith with the contract, that they 
should be assisted in staying in their home rather than being 
dropped because the paperwork is not done. Sometimes it takes a 
long time to get the paperwork done. We have people who call 
us, the elderly, for example, who are asked for paperwork and 
they have no assistance in trying to put that paperwork 
together. And we finally get them with some counselors and the 
counselors have to start from scratch in helping this 80-year 
old person who has been in that house for 30 or 40 years who 
got a refi through some slick loan initiator, and then we find 
that this person has been in HAMP, they have paid, and they are 
going to get kicked out of their home.
    So it is very disturbing. And every time we hold these 
hearings and we go over these questions and we bring this to 
your attention, it gets even more frustrating.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Conyers. Thank you very much. I am pleased now to call 
Darrell Issa, recognize him and to thank him for his--he has 
quite a schedule and he has fulfilled his commitment to return 
back to the Committee for questions, and we yield to him at 
this time.
    Mr. Issa. Thank you, Mr. Chairman. And nothing could be 
more important than American homeowners' ability to stay in 
their home if they have the means to do so, and I appreciate 
your leadership on this.
    And for my colleague from California, as you may recall, we 
have asked the special IG for an audit of the program you 
mentioned earlier, and as soon as I get it back I will share it 
with your office. I very much think you have a point, that this 
is an example where we have got to get the numbers to figure 
out whether in fact it needs to be shut down or revamped.
    I will try to be brief, I know we have votes coming up and 
we have a lot of Members still to ask questions. Mr. DeMarco, I 
am going to only ask you one question, and I sort of view it 
this way. In the news, rightfully so, there has been huge 
indignation that loans are being not fully looked at and simply 
stamped, the so-called robo signatures. But isn't it true that 
Fannie and Freddie admitted that they didn't look at individual 
loans, that they relied on third-party guarantees of large 
packs of them when they took on trillions of dollars of 
obligation effectively on behalf of the American people?
    Mr. DeMarco. Congressman, Fannie Mae and Freddie Mac do not 
service mortgages. They do guarantee mortgages that they 
acquire or they securitize.
    Mr. Issa. What I am getting to is they took mortgages 
without looking at them, just as we are initiating HAMP events 
today, based on, if you will, stated income, which is another 
name for the beginning of a liar's loan if you don't change 
along the process, right?
    Mr. DeMarco. I see. Fannie Mae and Freddie Mac typically 
purchase their loans that have been run through an automated 
underwriting system of theirs so that it passes or doesn't pass 
a screen that they have developed that defines their 
underwriting----
    Mr. Issa. Well, didn't their screen fail? Isn't it true 
that they took crap in? They took in outright lies in which the 
underwriting property was never worth what it was borrowed 
against and the individual never had the income to repay it? 
Isn't that true in many, many, many, many thousands of cases?
    Mr. DeMarco. Congressman, they have drawn $151 billion from 
the American taxpayer. They clearly bought loans that they 
either did not adequately underwrite or they did not price the 
risk adequately. And they certainly did not establish and build 
up in their corporations sufficient capital to back the risk 
they were taking.
    Mr. Issa. I appreciate your honesty and candor. Because one 
of the challenges that will not be met in this Congress, but we 
will be dealing with in the next one, is what do we do going 
forward, how do we unwind the history, and then if the Federal 
Government is going to have participation through some form of 
a GSE, how do we make sure this doesn't happen again and, more 
importantly to me, make sure that executives don't get paid 
millions simply because they took a lot of these on, and the 
less they looked and the more they took on the higher their 
bonuses were? And I think you would agree that that is part of 
our undisputed history.
    Ms. Caldwell, I appreciate your presence here. You have 
been before both our Committees and you have always, you have 
been gracious and patient for us to ask a lot of questions, 
often the same. In this case I will try not to completely 
retrace our steps on HAMP, but let me go through just a couple 
of them that I think the record is not completely clear on 
here.
    Although you have made changes in the front end of HAMP 
recently, I mean it is an evolving program, isn't it true that 
basically people do not have an obligation to at least somewhat 
substantiate their income at the very, very, very beginning of 
an application, that they still come in with effectively I make 
this much, give me 90 days to prove it?
    Ms. Caldwell. Congressman, effective June homeowners coming 
into HAMP verify their income before the trial modification 
starts. We announced that change in January and had it take 
effect in June. Certainly last year, when we were in the midst 
of the crisis and servicers did not have capacity to verify 
income up front, we did permit homeowners in under stated 
income.
    Mr. Issa. Which brings, the question is, in America, 
particularly if you are a salaried employee, and most of the 
people were, not all, but most, why was there ever an 
expectation that the status quo, the lead-in of this thing 
would be this is how much I make and I will prove it later? 
Because the 90 days in fact stretched on in the beginning of 
this process, didn't it?
    Ms. Caldwell. That is correct. And I think we certainly, 
both servicers, Treasury and participants in the program, would 
all acknowledge that the capacity to collect the documentation, 
which as you stated it seemed like it would be easy, presented 
a very difficult challenge. And we struggled with the 
documentation for, you know, a good period of time. And that is 
why in January we did change the program to require 
documentation up front, so that we wouldn't have the problems 
that Congresswoman Waters discussed about lost paperwork and 
not good treatment of homeowners or the one that you addressed 
about the potential for people coming in and having the 
mortgage reduced and then never providing income.
    Mr. Issa. Now, just to make the record clear, as I 
understand it, and correct me if I have misunderstood this all 
along, but the participants, if they initiate and it goes along 
anywhere except to a permanent modification, you don't 
reimburse that, is that correct? In other words, the B of A or 
any other bank or servicer, they are eating the front end of 
the process if it completely fails, isn't that true?
    Ms. Caldwell. Correct, yes. HAMP is a pay-for-success 
program, so the servicers, the investors and the homeowners 
only receive incentives if the mortgage is successful.
    Mr. Issa. Let's try to quantify that. How much have you 
paid so far?
    Ms. Caldwell. Again, I don't have the exact figures in 
front of me, but I would say approximately $700 million.
    Mr. Issa. So you paid about half a billion, round number?
    Ms. Caldwell. A little more than that, but that is fair.
    Mr. Issa. And you have obligated $30 billion, round number?
    Ms. Caldwell. For the HAMP program, correct.
    Mr. Issa. So there is a lot of obligation and not much pay-
for-success at this point, right?
    Ms. Caldwell. And I think it is important that success is 
defined over 5 years. So the amount paid out to date just 
reflects the one time success payment when a modification 
converts and then there is payment that goes through 5 years 
for each year that the modification is successful.
    Mr. Issa. And that is typically $1,000 at a crack times the 
number of loans and so on. They are relatively small payments 
per loan, right?
    Ms. Caldwell. The payments to the servicer and the 
homeowner are fixed, but for the investor it is a cost share 
based on the mortgage reduction between 38 and 31 percent, so 
that could vary by a lot.
    Mr. Issa. So this $30 billion program over 5 years that is 
serviced, if you will, on the front end of actually going to 
completion about half a million people, is going to cost us $30 
billion over 5 years. And you are probably aware that in our 
hearings next door the companies, the servicers, the banks, 
told us that basically anybody who got into this 500 million, 
virtually all of them would have renegotiated without the HAMP, 
that in fact the ones who succeeded are the same who would have 
succeeded otherwise. Are you aware of those statements, I 
assume?
    Ms. Caldwell. I am aware of those statements, yes.
    Mr. Issa. Well, you know, Congresswoman Maxine Waters and 
all of us on the dais represent different constituencies, but 
we all have one thing in common, which is we know that money is 
fungible. So if all of the money you paid were obligated, half 
a billion paid out, $30 billion obligated and continuing to 
escalate, if all of it would have been, if these people would 
have gotten loan modifications anyway, they would have gotten 
to stay in their homes, assuming they applied, and it could 
have all been done with no Federal assistance, and they still 
would have gotten substantially the same deals, or at least 
they would have gotten their loans which they felt they could 
no longer afford modified so they could afford them, then 
shouldn't we take that $30 billion over 5 years and ask 
Congresswoman Waters and Congressman Conyers and others where 
we would like to spend $30 billion helping people in need 
instead?
    It is not just a rhetorical question, it is based on the 
hearings next door and here. It is the greatest question I have 
going into the new year for HAMP, is why do we continue 
investing in something that takes a very long time, delays the 
disposition of land and our homes and we have had testimony 
from the banks participating and nonparticipating that it 
doesn't create any substantial amount of new modified loans, it 
simply reimburses for the most part for the people they would 
have done anyway.
    Ms. Caldwell. I think one of the things that, again, is 
important to think about in HAMP is that it does pay for 
success. And those same servicers have also testified that the 
existence of HAMP fundamentally changed the approach of 
modification in terms of payment reducing and other types of 
programs.
    Mr. Issa. Ma'am, I have no doubt that in the midst of a 
crisis Republican and Democratic Presidents made decisions 
along with Treasury to try to find ways to change what was a 
free-fall. But Congress has an obligation to not live up to the 
worst of what Ronald Reagan always said, which is nothing had, 
I am paraphrasing, had greater immortality than a temporary 
government program. This program seems to have outlived its 
usefulness in that we are no longer in free-fall, we are in a 
period in which it appears as though loan modifications would 
occur anyway, and that if we began looking at the next tranche 
of $30 billion and said, well, can we target it only to those 
which would otherwise not have successfully been modified, can 
we modify the use of--I am not saying to stop spending money 
necessarily, but can we spend this money better in other ways 
than simply rewarding basically banks for doing what they would 
do anyway in their best interest?
    Ms. Caldwell. And I think that is a very important 
consideration for Congress to have, but I also would just like 
to say that as we sit here today we have heard stories from 
many Members that modifications are not being done the way they 
need to be done, that the forecast for foreclosures continues 
to be high, we have heard multiple ranges of projections, but 
as we sit here today, you know, my office is charged with 
making sure modifications get done in accordance with program 
guidelines, and that goes to 2012.
    Mr. Issa. And I appreciate your dedication. You know, the 
word ``bureaucrat'' is not always a pejorative. You are
    Doing what is your task. Our challenge and Congresswoman 
Waters' challenge is can we take the next tranche of $30 
billion and look at those who are failing in what we now call 
HAMP and say, well, wait a second, maybe what we should do is 
let loan modifications occur and only look at those who fail to 
get a modification through an ordinary way and then look at 
them on a different merit basis.
    So I understand that your left and right barriers are your 
program, and I think you have been ingenious in trying to 
improve it over time. It started off as a terrible program; now 
it is only a program we are not sure does us any good. But that 
is a lot better than it was initially.
    So Mr. Chairman, I respect that I have gone over my time. I 
appreciate it. I look forward to us continuing to figure out if 
there is a way to use these funds better. And I appreciate, and 
I particularly do, Phyllis, you have been great, you have done 
the best you can do, I think it has been very good of you to 
continue to try to take a program and make it work better than 
when it started. And I don't hold you accountable, but I do 
hope that we hold ourselves accountable to look at where the 
best place to put the dollars are.
    I yield back.
    Ms. Caldwell. Thank you.
    Mr. Conyers. Thank you very much, Darrell Issa. I am 
pleased now to recognize a former Subcommittee Chairwoman, 
Sheila Jackson Lee of Houston, Texas.
    Ms. Jackson Lee. Mr. Chairman, thank you, and I hope on 
your wisdom that we will continue this effort. I am delighted 
to listen to the questioning of Mr. Issa because he has 
confirmed of your genius that these hearings were long overdue. 
And I guess you will have to hear us pontificate for a little 
bit.
    Let me, first of all, thank all the witnesses. And coming 
at it from the perspective of the Judiciary Committee, I know 
that we tried some months or more than a year ago to organize 
the concept of bankruptcy and foreclosure to allow the 
homeowners to work their own arrangement out. And it was 
interesting to hear the banking industry and mortgagors saying 
that we would have a calamity. And I frankly believe we have a 
calamity now, because we continue to see foreclosures, the tide 
has not stopped. And as I understand some of my colleague's 
questions, Congresswoman Waters raised a question of lost 
paperwork, I raise a question or the point of arrogance by 
banks: We don't have to worry about the paperwork, decisions 
are already made. And it is just perplexing, compounded by the 
fact that it is like pulling steak from a barracuda to try to 
get a loan from a bank today. And of course they threw it back 
on the regulators.
    So I guess as we have listened to this series of 
questioning, and forgive me for not hearing the details of your 
testimony, I came in a little bit on Judge Winslow's remarks, 
but I still view where we are as a crisis, as a calamity. I 
don't see any progress having been made. I think the banks are 
culprits. We have made them richer and less sensitive to the 
intent of this body, which was to create greater access to 
credit, stabilize the marketplace. It is difficult for people 
to secure mortgages today, it is difficult for people to 
refinance, there is no relief on foreclosures, and the fat cats 
keep getting fatter.
    And I think there is a valid point to the distinguished 
gentleman from California's comment about whether or not this 
program is working that you are in charge of, Ms. Caldwell, and 
whether or not there needs to be less of a boondoggle for the 
banks getting money to do good stuff and they don't do it.
    So I would like to raise the question of what 
considerations is Treasury giving to totally modifying what you 
are responsible for? What kind of comfort level do you have 
with success on this remodification effort, and I have not 
listened to all that you have responsibility for. And what kind 
of vigorous give and take or oversight or hammer do you have on 
the banks? What is the punitive measure that can be utilized 
for banks that continuously ignore the homeowner? The homeowner 
is usually one person. They don't usually come in a class 
action, they don't usually organize the block and say let's 10 
of us go in. It is usually one person at a time. That is an 
easy, easy prey to knock over. You don't have to even worry 
about that person. Because either by the time they are already 
out of their house, they are foreclosed on, either by the time 
they don't have the means to stay even in a foreclosed house 
because they can't pay for other things, maybe they are in that 
bad a shape, so they may go away quickly, particularly if they 
are not represented by counsel. And in this instance I think 
this was a process where they could handle this on their own.
    But how deeply, I asked two questions, I hope you took note 
of them, how deeply does this program that you are
    involved in penetrate beyond the Beltway to provide a real 
comfort for these homeowners who are still going through 
foreclosures neighborhood by neighborhood, city by city, 
sometimes it is up, sometimes it is down, but it is still 
continuing?
    Ms. Caldwell.
    Ms. Caldwell. Thank you. Let me just first say that the 
stories that we hear about lost documentation, robo-signing and 
other practices are, you know, disturbing, inexcusable and, you 
know, servicers need to be held accountable in those cases 
where they are violating the laws in States which they do 
business. You know, the program that we operate, the Making 
Home Affordable Program, is a program authorized through TARP 
that is a contractual relationship, so it is governed by 
contract versus enforcement or regulatory agency. But when 
those servicers have signed the contracts we expect to hold 
them accountable.
    Ms. Jackson Lee. In what way; what is the punitive measure?
    Ms. Caldwell. Again, because it is contractual there is no 
civil money penalties or, you know, fines. We have remedies 
that we can withhold incentives on permanent modifications or 
we can claw back money that has already been paid. But our 
focus now is to get more modifications made.
    Ms. Jackson Lee. And do the servicers include banks that 
you have contracted with?
    Ms. Caldwell. The servicers, yes, bank servicers.
    Ms. Jackson Lee. Include banks and others, forgive me for 
not understanding the distinction. Pardon me?
    Ms. Caldwell. Yes.
    Ms. Jackson Lee. All banks?
    Ms. Caldwell. No, not all banks.
    Ms. Jackson Lee. Right, but it does include some banks?
    Ms. Caldwell. It does include banks, servicers that are 
part of banks.
    Ms. Jackson Lee. And this was done administratively or when 
we passed TARP did we instruct Treasury to do this, meaning the 
Congress? Did we instruct or you have done this under the TARP 
funds administratively?
    Ms. Caldwell. I am not sure I have the answer to that.
    Ms. Jackson Lee. We passed TARP. That was a legislative 
action.
    Ms. Caldwell. Correct.
    Ms. Jackson Lee. Did we create and instruct you on this 
modification program that you are now speaking of, or did you 
create it administratively under TARP using TARP funds?
    Ms. Caldwell. Again, I was not part of Treasury when TARP 
was created, but I understand that there was always a mortgage 
modification component to it. When I joined, the office had 
already been established. So I don't know all of the 
legislative detail behind the creation.
    Ms. Jackson Lee. I will let you finish, but I think it is 
dastardly that we would have--I don't think there has any place 
in business where there is not a punitive measure for breaching 
contract. And for us to just pat people on the back or tap them 
on the knuckles, if you will, a tap-tap and say, oh, naughty, 
naughty, and they are literally killing people and throwing 
them out of their houses is a disgrace. And it may be that we 
need to remedy that. There needs to be some penalties where 
people feel the pain that they are creating for this whole 
market.
    But finish, if you would. I just want to go to these other 
witnesses for questions. So you have got this modification 
program, it is contractual--and you can finish, go ahead. I 
think the question I want to hear from you is the fact that, 
you know, what is the punitive, what is the relief--as I 
understand it, that you have not implemented any of the 
remedies or claw backs, but what is it when this process fails 
and the victims are the sufferers, what do you all do?
    Ms. Caldwell. Again, you know, in those cases where laws 
have been violated we expect the servicers to be held 
accountable. In terms of the authority under our contracts, in 
those cases where servicers did not solicit homeowners for 
HAMP, we have required them to suspend those foreclosures and 
go back and reconsider those homeowners for modifications. In 
terms of those situations where homeowners have been 
inappropriately denied, we ask the servicers to reconsider 
those decisions.
    So again, while we have not gone back and clawed back 
incentives at this point in time, remembering we are still, you 
know, less than 2 years into the program and, you know, may in 
some cases be building those steps necessary to impose fines, 
we have taken every step to change the behavior of the 
servicing industry and make sure that homeowners had an 
opportunity to be fairly considered for HAMP.
    Ms. Jackson Lee. Let me move on to Mr. DeMarco very quickly 
and let Julie Williams contribute as it relates to how you fit 
into this process. But Mr. Chairman, I think it is a darn 
disgrace. And I am sitting next to a seasoned Member of the 
Financial Services Committee who has lived through this, 
Congresswoman Waters. And I imagine that they have crafted as 
much as they could craft a structure within the capitalistic 
system. All of us claim and have an affection for capitalism. 
No one here is waving the socialist flag or the Communist flag. 
But if there is ever a disgraceful debacle that has shown no 
positive relief on behalf of the United States Government for 
its people, its people who pay taxes, its people who are the 
basis of this country, it is mortgage foreclosure, because we 
have gone through it. And so I would simply say that the 
Judiciary Committee needs to look at this.
    I frankly believe there should be punitive measures, jail 
time. Because it is absolutely absurd that people can be 
comfortable in their offices using our money to fool around, 
mess up and nothing happens to them at all. But the poor victim 
in the home, the home that is $1 million or $250,000 or 
$55,000, you know, is not only the victim, but also gets blamed 
because that is the dodo who got into a house that they 
couldn't afford. Fraud was limited; it existed, yes. But in 
many instances people were well intentioned by who led them to 
believe what they could handle. And then there was just the 
average Joe, hard working Joe, whose two-income family tried to 
get a brownstone in New York or tried to get a house in 
Detroit, you know the conditions there, or in Houston or in 
L.A. Or elsewhere.
    So if anyone can answer. Judge Winslow, I didn't hear your 
testimony. I heard it but didn't hear it.
    Judge Winslow. I am so sorry you didn't.
    Ms. Jackson Lee. Yes, I know. I am going to be reading it 
though. Do you have any insight on this question of a lack of a 
punitive measure, or do you have any insight on why we failed 
to craft the bankruptcy process for holders of mortgages to 
protect themselves from foreclosure.
    Judge Winslow. All right. If I could be sure that I 
understand your question so that I can answer it as accurately 
as I can. Why not have the trustee in bankruptcy and the 
bankruptcy court handle the process; is that the question.
    Ms. Jackson Lee. We had legislation that failed to make the 
mark that we were going to include access to the bankruptcy 
courts for mortgage foreclosure, yes, so that all parties could 
be protected. You must have heard that debate, it has been 
going on for a number of years. So I just need yes or no. Do 
you think that is a viable approach?
    Judge Winslow. I do not.
    Ms. Jackson Lee. Why not?
    Judge Winslow. Because the trustee in bankruptcy and the 
bankruptcy judge have an obligation to make a determination as 
to what point all assets have been appropriately distributed 
from the estate of the bankrupt and then there is a release.
    We see, I see on numerous occasions, probably every 4 or 5 
proceedings that appear before me, at least one and frequently 
more than one bankruptcy which was ultimately released. It is 
not a salvation. It is an----
    Ms. Jackson Lee. Because my time is limited and the 
Chairman has been very kind and I just have one more question, 
let me say to you I am not convinced.
    My final point is do you think there should be criminal or 
punitive measures for a failed process, bankers, servicers and 
others having a dereliction of duty that causes in a 
potentially criminal way for viable homeowners and others to 
lose their homes?
    Judge Winslow. Yes.
    Ms. Jackson Lee. All right. Thank you, sir. Let me move to 
Ms. Williams and Mr. DeMarco. I will ask you collectively as 
government representatives, what are you doing to stop the tide 
of foreclosures realistically? And what are you doing to help 
punish the deadbeats, who are servicers who are not doing their 
job?
    Just start with you, Ms. Williams.
    Ms. Williams. Okay. Just by way of a little bit of 
background, the Office of the Comptroller of the Currency, a 
bank supervisory agency; we are responsible for national banks. 
We have been--and I describe this in my written testimony in 
some detail--very involved and very active in focusing on 
causing national banks to improve their handling of the 
modification process and to increase the volume of affordable 
sustainable modifications that national banks are entering 
into.
    Ms. Jackson Lee. Do you keep records, can you tell me that 
you have sizably increased that? Do you have punitive measures? 
Do you have criminal measures? Do you have civil fines for 
their inappropriate behavior?
    Ms. Williams. Yes, we do. Let me break those down. We have 
a substantial amount of data and----
    Ms. Jackson Lee. How many, I would like to see that 
submitted to the Committee.
    Ms. Williams. We can provide for you information on 
modifications by types that national banks have entered into, 
the characteristics of the modifications, the extent to which 
the mods resulted in reduced payments of 10 percent, 20 
percent, more than 20 percent. We have a lot of data on that. I 
am happy to share that with you.
    Ms. Jackson Lee. I would appreciate it. Can you give me one 
answer, do you have a list of those who have been civilly 
fined, if you don't have criminal fines or punished for their 
inactivity?
    Ms. Williams. For their inactivity or----
    Ms. Jackson Lee. Their improper, their, if you will, lack 
of performance.
    Ms. Williams. We are in the midst right now of a very 
extensive multi-agency examination process that relates to the 
foreclosure documentation and integrity issues. I describe 
this, there is more detail in my written statement.
    Ms. Jackson Lee. Right.
    Ms. Williams. It will be done by the end of December. In 
the weeks after that, we will be evaluating what enforcement 
and supervisory steps we want to take. All of the banking 
agencies are a part of this. We have very, very broaden 
enforcement remedies.
    Ms. Jackson Lee. Well, the question is whether there has 
been any penalties, whether there has been any revocation of 
charters. And let me just say that I love our banks, we have 
community banks, we have large banks, and national banks as you 
have indicated. But there has to be an even playing field. 
There is not in this mortgage foreclosure.
    I close on Mr. DeMarco. Do you have any teeth in what you 
are doing? This love of capitalism or this fear that the 
marketeers threaten Congress as they did a few hours before we 
passed this bailout that all would collapse, and we would never 
see America as it was ever again. We see that we are still in 
the midst of a quagmire. All of these threats I think have 
frozen the Federal Government into activity. Because you cannot 
possibly be doing anything if we go into our districts and find 
all these people that are in foreclosure, and they will say to 
you we tried to reach the bank, we tried modification and then 
we can't even get access to credit on another side of the coin.
    Mr. DeMarco.
    Mr. DeMarco. Congresswoman, since we put Fannie Mae and 
Freddie Mac into conservatorship those companies have completed 
about 1.2 million foreclosure alternative transactions. We 
report on that on a monthly basis to the Congress through what 
is called the Federal Property Managers Report. I would be glad 
to provide a copy of that to you.
    With respect to penalties, Congresswoman, Fannie Mae and 
Freddie Mac's relationship with the mortgage servicers is a 
contractual one. And on the basis of contractual violations of 
representation and warranty, Fannie Mae and Freddie Mac have 
put back to mortgage servicers and originators billions of 
dollars worth of mortgages. I provided the actual data 
yesterday on the Senate side. I will be happy to provide the 
data on that to you. And there is still requests outstanding 
totaling in the billions of dollars. I also reported that. I 
would be pleased to provide that data to you as well.
    And I would say with respect to Fannie Mae and Freddie Mac, 
while they are in some sense certainly victims of problems in 
the mortgage servicing thing, they also need to be held 
accountable for the problems that we have in the housing 
market, and obviously the Federal Government through FHFA, 
which was 6 weeks old at the time, placed Fannie Mae and 
Freddie Mac into conservatorship. The CEOs were dismissed from 
the job, the Boards of Directors, much of senior management has 
been replaced. And yes, in the past there have been civil money 
fines against certain management at those companies.
    Ms. Jackson Lee. Well, thank you. It may be that we are the 
only ones who did anything, and certainly Fannie Mae and 
Freddie Mac were the ones that everyone wanted to put on the 
guillotine because it was easy to do. I think we need to look 
closely at criminal fines and other penalties, Mr. Chairman, 
for this foreclosure debacle. No one is getting it, people are 
still hurting. As long as we are fooling around with 
contractual relationships, there will be no action whatsoever. 
The banks will cry foul, they will talk about the system is 
collapsing and the world is coming to an end, and we will stand 
back and hold our hands up and all of America will be walking 
past foreclosed properties.
    Mr. Chairman, I thank you for this hearing and I hope the 
Judiciary Committee can get its teeth into this process. I 
yield back.
    Mr. Conyers. Thank you, Sheila Jackson Lee.
    I turn now to the Ranking Member of the Committee, the 
gentleman from Arizona, Mr. Trent Franks.
    Mr. Franks. Thank you for that advancement. I appreciate 
the way that you advanced my position here. It is temporary?
    Mr. Conyers. Yes.
    Mr. Franks. He says it is temporary. Thank you, Mr. 
Chairman.
    Mr. DeMarco, if I could begin with you, sir. In your 
written testimony you state that Freddie Mac and Fannie can 
require a servicer to pay damages if the servicer does not 
follow the servicer guidelines. And of course that seems very 
appropriate to me. At the same time it perhaps introduces a 
little more uncertainty into the current crisis which may 
compound the problem, at least in the short-term.
    But my first question is whether Freddie or Fannie have 
actually sought any damages. It is a little related to Ms. 
Jackson Lee's question, but as a result of the robo-signing 
controversy, have you sought any damages from any of those 
entities?
    Mr. DeMarco. Servicers were reminded on October 1st by 
Fannie and Freddie that robo-signing or those sorts of mistakes 
were not following proper procedures and foreclosure process 
and is a violation of the seller-servicer agreement. They have 
been alerted that this makes them subject to penalty, and the 
position at the moment, this is still fairly early, is we are 
assessing what the damage has been, to know what sort of remedy 
under the contracts to pursue, because we are still trying to 
find out whose got the problem, what the scope of it is and 
what has been the damage to Fannie Mae and Freddie Mac as a 
result of that. There has not been an assessment made to date 
that I am aware of, but they were alerted of this possibility 
as set forth back in the contract back on October 1st.
    Mr. Franks. Given the conservatorship, the question is sort 
of a hard one to ask, I ask if Freddie on Fannie have done it 
or if you have done it. Who is responsible for making the 
decision on whether or not to seek damages in the first place 
given the conservatorship in place at this time?
    Mr. DeMarco. As we describe at the time the two companies 
were placed into conservatorship, the day-to-day operations of 
the company were delegated to the senior management, the 
management team and the reconstituted boards of directors of 
the company, so that there could be normal functioning 
corporate governance. So day-to-day operations, including 
executing and implementing and carrying out terms of contracts, 
are the responsibility of management. But I can assure you, 
Congressman, on this matter that has all of our attention, we 
are paying close attention to what the companies are finding 
with respect to added losses that they may be incurring as a 
result of these matters. And I would expect that appropriately 
remedies, fines, so forth, under the terms of the contract 
would be pursued.
    Mr. Franks. That makes sense. In other words, it is really 
their responsibility at this point, but you are having some 
very pointed discussions with them?
    Mr. DeMarco. Yes. As conservator we are ultimately 
responsible. And the companies understand quite well and I am 
pleased with the support and activity of the senior management 
and the board. They fully understand that both of these 
companies are operating only as a consequence of the backstop 
provided by the American taxpayer, that they have a 
responsibility in operating these businesses, to do so in a way 
in which it minimizes losses on these troubled mortgages, 
because those losses are passing through to the American 
taxpayer.
    Mr. Franks. I guess that probably tees me up for the next 
question. Given the conservatorship of Freddie Mac and Fannie 
Mae, how would an extended nationwide foreclosure moratorium 
potentially affect the taxpayers?
    Mr. DeMarco. Congressman, I believe such an extended 
nationwide moratorium would add cost to the taxpayer. And I go 
into this a little bit in my written statement, but I would not 
support a nationwide moratorium. I don't see the grounds for 
it. At this point in time I think that absolutely where there 
are mortgage servicers that are not processing foreclosures 
properly, if they are in violation of State law, if they are 
not doing it according to contract, that that must be 
corrected, but I do not believe that we have the evidence to 
suggest that a nationwide foreclosure moratorium would on 
balance help this matter. I think that it would further harm 
neighborhoods and increase costs to the taxpayer.
    Mr. Franks. I understand.
    Mr. Chairman, some fairly learned voices have questioned 
the legality of the Mortgage Electronic Registration System, 
which is commonly known as the MERS system. And since about 60 
percent of the Nation's residential mortgages are recorded in 
the name of MERS, Inc., the legality of this sort of obscure 
entity should either be established or addressed at least. And 
questions have been raised about MERS being both acting as an 
agent and as a principal in mortgage deals, and it just seems 
like the incoherence of the MERS legal position then becomes 
fairly challenging to sort out.
    This may be something for Judge Winslow to look at here, 
but can you address those concerns? Judge, if it is all right 
with you, sir, I will start with you, but I think this will be 
something anybody can take a shot at because in property 
rights, protecting, you know, property rights it becomes 
obviously very critical to define precisely who owns what. And 
this seems to blur that line pretty dramatically in my mind.
    Judge Winslow. I think the blurring started after 1997, and 
that is about the creation date of MERS Corp. and MERS. Through 
the years up to about 2004, MERS took a position they were a 
nominee only and did not act as a foreclosure agent. There then 
came a time up until approximately 2007 when MERS changed that 
position and stated that they would not any longer act as an 
agent to foreclose, particularly after the beginnings of the 
robo-signing recognition. It is still the case that MERS from 
time to time in the older cases, as well as in some of the 
newer cases where they, I understand it from the Web site, 
believe that they have the actual note in hand, that they will 
act as a mortgagee or in the capacity of a mortgagee in 
foreclosure as a plaintiff. I don't think that without having 
an equitable interest in the mortgage that the nominee in 
equity has the right to commence a foreclosure proceeding.
    Mr. Franks. Well, judge----
    Judge Winslow. Does that make sense?
    Mr. Franks. You very eruditely defined why I asked the 
question. 
    Judge Winslow. Thank you.
    Mr. Franks. I am impressed. But obviously you see the nexus 
of the question. And Ms. Williams, if you want to take a shot 
at it.
    Ms. Williams. Okay. Let me add a couple of pieces here. 
There is a lot of confusion around because there is a lot of 
imprecise language that is used in some of the descriptions of 
the process.
    Mr. Franks. Precisely, it's imprecise.
    Ms. Williams. It takes you back to your real property 
classes in law school about the difference between the mortgage 
note and the mortgage. MERS doesn't hold the note; the note 
will go ultimately to a document custodian. What MERS is doing 
is acting as a nominee with respect to the mortgage. And it is 
the mortgage that gets recorded, not the note and there is 
confusion about that.
    Issues about MERS's status are fundamentally issues under 
State property law. And that law is long-standing, our Acting 
Comptroller sometimes refers to these principles as going back 
to the days of Queen Elizabeth I, and some of that is probably 
quite right. So you are dealing with a situation where you have 
a modern type of electronic registry in the context of State 
property laws that have principles that are really rather quite 
old.
    Separate from that, with respect to MERS I just want to 
add--and this is in my written testimony--that we are doing an 
examination of MERS and how MERS operates and the processes and 
procedures that it follows in order to do what it does. It is 
an interagency examination. The FHFA examiners are also part of 
this as well as examiners from the Fed and the FDIC. So looking 
operationally at MERS is also part of the examination work that 
we have underway right now.
    Mr. Franks. I think Professor Peterson might have been 
inclined to ask some of those same questions.
    I guess my last question is this, Mr. Chairman, and I 
address it to the group here to see who might best answer it, 
which entity created this MERS system? What was the fundamental 
reason for it? What was the rationale for it? And of course 
States feel like to some degree that their statutorial 
authority has been subordinated in this process and maybe they 
are right, maybe they are not, but those questions. And what is 
the answer? What would you do to address it?
    Judge, you sound like you are ready to take it on. 
    Judge Winslow. I would be very pleased to. We have been in 
touch with MERS, my office has, since approximately 2004, 
speaking to general counsel, exchanging e-mails and trying to 
have an understanding of precisely what it is that they do. So 
at any particular moment in time their function was defined, 
but morphed into something else thereafter. Typically and from 
the beginning MERS Corp., which is owned substantially by 
banks, insurance companies like AIG and others, look to using 
companies such as MERS in order to facilitate the transfer of 
the mortgage. And it can do so in an inexpensive fashion and in 
a rapid fashion and sometimes so rapidly that the transfer 
takes place before the County Clerk has any notice, as a for 
instance, of the transfer. And that does become a problem even 
though in many States it is permissible to transfer a mortgage 
without making the change in the records of the County Clerk.
    Mr. Franks. So would anyone want to suggest any way that it 
should be addressed at this point? Is there anything that you 
think is an important next step?
    Mr. DeMarco.
    Mr. DeMarco. Congressman, I would simply say that the 
review that Julie Williams mentioned is underway and I would 
like to see what comes out of that, but the basic premise here 
that there be a way of adding liquidity to the mortgage and 
mortgage servicing is something that developed in part in 
response to the growing mortgage industry and the growing 
transfer of mortgages, mortgage servicing, and the development 
of securitization. And this utility, if you will, is something 
that has been developed to contribute to facilitating 
development of securitization, the development of 
securitization, developed to be able to better access global 
capital markets, to ultimately be able to reduce mortgage costs 
for borrowers.
    So while there are things, questions being raised about 
MERS, they are being looked at and there should be, I think we 
need to keep in mind here that this is part of, you know, as 
has been mentioned, coming to grips with technology, 
securitization and ways of facilitating financial transactions.
    Mr. Franks. So you are really not saying that it was part 
of catalyzing the bubble, it was just sort of one of the 
accoutrements that went with it, it sounds like, and that 
sounds reasonable.
    Mr. Chairman, I yield back and thank you all for coming 
here today.
    Mr. Conyers. Thank you, Trent Franks. I am now pleased to 
recognize the gentlelady from California from California, Dr. 
Judy Chu.
    Ms. Chu. Thank you, Mr. Chair. I would like to ask Justice 
Winslow about the remedies available in court. According to the 
Washington Post, some judges in New York are estimating that 
they are dismissing 20 to 50 percent of the foreclosure cases 
on the basis of sloppy or fraudulent paperwork that was filed 
by lenders. In one case the court ruled in favor of a homeowner 
in Long Island and cited that the mortgage company's paperwork 
on her foreclosure case was flawed and that its behavior was 
repugnant. The judge erased the family's $295,000 and gave the 
house back for free.
    Now while this may be an unusual result, it does illustrate 
that there is the power of the court to remedy some of these 
fundamental flaws in the system. I would certainly like that to 
be available in California, but unfortunately we are a non 
judicial State where the lender doesn't have to prove to a 
judge that they have to foreclose on a homeowner.
    The problem is how could you catch this kind of repugnant 
paperwork in this kind of situation where you are a nonjudicial 
State? And how could an average homeowner without high level 
mortgage knowledge even know what to look for? 
    Judge Winslow. Thank you so much for the question. And I do 
want everyone to realize that the case that you are referring 
to, the Yano case, has in fact been reversed by the Appellate 
Division Second Department with some admonition to Judge 
Spinner that he exceeded his authority in revoking, 
terminating, voiding the underlying mortgage obligation.
    I believe that cases such as this on one side are positive 
because they bring to the attention of the community the nature 
of the problem that we have. On the other, I think they are not 
positive because they lead to unpredictability, inability to 
understand what is going to happen next. We have the tools 
right now under 3408 of the C.P.L.R. And under the direction of 
the administrative rules established by Jonathan Lippmann and 
Ann Pfau, the Chief Administrators, State of New York, to do 
two things. One is to require the certification of all 
documents by the attorney representing the lender. And failing 
to do that, there would be implications under what is called 
Rule 130 of the Uniform Trial Rules. So there are significant 
penalties available for failing to comply with that particular 
rule.
    The use of an extreme to address a particular problem may 
not always be more than today's sound byte. And I am afraid 
that in some cases that is what is happening and an improper 
conclusion is being reached by the public that oh, I have a 
chance now to wipe out my mortgage. That is not what is 
happening in New York State.
    New Jersey adopted the same rule literally 3 days ago about 
requiring the note and mortgage to be together, and it is 
growing into a State, common law State that has much of the 
same rules as New York. And you know certainly about Florida. 
So there are within our system right now penalties available 
under Rule 130 which provide for $10,000 fines to both the 
attorney and the principal in a case, plus all of the costs 
associated with the defense of the case by the defendant or the 
plaintiff who was wronged in the matter.
    That is the answer that I think we should follow up on. If 
we need more than that, then I think the trouble is going to be 
of such a nature that the draconian method, if applied, is 
going to ultimately find a way to raise its head and show that 
it is not the answer.
    Ms. Chu. Do you think it is true that the judges in New 
York are estimating that they are dismissing 20 to 50 percent 
of foreclosure cases due to sloppy paperwork?
    Judge Winslow. I am sorry?
    Ms. Chu. You said that the Yano case was reversed.
    Judge Winslow. Yes.
    Ms. Chu. But in terms of the other judges the Washington 
Post said that they were dismissing 20 to 50 percent of the 
foreclosures cases on the basis of sloppy or fraudulent 
paperwork that was filed by lenders.
    Judge Winslow. Yes. In those particular cases I will tell 
you what I do and I don't think that it is substantially 
different than many of the judges of this State do. There is 
either a motion for a default judgment, the 3215, or a motion 
for summary judgment, 3212, which is made by the plaintiff. If 
in fact when I examine the submission it is faulty, dismiss the 
submission and look at the underlying action. And if there is 
no basis for the underlying action, dismiss that. That still 
allows the lender the opportunity to remedy it, if the lender 
can. So the matter doesn't end and we don't have a 
circumstance, with rare occasions, where the lender is deprived 
of any action or claim that it could maintain against the 
borrower.
    Ms. Chu. I am still thinking about any State over the next 
2 years an additional 7,000 foreclosures are expected and an 
almost 10 percent of these could be saved through a court 
supervised modification.
    Judge Winslow. Yes.
    Ms. Chu. What concrete remedies do you think are available 
in a State like mine?
    Judge Winslow. I'm sorry, how did I get that information?
    Ms. Chu. Well, I am just talking about California, which is 
a nonjudicial state.
    Judge Winslow. Okay, and?
    Ms. Chu. What concrete remedies are available in our State?
    Judge Winslow. What can we do about the 7,000?
    Ms. Chu. Yeah.
    Judge Winslow. What we can do about the 7,000 is to try a 
mediation, but that is the most. And I don't believe it is 
going to be effective. I have not seen mediation work as well 
as I would like or hope to see because both sides have the 
opportunity to say no. But since the 7,000 constitute notice 
only of a pending default matter which will result in a 
foreclosure, there is nothing that the State--that New York 
State can do other than to make the suggestion that there be a 
mediation.
    Ms. Chu. Okay, thank you.
    Judge Winslow. Thank you.
    Mr. Conyers. Our final questioner for the day is the 
distinguished gentleman from Florida, Mr. Deutch. I want to 
commend him, he has been at the beginning of these hearings. He 
has been through much of the middle part of it, and now he will 
be the final Member to question the panel. The gentleman is 
recognized.
    Mr. Deutch. Thank you, Mr. Chairman. Let the record show, 
Mr. Chair, that even as I was not sitting here I did watch the 
hearing as I was eating my sandwich. I appreciate the 
opportunity. I would like to go back to Judge Winslow for 1 
second.
    The certification process that you described with the 
$10,000 penalty, what happens if there is a false certification 
that is discovered only when it is too late? The fraud, the 
robo-signature, the notary example that you gave, some other 
violation, mortgage servicer, whatever it is, it appears too 
late and the homeowner has been foreclosed out.
    Judge Winslow. As about as bad as it could possibly be, 
because you can set aside, you can set aside that whole 
transaction and require one of two things, either an 
enforcement proceeding, which would require that the property 
be returned to the original homeowner-borrower, or that damages 
equal to the actual loss be paid by the lender or the nominee 
who commenced the foreclosure action.
    Mr. Deutch. Thank you. And Ms. Williams, given the late 
hour and the votes that were just called, I will say that I do 
have some serious concerns about the findings in the 
congressional oversight panel report from the 16th of November, 
particularly the securitization process. I will submit those to 
you as follow-up questions.
    But I did want to return to something you said earlier in 
an exchange you had with Mr. Goodlatte. He had asked about why 
your office had not paid attention to this sooner; you talked 
about the focus being on modifications. The answer was there 
were no warning signs about foreclosure documentation that were 
triggering any red lights. There was an article in 2007 about 
some, I think it was Deutsche Bank where the foreclosure--2007 
in fact where Deutsche Bank lacked standing to foreclosure in 
14 cases because it couldn't produce the documents. That was 
followed by other cases around the country. I think it would be 
helpful to understand how it is that we might have missed 
those, and at this point what is in place to ensure that we 
don't miss something like that going forward?
    Ms. Williams. A perfectly fair, appropriate question. What 
I was trying to explain is that we didn't have indicators of a 
systemic programmatic problem with the foreclosure 
documentation. I think that we would not argue that there have 
been situations that have occurred over the course of the last 
several years where a particular practice or particular 
situation, a particular loan that involved a bank, a national 
bank or otherwise, was not handled properly and that there have 
been instances of litigation over that. But what we have 
typically looked at in the examination process when we are 
focusing on what I term general business processes, how you 
sign the documents, doing the notarization properly, is the 
bank's internal control processes, their quality assurance and 
their audit to see that those issues are being identified and 
they weren't. And the issues weren't surfacing in our own 
consumer complaint system either.
    Mr. Deutch. Excuse me, if I may, just to fast forward, you 
have acknowledged earlier that this raises concerns about the 
overall integrity of the foreclosure process. Certainly in my 
State of Florida this is a devastating crisis and the integrity 
of the entire process has absolutely been called into question.
    So I would like to address what is going to be happening 
through your office, through the OCC? The OCC's mission is to 
regulate and supervise national banks. What will be happening? 
You talked about the potential for civil money penalties, you 
talked about the potential for criminal referrals if warranted. 
Who is making that determination? Whose conducting the 
investigation? How much staffing is there? How can we be 
assured that this report that will be coming out in the next 
few weeks will actually lead to the necessary actions we take 
to restore some integrity to this process?
    Ms. Williams. Right, right. First of all, what is being 
done right now, and what we initiated a number of weeks ago 
when the problem came to light as a result of the Allied Bank 
situation is we immediately directed the major servicers that 
we supervise to do a self-assessment and they did self-identify 
that they had some of the same issues. That resulted in them 
stopping foreclosures and correcting practices that were then 
being conducted. So there is a corrective process that was 
already initiated. This is essentially what I am trying to say.
    At the same time we began the process and teed off a little 
while later after it was organized with other agencies a very 
comprehensive, horizontal, multi-servicer examination process 
that we are in the midst of right now, and it will be as a 
result of what we find when we conclude those examinations that 
will be the basis for the decisions that at least the banking 
agencies would make in terms of what type of supervisory or 
enforcement actions we would take with respect to the 
institutions that we supervise. We expect that we will be done 
with the on-the-ground exam work by the end of this month. The 
results will be beginning to be communicated to the 
institutions shortly thereafter in the public report that the 
agencies are envisioning in January hopefully.
    Mr. Deutch. Right. And you said that there may be civil 
money penalties or there may be criminal referrals.
    Ms. Williams. I was describing the very broad range of 
types of powers that the banking agencies have.
    Mr. Deutch. Who will be making those determinations?
    Ms. Williams. Each banking agency will make those 
determinations with respect to the institutions that we have 
jurisdiction over.
    Mr. Deutch. And they will be making those determinations 
based on what? Is there anything anecdotally that we have seen 
in any of these accounts in the various newspapers around the 
country, is there anything that stands out as the type of 
activity that if confirmed might lead those sorts of penalties?
    Ms. Williams. Well, there clearly have been breakdowns in 
controls and oversight, but we need to get to the end of our 
examination process to understand the dimensions of the 
problems, if that was all, if there is more of what else needs 
to be fixed before we can make any final decisions about what 
the appropriate remedies and sanctions are.
    Mr. Deutch. Okay. Finally, Mr. Chair, let me understand 
then, there is a public report that will be coming out in 
January?
    Ms. Williams. Well, what the agencies have committed to do 
is to come out with--the particular contours of this, I don't 
think has been decided, but a form of public report on the 
results of the horizontal exams. It would not, I would expect, 
be bank specific, but it would talk about the types of issues 
that were discovered, sort of lessons learned for the servicers 
and also perhaps serve as a basis for the agencies to think 
about developing some uniform standards for mortgage servicers 
and also for the agencies to think about techniques to use 
going forward for our own supervision.
    Mr. Deutch. And I would respectfully suggest that uniform 
standards going forward will be helpful. But there are hundreds 
of thousands of foreclosure cases winding their way through the 
courts in Florida through this rocket docket process where 
separate foreclosure courts have been established. Those 
hundreds, the hundreds of thousands of citizens in my State 
aren't worried about uniform standards that will be applied 
proactively. They want to be sure that the actions that have 
been taken thus far to the extent that there is some evidence 
of fraudulent activity or a pattern of fraud, whatever is 
necessary for there to be penalties, that the law is upheld so 
that there is some confidence brought back into this 
foreclosure process and so that they know that the consumers of 
my State and nationwide are actually receiving the just due 
that they deserve. That is what I hope comes from this.
    Ms. Williams. Yes, sir, we understand that.
    Mr. Deutch. Thank you, Mr. Chair.
    Mr. Conyers. Thank you, Mr. Deutch. Our gratitude to all of 
the witnesses. We appreciate your bearing with us. There will 
be an additional hearing in which the second panel will be 
rescheduled and the bankers, of which there are approximately 
six, that are also scheduled to testify on this matter.
    And if Mr. Franks has any comment he can make it now.
    Mr. Franks. Thank you all for being here.
    Judge Winslow. Thank you, sir.
    Mr. Conyers. And the hearing stands adjourned.
    [Whereupon, at 2:50 p.m., the Committee was adjourned.]


                          FORECLOSED JUSTICE:
                       CAUSES AND EFFECTS OF THE
                      FORECLOSURE CRISIS (PART II)

                              ----------                              


                      WEDNESDAY, DECEMBER 15, 2010

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:15 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Henry 
C. ``Hank'' Johnson, Jr. presiding.
    Present: Representatives Scott, Watt, Johnson, Chu, Deutch, 
Schiff, Smith, Sensenbrenner, Coble, Gallegly, Goodlatte, King, 
Franks, and Rooney.
    Staff Present: (Majority) Susan Jensen, Counsel; James 
Park, Counsel; Reuben Goetzl, Clerk; and Zachary Somers, 
Minority Counsel.
    Mr. Johnson. [Presiding.] The Committee will come to order. 
Good morning, and before I recognize myself for a brief 
statement, I do want to welcome Senator Sheldon Whitehouse from 
the State of Rhode Island, who is with us today to testify 
regarding the Home Affordable Modification Program. This is the 
continuation of a hearing that started either last week or a 
week before that, and we had to call it off due to votes, a 
long series of votes. And so I appreciate the second panel 
members for coming today.
    We will first hear from Senator Whitehouse. Senator 
Whitehouse is very busy over in the Senate and doesn't have a 
lot of time. So without any further adieu, I would like to 
recognize him. He has for more than 20 years championed health 
care reform, improving the environment, solving fiscal crises, 
and investigating public corruption. As Chair of the Senate 
Judiciary Committee's Subcommittee on Administrative Oversight 
and the Courts, Senator Whitehouse has been a fearless consumer 
advocate on various issues, particularly in the area of helping 
homeowners save their homes from foreclosure.
    We very much look forward to his comments and appreciate 
his contribution to today's hearing.
    Would you begin, Senator?

        TESTIMONY OF THE HONORABLE SHELDON WHITEHOUSE, 
         A U.S. SENATOR FROM THE STATE OF RHODE ISLAND

    Senator Whitehouse. I will gladly do that, Representative 
Johnson. I thank you for the opportunity to testify. Ranking 
Member Smith, Members of the Committee.
    Sadly the foreclosure crisis remains unabated in my home 
State of Rhode Island and many other parts of the country. And 
I appreciate that you have convened this hearing in the final 
days of the 111th Congress to inquire that this issue.
    Mr. Johnson. And Senator, will you pull that microphone up 
just a little closer. Thank you.
    Senator Whitehouse. I look forward to working with this 
Committee on legislation next year.
    In my capacity, like yours, Representative Johnson, as 
Chairman of the Subcommittee on Administrative Oversight and 
the Courts, I have chaired several hearings recently on the 
foreclosure crisis, most recently in late October. At that 
hearing a constituent of mine, Larry Britt from Riverside, 
Rhode Island, told a story that is probably familiar to this 
Committee.
    Larry had applied with his mortgage servicer for a mortgage 
modification under the Obama administration's Home Affordable 
Modification Program, which we call HAMP, and shepherding that 
request had become for Larry a nearly full-time job. Time and 
again over a 19-month period, the mortgage servicer asked Larry 
to submit, and resubmit, and resubmit document after document. 
Despite Larry having FedEx and facsimile records proving that 
he had already submitted those documents, the bank consistently 
alleged that Larry failed to send in the necessary paperwork 
and he had to do it over and over again. When he tried to clear 
up things over the phone he was punted from department to 
department, never once during his 19 months of many calls 
reaching anyone who appeared to have any authority to make a 
decision.
    After 19 months of this bureaucratic nightmare, the bank 
finally approved Larry for a mortgage modification. The 
modification papers came to him via FedEx just 1 day after a 
bank representative told him that he didn't qualify for a 
modification. While he is cautiously optimistic with those 
papers in hand, he still isn't certain that the bank won't 
changes its mind again.
    Larry's story and thousands more like it get to a story of 
bureaucracy run amok at the very heart of the foreclosure 
crisis. Mortgage companies unwilling or unable to efficiently 
evaluate modification requests, homeowners and mortgage 
investors in limbo, suffering the consequences. When the 
paperwork runaround leads to foreclosure, a family loses its 
home, neighbors lose property value, communities lose tax 
revenue. Investors who purchase the right to the mortgage 
payments may lose out too. Often the foreclosure is not 
necessary.
    I met with a group of Rhode Island realtors the other day 
and every single one sitting around the table had the same 
story. Each one of them had at least one short sale nailed down 
with a buyer and a seller and had the experience of a 
foreclosure notice appearing and interrupting the short sale. 
Obviously that was the worst outcome for the homeowner. It was 
also a worst outcome for the investors, because the result from 
the foreclosure sale was worse than the outcome that had been 
agreed to in the short sale.
    In the age of securitization the servicer merely serves as 
a processing agent and may not work in the interest of the 
people who actually own the mortgage. And in the age of 
corporate bureaucracy, the left hand may not know what the 
right hand is doing.
    While the program was well-intentioned, the poor 
performance of the HAMP has demonstrated that cash incentives 
alone won't get the banks to operate effectively and in good 
faith. A different mechanism is needed to ensure compliance.
    In the past I had focused on proposals to give bankruptcy 
court judges the power to reduce the principal on primary 
residences mortgages, the same way they can for other mortgages 
on vacation homes, on loans for cars and boats. While I have 
long believed that this is the most efficient and least costly 
way to keep families in their homes and many observers agree, 
the large banks have fought against it with their full lobbying 
might.
    Despite House passage of cram-down legislation in March of 
2009, for which I thank and applaud you, we in the Senate have 
been unable to overcome filibusters. Given these political 
realities I decided to add to the focus of my Subcommittee a 
different approach, already underway in several bankruptcy 
courts. Under programs adopted in bankruptcy courts in Rhode 
Island, New York, Florida, and Vermont, the court may order the 
homeowner and the mortgage servicer to sit down and negotiate 
in good faith, a settlement that is preferable to foreclosure 
for all parties.
    While judges have the ability under the programs to appoint 
a formal mediator if the informal talks don't work, in practice 
it has not been necessary in the vast majority of cases. For 
most homeowners the mere chance to speak directly with their 
mortgage company, with someone who has some authority is enough 
to lead to a mutually beneficial agreement.
    Under the bankruptcy loss mitigation programs the power of 
the court to compel good faith talks breaks through the 
bureaucratic maze of the voluntary modification programs. The 
court of course does not have the power to force a settlement, 
but it can force the parties to talk to each other, and that 
can avoid a costly foreclosure that will benefit no one.
    The programs in Rhode Island and the other States were 
designed with the input of creditors and homeowners and have 
been successful to date. I believe that the courts have 
appropriately implemented these programs under their section 
105(d) authority to convene pretrial status conferences. 
Unfortunately, one servicer has challenged the authority of the 
bankruptcy court in Rhode Island to require it to come in and 
talk to the homeowner before it forecloses on their home. I 
have no doubt that the court's authority will be upheld 
eventually, but it could be years of litigation and appeal 
before the parties have a final answer. In the meantime other 
judges around the country may be reluctant to adopt a program 
facing such a challenge.
    I proposed a simple legislative fix that would clarify that 
bankruptcy courts can run foreclosure loss mitigation programs, 
can make parties talk with each other before someone's home 
gets taken away. I hope that this Committee will help me pass 
it into law early next year. It seems plain and 
noncontroversial.
    The American people are tired of taxpayer bailouts for 
banks, and we owe it to them to support a sensible program that 
comes with zero cost to the taxpayer. Bankruptcy will not be 
the answer for every homeowner, but the loss mitigation 
programs can help homeowners like Larry cut short a stalled 
application process and finally get an answer to their 
modification request. One could even imagine that the good 
sense of this could cause it to propagate outside of the 
bankruptcy process on a voluntary basis.
    In Rhode Island bankruptcy court loss mitigation has 
already saved 100 homes and it has the potential to save 
thousands more across the country. I believe that makes it 
worth supporting.
    Once again, thank you for the opportunity to take part in 
this hearing and I commend your good work. Thank you, Mr. 
Chairman.
    [The prepared statement of Senator Whitehouse follows:]
        Prepared Statement of the Honorable Sheldon Whitehouse, 
             a U.S. Senator from the State of Rhode Island

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Senator, and thank you for the 
legislation that you just mentioned. I think it is good in the 
judicial States, foreclosure judicial States, but there are 
about half the States almost that suffer from a nonjudicial 
foreclosure process, States like Georgia where I hail from, and 
I am looking at some legislative solutions to that process, 
some Federal legislative solutions to that process which should 
measure up well with your efforts.
    Senator Whitehouse. Mr. Chairman, in States like yours and 
mine, which are both nonjudicial foreclosure States, the 
ability of a homeowner to seek bankruptcy protection in order 
to stop foreclosure and resolve all of their credit issues at 
the same time is facilitated by this proposal. So it is 
effective in Rhode Island and I think it would be effective in 
Georgia as well, notwithstanding the nonjudicial nature of your 
foreclosure process.
    Mr. Johnson. Certainly. Thank you.
    Senator Whitehouse. Thank you, Chairman. Thank you all for 
your courtesy.
    Mr. Johnson. Thank you for your appearance today.
    And now we will call for the second panel. I will now 
recognize myself for a brief statement.
    These are challenging times in America, our economy is 
struggling during an unprecedented housing crisis, a crisis 
that is devastating American families and neighborhoods. Too 
many constituents have contacted my district offices for 
assistance because the banks and lenders are losing their 
paperwork, failing to respond to their request for 
modifications and failing to return their calls in a timely 
manner. Their lives are disrupted and turned upside down by the 
foreclosure process and by the shoddy procedures. The same 
bankers who came to Congress with hat in hand demanding a 
bailout, the same bankers who couldn't have survived without 
welfare paid for by the American taxpayer, those same bankers 
have no problem summarily throwing the American taxpayer out of 
her home without due process, without accurate documents, 
without regard for the human beings whose lives are being 
affected.
    So I submit to our friends from the financial industry that 
our constituents, your borrowers, are living human beings. They 
have blood flowing through their veins, they care about their 
loved ones, they agonize over what will happen to their homes. 
They need to be treated fairly during the foreclosure process.
    One of the major causes of this foreclosure crisis was 
greed. Banks and lending institutions, fueled by greed, put 
everyday hardworking Americans into mortgages that they knew 
that these Americans could not afford. In last week's 
foreclosure hearing we had a chance to hear from a judge who 
has presided over more than 1,000 mortgage cases. He testified 
to the many problems he sees time and time again in his 
courtroom, including situations where lawyers representing 
mortgagors failed to know who they represented, or they lacked 
the underlying note evidencing their entitlement to seek 
foreclosure, or they failed to establish the legal chain of 
title establishing the standing of their client mortgagors, and 
they submitted to the court in some cases false affidavits 
attesting to the ownership and the note of the mortgage.
    Recent press reports indicate that lenders have executed 
foreclosures recklessly and without adequate review of relevant 
documents. The practice of robo-signing, where lenders sign 
foreclosure documents with little or no knowledge of the 
contents of the documents, calls into question the legitimacy 
of hundreds of thousands of foreclosures. Other problems 
rampant in the foreclosure process range from the imposition 
and collection of improper fees, poor underwriting and improper 
servicing, not to mention the pervasive predatory lending that 
set the stage for the crisis in the first place.
    These are serious issues that do not appear to be isolated 
incidents, but rather a systematic problem within the 
foreclosure industry.
    Since 2007, Americans have lost nearly 6 million homes to 
this foreclosure crisis. This issue is of the utmost importance 
to me because my home State of Georgia ranks seventh in the 
Nation for foreclosures. Foreclosure and predatory lending 
issues have always been crucial issues to me. As a Dekalb 
County commissioner, I authored and passed Georgia's first 
approved ordinance against predatory lending which State 
legislators later used as a guide in passing a statewide law.
    As foreclosures continued to surge, we must ask if mortgage 
servicers are doing all that they can to provide sustainable 
alternatives to foreclosure. How can we ensure that servicers 
have the training, personnel support, and judgment to properly 
service loans and interact with customers to avoid foreclosure? 
This is a time of economic and financial instability, and at 
the very least families should be able to go to sleep at night 
knowing that they have a place to lay their heads. 
Unfortunately, many Americans live under the shadow of imminent 
foreclosure and struggle against servicers who are often 
incompetent and disinterested.
    I thank the Chairman for all of his hard work on this 
Committee during this Congress and for taking the time to hold 
this hearing. The Chairman had to depart for another very 
important meeting, and he asked me to chair this full Committee 
today.
    I look forward to hearing from the witnesses today, and I 
yield back the balance of my time and will now recognize the 
Ranking Member of the Judiciary Committee and soon to be 
Chairman, my friend, Congressman Lamar Smith from Texas.
    Mr. Smith. Thank you, Mr. Chairman. Mr. Chairman, I was 
interested in your opening statement because I didn't realize 
what you had done in the Georgia legislature to help address 
this problem and that is much appreciated, and I was glad to 
hear you say that a State law had been the result of your 
efforts.
    Mr. Chairman, let me thank the witnesses from the second 
panel at our last hearing for their patience and for coming 
back to testify this week. I regret we were unable to hear from 
you the last time but appreciate your effort to be here today.
    Errors in the foreclosure process are inexcusable and 
undermine the rule of law and the due process rights of 
borrowers. However, there does not appear to be any evidence of 
fraud or intent to mislead the courts. Rather, all indications 
are that the foreclosure documentation problems are limited to 
unacceptable, but curable documentation defects.
    While the foreclosure documentation issues are troubling, 
and mortgage servicers undoubtedly will be held accountable for 
their mistakes, the larger problem is how to end the 
foreclosure crisis. We seem to be caught in an economic paradox 
between job creation and recovery of the housing sector.
    As Peter Lawson of the American Enterprise Institute has 
observed, ``The housing industry, which amounts to almost one-
sixth of the U.S. economy, has always been the economic sector 
that led the United States out of recessions.'' But at the same 
time it appears that jobs are what we need for the housing 
sector to recover. Analysts at Moody's have noted that without 
jobs fewer households are created and the existing households 
are unable to afford to buy a home.
    Unemployment, coupled with a large number of borrowers who 
are under water on their mortgages and an overall lack of 
consumer confidence, is creating a drag on the housing sector. 
And by all indications a weak housing sector is constraining 
the broader economy. So while the mortgage documentation 
problems that are the genesis of this hearing are important, 
the more important question is how do we get the housing sector 
moving again?
    At this point Obama administration programs like the Home 
Affordable Modification Program has succeeded in spending large 
sums of taxpayer money, but have had little success at stemming 
foreclosures. Hopefully as we move forward we can establish 
more effective policies for both job creation and recovery of 
the housing sector.
    Mr. Chairman, I look forward to the witnesses' testimony 
and I yield back the balance of my time.
    Mr. Johnson. Thank you, Congressman.
    In the interest of proceeding to our witnesses and mindful 
of our busy schedules, I ask that other Members submit their 
statements for the record. Without objection, other Members' 
opening statements will be included in the record and without 
objection, all Members will have 5 legislative days to submit 
opening statements for inclusion in the record. Without 
objection, the Chair will be authorized to declare a recess of 
the hearing at any point.
    I will now introduce our second panel. First is Mr. James 
Kowalski, Jr. He specializes in consumer protection litigation. 
Prior to entering private practice, Mr. Kowalski served as an 
assistant State attorney for Florida from 1989 to 1996, where 
he prosecuted public corruption, sex crimes, and homicides. He 
is a graduate of the University of California at Berkeley and 
the University of San Francisco School of Law. Mr. Kowalski 
also brings the perspective of having practiced in Florida, one 
of the States like my State of Georgia which has been hardest 
hit by the ongoing foreclosure crisis. He has also been on the 
forefront of the foreclosure documentation scandal. Welcome, 
sir.
    Next is Mr. Thomas Cox. He has been a lawyer for more than 
40 years and currently is a volunteer program coordinator at 
the Maine Attorneys Savings Homes Project. The project is 
jointly sponsored by the Pine Tree Legal Assistance and its 
affiliated Maine Volunteer Lawyers Project. Mr. Cox brings to 
this hearing a unique perspective. While he currently 
represents homeowners facing foreclosure, he used to represent 
lenders seeking to foreclose. I think his perspective will be 
particularly interesting on the foreclosure documentation 
issues that we are considering here today. Mr. Cox received his 
AB from Colby College and his JD from Boston University. 
Welcome, sir.
    Our next witness, Ms. Sandra Hines, has been detained, a 
flight delay I believe, so she may or may not get here before 
we conclude this hearing.
    Next I would like to welcome Vanessa Fluker. She is an 
attorney who practices in Detroit, which some consider to be 
one of the Nation's home foreclosure epicenters. Nearly every 
day she is in court helping those at risk losing their homes to 
foreclosure, and she is a leader of the Moratorium, now 
Coalition to Stop Foreclosures, Evictions and Utility Shut-
offs.
    Thank you for being here, ma'am. Over the years Ms. Fluker 
and Chairman Conyers have worked very hard to have the State of 
Michigan institute a statewide foreclosure moratorium, and we 
will want to hear her explain to us why such a moratorium is 
needed. Ms. Fluker received her joint MA/JD degree in 2002 from 
the WSU Law School and the Department of Political Science.
    Our next witness is Tom Deutsch. Mr. Deutsch, excuse me, 
sir, is the Executive Director of the American Securitization 
Forum. Before obtaining that position he practiced law in the 
capital markets department of Cadwalader, Wickersham & Taft. He 
earned his BA from Washington University in St. Louis and his 
JD from the University of Pennsylvania. Welcome, sir.
    Our final witness is Mr. Christopher Peterson, who is an 
Associate Dean for Academic Affairs and a professor of law at 
the Quinney College of Law, University of Utah. He has lobbied 
on consumer lending policy and testified on consumer finance 
before the U.S. Senate Banking Committee and the White House. 
He has a BS, an HBA, and a JD from the University of Utah. It 
won't come as a surprise, but Professor Peterson has strongly 
divergent views from Mr. Deutsch on the impact of 
securitization on real property law. So we are looking forward 
to an erudite discussion from both of these experts.
    Now, Mr. Kowalski, would you please begin?

 TESTIMONY OF JAMES A. KOWALSKI, JR., ESQUIRE, LAW OFFICES OF 
          JAMES A. KOWALSKI, JR., PL, JACKSONVILLE, FL

    Mr. Kowalski. Representative Johnson, Members of the 
Committee, thank you for inviting us here today to testify on 
issues relating to the foreclosure crisis facing our country. I 
am an attorney practicing in Florida and a member of the 
National Association of Consumer Advocates. I would like to 
start my testimony by making a few clear points in follow up to 
the regulators' testimony during your last hearing.
    First, the manufacturer of significant documents for 
submission to the courts is not a recent practice by the 
servicing industry. It is widespread and longstanding. The use 
of robo-signers, more accurately called robo perjurers, where 
an individual submits testimony under oath in the form of an 
affidavit, an affidavit relied upon as the primary evidence of 
the court in evicting the homeowner, where the individual has 
no personal knowledge whatsoever regarding the substance of 
their testimony, is not a recent practice by the servicing 
industry. These abuses of the judicial system are not the work 
of a few individuals or a rogue, outsourced unit of the 
servicer. The systemic use of manufactured documents and false 
affidavits is a business model. It has been the business model 
of the servicing industry for years.
    I have been an attorney in Florida for 20 years, starting 
as a assistant State attorney in the Fourth Judicial Circuit in 
1989. I served as the division chief of the Public Corruption 
Unit in the County Court, and as the senior trial attorney in 
the Special Assault Unit in the Repeat Offender Court Unit. I 
was also a member of the on-call homicide team, and I put three 
men on Florida's death row.
    After leaving the State attorney's office in 1996, I 
entered civil practice and began representing individuals in 
wrongful debt collections and wrongful mortgage foreclosure 
cases in the early 2000's. I took my first robo signer or robo 
perjurer deposition in 2003.
    As a result of almost a decade of handling wrongful 
foreclosure matters, I have reached five general conclusions. 
First, the servicing industry as a business model is 
irretrievably broken, and the application of servicing industry 
procedures to loan modifications or, to that matter, to any 
issues whatsoever with the foreclosure itself has been 
counterproductive. The clearest evidence of this is in the dual 
track process where a borrower who might not be behind at all, 
who calls his or her servicer to inquire about a loan 
modification or wrongly force placed coverage or a posting 
error by the servicer will often end up months down the road 
with one unit of the servicer continuing to deal with what by 
then is a horrific customers relations issue, while another 
unit of the same servicer proceeds blindly and mindlessly with 
foreclosure.
    The various units of the servicer do not communicate, are 
not permitted to communicate, and do not even have access to 
each other's computer systems. At every turn the goal appears 
to be the pursuit, churning, and diverting of servicer fees. 
Examples of everything I will testify about are in the exhibits 
that I filed with my testimony.
    Number two, affidavits and assignments of mortgage filed in 
mortgage foreclosure cases are for the most part worthless. The 
overwhelming evidence from Florida and around the country 
consists of proof that affidavits are completed by persons who 
not only do not read the file, they do not even have access to 
the critical portions of the file.
    It is also now evident that assignments are created after 
the fact in an attempt to show a chain of ownership, and many 
critical facts in the assignment such as the date or the 
assertion of an equitable transfer are not based on any 
evidence at all. For example, the date often used by the 
assignment is the date the file was transferred to the law 
firm, not the date the servicer purportedly took ownership or 
the trust purportedly took ownership.
    I listened to a Federal district judge last month describe 
affidavits as all surface and no anchor. I have never taken the 
deposition of an affiant or read or reviewed a deposition taken 
by another lawyer in more than 7 years of this practice where 
the affidavit itself was wholly truthful.
    Number three, many of the mill law firms are overwhelmed by 
the internal structures and by demands placed on them by the 
industry, and as a practical effect have complied with whatever 
they have been asked to do. This includes law firm employees 
signing affidavits on behalf of their clients where a law firm 
employee had no personal knowledge and was acting outside the 
scope of whatever authority they might have.
    Number four, Legal Aid groups and HUD counselors are an 
integral part of the solution and must be better funded to 
provide support at all levels.
    Number five, local counsel unfortunately has no connection 
to these issues.
    In conclusion, I would respectfully suggest that the major 
servicers should not be believed when they assert that 
borrowers are deadbeats and that speeding up the process and 
rubber-stamping MERS is the course we should follow. At some 
point we simply have to stop accepting the ever changing 
excuses offered by the servicing industry. If we are to restore 
trust in our institutions, we have to start at some point to 
reform the servicing industry. The dual track concept needs to 
end immediately. Fannie and Freddie need to be incentivized to 
be part of the solution. MERS needs to end. The servicers do 
not need a truth bailout to go along with a financial bailout 
we have given them as a reward for truly abysmal business 
practices. And Legal Aid groups and HUD counselors have to be 
properly funded.
    Mr. Johnson. Mr. Kowalski, I am going to ask that you sum 
up at this time. I neglected to mention to the witnesses that 
each of you have 5 minutes, as indicated on the contraption in 
front of you. There is a green, a red and a yellow light. The 
green light cuts off after 4 minutes, it goes to yellow, and 
then it goes to red. So if you would, sir, please.
    Mr. Kowalski. Lawyers will always say I just have a few 
more points, but I do just have a few more points. As members 
of the National Association of Consumer Advocates, we would 
appreciate the opportunity to form a bipartisan partnership to 
confer as regularly as you want with the Members of this 
Committee, with your staff, with OCC, with Treasury and with 
others to work through the short and long-term solutions to 
these issues. But at each step the interests of American 
homeowners need to be considered first.
    Thank you.
    [The prepared statement of Mr. Kowalski follows:]
              Prepared Statement of James A. Kowalski, Jr.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               __________

    Mr. Johnson. Thank you, sir.
    Next we will have Mr. Cox give his statement. Thank you, 
sir.

    TESTIMONY OF THOMAS A. COX, ESQUIRE, VOLUNTEER PROGRAM 
COORDINATOR, MAINE ATTORNEYS SAVING HOMES PROJECT, PORTLAND, ME

    Mr. Cox. Chairman Johnson, Members of the Committee, thank 
you for this opportunity to be here today. I am retired from 
the private practice of law in Maine, where for many years I 
represented lenders as well as the FDIC in loan litigation 
matters. For the past 2\1/2\ years I have been working full-
time as a volunteer with Pine Tree Legal Assistance of the 
Maine Volunteer Lawyers Project. I have come to know the 
foreclosure industry well from both sides of the street.
    At the hearing conducted by this Committee on December 2, 
2010, representatives from Treasury, the Federal Housing 
Finance Agency, and the Office of the Comptroller of the 
Currency each said that their agencies first learned of the 
issues relating to dishonest foreclosure affidavits and other 
foreclosure irregularities when the news broke in the press in 
September of this year. Those were stunning admissions. These 
issues have existed for years now and have been widely known to 
those of us representing homeowners. There was a massive 
failure in the regulators' oversight of these servicers. The 
issues we are talking about today should have been immediately 
apparent from any reasonably diligent examination of the 
servicer's foreclosure operations.
    Because the time allowed for me to speak is so brief I am 
going to address my remarks solely to my dealings with GMAC 
Mortgage over the last several months.
    Problems with GMAC Mortgage were first exposed on the 
public record by Attorney Kowalski in Florida back in 2006 when 
he was dealing with a robo-signed affidavit from a GMAC limited 
signing officer that was executed in 2004. So we know these 
activities go back at least 6 years. The Florida court 
sanctioned GMAC for that conduct in 2006, but GMAC rewarded its 
employee who was the cause of those sanctions with a promotion. 
She became the supervisor of GMAC's document signing department 
where she is the supervisor the GMAC's current robo signer, 
Jeffrey Stephan. It was his dishonest affidavit signing 
practices revealed in the deposition that I took of him on June 
7th that forced GMAC to finally announce a halt in sales and 
evictions from foreclosed homes on September 17th of this year. 
Stephan, who signs between 8 to 10,000 documents a month, 
testified on June 7th that when his affidavits state he has 
personal knowledge of the facts stated in them, he doesn't. 
When his affidavits state that he has custody and control of 
loan documents at issue, he doesn't. When his affidavit states 
that he is attaching true and accurate copies of loan documents 
to his affidavits, he has no idea if that is true because it 
doesn't even look at them. And Stephan admitted that when his 
affidavits contained a sign attestation by a notary public that 
he personally appeared to be sworn, he doesn't even bother to 
do that. Furthermore, he testified that his practices are fully 
in accordance with GMAC Mortgage practices and procedures.
    When GMAC Mortgage realized the damaging admissions made by 
Jeffrey Stephan in the deposition I took, rather than 
immediately moving to correct the problem, GMAC sought to cover 
it up. GMAC sought money sanctions against me personally for 
sharing that deposition transcript with other foreclosure 
defense lawyers around the country. They sought an order from 
the court that it be used in no other case and they sought an 
order from the court that it be retried from any lawyers who 
had received it from me.
    In the end the Maine court denied the motion for sanctions 
that GMAC sought and imposed affirmative sanctions against GMAC 
for its bad faith affidavit signing practices and ordered GMAC 
to pay attorneys fees sanctions in that one case alone of 
$27,000.
    Very recent actions of GMAC Mortgage prove that it is not 
prepared to cease its use and reliance upon these false 
affidavits. At the hearing conducted by the House Subcommittee 
on Housing and Community Opportunity on November 18th, 2010, 
Thomas Marano, the CEO of Ally Financial, the parent 
corporation of GMAC Mortgage, testified that GMAC is no longer 
proceeding with foreclosures based upon Stephan's affidavits 
without first going to the courts and seeking approval to use 
them. This fall we notice that GMAC Mortgage was doing exactly 
the opposite in Maine and was proceeding with foreclosure 
judgments based upon those false affidavits. We brought a Maine 
State court class action against GMAC seeking an injunction to 
stop it from continuing these offensive practices.
    GMAC has vigorously opposed that effort to prevent the 
Maine State courts from even considering our request for 
injunctive relief. GMAC removed our case to the United States 
District Court in Maine, where the Anti-Injunction Act 
prohibits that court from enjoining any State court 
proceedings.
    In light of these efforts by GMAC to avoid any judicial 
consideration of an injunction, the District Court ruled just 
this past Friday that even though we clearly had a right to a 
hearing on the merits in the State court, that court was 
powerless to grant any relief.
    I submit to you that there has been abuse of our judicial 
systems by the foreclosure industry on an unprecedented and 
truly massive scale. Economic interests are driving this abuse. 
Until these perverse economic interests are addressed and until 
the regulators truly start monitoring the loan servicers and 
until the force of the criminal justice system is brought to 
bear upon the dishonest conduct of the servicers, including 
more than just the robo signers, those at higher levels who 
clearly have been aware of and condoned and ordered this 
conduct, there is not likely to be enduring change in this 
industry.
    I thank you for the opportunity to be here today, and I 
welcome for questions.
    [The prepared statement of Mr. Cox follows:]
                  Prepared Statement of Thomas A. Cox

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Mr. Cox. Next we will hear from 
Sandra Hines. Is it Saundra or Sandra?
    Ms. Hines. Sandra.
    Mr. Johnson. Ms. Hines is a lifelong Detroit resident and a 
social worker. She brings to this hearing her personal 
experience of losing her family home of 37 years to foreclosure 
and of being evicted from that home. Ms. Hines has turned those 
painful experiences into valuable resources that she uses to 
assist others facing foreclosure. She has been a tireless 
advocate on other important issues of concern to the citizens 
of Detroit.
    We welcome you to the hearing, and we would like to hear 
your testimony now if you would.
    Ms. Hines. Thank you.
    Mr. Johnson. Thank you.

  TESTIMONY OF SANDRA D. HINES, FORMER HOMEOWNER, DETROIT, MI

    Ms. Hines. I want to first thank the honorable men and 
women here who can make a difference in our lives in America.
    I lost my family home to foreclosure and eviction. And I 
don't know if anybody here knows anyone or has had anyone in 
they family lose they home, but it is an uprooting. We were 
uprooted.
    I still have a lump in my throat, hole in my chest every 
time I think about it, because my mother and father worked real 
hard to get that house. We moved into 16582 Lesure, Detroit, 
Michigan in 1970. When we moved into that home we was the 
second Black family on the block. My mother and them was 
seeking a better way of life for us and a better environment. 
We stayed--my mother put a roof on that home, she put in a new 
furnace, she put in a hot water and cooler heater. She he had 
the porch redone, she had awnings put around the house. She 
also had before my father died central air conditioning added 
to the home.
    My mother--I mean my sister and my father was GM workers. 
My father worked for GM almost to the day he died. He contacted 
cancer from working for General Motors in those foundries that 
was spitting out asbestos and lead and everything else.
    I'm here to say that we believed in the American dream. 
Most of the people who have bought homes in America believed in 
the American dream. Now we are facing the American nightmare. 
None of us in America would have thought that the government 
would turn their back on the people and not allow the people to 
have the kind of help that they need because the banks decided 
they wanted to trick and rob people of they homes.
    Now we can sit here all day. I am a little disappointed 
that the room is not full, I don't know, maybe this is a 
special committee and this is the only Committee that is 
listening to people that's really trying to save their homes. 
But I wish that every chair was filled in this room so that 
they can understand the pain that is associated when you lose a 
home of over 40 years.
    We moved 40 years of memories in the cold, snow like a day 
that we had in Detroit where it snowed all day, the ice was 
covered over. They threw us out in conditions like that. They 
took my mother's antique furniture and they threw it over in 
the dumpster. The bailiff stood out there with his gun to let 
us know that he would take us to jail and kill us if we tried 
to stop him from coming into our house. It was the most 
horrible and most pitiful experience I have ever had in my life 
to lose a home that I lived in for 40 years.
    Where do you go on Christmas now? Me and my sisters are 
divided. We staying in apartments when we always had a home. 
Where do you go on Easter when you don't have a home anymore? 
What can you call--what can we call home now after all of years 
that my father worked at General Motors and my mother worked 
for a neighborhood service agency, helping people all her life 
because she was an investigator for JDO.
    And my mother--our house was paid for. The part that hurts 
me so much, my mother told us, my mother said, don't remortgage 
the home. If you remortgage the home, the bank is going to 
steal it. She was telling my friends, my young friends who was 
first-time buyers who was buying homes at that time that was 
coming to my mother and didn't understand what was going on, 
and I am talking about back in like 2004 and '3, they didn't 
know this was the beginning of foreclosure and evictions. My 
mother encouraged them and begged them, don't remortgage your 
home. A couple of them didn't and they have their home today 
because they didn't. The ones that did don't have they home, 
they experienced foreclosure and eviction just like we did.
    I just don't know why we have to come and beg people that 
we put in office to work for us to work for us. What has 
happened to America? I mean I don't get it. I don't get it why 
you all sit here and make decisions over our lives and you all 
can't see that if you throw us out of our homes we don't have a 
life. Your life change. All of you got a home. You got money, 
you got health care, you got the best insurance that anybody 
can have, you probably have the best homes that anybody can 
have. Don't you think other Americans want that, too? Isn't 
that what America is supposed to be about? The land of the 
brave and the home of the free? The people worked, the people, 
the people have worked and built America what it used to be. 
Because America ain't what it used to be no more.
    My mother used to always say, they are going to turn 
America into a third world country. Well, you just about to did 
it. Come to Detroit and look at the neighborhoods, how they 
have been ravaged by foreclosure and evictions. You ride down 
the street 6 and 7 houses on one block out of maybe 20 houses, 
10 on one side, 10 on the other side. Seven and 8 of them 10 
have been shut down because of foreclosure. I don't know where 
those people are at.
    I came here to tell a story of the people. Maybe if the 
people tell the story ya'll will get it. Because ain't none of 
the rest of ya'll been able to respect the other ones. I have 
seen the Congressmen that have argued on behalf of the people, 
they get shut down. It is like they not saying anything that 
anybody else is listening to. So we have to come now--and I am 
going to tell you, I wasn't on the roster to come from Detroit. 
Once I found out that you was having a hearing I asked my 
relatives, I asked my friends to give me money to come here. 
Just so happen it worked out. And on my way here I missed the 
first plane, I broke my glasses while I was on the plane. That 
is why I can't read my statement. But I'm here, because I am 
supposed to be here representing the American people. And it is 
not just Black people that is experiencing this, it is all 
people, all of the people in America. America is a melting pot. 
People come here because they want help, they want to be free. 
They want to have what we said America was. And even the people 
that was born here in America, those of us who claim to be 
Americans, not only are you not helping those who have came, 
now you are not helping us, the Americans. Why should people 
have to come here and tell you this when you see us, the 
millions and millions of people in foreclosure and evictions? 
Don't you want to do something about it? Don't you want to 
bring America back? It looks like a garbage dump now. Each city 
from each city. Everything is falling down, it is because 
people are stealing everything that ain't nailed down and not 
doing what the people put them in office to do.
    Mr. Johnson. Ms. Hines, I want to thank you so much for 
your statement.
    Ms. Hines. I am sorry if I appear to be angry, but I am. I 
am mad at hell. And I thank you. I know my time is up. I 
appreciate everybody listening to me, but the bottom line is, 
and I'm going to close on this: Don't listen, do something 
about it.
    [The prepared statement of Ms. Hines follows:]
                 Prepared Statement of Sandra D. Hines

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Thank you, Ms. Hines.
    Next we will hear from Ms. Fluker, is it Fluker?
    Ms. Fluker. Yes, it is.
    Mr. Johnson. And if you pull that microphone up and cut it 
on.
    Ms. Fluker. The light is on.
    Mr. Johnson. I don't think it must be working.
    Ms. Fluker. Is it better now?
    Mr. Johnson. Perhaps if you would grab one of the other 
microphones, that would be good.
    Ms. Fluker. Is this better?
    Mr. Johnson. Oh yeah, that is much better.

TESTIMONY OF VANESSA FLUKER, VANESSA G. FLUKER, ESQUIRE, PLLC, 
                          DETROIT, MI

    Ms. Fluker. First of all, I would like to thank the 
Committee for having this opportunity to come here today to 
present testimony regarding this very important issue. I, too, 
like Ms. Hines from the City of Detroit, Michigan, who is 
ranked at the top of the list, we are almost at the very top, 
in foreclosures leading to evictions because we are a 
nonjudicial State.
    First, I would like to address the perspective of, the 
media perception has been that for some reason we have all 
these massive foreclosures because you have this multitude of 
people who bit off more than they could chew, who went into 
homes that just were exorbitant and beyond their reach. This is 
not true. The majority of people in subprime mortgages are the 
working poor, minorities and senior citizens, and that is what 
constitutes and makes up the majority of my practice.
    Unfortunately, the scenario is such that these subprime 
mortgages were marketed and pushed disparately on the working 
poor, minorities, and senior citizens. For instance to give a 
real life firsthand perspective, my client, Ms. Hart, works 
every day as a legal assistant, mother dying of cancer, she has 
been fighting for 2 years to get a modification with Bank of 
America, who by the way just got $7 billion additionally in 
January of this year to do that. No go. They are proceeding to 
evictions on that matter right now. The only reason an eviction 
hasn't occurred is because there may be some impropriety with 
the affidavits and documentation.
    My client, a senior citizen, who was diagnosed with 
dementia in 2000, who was put in a pay-option ARM mortgage in 
2007, who we are still fighting. Of course it is his family 
now, seeing as we have been fighting so long he died a week and 
a half ago.
    My client who has a farm in Michigan, who was put in a 
subprime residential mortgage, interest only, but now he covers 
his house and his whole farm, and they are foreclosing and they 
are trying to take the whole farm.
    Or even more egregious, my client who was in active duty in 
Iraq, serving his country, comes back, he is in foreclosure. 
They are like oh, well, too bad. We can't work with you, we 
can't modify your loan.
    This is just a sampling of what I deal with every day, and 
it is voluminous.
    And what makes this situation just in my opinion outrageous 
is because after, as we all know, it was the $700 billion 
bailout, approximately 75 percent of these subprime mortgages 
now are insured or underwritten by the government. Why does 
that become so significant? Because if in fact a mortgage is 
underwritten or guaranteed by Fannie Mae or Freddie Mac, when 
the banks and lenders throw these people out in the street they 
get paid the full mortgage value. That is why it is a bonanza 
in Michigan. Michigan property values have dropped in some 
areas up to 70 percent.
    So for instance, I have a client whose fair market value is 
going between 12,500 and $15,000. Well, the mortgage balance on 
the home, being the adjustable rate predatory mortgage is close 
to $200,000. Guess what, if they are successful, in throwing 
that individual out of their home, they don't get the full 
market value, they get that full mortgage value. Therefore, why 
is there any incentive for any lender to work with anybody when 
they are being paid the full mortgage value?
    Now this was really brought to light in the New York Times 
article on October 18th of this year. The article is about Bank 
of America, who is a perfect example, it is the same across the 
board. It talked about them resuming their foreclosures after 
the robo-signing issue. And what is significant about that 
article is because on page 2 it talks about of the 14 million 
mortgages that Bank of America holds, Fannie Mae and Freddie 
Mac underwrite one-half of them to the tune of $2.1 trillion. 
Layman's terms, if Bank of America forecloses on all of those 
underwritten loans by Fannie Mae and Freddie Mac, they would 
make $2.1 trillion. Again that is why my clients who sent 
paperwork in for modifications, 2, 3 4, 5, 6, 7 times, I turn 
around as an attorney send it in 2, 3, 4, 5, 6, 7 times, 
certified mail, green card receipt, we haven't received the 
document and they are moving their house to foreclosure. That 
is why that occurs, that is why. People who are going to trial 
modifications, who have paid 3 months, 6 months, 9 months take 
their money. All of a sudden say, oh, by the way, after paying 
the trial modification for 9 months, you don't modify. Next 
thing they know because we are nonjudicial they have a sheriff 
sale tacked to their door and they are the host house for the 
sheriff sale.
    This is just getting outrageous, and I challenge this 
Committee and Congress to do this, I believe this will be a 
very telling statistical aspect--and I know my time is running 
out.
    Fannie Mae and Freddie Mac always talks about how many 
houses they have sold, which is true, because in Detroit you 
can get a beautiful house for 10, $15,000. Someone needs to 
compare the numbers, how much money was paid to the banks for 
those mortgages versus how much money was made from the sale of 
those homes. And I can assure you for Michigan it will be an 
outrage, because basically we are bailing out the banks in a 
silent bailout with these guaranteed mortgages and there is no 
incentive to work with the borrowers.
    Thank you.
    [The prepared statement of Ms. Fluker follows:]
                  Prepared Statement of Vanessa Fluker

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Johnson. Mr. Deutsch?

    TESTIMONY OF TOM DEUTSCH, EXECUTIVE DIRECTOR, AMERICAN 
               SECURITIZATION FORUM, NEW YORK, NY

    Mr. Deutsch. Representative Johnson, Members of the 
Committee, my name is Tom Deutsch. And, as the executive 
director of the American Securitization Forum, I appreciate the 
opportunity to testify here today on behalf of the 330 ASF 
member institutions who originate the collateral, structure the 
transactions, serve as trustees, trade the bonds, service the 
loans, and invest the capital in the preponderance of 
residential mortgage-backed securities in the United States.
    In my prepared statement, I highlight some of the key 
aspects of securitization as well as its critical importance to 
the U.S. and global economy. Importantly for this hearing, 
there are nearly 55 million first-lien mortgages in America 
today that total approximately $9.75 trillion of outstanding 
mortgage debt. Approximately three-quarters of this debt, or 
about $7 trillion, resides in mortgage-backed securitization 
trusts and are beneficially owned by institutional investors in 
the United States and around the world, such as pension funds, 
mutual funds, and insurance companies.
    But in my remarks today, I seek to address specifically the 
concerns raised by a few commentators, that securitization 
trusts may not actually own the $7 trillion of mortgages that 
are contained within those trusts. For example, a recent 
Congressional Oversight Panel report has even suggested that 
these issues could create systemic risk to the banking sector 
if loans weren't validly assigned to the securitization trusts.
    But the concerns that have been raised have not been 
supported by substantiation that there are, in fact, signs of 
systematic fails in the process of assignments. Indeed, the 
origin of these concerns is not clear. They are not the result 
of a series of new court cases supporting the legal arguments 
advanced, but instead appear to be largely the result of novel 
academic theories. In fact, even the Congressional Oversight 
Panel report states that, quote, ``The panel takes no position 
on whether any of these arguments are valid or likely to 
succeed,'' end quote.
    So all of these dire consequences flow directly and solely 
from a single mistaken core premise--that is, the trusts, and 
ultimately the institutional investors such as pension funds 
and mutual funds, don't actually own the $7 trillion of loans 
in those trusts. As discussed in great detail in my written 
testimony, this core premise is incorrect. And, therefore, the 
dire consequences of this faulty premise will not follow.
    Just last month, the ASF issued a white paper on this 
subject that is part of our written testimony that puts to rest 
many of the questions that have previously been raised by the 
ownership of mortgage loans. In that white paper, ASF 
exhaustively studied traditional legal principles and 
processes, including the Uniform Commercial Code, or UCC, and 
substantial case history throughout every one of the 50 U.S. 
States and the District of Columbia and found that traditional 
legal principles and processes are fully consistent with 
today's complex holding, assignment, and transfer methods for 
mortgage loans. In fact, 13 major U.S. law firms, listed in 
Exhibit A to the ASF white paper, reviewed it and believe that 
the executive summary contained therein represents a fair 
summary of the legal principles presented.
    Although the ASF white paper answered many of the concerns 
that have previously been presented, some new concerns have 
been raised since that white paper was published. For example, 
one commentator has proposed that securitizers have not met the 
contractual requirements for a complete or unbroken chain of 
endorsement.
    In our written testimony, we rebut this novel academic 
theory in great detail, with analysis of key contractual 
provisions, the intent of the contracting parties, industry 
custom, independent third-party trustee acceptance, as well as 
relevant caselaw and UCC applicability. In particular, this 
argument overlooks the fact that each separate step in the 
chain of transfers of ownership by each party, from the 
originator to the securitization trust, is fully documented by 
a separate contract.
    The proposition itself, though--that securitization legal 
professionals have uniformly opted out of the applicable laws, 
such as the UCC, to set an even higher bar for transfers but 
then subsequently and systematically ignored that higher bar--
appear on their face to be illogical assertions and, 
ultimately, as a legal analysis in our written testimony 
demonstrates, are patently false.
    From time to time, though, mistakes will occur. And they 
certainly do occur, particularly in a market where 55 million 
mortgages are being serviced and in the worst housing crisis 
that we have seen since the Great Depression. But those 
mistakes do need to be addressed. But the contractual 
provisions of the Pooling and Servicing Agreement and other 
underlying documents allow for those mistakes to be corrected 
over time.
    In conclusion, the ASF greatly appreciates the opportunity 
to appear before this Committee today. And I look forward to 
answering any questions the Committee Members may have. Thank 
you.
    [The prepared statement of Mr. Deutsch follows:]
                   Prepared Statement of Tom Deutsch

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                               __________

    Mr. Johnson. Okay. Thank you, Mr. Deutsch.
    And if the panel will allow me just a couple of seconds to 
consult.
    Okay. Mr. Peterson, your testimony, please.

 TESTIMONY OF CHRISTOPHER L. PETERSON, PROFESSOR, S.J. QUINNEY 
     COLLEGE OF LAW, UNIVERSITY OF UTAH, SALT LAKE CITY, UT

    Mr. Peterson. Mr. Chairman, Ranking Member Smith, other 
Members of the Committee, thank you for the opportunity to 
testify.
    If the long scope of history teaches us one single lesson, 
it is this: that, sooner or later, the powerful folks in 
society are going to come and try to take the land from the 
less powerful folks.That is an immutable lesson from history. 
And if you learn nothing else from it, that is the truth about 
the human species. And I think that that is what we are seeing 
today.
    One of the first things that the European colonists that 
came over from Europe did, before they set up the United States 
Constitution, before freedom of speech, before separation of 
church and state, before any of our constitutional principles, 
all 13 original colonies passed land title recording statutes 
that established real property records in the control and 
custody of democratically elected county recorders or county 
officials.
    So the people who got to decide who owned the land was the 
first thing that they set up. And they did that because, in 
Europe, there was an understanding that, sooner or later, the 
rich folks were going to come and try to take the land from the 
poor folks. And that legacy of certainty and real property 
ownership has been around in our country for a long time, and 
it is something that we have come to take for granted. We had 
that, and many other countries don't.
    But in the 1990's, the mid-1990's, the Mortgage Banking 
Association decided that they no longer wanted to pay the fees 
that were required since the beginning of the Republic to 
record documents with county officials. So they decided to 
create a shell company that would pretend to own all of the 
mortgages in the country. That way, they would never have to 
pay another fee for recording an assignment as those mortgages 
changed hands in the process of securitization. And, overall, 
this wasn't going to save that much money, but on any given 
loan maybe they would save $200, $250, plus the hassle of 
recording.
    And they did this without any permission from the State 
legislatures or without any authority from appellate courts 
that said that they could do that. This was a radical and 
fundamental change in the real property recording system.
    The name of the company that does this is called MERS, or 
the Mortgage Electronic Registration System. It is one of the 
currents in the foreclosure crisis that really hasn't been 
played out in the press and it hasn't been discussed in 
Congress to the extent that I think it should. And my testimony 
is going to focus on that particular company.
    First, I believe that MERS is an anti-democratic 
institution. It undermines not only the democratically elected 
county recorders and circumvents the democratically adopted 
State legislatures' land title statutes, but it also 
circumvents the States' rights by creating a shadow company 
that is owned by Wall Street banks and insiders and is operated 
outside of Washington, D.C., without any oversight from the 
Federal or State governments.
    Second, I think that MERS is not only anti-democratic, it 
is deceptive, and it doesn't work well. Because there is so 
much legal uncertainty since they created a new legal system 
without any cooperation from legislatures, it is not clear 
whether or not their claims of owning mortgages are actually 
valid or will be ratified over the long term as State appellate 
courts look into it further.
    Also, I would submit that the MERS system stymies 
modification of mortgages. Families that are in the foreclosure 
process oftentimes get a notice from this company called MERS 
and don't understand who it is or whether or not they can 
negotiate with that particular company. It makes it more 
difficult and more confusing for borrowers at precisely the 
time when they are most vulnerable, on the eve of foreclosure.
    A couple of solutions that I would suggest for the 
Committee to consider:
    It seems to me that Fannie Mae and Freddie Mac, as well as 
FHA and the VA and other Federal housing finance agencies, 
ought to stop buying mortgages that are recorded through this 
exotic and unprecedented system. We still have a legal system 
that is safe and reliable. Why is the Federal Government still 
buying mortgages that are recorded in untraditional ways? Not 
only does it ratify the undemocratically motivated initiatives 
of the financial services industry, but it also imposes risks 
on the taxpayers because it is not certain how these legal 
issues are going to be worked out.
    I would also suggest to the Committee that we ought to 
consider some new ideas in trying to incentivize modifications. 
Here is one: Why don't we create a one-time emergency homestead 
exemption of $15,000 that allows the first $15,000 in proceeds 
of a foreclosure sale to go to the family as opposed to the 
servicer. It is a little bit like a compromise between the 
cram-down legislation that had been considered earlier, but it 
is much more simple. It would be easy to administer.
    The first $15,000 in proceeds goes to the homeowner. That 
creates incentive for the homeowner to not drag their feet and 
fight out long foreclosure battles because there is $15,000 
that they can spend on getting a deposit on a new apartment and 
the first month's rent and getting the kids in a new school. 
Also, it creates some real incentives for servicers and the 
investors to really get serious about modifying mortgages.
    And, unlike the HAMP program, it doesn't cost taxpayers a 
dime. Congress could do this with its Commerce Clause 
authority, I believe. And it would be a real meaningful fuel 
injector in the foreclosure system that might actually do some 
good, whereas the current programs are not doing any good and 
are failing.
    Thanks for your time.
    [The prepared statement of Mr. Peterson follows:]
             Prepared Statement of Christopher L. Peterson

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                               __________

    Mr. Johnson. Thank you, Mr. Peterson.
    This hearing has released to the public some very 
spectacularly devastating information about the mortgage 
industry in this country as it works: Mr. Kowalski, having put 
three people on death row in Florida as a criminal prosecutor, 
who is now handling mortgage fraud, foreclosure fraud cases, 
discovered back in 2003 the robo-call, the robo-signing 
phenomenon that has been quietly permeating the foreclosure 
process for perhaps years prior to that time. No telling how 
long. And then Mr. Cox having uncovered from the master robo-
signer--or the current master robo-signer--his practices, which 
are fully in keeping with GMAC mortgage practices, just 
devastating.
    And then Ms. Hines, to put the human face on how this drama 
affects people, real human beings and real families. And Ms. 
Fluker coming forward with testimony about Fannie Mae and 
Freddie Mac and how the taxpayers ultimately are on the hook 
for the full value of these mortgages even though the 
collateral now is not worth the paper that it is written on, in 
some cases.
    And then Mr. Deutsch having some expertise in how this 
system works. And Mr. Peterson then coming forward from the 
early annals of history of America about the importance of 
title to land to the settlers, how important that was, and 
bringing us up to date now on how the mortgage industry has 
sought to evade recording fees for documents, assignments of 
mortgages, and have put in place this concept of the Mortgage 
Electronic Registration System, Incorporated.
    Can you tell us, Mr. Peterson, a little bit more that that 
entity?
    Mr. Peterson. Sure. The company operates a database. Think 
of it as a big Microsoft Excel spreadsheet. And members of the 
system can enter information onto that database about the 
ownership of the loan or who owns the servicing rights of the 
loan.
    But the tricky part that makes it legally problematic is 
that, in order to justify not recording those assignments, as 
the promissory note gets transferred to various companies on 
toward securitization, the mortgages list MERS as the mortgagee 
on the loan. The mortgagee, of course, historically, is the 
same person as the lender, and it is the one who owns the right 
to foreclose, owns the lien.
    And it is very controversial, I think, from a legal 
perspective whether or not MERS can be a mortgagee because they 
don't actually invest in the asset, they don't make any loans. 
And now three State supreme courts--Maine, Arkansas, and 
Kansas--have all held that, in various contexts, MERS actually 
is not a mortgagee.
    And it creates some real inconsistency with the position of 
the securitizing banks and the trustees that manage the pools 
of loans because they also claim to own the mortgage. They need 
to do that because otherwise their investors will be upset, as 
Mr. Deutsch pointed out----
    Mr. Johnson. Let me stop you here.
    Mr. Peterson. Yes, please, I apologize.
    Mr. Johnson. Who owns--or who are the participants in MERS? 
Who are the owners of MERS? And does MERS have the ability to 
cut through the rigamarole that the attorneys, Mr. Kowalski, 
Mr. Cox, and Ms. Fluker, have to deal with in terms of 
establishing a chain of title, if you will? Does MERS have the 
ability to be of assistance in terms of running that title 
down?
    And I would like to hear from each of the witnesses about 
that.
    Mr. Peterson. Well, it is a great question. MERS is owned 
by Fannie Mae, Freddie Mac, and also all the big banks, Bank of 
America, Citi, et cetera. That is who owns it.
    Can MERS cut through the rigamarole? My answer is no; MERS 
actually exacerbates the rigamarole. Why? Because MERS is just 
a shell company. They don't have many employees. So they have 
what are called--they have about 20,000 so-called ``vice 
presidents.'' And these vice presidents become vice presidents 
by getting a boilerplate corporate resolution--I am using air 
quotes, for the record--corporate resolution. I am not sure 
that it really is that.
    But they get this corporate resolution off the Internet. 
And these are really customer service representatives, 
paralegals, workers for servicers that pretend to be vice 
presidents of MERS. And they are the same people, in many 
cases, that were the so-called ``robo-signers.'' So vice 
presidents of MERS are pretending to be--employees are 
pretending to be vice presidents of MERS when they go about 
doing this robo-signing nonsense.
    So I don't think that MERS has helped clear up the system 
at all. It makes it more difficult for homeowners to understand 
what is going on. And it creates confusion and, I think, even 
deception in the system.
    Mr. Johnson. All right. Thank you.
    Mr. Kowalski?
    Mr. Kowalski. If you look to--and I understand you wouldn't 
have it in front of you--but if you look to Exhibit 6 that I 
filed with the Committee, you will see a MERS assignment. It is 
an assignment that purports to have been signed on behalf of 
First Horizon Home Loan. It is actually signed by an office 
manager of the law firm that is foreclosing in this case.
    And when I finally received, for example, the purported 
power of attorney that allowed the office manager to sign 
hundreds of these without knowing whether any true transfers 
took place at all because it is not part of her law firm office 
manager job description, I received a power of attorney that is 
also the next document in your Exhibit 6 that plainly makes 
clear that she doesn't even have authority to have signed the 
affidavit that she knows nothing about.
    So, in short answer to your question of whether MERS helps 
make the process more transparent and solves issues, for the 
courts in particular, the answer is clearly no.
    Mr. Johnson. Thank you.
    Mr. Cox?
    Mr. Cox. Representative Johnson, MERS has proven to be a 
significant problem for us in Maine. MERS claims that it has 
the right to foreclose mortgages in its own name. MERS has 
admitted that it does not own any loan; it never has owned a 
loan. MERS has no right to collect payments on any loan. It 
admits that. But yet it claims that it has the right to 
foreclose mortgages.
    In Maine this summer, we went to the Maine Supreme Court, 
and we obtained a decision in the case of MERS v. Saunders, 
which explicitly held that MERS does not have the right to 
conduct foreclosures.
    MERS seeks to get around that problem by a subterfuge. 
Jeffrey Stephan is a MERS vice president, in addition to being 
an employee of MERS. What MERS tells people like Mr. Stephan is 
that, when MERS wants to foreclose in its own name, Mr. Stephan 
should get out his MERS hat for a moment and put it on and call 
himself a MERS vice president. And in that moment, he should 
take possession of the promissory note that belongs to GMAC, 
perhaps, and hold it in his hand. And at that moment, MERS owns 
it, they claim. And because of that, MERS claims that, from 
there on out, it can go forward and foreclose.
    This is a subterfuge on homeowners and lawyers all over the 
country, who don't even know who owns their mortgage and who 
they should deal with in trying to handle foreclosures and 
negotiate modifications.
    Mr. Johnson. Thank you.
    And I will be vacating this seat perhaps during Ms. 
Fluker's response to the question. And I would also ask you to 
respond, as well, Mr. Deutsch. And the reason why I will vacate 
the chair is because the Chairman is back.
    Thank you.
    Ms. Fluker. MERS is a problem in Michigan, as well. As 
stated earlier, Michigan is a foreclosure-by-advertisement 
State. That means it is done statutorily. In Michigan, in order 
to have a valid foreclosure on a property, you are supposed to 
be able to show that you have an ownership interest in the 
indebtedness. MERS cannot have an ownership interest in the 
indebtedness, because if you look at MERS's title on every 
mortgage, MERS is solely the nominee for the mortgagee.
    However, because of the changing of hats, so to speak, of 
the affidavits that are submitted, it has become a split issue 
in Michigan. There are cases up on appeal right now. There are 
judges who say, ``Hey, this doesn't make sense. There is no 
ownership interest.'' There are others that have said, well, 
because of the contractual relationship with the mortgage 
document, that they could have some standing.
    The bottom line is MERS is merely, as Mr. Peterson said, a 
shell corporation. If you look at their Web site, they strictly 
hold themselves out to be a recording agency. Caselaw from 
Nebraska and Kansas has indicated that they do not do any 
servicing on the loan, meaning they don't accept payments, they 
don't hold the mortgage. Therefore, it almost seems kind of 
commonsensical that they don't have an ownership interest in 
the loan. Yet they continue to foreclose independently without 
stating the actual lender or servicer, which has obviously 
exacerbated and complicated the foreclosure matter even worse 
than it already was.
    Thank you.
    Mr. Deutsch. In 2010, we have 55 million mortgages 
transferring through the system. In the 1600's, when our land 
title property records were created--I can't give any kind of 
significant detail to that, but I am guessing we were in the 
hundreds, maybe thousands of things being recorded.
    Our complex financial system has expedited the speed at 
which mortgages move through the system, whether they are 
originated or they are transferred--certainly a much more 
complex system. That complex system, though, has enabled a 
massive increase in homeownership in America over the course of 
the past 20, 30, 40 years. MERS has played a part of that, just 
as the securitization process has played a critical part of 
that, to allow additional access to credit.
    MERS acts as a transfer of the title of the mortgage loan. 
That is, as an originator originates the loan, they may sell it 
to a subsequent purchaser, who then may sell it to another 
purchaser, who then ultimately securitizes it. And by that 
securitization process, you are able to link the process of 
originating the loan with institutional investors, such as 
pension funds and mutual funds, who are looking to invest money 
to effectively lend, through the securitization process, money 
from the mutual funds and pension funds directly to homeowners.
    And MERS acts as a recording agent so that you are able to 
track the ownership of that mortgage from ultimately the 
originator to the ultimate investor who owns those loans. The 
process of doing that allows for the additional creation of 
credit.
    Moreover, MERS does act on behalf of the trust. And in a 
majority of jurisdictions throughout America, it has been found 
that MERS does have the ability to foreclose in their own name. 
But in many jurisdictions, or in those jurisdictions that have 
been cited before, servicers are transferring the ownership 
interest out of the MERS name and into the name of the trust, 
who is the beneficial owner.
    So this is a question of technicality as to who can 
foreclose, not to whether foreclosure can occur.
    Mr. Johnson. Thank you.
    Mr. Conyers. [presiding.] Well, thank you very much, Mr. 
Johnson, for stimulating all of the witnesses to the response.
    I would like to now turn to the distinguished gentleman 
from Arizona, Mr. Trent Franks.
    Mr. Franks. Well, thank you, Mr. Chairman.
    And I thank all of you being for being here.
    Let me start by suggesting, Mr. Peterson, that your opening 
statement was very compelling to me. You know, there is an old 
Iroquois quote that says, the secret to the universe is in the 
true naming of things. Sometimes clarity and specificity are 
very, very important. And I think that that applies 
fundamentally to property rights. And I want to ask you some 
questions about that in the course of the moment here.
    But I was also touched deeply, Ms. Hines, by your 
testimony. And I want to be very careful how I respond to that, 
because it seems to me that for 40 years your family did pretty 
well until government came along and kind of messed things up.
    And I would suggest that Ms. Fluker's comments were also 
very compelling, in that we have created a system because of 
government's involvement that now we have actually created a 
disincentive for banks to work things out with the homeowner 
because they, for understandable reasons--I mean, we have a lot 
of major pension fund people that have contributed, or I should 
say invested in these things and we are trying to hold the 
system together.
    But the end result, Ms. Fluker is correct; the end result 
is that, because of government involvement here and the lack of 
market discipline that comes with government involvement that 
seems to hold the system together, we are in a situation now 
where banks have an incentive oftentimes to foreclose rather 
than to work things out with the homeowner. And I think there 
is something desperately wrong with all of that.
    It is ironic that, when this republic was first put 
together, one of the comments of the Founding Fathers was 
that--you know, when they were asked, what have you given us? 
The response was, well, we have given you a republic if you can 
keep it. And it seems like we forget that the Founding Fathers 
knew that sometimes government had the power to waste the 
substance of its people under the pretense of taking care of 
them.
    And I really believe that government here, and with all 
good intentions, has caused a great deal of chaos and lack of 
specificity and a lack of market discipline that has created a 
lot of these problems. So, in a sense, I am afraid that 
government is as much a part of the problem as it is any 
possible solution.
    With that, Mr. Peterson, if I could speak to some of your 
comments related to MERS. In your testimony, you actually 
question the legality of the Mortgage Electronic Registration 
System--I am saying that so everybody understands what it is--
which, of course, is the MERS system that has been talked about 
here quite a lot. And I think it is a very significantly 
important subject since about 60 percent of the Nation's 
residential mortgages are recorded in the name of MERS, Inc. 
And the legality of this obscure entity should be either 
established or addressed. It seems very clear that this is a 
big issue.
    You lay out MERS's dual and seemingly conflicting claims of 
acting both as agent and principal in mortgage deals. And you 
describe the incoherence of MERS's legal position as, quote, 
``exacerbated by corporate structures that is so unorthodox as 
to arguably be considered fraudulent.'' Well, I have to tell 
you, I agree with you completely; there is no disagreement 
here. Clarity here is lacking. And I understand that there was, 
you know, an effort to do something good here, but the clarity 
was lost in the process.
    So can you elaborate any more? Is there anything else that 
you want to say about that that you haven't already said?
    Mr. Peterson. Well, thank you for the respectful comments.
    Yeah, I think that I would like to add that, you know, MERS 
is significantly depriving county governments of revenue, which 
I think is another potential problem. Nobody likes taxes, I 
don't like taxes, but, you know, if we are going to no longer 
require or no longer facilitate recording assignments between 
mortgagees down the chain into securitization, then it needs to 
be the legislatures that decide that we are going to do that.
    And also, speaking to the legality issues, you know, there 
was no State legislature that adopted a statute that said that 
they could do this. And what is more, they are going to drag up 
some cases here and there from, you know, this era or that era 
saying there is some nominal form of recording that is allowed 
and you could still successfully perfect a mortgage. But, look, 
there has never been a situation where the facts would arise 
before an appellate court that replicate these facts. We never 
tried to have one shell company try to own all the mortgage 
loans in the country before, so they are not going to find any 
case that says that that is legal that a Supreme Court can't 
distinguish.
    So the reality is that we are going to have some real 
uncertainty about whether or not these loans are perfected and 
even, potentially, whether or not mortgage loans are 
enforceable. And that is something we are going to have to deal 
with for the foreseeable future.
    Mr. Franks. So you believe that it has kind of become an 
anti-democratic institution and that it has fundamentally 
weakened or diminished the clarity of property rights itself?
    Mr. Peterson. Yes, I believe that. And, I think, 
increasingly, there are title insurance companies, especially 
the independent, smaller title insurance companies, that are 
starting to come to that recognition, as well. I believe it 
does decrease the certainty of property rights in our country.
    Property rights are a function of law. Right? Law is what 
creates property rights. And if you have the new oracle, the 
new definer of who owns something be an institution that is 
created by an industry trade association, as opposed to a State 
legislature or an appellate court, in a country that purports 
to be a democratic republic, you have just introduced all sorts 
of uncertainty into the system. It is not clear whether or not 
the structure that they set up without permission is going to 
be recognized by the courts as legitimate.
    And that is not just a bleeding-heart/professor/liberal 
comment; that is a decrease in an economic resource that 
industry and consumers alike have relied upon. There are a lot 
of countries out there where nobody knows who owns the land. 
And so it makes us less likely to invest in the land, it makes 
us less certain about whether or not we want to start 
businesses or build homes, because you can't be certain that, 
you know, 10 years down the road, some strong person might come 
and take that from you. We have lost some of that certainty by 
losing the effectiveness of our State and county real property 
records.
    Mr. Franks. Thank you.
    Mr. Chairman, if I could just ask Mr. Deutsch to respond to 
that, because I know that he had some potential dissent here, 
and I wanted to give you a chance to do that. Then I am 
prepared to yield back.
    Mr. Deutsch. Thank you, Mr. Franks. And certainly, for the 
record, I do have strong dissent with Mr. Peterson's comments.
    In I believe it is 46 States, the validity of MERS to 
effect a foreclosure has been upheld by the State judiciary. In 
a minority of States, in four States--I think all four of them 
have been mentioned--there has been some question as to whether 
MERS itself can initiate the foreclosure. But, in those 
instances, the mortgage loan could be transferred out of MERS's 
name and into the beneficial owner's name, whether that is a 
trust or another investor, to be able to initiate the 
foreclosure.
    So there is very clear legal property right for MERS or any 
other system to be able to foreclose. There is no question as 
to the property rights.
    To the second question and the second issue as to the 
recording fees, I think there is a very strong reason why we 
don't want to pay recording fees that don't do anyone any good. 
Particularly, as it pertains to Dodd-Frank, which was just 
passed, there is a specific provision that does provide the 
opportunity for any borrower to be able to find out who owns 
their loan. So that has been addressed in another means, in a 
Federal legislation.
    But I think the critical component for MERS is to be able 
to allow the facilitation and transfer of mortgage loans in the 
secondary market system to help keep mortgage loan costs as low 
as possible.
    Mr. Franks. Thank you, Mr. Chairman.
    Mr. Conyers. Thank you, Trent Franks. An interesting line 
of questioning.
    Did anyone, before I recognize Howard Coble, want to make 
any comment about this discussion so far? Mr. Kowalski and Mr. 
Cox?
    Mr. Kowalski. One quick point, if I could, Mr. Chairman.
    With regard to the issue of whether or not MERS is 
transparent and tracks investors, I have a MERS screen print 
from the MERS servicer ID system that I printed off last week 
for another issue.
    And just as an example, when a HUD counselor is trying to 
do a loan mod, one of the things they are constantly being told 
is they need to know what the investor guidelines are--investor 
guidelines, investor guidelines. The actual reality is the 
servicers control everything, and the servicers, if they are 
interested in the loan mod, don't even talk to the investor.
    But this is a MERS servicer ID from last week. The servicer 
is GMAC Mortgage. Investor: Quote, ``This investor has chosen 
not to display their information. For assistance, please 
contact the servicer.'' So if you are trying to find out who 
owns your loan from the MERS system, you can't do it anymore.
    Mr. Cox. Mr. Chairman, with all due respect to Mr. Deutsch, 
I suggest that he is perpetuating a myth that MERS has been 
spreading about the country.
    Maine is one of the first State supreme courts to address 
the legitimacy of MERS's right to foreclose mortgages, and it 
did so this summer, and it said that they have no right to 
foreclose mortgages.
    Almost no other States and their supreme courts have 
addressed the issue. There have been a number of lower-level 
trial court decisions going both ways. But when Mr. Deutsch 
suggests that 46 States have blessed the concept of MERS 
foreclosing mortgages, I suggest that he is not being accurate.
    Mr. Conyers. Attorney Fluker, your silence isn't kidding me 
one bit.
    Ms. Fluker. Thank you, Chairman. I definitely would like to 
address the issue, as well.
    One thing that I think is very important is that the 
emphasis has been on MERS, recording, the assignments, things 
of that nature, but that is what the problem is. Even though, 
as Mr. Deutsch indicated, while MERS can assign it back to the 
servicer, who can then foreclose or assign it here or there, 
but all those assignments are not establishing who has the 
ownership interest in the debt, who actually owns this mortgage 
and this loan. And that is the problem.
    You can go all the way through litigation. I have a case 
right now. We have been to Federal court; we are back in State 
court. And at the end of the day, we found out when they 
foreclosed there wasn't even a deed. There was no chain of 
title for the ownership of the mortgage. And 6 months after the 
sheriff's sale, a, quote/unquote, ``affidavit of lost deed'' 
was filed, signed by the same person who has been the corporate 
resolution person for a zillion different other companies and 
MERS. So, I mean, you know, there is questionability as to the 
legitimacy of that.
    But that is one of the major problems with MERS, is you 
cannot determine strictly from a MERS assignment who has the 
ownership interest in the debt. And when you challenge it, 
there is no way to track back because MERS is solely a 
recording agency and is not a servicer or a lender.
    Mr. Conyers. The Chair now recognizes the distinguished 
Chairman of the Subcommittee on Crime and also a distinguished 
Member of the Budget Committee, Bobby Scott of Virginia.
    Mr. Scott. Thank you, Mr. Chairman.
    Let me just follow up on that. If a person buys property at 
foreclosure, who do they buy it from?
    Mr. Peterson?
    Mr. Peterson. It is not clear. The title to the land is 
still--the fee simple ownership of the land is still deeded in 
the homeowner. But there is a lien on the land, and the lien is 
recorded in the name of MERS. Now MERS has to come and file a 
release of the lien. But it is never clear whether or not the 
person that is acting on behalf of MERS--remember, this is not 
a real employee of MERS; this is a vice president that is an 
employee of some other company--it is not clear whether or not 
that person is the appropriate individual to release the lien. 
So, basically, we just have to trust the----
    Mr. Scott. Well, release the lien is one thing, but the fee 
simple title, who transfers title?
    Mr. Peterson. MERS says that they are filing a release of 
the lien, and then the homeowner buys fee simple title from the 
previous homeowner.
    Mr. Scott. Well, the homeowner is being foreclosed on. I 
mean, they don't sign anything. I mean, if you are doing a 
title search and you see a foreclosure in it, you see the 
owners bought the house, the mortgage is recorded. The next 
thing you know, somebody else owns the house. Who transferred 
the title?
    Mr. Kowalski. In judicial foreclosure States, when there is 
a sale, the clerk's office transfers title to the bidder at the 
sale, which is almost always, unless there is equity in the 
property, is almost always the foreclosed entity.
    A servicer in Florida--in Florida, typically we see 
servicers foreclosing in their own names. So when the title 
transfers, to make this issue even more confusion, instead of 
the investor trust transferring, you have the servicer 
purporting to transfer on behalf of the investor trust through 
the local clerk's office without any intervening assignments or 
true transfers being recorded as the headache for the title 
company down the road.
    The perfect storm of that is in my Exhibit 1, which is 
where you have two securitized trusts, both alleging they both 
own the same note, foreclosing on the same house at the same 
time. So to add a further layer on it----
    Mr. Scott. Two different buyers?
    Mr. Kowalski. Well, it is an active foreclosure. So it is 
two different securitized trusts through two different 
servicers, both alleging in the paperwork they file with the 
court--and, in one case, swore to under Florida's recent civil 
procedure amendments--alleging they each own the same note and 
are foreclosing on the same house at the same time.
    I have also cited a Florida appellate court decision where 
one of our appellate courts reversed on the same fact pattern, 
to add another layer to this issue of what exactly the clerk is 
transferring when a clerk in a judicial foreclosure State 
actually transfers the title.
    Mr. Scott. Mr. Cox?
    Mr. Cox. Representative Scott, a related problem--and, 
again, I have to address some of the testimony from Mr. 
Deutsch. He has described how, in some instances, MERS will 
assign a mortgage backout to a foreclosing party other than 
MERS. I would say, in 20 to 30 percent of the cases that I 
encounter, when MERS is doing that--and I can give a specific 
example.
    We have a case in Maine where a mortgage was granted to 
MERS as nominee for First National Bank of Arizona. Last year, 
MERS assigned that mortgage backout to another banking 
institution as nominee--purporting to act as nominee for First 
National Bank of Arizona. The OCC had closed that bank a year 
and a half earlier. MERS had no power to act for that bank at 
the time that it made that assignment. And it is leaving in its 
wake a massive title problem all across the country because of 
this.
    Mr. Scott. I want to get to another issue, and quickly in 
the time I have left, and that is on the accounting principles, 
whether or not there is something in accounting principles that 
create disincentives for the banks to work with people.
    I understand that if there is a short sale, the bank has to 
realize the loss right then and there. However, if there is a 
foreclosure, in which case they are going to end up with less 
money, they don't have to realize the loss, according to 
accounting principles, until much later. So if the bank is kind 
of on an edge and wants to keep their books as fat as possible, 
they are better off going into foreclosure because they don't 
have to realize the loss, rather than a short sale, which is in 
everybody's best interests--the homeowner, the new buyer, the 
bank actually.
    Are there disincentives in accounting principles that we 
might want to address to encourage people to do what is in 
everybody's best interest, rather than allow the fraud of 
allowing banks to have on their books assets listed at values 
that are not realistic?
    Ms. Fluker. I would like to take that question first, if it 
is okay.
    One of the major problems, as I articulated somewhat but 
didn't go into detail in my testimony when I began, was that 
such a large percentage of the loans now are insured by the 
Federal Government--Fannie Mae and Freddie Mac.
    Now, let me be clear. Under the Making Home Affordable 
program, there is a specific hierarchy of loss-mitigation 
procedures that should be followed. First, you should be 
looking at the borrower's loan to see if they are eligible for 
a modification using the formula articulated in their 
supplemental guidelines, looking at the 31 percent of the 
income, things of that nature.
    If, for some reason, there is not the financial possibility 
or feasibility of modifying that loan, you are immediately to 
go to the next foreclosure alternatives, being short sale and 
deed in lieu. That, again, just like the modifications, are 
even less of a possibility from the mere fact--I know in 
Michigan you are looking at almost a 70 percent property 
decrease. And I would venture to say in other States, even 
though the property decrease may not be that significant, there 
is a decrease.
    So there is every incentive to move forward with the 
foreclosure when you are getting paid the full mortgage debt 
plus the foreclosure fees, plus the costs, plus the attorney 
fees that the foreclosure attorneys charge to foreclose on 
these properties.
    Mr. Scott. Wait a minute. On the short sale, the Federal 
guarantee of the loan does not kick in to make the loan whole?
    Ms. Fluker. I don't believe it kicks in 100 percent. There 
are some incentives in place, but it is much more lucrative 
because you are getting the full mortgage debt at the 
foreclosure. At the short sale, the purpose of the short sale 
is that you are selling the property short of what the full 
mortgage debt is. Therefore, there is not going to be the same 
level of profitability.
    And, moreover, the way the structure is set up now, with 
the way the laws are set up, it is actually much more expedient 
to send someone out two modification letters, tell them you 
didn't receive their documents, shoot them to a sheriff's 
sale--which is very simple in Michigan because Michigan is a 
nonjudicial foreclosure. You don't have to go into court to 
foreclose on anybody in Michigan.
    In fact, to show you how bad it is in Michigan and how 
disingenuous this process is, I have people I started 
representing at the eviction action still getting these form 
letters from their lender and servicer, saying, ``Hey, call us. 
We can help you. We can modify your loan.'' Why are they still 
getting those letters? It is because, under the supplemental 
guidelines of the Making Home Affordable program, they are 
mandated to reach out with solicitations to borrowers in order 
to remain eligible for those programs and receive those 
incentives.
    So, in essence, there is an opportunity get one, two, three 
bites at the apple and then, at the end of the day, walk away 
with the whole basket because you get paid the full mortgage 
value on a property that is significantly less than that 
mortgage balance.
    Mr. Scott. Mr. Cox?
    Mr. Cox. Representative Scott, there are servicer fee 
incentives that really are at the fundamental base of this 
problem.
    If you consider a situation--suppose a lender or a servicer 
is considering a short sale today versus carrying that property 
to a foreclosure 6 months from now. If the servicer approves a 
short sale today, its fee revenue for servicing that loan stops 
today. If they keep that on their books for 6 months, they earn 
fees for property inspection, broker opinions of value, forced 
placed insurance, and all of the other fees that continue to 
accrue until that house is finally sold at foreclosure.
    When it sells at foreclosure for perhaps 50 percent of what 
the short-sale price would have been, the servicer suffers no 
consequence because it doesn't own the loan. The investor 
suffers the consequence. So the servicer incentives are to 
block short sales and to keep the property earning a fee 
revenue for them.
    Ms. Hines. They created a whole new scheme in Michigan, 
where the thieves and the criminals go into the houses--as soon 
as the house is foreclosed on and the people are thrown out, 
they see the dumpster roll up, the next day the thieves go in, 
steal everything out of the home of any value, and so they 
leave the home a shell. And the banks still get money because 
the homes are insured.
    And beautiful homes that were once appraised at $100,000-
plus are reduced to being sold for $15,000 and $10,000 because 
the thieves went right in and stole everything that wasn't 
nailed down. So they created a whole criminal industry off of 
foreclosure and eviction.
    Mr. Scott. Mr. Chairman, it seems to me that we ought to 
look into the financial incentives. And we have just heard how 
a foreclosure--people who are doing the foreclosure have an 
economic interest in getting less money at a foreclosure than 
they could have at a short sale. Everybody is disadvantaged.
    And I think there are also some accounting principles 
where, when you realize the loss, it would give people an 
incentive to just carry this phantom value on the books, 
creating another disincentive. And I think that is an area we 
need to look into.
    Mr. Conyers. I would like Susan Jensen and Mr. Park to talk 
with you and me about the underlying problems, that we are 
actually encouraging the wrong thing to happen in this downturn 
that we are in. And I would like to explore that further with 
you, sir.
    I would like to turn now to Howard Coble of North Carolina, 
but I don't know if he is Chairman-elect of a Committee again. 
He is a senior Member of the Committee. We are not sure what 
his future status will be after January 5, but I do know that 
he has been around here a long time, and we are proud to 
recognize him now.
    Mr. Coble. Thank you, Mr. Chairman.
    Mr. Chairman, I plead guilty to being a senior Member of 
the Committee. That is about all I know with certainty right 
now. But thank you for that. We will see. I will let you know. 
Stay tuned.
    Thank you, Mr. Chairman.
    Good to have the panelists with us.
    Professor Peterson, let's visit MERS again. What role, if 
any, did Freddie Mac and Fannie Mae play in the creation of 
MERS? And what are these entities' current ownership stakes in 
MERS, if any?
    Mr. Peterson. Well, they played a significant role. I think 
that the origin of MERS was at Mortgage Banking Trade 
Association meetings, where they cooked up the idea. Fannie Mae 
was a big part of that. I also think that Fannie Mae helped 
legitimize the agency--or this company. People saw Fannie Mae 
as being part of the government and saw that as, you know, a 
stamp of approval from the Federal Government.
    Of course, you know, there are a lot of things about the 
GSEs that I really support and think worked well. Everybody 
disagrees about some of these points, but, you know, back in 
the 1950's and the 1960's, they really were helping create some 
homeownership, the GSEs were. But in the past 15 years, I think 
that they got out of hand and really became very profit-
oriented businesses. And their support of Fannie Mae, in my 
mind, was because they were trying to shave a few dollars and 
cents off of their bottom line to help facilitate bigger 
commissions and bonuses for their management. That is what I 
think happened.
    And so I think that Fannie Mae and Freddie Mac bear some 
responsibility in creating this MERS problem. And, at a 
minimum, we ought to get Fannie Mae and Freddie Mac to stop 
digging that hole deeper and, at least for the time being, not 
purchase any more MERS loans because of the risk that that is 
going to place on the United States Treasury.
    And currently they still have an ownership stake in the--as 
far as I know, they have ownership stake in the MERS business.
    Mr. Coble. Thank you, Professor.
    Mr. Deutsch, several Members of Congress have proposed a 
nationwide foreclosure moratorium in response to the 
foreclosure documentation scandal. How would such a moratorium 
affect the housing market?
    Mr. Deutsch. I think it would be catastrophic to the 
housing market. If you ultimately decline or disallow 
foreclosures to occur in situations where a modification 
doesn't work, a short sale doesn't work, ultimately the capital 
markets will freeze up. Mortgage funding will no longer flow to 
new originations of mortgages. First-time homebuyers will not 
be able to get mortgages. Because, simply put, the capital 
markets will not put money into a mortgage process if a 
borrower doesn't pay back that mortgage and they can't exercise 
rights to the underlying collateral.
    Mr. Coble. Thank you, sir.
    Mr. Cox, Mr. Kowalski, or Ms. Fluker, either or all of the 
three, you have testified regarding alleged abuses by servicers 
in some cases. Courts, however, have procedural rules in place 
to punish those who swear out false affidavits, mislead the 
court in one way or another, or engage in other unethical 
behavior.
    Why are these mechanisms not sufficient?
    Mr. Cox. Representative Coble, speaking for Maine, we have 
a State judicial system that is in deep trouble. We have 
judicial vacancies. We have vacancies in the courthouses. 
Courthouse hours are being curtailed. The system is simply 
being overwhelmed.
    The problem we face is that the court system has enough 
trouble dealing with its case flow and with a huge increase in 
foreclosure cases that, so far, the States have been unable, at 
the State level, to deal with this problem.
    I would respectfully suggest there is a solution here in 
Washington. Attorney General Holder last commented on this 
issue back on October 6th when he talked about foreclosure 
irregularities, and he has not been heard from since. And I 
respectfully suggest that if criminal charges were considered 
across the country, you would see a significant change across 
the servicing industry in incentives for getting away with what 
they have been getting away with.
    So I suggest that a solution countrywide--because this is a 
countrywide problem--exists here if somehow the Attorney 
General's office can be led down this road. I met with the U.S. 
Attorney in Portland, Maine, a month ago to discuss this. And I 
sensed, from his feedback to me, he is waiting from word from 
Washington.
    Mr. Coble. Thank you.
    Either of the other two want to be heard?
    Thank you, Mr. Cox.
    Ms. Fluker. Thank you for your question.
    First and foremost, so much of this turns not only on just 
there being the potentially fraudulent or faulty paperwork. I 
am from Michigan. Michigan is a nonjudicial foreclosure State. 
Therefore, technically, there is no paperwork until the person 
gets to the eviction stage. You have a sheriff's sale. A 
posting is put on an individual's house. The first time they 
actually see any paperwork regarding that foreclosure is when 
they get to eviction.
    Eviction hearings in Michigan are handled by the State 
district court. It is an expediting hearing. You get the 
eviction notice; the hearing must be within 7 days of that 
notice. So, literally, you are looking at documentation--if, in 
fact, the borrower has representation, which 99.9 percent of 
the time they don't. But if they do have documentation, it is 
only at that point that you have the ability to review those 
documents.
    And, as Mr. Cox indicated, you have an overwhelming 
scenario with the court system. Many times they are, you know, 
unable or unwilling because of their caseloads to take the time 
to--literally, you are going back and reviewing the whole chain 
of title. So it puts borrowers at a disadvantage.
    Mr. Coble. I thank you.
    Mr. Chairman, I see my red light has illuminated. May I 
hear from Mr. Kowalski?
    Mr. Kowalski?
    Mr. Kowalski. In Florida, yes, to answer your question, the 
State bars are looking at this. Our State attorney general has 
not been active on this issue, although I understand there is a 
collection of 50 State attorney generals that are looking at 
it.
    But part of the problem, in terms of the Federal 
Government's response, is this: The banks have always come here 
and said, we do not want to be regulated by the States; we do 
not want to face 50 different jurisdictions; we do not want the 
State attorneys general and individual State regulatory 
agencies to regulate us because we are national concerns.
    They have come to Congress and said, make us immune, under 
the National Bank Act and other acts, make us immune from the 
meddling of individual States. And that is what has happened. 
So, as a result, these are national banks. They are regulated 
by the Federal Government agencies. And, in many cases, the 
need for transparency, which has been addressed over and over 
again today, is a Federal issue.
    Mr. Coble. Thank you, sir.
    I yield back, Mr. Chairman.
    Mr. Conyers. We have only a few minutes before voting, and 
I want to divide that time between Mel Watt and Elton Gallegly.
    Mel?
    Mr. Watt. Do we know how much time we are dividing?
    Mr. Conyers. Well----
    Mr. Watt. I will just take my time, and you cut me off 
whenever you get ready.
    Mr. Conyers. Ask the fellow to find out. He is on the phone 
right now.
    Mr. Watt. Well, they haven't called votes, so we would have 
at least 15 minutes after they call votes. So I think we can 
get through in regular order here.
    Let me thank my colleague from North Carolina, Howard 
Coble, for starting down a chain of questions that I wanted to 
try to pursue related to Fannie Mae and Freddie Mac's 
involvement with MERS.
    I noticed that the former administrator of the Federal 
Housing Finance Agency is here in the room, and maybe he should 
be at the witness table.
    But let me just ask Mr. Deutsch, what is your understanding 
of Fannie and Freddie's involvement with MERS?
    Mr. Deutsch. I don't have a detailed understanding of the 
corporate governance relationship with MERS. They are some part 
owners of the MERS registration system. I don't know the 
percentage of that ownership, but they are part owners. And----
    Mr. Watt. So how could a private registration service take 
the place of State laws that require establishment of a chain 
of liens and ownership through title transfer records?
    Mr. Deutsch. I don't think MERS takes the place of the 
State laws. MERS operates within the State laws that have been 
held up in a majority of jurisdictions.
    Mr. Watt. So when a mortgage comes to MERS, does it record 
that mortgage in the State registries?
    Mr. Deutsch. When a mortgage is originated, let's just say 
at the very beginning of the process, it will be filed by MERS 
as an agent, as the owner of the mortgage in the State 
registry, so that then it can be transferred in the system.
    Mr. Watt. How is MERS an owner of the mortgage at that 
point?
    Mr. Deutsch. Well, they are acting as an agent for the 
beneficial owner.
    Mr. Watt. An agent, but they are not the owner.
    Mr. Deutsch. They are not the beneficial owner.
    Mr. Watt. And when they transfer ownership, if my State 
requires that that be documented on the public records as to 
establish for everybody in the public--the owner and everybody 
else--the chain of title, what would happen when that transfers 
from MERS to somebody else?
    Mr. Deutsch. Well, a transfer can be effected, and 
particularly in the capital markets, they are effectuated 
through----
    Mr. Watt. I am not talking about in the capital markets. I 
am talking about on the State land registry titles.
    Mr. Deutsch. Well, there is a critical relationship between 
how it is done in the legal system via contracts and how it is 
done----
    Mr. Watt. All right. Well, let me--is the former Federal 
Housing Finance Agency administrator with you?
    Mr. Deutsch. OFHEO Director Falcon?
    Mr. Watt. Yes.
    Mr. Deutsch. Or, former OFHEO Director Falcon?
    Mr. Watt. Yes. Could you find out from him, while I go on 
to the next question, what Fannie and Freddie's formal 
relationship with--he is with you, right?
    Mr. Deutsch. He is an advisor, a senior advisor.
    Mr. Watt. Okay. Well, would you turn to him and find out 
from him, while I go on to another question, what Fannie and 
Freddie's involvement with MERS was at its origination, if he 
was involved in it at that time?
    Mr. Deutsch. Sure.
    Mr. Watt. Let me go to another question. This whole thing 
has been frustrating for me, in particular, because I serve not 
only on the Judiciary Committee but on the Financial Services 
Committee, which has jurisdiction over the GSEs and the 
preemption issues that get raised.
    Ms. Fluker, there has been a lot of talk recently about 
standardizing these foreclosure procedures by having the 
Federal Government take them over. It seems to me that there 
are some substantial preemption issues involved with that, 
Federal preemption of State laws.
    What is the State of Michigan's State legislature doing 
to--is it concerned about this whole process that you have 
described of nonjudicial foreclosures?
    Ms. Fluker. First and foremost I think that it is important 
to note that specifically with respect to MERS issues, there 
are quite a few cases up on appeal because it is kind of split. 
We are a nonjudicial foreclosure State. There has not been any 
discussions as far as changing that structure into a judicial 
structure to my knowledge. However, I think it is very 
important that we realize that it is not an issue whether the 
foreclosure is judicial or nonjudicial.
    Mr. Watt. Well, I understand that. But if a sheriff has to 
make a decision to go and tack something on a door in Michigan 
before a court even gets involved in it, that presents a 
serious problem for that State. It doesn't happen to be the 
process in North Carolina, and I don't know how the Federal 
Government can solve that. That is a State issue. So you know, 
I am just going to encourage you on some of this stuff you are 
going to have push State legislators because if the Federal 
Government standardizes it and preempts all foreclosure laws in 
the State, I think you are going to be--a number of States are 
going to see their foreclosure laws go down. In your State you 
might see them go up, but I mean I just have some serious 
reservations about federalizing foreclosure law, and I would 
say that to all the attorneys on this panel.
    My time is up. I would like to get an answer to this first 
question about Fannie and Freddie's involvement now that I 
notice Mr. Deutsch has consulted with his advisor.
    Mr. Deutsch. For any information about MERS, the ownership 
interest, you would have to direct those questions to MERS. 
Neither one of us are aware of precise ownership interest of 
Fannie and Freddie.
    Mr. Watt. Well, you are here representing MERS, aren't you?
    Mr. Deutsch. I don't represent MERS. They are not a member 
of the American Securitization Forum.
    Mr. Watt. So who are you here representing?
    Mr. Deutsch. At the outset my testimony I indicated those 
who originate the loans, those that service the loans, the 
trustees of the loans, the investors in mortgage loans.
    Mr. Watt. All right. Thank you. That perhaps my be the next 
hearing that somebody has.
    Mr. Conyers. Well, I would ask you to join with me and 
Bobby Scott and our staff to think about the next hearing, Mel, 
and I thank you very much.
    I turn now to Elton Gallegly and recognize him, the 
distinguished gentleman from California.
    Mr. Gallegly. Thank you very much, Mr. Chairman. This issue 
is of particular interest to me. In my former life I had a real 
estate brokerage business, and I have held a broker's license 
in the State of California for 43 years. And I can tell you in 
the 20 some years that I was in business before I came to 
Washington I had the good fortune of working with a lot of 
wonderful people over the years. And to the best of my 
knowledge, I never had a client or a customer that ever had 
their home foreclosed on. I think a lot of that was due to the 
fact that times were different, the economy was different, 
property values were escalating, so even probably the least 
focused salesmen and brokers could look like a hero because of 
inflated values. That hasn't been the case in the last several 
years, and there have been many reasons for that.
    But I would like to get back to Ms. Hines and put the human 
side on this and see how we get into these situations whether, 
we are dealing with predatory lenders, whether we are dealing 
with lack of good oversight of the process of brokers and 
mortgage--real estate brokers, mortgage brokers and some 
personal responsibility.
    It is my understanding in your testimony, Ms. Hines, that 
it was you and your sister that inherited the home from your 
mother and father that had lived in the home for at least 30 
years before they passed; is that correct?
    Ms. Hines. Yes.
    Mr. Gallegly. And when you inherited the home, was it free 
and clear?
    Ms. Hines. Yes, it was paid for.
    Mr. Gallegly. Okay. So they had worked most of their adult 
lives working their tails off to be able to pay their bills in 
a responsible way and you inherited the home.
    What year did you inherit the home?
    Ms. Hines. In 2006.
    Mr. Gallegly. 2006?
    Ms. Hines. Uh-huh.
    Mr. Gallegly. And how long was it after you inherited the 
home before you borrowed money?
    Ms. Hines. I think it was 2005.
    Mr. Gallegly. Okay.
    Ms. Hines. It was 2 years, we went into foreclosure in 
2007.
    Mr. Gallegly. Okay, what year did you get the loan on the--
how long was it after you inherited before you borrowed money 
on the property?
    Ms. Hines. About maybe 5--maybe about 4\1/2\ years before 
we borrowed.
    Mr. Gallegly. But you said you inherited it in 2005?
    Ms. Hines. We inherited it in 2005. Well, my mother died, 
she has been dead now for 8 years. So 8 years when she died, 
whatever the time frame.
    Mr. Gallegly. So you inherited the property about 2002?
    Ms. Hines. Yes.
    Mr. Gallegly. And what year did you borrow money against 
the property?
    Ms. Hines. In 2007.
    Mr. Gallegly. So you lived there for 4 years----
    Ms. Hines. My sister and her children lived there for 4 
years.
    Mr. Gallegly. And when did it go into foreclosure?
    Ms. Hines. In 2007.
    Mr. Gallegly. The same year that you borrowed the loan?
    Ms. Hines. Well, yes--we borrowed--no, we borrowed the loan 
the year--I think we borrowed the loan--my sister borrowed the 
loan 2 years before the house went in foreclosure.
    Mr. Gallegly. Okay. And----
    Ms. Hines. Let me explain something because I don't want to 
confuse anybody. My sister was living in the home. I was living 
in an apartment. So all of the business, and she hid a lot of 
the mail that she received when the house started going into 
foreclosure from me and my other sister, who didn't live in the 
home.
    Mr. Gallegly. You said you borrowed the money to do repairs 
on the property.
    Ms. Hines. My sister came to us because the house was in 
dire need of repairs.
    Mr. Gallegly. So the money that you borrowed probably 
enhanced the value of the property?
    Ms. Hines. Yes, yes.
    Mr. Gallegly. Okay. Was all the money used just for 
repairs?
    Ms. Hines. Most of it, not all of it. Most of the money was 
used for repairs. My nephew got married that year and my sister 
took some of the money and helped with the wedding.
    Mr. Gallegly. Okay. The reason I ask the questions is 
because it shows that you are fighting a declining market in 
value and you enhanced the value, yet you still ended up as we 
refer to upside down. Do you remember offhand what the value 
loan-to-value ratio was when you bought the property, meaning 
how much was it----
    Ms. Hines. How much the house was appraised for?
    Mr. Gallegly. Right.
    Ms. Hines. The house was approved for $80,000?
    Mr. Gallegly. And how much did you borrow?
    Ms. Hines. We got 43,000?
    Mr. Gallegly. So it was about 50 percent, plus or minus?
    Ms. Hines. Yes. And I would say out of the 43,000 that we 
received, 40,000 went into the house, because we had to have--
--
    Mr. Gallegly. So you spent almost all--so theoretically you 
might assume that it increased the value to over 100,000 if you 
put 40,000 in it?
    Ms. Hines. Yeah, because we had to remove a tree. The 
basement kept flooding, every summer the basement would flood 
and it was because of a tree in the backyard. So we had to 
remove a tree with the money.
    Mr. Gallegly. Pardon me, I see the time has expired. And I 
really didn't want to get off too far on this, I just wanted to 
show how you got into this situation. I assume there are a lot 
of people, your friends and neighbors, who are in similar 
situations.
    Ms. Hines. Well, it ballooned once we took out the loan, 
the mortgage on the house then--my sister was paying 588 
initially and then after a 3-period it ballooned to 988. My 
sister was on disability because she had worked at Cadillac, 
too, and she had incurred asthma and had had really attacks--a 
lot of attacks to where they put her on disability for General 
Motors.
    Mr. Gallegly. And within 90 days they increased your 
mortgage almost 100 percent?
    Ms. Hines. Yes.
    Mr. Gallegly. And they didn't explain that to you when you 
purchased the property, that it was an adjustable after a 
period of time?
    Ms. Hines. No, they did not.
    Mr. Gallegly. This was not in the contract anywhere.
    Ms. Hines. Yeah, it was under a contract. And they gave us 
a contract. The contract was like 125 pages that we had to 
read. And so I am just being honest, we did not--not being 
lawyers, not thinking that it was going to go from one amount 
to another amount, and because the house was practically--for 
the base of the house, we had to have the base of the house 
reinforced. They call it point and pay.
    Mr. Gallegly. Well, I guess my point is, I really question 
how a mortgage could increase 100 percent in a period of 90 
days without the borrower knowing about it. If this was not 
clearly explained to you and you didn't sign it somewhere, I 
think there may be another problem here. So you have got lots 
of lawyers.
    Ms. Hines. Well, We got ripped off by a couple of lawyers. 
We went to a couple of lawyers to help us on the issue and they 
ripped us off, too. It has just been a nightmare ever since 
this thing happened. I am not a financial person, I am not a 
lawyer. I wasn't living in the house to actually give you 
moment-to-moment accounts of what money was spent.
    Mr. Gallegly. No, I didn't mean that.
    Ms. Hines. I know that you are not, I am just saying that 
we went through a lot and we are still going through a lot as a 
result of being evicted from that house.
    Mr. Gallegly. Thank you, Mr. Chairman.
    Mr. Johnson. [Presiding.] Thank you. Ms. Hines, do you have 
any idea what a yield spread premium is?
    Ms. Hines. No, I do not and I don't think my sister does 
either.
    Mr. Johnson. I will now recognize the gentlelady from 
California, Ms. Chu.
    Ms. Chu. Thank you, Mr. Chair. Well, as we all know, HAMP 
fell far short of the expectations. It was supposed to help 3 
to 4 million people from foreclosure but instead only helped 
700 to 800,000. And the congressional oversight panel that was 
held in the House cited the Treasury's failure to require 
servicer participation, failure to hold servicers accountable, 
and the decision to outsource critical program functions to 
Fannie Mae and Freddie Mac. Moreover, these programs weren't 
designed to handle foreclosures due to unemployment.
    I have a great concern because in California we indeed are 
facing far more foreclosures, in fact 1.5 million new 
foreclosures just in my State alone. And we have created 
another program called the Hardest Hit Funds Program, which is 
a TARP-funded program, and it is to be administered to low and 
moderate homeowners and to include principal reduction programs 
which several of you have mentioned as being very important, as 
well as programs to assist unemployed homeowners. But the 
problem is that not one bank has officially signed on to join 
this program in California. And so we are encountering the same 
problems.
    I want to ask anybody on the panel how we could get banks 
to participate in these government run programs and give true 
foreclosure relief to hardworking families.
    Ms. Fluker. Thank you. I think one of the major things that 
needs to be done, and it is in my written testimony, and people 
don't like this word, but it needs to be out there and it needs 
to be understood, there needs to be a moratorium on these 
foreclosures. People hear that word, they get scared, they are 
like, oh, my God, these borrowers are looking for a free house. 
That is not what a moratorium is. This is something that was 
done during the Great Depression in 25 States during the 
1930's. It was upheld as constitutional by the U.S. Supreme 
Court in Home Building and Loan Association v. Blaisdell. That 
is 290 U.S. 398, 1934, for people who like to look up cases. 
And what actually happened was instead of going to court 
throwing people out in the street, people went to court and the 
judge determined a reasonable rent for these people to pay.
    I think that is more than appropriate in this situation, 
not only because of our economic situation, but due to the fact 
we have so much underlying predatory and fraudulent conduct 
coming on. It would allow borrowers to still remain in their 
homes until all of this is sorted out. We can come down here 
week and week, month after month, but every day that goes by 
someone is being foreclosed and evicted and they are like Ms. 
Hines, who is not an isolated situation for people to sign 
these loans and not know if there were adjustable rates.
    I have senior citizens that have owned their homes, 30, 40, 
45 years, documents are brought to them, you are dealing with a 
broker who is a smooth talker, like I am taking care of you, 
look, everything is fine, that is why my paralyzed 80-year-old 
woman in a wheelchair is now facing eviction because she signed 
a loan for 331 and within a year it was over $1,400.
    Ms. Chu. Okay. Well, I would like to hear from a variety of 
opinions. So Mr. Kowalski and then Mr. Peterson.
    Mr. Kowalski. To start with, your question about hardest 
hit, I read this week for example that Treasury outsourced an 
opinion letter to a banking law firm to issue an opinion as to 
whether or not the hardest hit funds could go to Legal Aid 
groups and HUD counselors to assist with foreclosure 
prevention, and not surprisingly the banking law firm gave--I 
am not sure why the Treasury lawyers couldn't do this work, but 
the banking law firm gave the opinion to Treasury that it 
couldn't. Of course it can. The only system that we have been 
able to develop in Florida at least is a cooperative agreement 
between the legal services groups, HUD counselors who are 
properly aware of what is going on with these loan 
modifications, and pro bono lawyers, working in cooperation 
with the judiciary. The Florida Supreme Court created the 
entire Judicial Mortgage Foreclosure Mediation Program, for 
example.
    HAMP needs to be strengthened, not abandoned. Maybe some 
concepts need to be looked at, but it is not voluntary, it is 
tied to TARP. It was always tied to TARP, and the HUD 
regulations make it clear it is tied to TARP. At the end of the 
day the servicers are all regulated by the Federal Government. 
The servicers make all of the decisions, the servicers decide 
when loan mods work, when short sales work, when foreclosures 
are pushed through, and those are all federally regulated 
entities.
    Ms. Chu. So you are saying it should be tied to the TARP 
funds?
    Mr. Kowalski. It is tied to the TARP funds. You gave them 
the money and in return for handing them the money it was you 
have got to go out and work on HAMP.
    Ms. Chu. Mr. Peterson.
    Mr. Peterson. One of the problems I see with HAMP is that 
the incentive that it tries to create to promote modifications, 
one of the ways it does that is by giving some very modest 
compensation to the servicer, if they succeed, and that happens 
over the stage period of time. It is not very much money and it 
is not a sharp enough incentive to get them to actually do it.
    So here is a different idea. Instead of having the 
taxpayers pay money to--a little bit of money to servicers to 
not foreclose, instead make the servicer or the investor 
through the trust pay an extra penalty if they actually do go 
forward with the foreclosure. So switch the incentive. And my 
advice would be peg it at 15,000, so the first is a national 
emergency homestead exemption. It is short of a moratorium, it 
is a reasonable compromise. So the first $15,000 in a proceeds 
of a foreclosure sale goes to the family to help them move on 
to the next location, get a deposit on the next apartment, pay 
that first month's rent, get the kids into school and that 
money has to be put on the table, cash on the table, if they 
are going to go forward with the foreclosure. It will give an 
incentive to borrowers that need that cash in order to move on, 
to stop fighting the foreclosure. It is a lot like the Cash for 
Keys programs that lots of servicers and lenders have done for 
generations where when you are foreclosing you give $1,000, 
2000, $3,000 maybe to the homeowner if they turn over the keys 
and turn over the property in good condition without having the 
fixtures stripped out, that sort of thing. Only the difference 
is it is a little more money, and it is also clearly signaled 
to everybody up front, so everybody knows that that $15,000 is 
waiting for them. Lots of homeowners that are in foreclosure 
don't understand that Cash for Keys is a possibility. So I 
think that that would be--it is an innovative idea, but it is 
also much more simple. We don't have to have a big bureaucratic 
structure that enforces it, it just becomes a Federal law, it 
is a bright line rule. It is very simple and it would be 
effective.
    Ms. Chu. Thank you.
    Mr. Deutsch. Maybe I will address Professor Peterson's 
proposal. Obviously I think that would create enormous 
challenges for the pension funds of say a firefighters pension 
fund or a police pension fund. Well, now you have incentive for 
the borrower to default because to pay $15,000 to not actually 
pay their mortgage, it seems that may cause an appreciable 
increase in the number of foreclosures in America because it is 
providing an incentive not to pay their mortgage. There are a 
lot of Cash for Keys programs out there that do provide 
relocation assistance where the servicers--when there is no 
other alternative beside foreclosure the servicers does help 
the borrower transition from their home to other places with 1, 
2, $3,000. But to force that upon the owners of these 
mortgages, to force them to pay $15,000 will have enormous 
downstream effects on the future of mortgage lending in 
America. In particular because Fannie Mae and Freddie Mac, 
which is right now on the backs of the taxpayer, because those 
institutions own such a significant amount of the mortgages in 
America, it ultimately would be bigger than the American 
taxpayer who is paying these $15,000.
    Ms. Chu. Well, I should cut it off here, because I far 
exceeded my time. So I will yield back the balance of my time.
    Mr. Johnson. Thank you, Ms. Chu. Next we will--I have been 
burning to ask this question all day. I think, Mr. Deutch from 
Florida, you know what my question is, do you not?
    Mr. Deutch. Mr. Chair, I think both our witness and myself 
go by Deutsch, if that's helpful.
    Mr. Johnson. And is there any other connection?
    Mr. Deutch. Other than having a last name that is often 
butchered, I don't believe that we are in any other way 
related.
    Mr. Johnson. All right. So at this time I will recognize 
Congressman Deutch.
    Mr. Deutch. Thank you, Mr. Chair, but in an attempt to get 
to know Mr. Deutsch better I do have some questions for you, 
and we will see if these are questions that you are comfortable 
answering. I wanted to talk a little bit about the 
securitization process and specifically the securitization 
through Real Estate Mortgage Investment Conduits. Can I 
continue?
    Mr. Deutsch. Sure, I am familiar with REMIC.
    Mr. Deutch. Here are the concerns that I have. REMIC as I 
understand received tax exempt status. Receiving the tax 
benefits, also as I understand it, requires strict compliance 
with the law, including the depositing of collateral within 90 
days of the REMIC's formation, is my understanding correct?
    Mr. Deutsch. Correct.
    Mr. Deutch. And as I further understand it, the law does 
not permit fixes to the transfer after that 90-day period. So 
under this requirement the only assets that would receive tax 
exempt treatment that are in a REMIC are those that are in the 
REMIC on the startup date.
    Mr. Deutsch. Correct.
    Mr. Deutch. Now, further my understanding is that a failure 
to comply with REMIC loss subjects the entity to 100 percent 
taxation.
    Mr. Deutsch. If a securitization trust doesn't meet the 
REMIC requirement, then the securitization trusts proceeds are 
paid onto the investors would be taxed as a corporate entity 
tax.
    Mr. Deutch. Right. And if they do meet the requirements 
then they are exempt.
    Mr. Deutsch. Correct, correct.
    Mr. Deutch. Now, the oversight panel, the congressional 
oversight panel that issued its report recently talked about--
described documentation standards in the foreclosure process 
have helped shine a light on potential questions regarding the 
ownership of loans sold into securitization without the proper 
assignment of title to the trust that sponsors the mortgage 
securities. You had said earlier, Mr. Deutsch, that from time 
to time mistakes do occur.
    Some of the issues then that I would like you to speak to 
include that if the millions of mortgage transfers during the 
boom or some number of them, small, large, there may be some 
dispute, but for those that were not properly completed, then 
under the REMIC rules, the REMICs may be empty entities that 
don't own anything; is that correct?
    Mr. Deutsch. Well, I think the problem with that is that 
the premise that the trust don't actually own the loans is 
invalid. The trusts actually do own the loans, and they were 
validly transferred, and there are abilities for the trust to 
be able to cure the transfer of those loans once they are in 
there to perfect the ownership of the loans.
    Mr. Deutch. I understand. They may perfect the ownership of 
the loans but they can't reclaim tax exempt REMIC status after 
that 90-day period.
    Mr. Deutsch. Once the loans ares in a trust if a deficiency 
is observed you have a 90-day period to be able to cure that 
deficiency.
    Mr. Deutch. The 90-day period----
    Mr. Deutsch. From the time of the discovery of the 
deficiency.
    Mr. Deutch. I would ask Mr. Peterson if that is your 
understanding as well of when the 90-day period starts to run.
    Mr. Peterson. My understanding is that you can't put them 
back in after it is closed. After the 90-day window following 
closure of the REMIC has expired you can't insert new 
collateral to the trust, otherwise it destroys the tax exempt 
status.
    Mr. Deutch. Okay. So there is a difference of opinion. The 
question then is if they are past this 90-day period, Mr. 
Peterson I will stick with you for a second. If they are passed 
the 90-day period and the tax exempt status is lost, can't be 
regained, then what about the next step of assessing liability? 
Would there be any liability to either the creators of the 
REMICs, would there be liability to the trustees or servicers 
at that point?
    Mr. Peterson. Well, you have exceeded the boundary of the 
competence that I feel most comfortable with. I am not a tax 
lawyer, and I don't have an extensive practice of thinking 
through what happens when a REMIC status is destroyed. That is 
a big problem, and it is not something I have seen before or 
worked on. So I will be very cautious in answering.
    Mr. Deutch. Let me just follow that up then. It is not 
something that you've seen because the issue hasn't been raised 
before; is that the reason?
    Mr. Peterson. Well, that is part of it, yeah. These big 
securitization deals, there is a lot of money on the line and 
the IRS has not been aggressively trying to declare these 
trusts as no longer tax exempt, in part because I think the 
Treasury Department has been attempting to prop up some of the 
financial institutions that would have exposure to those taxes. 
But I have to--again, I have to qualify this, that I am not a 
REMIC tax lawyers, so I don't want to--you pulled me off of my 
core competence.
    Mr. Deutch. Well, I won't ask questions in great 
specificity then. I will only ask again whether you have seen--
has the suggestion been made that the IRS ought to take a 
closer look at the tax exempt status of REMICs?
    Mr. Peterson. Yes, that has definitely been made. And, you 
know, who it is that decided not to do that is not clear to me. 
I assume somebody high up in the Treasury Department made that 
decision not to do that. My hunch, my intuition, respectfully, 
is that there are some compelling arguments that the collateral 
was not transferred consistent with the Uniform Commercial Code 
and there is ambiguity in the State laws out there about how 
that will get resolved.
    There is a credible argument that the tax exempt status has 
been destroyed. There has not been case law confirming or 
rejecting that proposition yet. It could go either way. And the 
thing that is scary about it is it is a closer call than you 
would think. Having plowed trillions of dollars into the 
securitization structure, one would think we pretty much have 
that locked down and certain. It is actually not that certain. 
There are some decent arguments both ways. What the courts are 
going to go do and what the IRS is going to do, no crystal ball 
here on the desk from my perspective.
    Mr. Deutch. And then finally, Mr. Chair, Mr. Deutsch, have 
you seen the suggestion made that some of these REMICs may have 
lost their tax exempt status or certainly given that there is a 
difference of opinion between you and Mr. Peterson that 
difference of opinion I would imagine can be found on a larger 
scale within the industry, have you seen the suggestion made 
that it ought to be examined and is this something that the IRS 
ought to do, if for no other reason than to clarify what the 
correct position ought to be?
    Mr. Deutsch. I am aware of two academic commentators who 
have proposed the idea. I think the IRS has a lot of work and 
the Treasury Department has a lot of work to do on analyzing 
and improving the HAMP processes.
    I think ultimately there is no merit to the argument or 
suggestion that any REMIC violations have occurred in the 7 
trillion--well, $1.5 trillion in private label mortgage 
securities that are outstanding. I think to follow up on every 
academic suggestion that something wasn't transferred validly 
without any proof, and I address this directly in my testimony, 
both in the written testimony as well as the white paper that 
we put out just last month, that there is no valid reason to 
believe that the mortgage loans weren't actually transferred 
into the mortgage tray.
    Mr. Deutch. I understand. Mr. Chair, this is my last 
question. I understand there may be no reason to believe that. 
I guess the final question I have is if, however, there is an 
example where the transfer was made outside of the 90 days, 
even outside of the 90 days once discovered, which would call 
into question the tax exempt status, in that case could you 
imagine the IRS ruling that the tax exempt status would be 
lost?
    Mr. Deutsch. I think what you are potentially postulating 
is if any individual loan wasn't put into the trust, if there 
was some mistake on an individual anecdotal loan, if that loan 
wasn't into the trust, that loan would not be in the trust but 
it doesn't destroy the REMIC status of the trust because of one 
loan's violation.
    Mr. Deutch. I am sorry that we are out of time, Mr. Chair, 
but I appreciate the time very much. Thank you.
    Mr. Johnson. Thank you, Mr. Deutch. And I will say that 
this has been a very enlightening and frightening hearing to 
realize that it is a basic human instinct to want to control, 
and that control manifests itself in ownership of property. It 
is sobering to think how far we have gone down the line toward 
too big to fail entities having rigged up the property 
ownership process so as to be in a position to attain control 
of property here in America, land of the free, home of the 
brave, where a man or a woman's home is their castle. And all 
of this through private enterprise has been aided and abetted 
we are told by the United States Government, by United States 
Government policy or the lack thereof. And we sitting above 
you, you all sitting down there, we sitting up here have the 
power to take this complicated scenario and learn from it, turn 
it around and return power and control to the people.
    And so I want to thank each and every one of you for your 
particular role in the fight, and I would ask you to not give 
up hope, to keep doing what you are doing. And I think 
collectively we will make a difference.
    I would like to thank all of the witnesses for their 
testimony today. Without objection, Members will have 5 
legislative days to submit any additional written questions 
which we will forward to the witnesses and ask that you answer 
as promptly as you can to be made part of the record. Without 
objection, the record will remain open for 5 legislative days 
for the submission of any other additional materials.
    Again, I want to thank everyone for their time and 
patience. And I hope that, Ms. Hines, you are able to get you 
another pair of glasses pretty quickly and hope your trip back 
to Detroit is not as eventful as the one this morning coming 
here, and that goes for all of you all who are traveling. 
Again, I want to thank everyone for their time and patience. 
Merry Christmas, Happy New Year, Happy Chanukah, happy holidays 
and what not. This hearing of the Committee on the Judiciary is 
adjourned.
    [Whereupon, at 12:48 p.m., the Committee was adjourned.]


























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