[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
ROBO-SIGNING, CHAIN OF TITLE,
LOSS MITIGATION, AND OTHER ISSUES
IN MORTGAGE SERVICING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 18, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-166
U.S. GOVERNMENT PRINTING OFFICE
63-124 WASHINGTON : 2011
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
EMANUEL CLEAVER, Missouri THADDEUS G. McCOTTER, Michigan
AL GREEN, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri GARY G. MILLER, California
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
JOE DONNELLY, Indiana WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
PAUL E. KANJORSKI, Pennsylvania ADAM PUTNAM, Florida
LUIS V. GUTIERREZ, Illinois KENNY MARCHANT, Texas
STEVE DRIEHAUS, Ohio LYNN JENKINS, Kansas
MARY JO KILROY, Ohio CHRISTOPHER LEE, New York
JIM HIMES, Connecticut
DAN MAFFEI, New York
C O N T E N T S
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Page
Hearing held on:
November 18, 2010............................................ 1
Appendix:
November 18, 2010............................................ 75
WITNESSES
Thursday, November 18, 2010
Anastasi, Anne, President, American Land Title Association....... 64
Arnold, R.K., President and CEO, Mortgage Electronic Registration
Systems, Inc. (MERS)........................................... 47
Caldwell, Phyllis, Chief, Homeownership Preservation Office, U.S.
Department of the Treasury..................................... 7
DeMarco, Edward J., Acting Director, Federal Housing Finance
Agency......................................................... 14
Duke, Hon. Elizabeth A., Governor, Board of Governors of the
Federal Reserve System......................................... 9
Fisher, Linda E., Professor of Law, Seton Hall University School
of Law......................................................... 62
Gordon, Julia, Senior Policy Counsel, Center for Responsible
Lending........................................................ 60
Jones, Alan, Manager of Operations, Wells Fargo Home Mortgage
Servicing...................................................... 44
Levitin, Adam J., Associate Professor of Law, Georgetown
University Law Center.......................................... 56
Lewis, Harold, Managing Director, Citi Mortgage.................. 46
Mairone, Rebecca, Default Servicing Executive, Bank of America
Home Loans..................................................... 40
Marano, Thomas, CEO of Mortgage Operations, Ally Financial Inc... 41
Mudick, Stephanie, Head, Office of Consumer Practices, JPMorgan
Chase.......................................................... 43
Sanders, Anthony B., Professor of Finance, and Distinguished
Professor of Real Estate Finance, School of Management, George
Mason University............................................... 58
Stevens, Hon. David H., Assistant Secretary for Housing/FHA
Commissioner, U.S. Department of Housing and Urban Development. 11
Walsh, John, Acting Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 13
APPENDIX
Prepared statements:
Anastasi, Anne............................................... 76
Arnold, R.K.................................................. 91
Caldwell, Phyllis............................................ 174
DeMarco, Edward J............................................ 186
Duke, Hon. Elizabeth A....................................... 199
Fisher, Linda E.............................................. 213
Gordon, Julia................................................ 219
Jones, Alan.................................................. 252
Levitin, Adam J.............................................. 262
Lewis, Harold................................................ 292
Mairone, Rebecca............................................. 300
Marano, Thomas............................................... 307
Mudick, Stephanie............................................ 316
Sanders, Anthony B........................................... 323
Stevens, Hon. David H........................................ 328
Walsh, John.................................................. 336
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written responses to questions submitted to Edward J. DeMarco 355
Written responses to questions submitted to Harold Lewis..... 357
Written responses to questions submitted to Thomas Marano.... 360
Written responses to questions submitted to Stephanie Mudick. 363
Written responses to questions submitted to John Walsh....... 367
ROBO-SIGNING, CHAIN OF TITLE,
LOSS MITIGATION, AND OTHER ISSUES
IN MORTGAGE SERVICING
----------
Thursday, November 18, 2010
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Representatives Waters, Lynch, Cleaver,
Green, Ellison, Donnelly, Kilroy, Himes; Biggert, Miller of
California, and Neugebauer.
Ex officio present: Representatives Frank and Bachus.
Also present: Representatives Watt, McCarthy of New York,
Miller of North Carolina, and Speier.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order.
Good morning, ladies and gentlemen. I would like to thank
our ranking member and other members of the Subcommittee on
Housing and Community Opportunity for joining me today for this
hearing entitled, ``Robo-Signing, Chain of Title, Loss
Mitigation, and Other Issues in Mortgage Servicing.''
This hearing is about the failure of the mortgage service
industry to uphold due process, to obey the law, and to live up
to its oft-stated goal of preventing foreclosures. This hearing
is about the aftermath of what happens when an industry is
essentially broken. It is also about what happens when our
regulators do nothing to pick up the pieces.
Since foreclosures started to spin out of control in 2007,
I have been sounding the alarm about problems in the mortgage
servicing industry. Working directly with homeowners, I have
seen firsthand the problems they create for borrowers trying to
obtain a loan modification, lost paperwork, incorrect
information, incorrect fax numbers, and flat-out lies.
Therefore, the recent allegations of foreclosure fraud and
robo-signing don't surprise me at all. In fact, I believe that
we are seeing foreclosure fraud and robo-signing for the same
reasons that we are seeing problems with homeowners unable to
receive loan modifications; it is because it is in the
servicers' financial interest to foreclose. They want to
foreclose as quickly as possible no matter the consequences.
The financial incentive that pushes servicers to foreclose
is the very reason why the Treasury Department designed the
Home Affordable Modification Program, that is the HAMP program,
which was supposed to remove that incentive to foreclose by
paying servicers to modify loans. However, it appears that HAMP
is delaying foreclosures just long enough for the banks to
improve their balance sheets. Of the 1.6 million homeowners who
have been offered trial modifications through HAMP, only 36
percent have obtained permanent modifications. In the meantime,
foreclosure rates are virtually unchanged since this time last
year when HAMP was supposed to be in full swing.
I think it is safe to say that HAMP isn't meeting its goal
of preventing foreclosures.
There is significant evidence to suggest that the speed-
driven, corner-cutting operations endemic in the mortgage
servicing industry have produced systemic and damaging
consequences for the Nation's homeowners and for our housing
and financial markets.
First, I am very concerned about reports that in the rush
to securitize loans, many promissory notes may have never been
properly transferred into their trust. Without properly
transferred notes, servicers could lack standing to foreclosure
and mortgage securities lose their favorable tax treatment. I
agree with my colleagues on this committee, the Congressional
Oversight Panel, and Senator Dodd that the Financial Stability
Oversight Council created by the Dodd-Frank Act should access
the extent to which this poses a systemic risk to the Nation's
financial system.
Second, and more importantly, a broken servicing industry
means that borrowers are likely denied due process. They got
the runaround. They waited for loan modification requests to be
processed only to be served with foreclosure notices. They
faxed and re-faxed paperwork which was repeatedly lost. They
were told to skip payments in order to receive help only to be
placed into foreclosure when they followed that advice.
Third, investors in mortgages are growing increasingly
dissatisfied with services for not meeting their contractual
obligations to negotiate profit-maximizing loan modifications.
Some of them are suing originators for misrepresenting the
original loan packages, and some are uneasy that servicers may
never have standing to foreclose on thousands of homes in the
first place. I am very anxious to hear from our witnesses about
these issues. Frankly, I want to know, given the problems in
the mortgage servicing industry--problems which have been
apparent for years--what our government and industry witnesses
intend to do to fix these problems and why any of them should
keep their jobs.
I would now like to recognize our subcommittee's ranking
member to make an opening statement. Mr. Neugebauer, you will
be doing that today; is that correct?
Mr. Neugebauer. Yes.
Chairwoman Waters. Thank you.
Mr. Neugebauer. I thank Chairwoman Waters for holding this
important hearing.
While we cannot lose sight of the fact that losing a home
is an emotional and gut-wrenching experience for any homeowner,
it is our job as Members of Congress to remove that emotion and
thoughtfully analyze the foreclosure process to determine the
best way to move forward for the American people as a whole.
Currently, the average foreclosure process takes nearly 16
months. To state it simply, a homeowner can live in a house for
16 months without making a single mortgage payment.
Furthermore, there are examples of homeowners who are actually
making money by renting out their homes during the foreclosure
process. I think we can all agree that is probably not
appropriate.
On the other side of the question, I have yet to hear any
victims who have been evicted while meeting all or most of
their mortgage payment obligations. In fact, some of the banks
that do business in my district have stated that they attempt
to contact homeowners an average of 100 times before they make
any foreclosure action.
There is no doubt that mortgage servicers should be
accountable for sloppy paperwork in the foreclosure process. It
is also inexcusable for any employees of a mortgage servicer to
sign off on foreclosure affidavits without diligently reviewing
each case filed. I am pleased with most of the remedial steps
taken by the financial institutions to address paperwork
problems in the foreclosure process in place to work with the
Federal regulators to ensure that this progress is built upon.
With all that being said, I am concerned that the paperwork
problems are being used as a tool to deliberately slow down the
mortgage foreclosure process. Lawyers see an opportunity to
extract fees by gaming the system to avoid foreclosures. While
borrowers are in default, then the foreclosures, for all
intents and purposes, are appropriate. State Attorneys General
are threatening to prolong legal action as a way of
intensifying pressure on lenders to modify mortgages as a part
of a potential settlement. Because of these actions,
foreclosure processes have slowed significantly. In the State
of Florida alone, for example, listings of foreclosed homes
have dropped 24 percent since late September.
I am also concerned about the ballooning foreclosure this
backlog will prevent the market from clearing, which could lead
to a further decline in housing prices. Delays are also costing
some banks as much as a couple of hundred million dollars per
month, according to some analysts. On top of that, mortgage
servicers are facing mounting legal expenses that have
increased servicing cost for lenders.
Over the long run, responsible borrowers will undoubtedly
face hundreds of dollars in additional fees or slightly higher
interest rates while delinquent borrowers enjoy, unfortunately,
free housing. That is just not right. As I study this issue
more closely, I am convinced that more than ever, we need to
work together to improve all aspects of the mortgage financial
system, and reduce the amount of opportunistic and frivolous
lawsuits so that our businesses and capital markets can be more
competitive globally. I look forward to working with my
colleagues on both sides of the aisle to address these issues
in the 112th Congress.
With that, thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
Without objection, Representatives Brad Miller, Jackie
Speier, and Carolyn McCarthy will be considered members of the
subcommittee for the duration of this hearing.
I will now turn to the chairman of the Financial Services
Committee, Mr. Barney Frank, for 2 minutes.
The Chairman. Thank you, Madam Chairwoman. And thank you
for the diligence with which you have been pursuing this issue.
The first thing I want to say is that I hope going forward
in a bipartisan way--because while there are issues that divide
us, this shouldn't be one--we will be able to adopt legislation
that will prevent this mess from occurring again.
It ought to be an important principle of the law that there
should not be important decisions that need to be made in the
private sector, and no one has the authority to make them. That
is where we are, to some extent, in the mortgage area.
Unthinkingly, we all allowed a system to grow up--and all
participants have some responsibility here because no one
foresaw this--in which there are disputes among servicers,
investors, and originators of the loan, and second
lienholders--and sometimes those are the same party wearing
different hats--and that has enormously complicated things.
Yes, there have been some perverse financial incentives as
well, but even where there is a will to move, we have a tangle
that is very daunting.
So I would hope that we would, going forward, be able, in a
bipartisan way, to pass laws that say--and I think the
principle should be simple--for every residential mortgage--
perhaps we go beyond that--there ought to be one party that is
responsible for making the decision. People who want to invest
in pools of mortgages ought to be told that they are doing that
subject to the right of that individual in charge to make
decisions so as long as no one's legitimate economic interests
are totally disregarded, but we also have to note that there
will be cases where inevitably there will be a conflict of
interest as to what should be done, and that is the important
thing to do going forward.
As to the paperwork, yes, I think those who have ignored
the law are culpable. I would hope that every financial
institution would be doing everything possible to straighten
out that paperwork problem. I think we do have to distinguish
between paperwork problems and substantive problems. And I
don't want people to get false hopes that this is going to lead
to a substantial number of foreclosures being permanently
forgotten.
There are people out there who got loans that they
shouldn't have gotten, and there is a lot of responsibility for
why they got them. And I would note that the legislation that
we got signed into law makes it very much less likely that will
happen in the future because of the rules we have about these
things. But we have to have a situation in which we move as
quickly as possible and is distinguished between paperwork
problems and those cases where there has been misjudgment and
fraud and get this cleared up because it is bad for the
economy, from all perspectives, to have this continue.
Chairwoman Waters. Thank you very much.
Mr. Miller for 4 minutes.
Mr. Miller of California. Thank you, Madam Chairwoman, and
Mr. Ranking Member, for convening this hearing today.
Many of the problems we got into in recent years, as all of
you know, were due to the lack of due process in the
underwriting process. I have been involved in the real estate
industry for almost 40 years, and normally, when you go through
a process of underwriting, an individual takes a loan and
processes it from inception to closure of the loan. That is not
happening today in the foreclosure process, and that has to be
addressed. Many of them out there are doing a good job at it,
the burden that is placed on them is making it very difficult,
but there are some that are short-cutting the process, and that
is pretty much why we are here today.
It is apparent more must be done to reach all who are in
need of assistance in the foreclosure process. Everyone needs
to have a better hand on the process. I have heard from many
back home in California, consumers are confused and don't know
where to go for information; the information they receive is
unbelievable. The confusion is not surprising given why we are
here today. I have talked to my constituents who provide
foreclosure assistance. The departments for servicing and loss
mitigation are not prepared to handle the volume of the types
of issues that are being raised by homeowners.
While I commend servicers for responding to the foreclosure
crisis by hiring more staff, additional bodies don't really
resolve the underlying process unless they are qualified to
handle that process. For instance, I have been told by
consumers that they have each received different information,
instructions and advice basically from each individual they
talk to on the phone; and every time they talk to somebody on
the phone, the information is different.
I understand this is a daunting process. Mr. Neugebauer
made a very good point that the delay in the normal process is
going to have a huge impact on the recovery of the housing
industry in the long run if we don't handle this in a
professional and efficient way.
What we need to know is how can servicers, regulators,
GSEs, and securitization markets do a better job of
coordinating so that consumers are fully aware of all their
options and that there isn't any mismanagement in the
foreclosure process? A few years ago, the California
Association of Mortgage Brokers testified on this very issue,
and I am frustrated that after all these years talking about
many of the things that we were worried about then have come to
fruition today.
For instance, the Feds recently issued guidance pursuant to
the language I amended in the Dodd-Frank replacing harmful and
punitive HVCC laws on appraisals. I was pleased that the Feds
issued a rule that would allow consumers a maximum amount of
flexibility when working through an agent. Once again,
consumers were able to shop for the most affordable loan
without having to order appraisal after appraisal in the
process.
However, FHFA has allowed both Fannie Mae and Freddie Mac
to put conflicting guidance in place. Denying the consumers the
right to flexibility in the appraisal process, the regulators
are continuing to end the cycle of uncertainty in the
marketplace. Housing recovery will be delayed if there
continues to be a lack of continuity in the system and a lack
of certainty in the process.
I thought we dealt with that issue because the issue of
appraisals proved to be very defective in the process, and I
don't know why Freddie and Fannie haven't accepted those same
guidelines. Perhaps you can inform me privately later about it,
but it seems like a process should be a process, and if it is
acceptable, it should be applied on a broad basis.
There needs to be certainty on the part of servicers,
investors, and homeowners, and regulators must do a better job
in providing that. I do look forward to your testimony.
Hopefully, everybody will be candid today, and we can try to
resolve this issue in a fruitful way that will benefit
homeowners and lenders both.
I yield back the balance of my time.
Chairwoman Waters. Thank you very much.
Mr. Lynch for a minute and a half.
Mr. Lynch. Thank you, Madam Chairwoman, for holding this
hearing.
Unfortunately, the effects of the foreclosure crisis are
still with us. As we have seen lately, the most recent hurdles
to mortgage modification continue with this robo-signing and
related title fraud. I believe the complications we now see in
the modification process are a direct result of the complexity
of our mortgage securitization practices. The opaque nature of
the bundling and the marketing and the slicing and dicing of
mortgage-based securities had made the process of mortgage
modification and foreclosure extremely difficult. The most
recent problems, so-called robo-signing, which is nothing more
than civil law, in some cases criminal fraud, indemnification
of title insurers in determining who has standard to foreclose
are just echoes of the complicated process by which these
mortgages originated.
I would like to hear from the servicers on the second
panel, especially about the process by which they manage the
parts of the loans that have failed and how certain tranches of
the toxic assets since affected the remaining management of
income on the loan for both the investors and the homeowners.
I appreciate the opportunity to look into these matters,
Madam Chairwoman, and I thank you for the time. I yield back.
Chairwoman Waters. Thank you very much.
Mr. Green for a minute and a half.
Mr. Green. Thank you, Madam Chairwoman.
I would like to do two things: I would like to, first,
thank you and the staff. The staff has been absolutely
excellent in preparing materials for this hearing, and I would
like to thank you for your leadership. I do this for fear that
I may not have another formal opportunity to do so in a setting
such as this.
The second thing that I would like to do is mention that we
have two significant phases of this process that create a great
deal of consternation. We have the alpha of it, which is where
the loans originate, and I think we have worked to try to clear
this up, but we have persons who originated loans and would
pass all of the liability onto others. And then at the omega
part of the process, we have persons who are identified as
servicers who don't suffer a lot of loss if delinquencies are
not properly handled, or if the modifications don't take place
as some think they should.
So with this in mind, I am curious as to how we will handle
this omega part, the end of the process, such that the loans
that are in delinquency can be appropriately handled such that
there can be loan modifications, and the servicers, of course,
are where this takes place.
So I am interested in hearing how we can make the necessary
adjustments and how the Consumer Financial Protection Bureau is
going to fit into this process. I thank you, and I yield back
the balance of my time.
Chairwoman Waters. Thank you very much.
The Chairman. Madam Chairwoman, I would ask unanimous
consent to make a brief statement. I am not going to be able to
stay, and there was one point that I rambled on more than I
thought, and I understand my light was on.
Chairwoman Waters. Without objection.
The Chairman. I would like to, if I could, leave a question
that I hope will be addressed, and it is for the FHFA and
others, and that is, one argument that was suggested to me is
that one thing that could help with this substantively is for
there to be a requirement of third-party notification of anyone
who is about to be foreclosed, because we have read these
stories about errors. I do not see any objection to a
requirement--some States require it, but I would hope, too,
that those agencies that are under Federal supervision, they
could implement it.
And it does seem to me that third-party notification would
go a long way--it is a lot easier to prevent something from
happening that shouldn't happen than to try to undo it. So I
would hope that people would comment on that, tell us what
their practices are with regard to an independent, third-party
notification and what, if any, objection there would be to
making it a requirement. I thank you, and I thank the members
for allowing me that.
Chairwoman Waters. Mr. Chairman, I want to thank you.
I am pleased to welcome our distinguished first panel.
Our first witness will be Ms. Phyllis Caldwell, Chief,
Homeownership Preservation Office, U.S. Department of the
Treasury. Our second witness will be the Honorable Elizabeth A.
Duke, Governor, Board of Governors of the Federal Reserve
System. Our third witness will be the Honorable David Stevens,
Assistant Secretary for Housing and Federal Housing
Administration Commissioner, U.S. Department of Housing and
Urban Development. Our fourth witness will be Mr. John Walsh,
Acting Comptroller of the Currency, Office of the Comptroller
of the Currency. And our fifth witness will be Mr. Edward
DeMarco, Acting Director, Federal Housing Finance Agency.
I thank you for appearing before the subcommittee today.
And without objection, your written statements will be made a
part of the record. You will now be recognized for a 5-minute
summary of your testimony. Let us get started first with Ms.
Phyllis Caldwell.
STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOMEOWNERSHIP
PRESERVATION OFFICE, U.S. DEPARTMENT OF THE TREASURY
Ms. Caldwell. Thank you, Chairwoman Waters, Ranking Member
Capito, and members of the subcommittee. Thank you for the
opportunity to testify before you today on robo-signing and
servicer performance in the Making Home Affordable Program.
The reports of robo-signing, faulty documentation, and
other improper foreclosure practices by mortgage servicers are
unacceptable. If servicers fail to comply with the law, they
should be held accountable. The Administration is leading a
coordinated interagency effort that includes many of the
agencies represented on this panel to investigate misconduct,
protect homeowners, and mitigate any long-term effects on the
housing market.
The foreclosure problems 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, the HAMP program has developed
rules and procedures to ensure that responsible homeowners are
offered meaningful modifications and other foreclosure
alternatives. To remedy servicer shortcomings, we have urged
servicers to rapidly increase staffing and improve customer
service. We have helped develop guidelines and certifications
on how and when borrowers must be evaluated for HAMP before
starting a foreclosure. We have also continued our compliance
efforts to ensure borrowers are fairly evaluated and that all
servicer operations reflect Treasury guidance.
Making Home Affordable has strong compliance mechanisms in
place to ensure that servicers follow our program's guidelines.
Treasury has built numerous procedural safeguards in HAMP to
avoid foreclosure sales. Specifically, program guidelines
require participating mortgage servicers to: evaluate
homeowners for HAMP modifications before referring those
homeowners for foreclosure; suspend any foreclosure proceedings
against homeowners who have applied for HAMP modifications
while their applications are pending; evaluate whether
homeowners who do not qualify for HAMP or who have fallen out
of HAMP qualify for other loss mitigation programs or private
modification programs; evaluate whether homeowners who cannot
obtain alternative modifications may qualify for a short sale
or deed-in-lieu of foreclosure; and finally, provide a written
explanation to any borrower who is not eligible for a HAMP
modification and to delay any foreclosure for at least 30 days
afterwards to give the homeowner time to appeal.
Servicers may not proceed to foreclosure sale unless they
have tried these alternatives. They must also first issue a
written certification to their foreclosure attorney or trustee
stating that ``all available loss mitigation alternatives have
been exhausted and a non-foreclosure option could not be
reached.'' On October 6th, Treasury clearly reminded servicers
of this existing rule, that they are prohibited from conducting
foreclosure sales until these pre-foreclosure certifications
are properly completed.
In addition, we have instructed our compliance team to
review the 10 largest servicers' internal policies and
procedures for complying with these guidelines. If we find
incidents of noncompliance, Treasury will direct these
servicers to take corrective action which may include
suspending those foreclosure proceedings and reevaluating the
affected homeowners for HAMP.
HAMP has achieved three critical goals; it has provided
immediate relief to struggling homeowners; it has used taxpayer
resources efficiently; and it has helped transform the way the
mortgage servicing industry operates. To date, almost 1.4
million borrowers have started trial modifications, and over
520,000 homeowners have started permanent modifications. These
homeowners have experienced a 36 percent median reduction in
their mortgage payments, or more than $500 a month.
By establishing modifications and affordability standards,
HAMP has dramatically changed the way servicers treat borrowers
at risk of foreclosure. In the first quarter of 2009, nearly
half of mortgage modifications increased monthly payments. By
the second quarter of 2010, 90 percent of mortgage
modifications lowered payments for the borrower.
In conclusion, we believe that foreclosure problems
underscore the continued need for servicers to focus on
evaluating borrowers for all loss mitigation options, starting
with HAMP. They must continue to be the servicers' first
priority.
We sincerely appreciate the efforts of both the members of
this committee and our partners in the housing community in
holding servicers accountable and improving the program's
design and performance. I look forward to taking your
questions.
[The prepared statement of Ms. Caldwell can be found on
page 174 of the appendix.]
Chairwoman Waters. Thank you.
Our next witness is the Honorable Elizabeth A. Duke.
STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Duke. Thank you.
Chairwoman Waters and members of the subcommittee, I am
pleased to appear today to discuss issues related to mortgage
loan servicing and the mishandling of documentation in
foreclosure proceedings.
As you know, the Office of the Comptroller of the Currency,
the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, and the Federal Reserve are conducting an in-depth
review of practices at the largest mortgage servicing
operations. In our examinations, the agencies are reviewing
firms' policies, procedures, and internal controls related to
foreclosure practices and are sampling loan files to test the
effectiveness of those policies, procedures and internal
controls. We are prepared to take supervisory action where
necessary and appropriate to hold institutions accountable for
poor practices.
Losing a home is a tragic event for a family and the
community in which they live. It is imperative that lenders and
servicers provide borrowers every opportunity to modify their
loans and retain their homes. If modification is not possible,
borrowers must be assured of all the protections afforded by
due process as required by law.
The issues raised as foreclosure improprieties came to
light have cast a pall of uncertainty across the entire housing
market. Any response must ensure that actions taken with
respect to borrowers and their homes are valid and in
accordance with the law. At the same time, those actions should
remove uncertainty and restore smooth functioning to housing
and financial markets. While it is difficult to determine the
incremental impact of further procedural delays in
foreclosures, delays and uncertainty resulting from flaws in
the foreclosure process have the potential to delay recovery in
housing markets and to undermine confidence in our financial
and legal systems.
Consumers and consumer counselors have been quite vocal in
their frustration over unreturned phone calls, lost documents,
and changing decision criteria that have plagued the loan
modification process. In light of such experiences, evidence of
improper procedures in foreclosure cases causes consumers, at a
minimum, to further mistrust the loan servicing process. At
worst, it can result in the improper loss of a home or
premature eviction from that home. For individual borrowers,
uncertainty about the prospect or timing of foreclosure makes
everyday decisions difficult. Borrowers who are uncertain about
their ability to keep their homes have little incentive to
invest in or maintain those homes, resulting in damage to
neighborhoods and lowering the value of surrounding properties.
And with widespread stories of foreclosure improprieties,
families in the process of buying a home or considering the
purchase of a home have become concerned about the validity of
their titles. Others who have purchased homes in foreclosure
have had their closings delayed while documents are reviewed.
Consumers have already fallen victim to foreclosure rescue
scams as charlatans posing as mortgage counselors claim to be
able to obtain mortgage modifications for a fee. In light of
new stories of mortgage abuse, new incarnations of these scams
are sure to proliferate.
Financial institutions face a number of risks if inadequate
controls result in faulty foreclosure documents or failure to
follow legal procedures. Recent events have shown that even the
possibility of problems leads to costly delays and reviews. In
cases where actual problems are found, regulators will require
lenders and servicers to correct not only the faulty documents
themselves, but the faulty systems that made them possible.
Institutions with widespread problems may be subject to fines
and fees in addition to the costs associated with correcting
the errors.
The Federal Reserve believes the best way to assist
struggling borrowers is with a mortgage modification that
allows borrowers to retain their homes with an affordable
mortgage payment. Foreclosures are costly to all parties, and
more broadly to our economy. Prudent modifications that are
consistent with safe and sound lending practices are generally
in the long-term best interest of both financial institutions
and borrowers.
In summary, the Federal Reserve has been actively working
to mitigate the harm to consumers and markets caused by
problems in mortgage loan origination, securitization, and loan
foreclosures. We are participating in interagency examinations
of the foreclosure processes in the financial institutions that
control the majority of the Nation's mortgages. We are
conducting examinations of lenders and servicers' loan
modification efforts. These efforts reflect a continuation of
actions undertaken by the Federal Reserve System since the
start of the financial crisis. We remain committed to the goal
of stabilized financial markets that promote economic recovery.
Thank you for holding this important hearing today, and I
would be happy to answer any questions you may have.
[The prepared statement of Governor Duke can be found on
page 199 of the appendix.]
Chairwoman Waters. Thank you.
Next, the Honorable David Stevens.
STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT
SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Stevens. Chairwoman Waters, and members of the
subcommittee, thank you for the opportunity to testify before
you today on behalf of HUD and the FHA regarding foreclosure
processing concerns that have been raised about certain
servicers.
Since taking office, helping families and the economy
recover from the worst economic crisis in 80 years has been the
top priority of this Administration. And with your help, we
have taken a comprehensive approach to addressing the housing
crisis that has helped more than 3.5 million families since
April of 2009 receive restructured mortgages with more
affordable monthly payments and only 3 times the number of
foreclosures completed during the same period.
But the job is far from over. Recent reports of faulty
documentation and fraudulent affidavits in the foreclosure
process remind us that we continue to pay a very steep price
for nearly a decade of abuses and bad behavior.
The notion that many of the very same institutions that
helped caused this housing crisis may well be making it worse
is not only frustrating; it is shameful. That is why HUD is
working with Federal agencies and regulators joining me today
to fully review the issues that recent foreclosure revelations
have raised. I appreciate the opportunity to discuss how the
Federal Housing Administration is responding to these
challenges and holding servicers accountable.
As you know, FHA requires the servicers it approves to
actively engage struggling homeowners to prevent avoidable
foreclosures; we call it loss mitigation. We do this to ensure
that help is being provided before homeowners get into trouble,
not just after the fact, by which time it is much less likely
that the families will be able to stay in their homes. FHA's
loss mitigation program has helped more than half a million
homeowners keep their homes in the last year alone, protecting
families, but also the taxpayer by reducing the number of
defaults in the FHA portfolio.
But at the time I took office, we found that significant
reviews of servicer performance were not being done at the
level of detail required. Last November, we implemented very
specific monitoring around servicer performance. This new, more
detailed reporting system enabled FHA to provide peer group
comparisons of servicers in their utilization of loss
mitigation options to allow us to identify which tools
servicers are using, how frequently, and how consistently.
Initial findings showed significant variations in the
performance of different servicers, triggering a much more in-
depth review of servicer operations. These early returns
suggest that some servicers are falling short in varying
degrees of meeting HUD's expectations in assisting borrowers
through the loss mitigation process. Fielding analyst reviews
suggest that some servicers appear to lack knowledge of FHA's
loss mitigation process while others may lack the correct
technology necessary to expedite loss mitigation requests. And
some seem to lack a sufficient number of experienced staff
necessary to clear loan modification request backlogs.
FHA is ensuring these servicers address these issues
through customized training and planning assistance, ongoing
evaluation of servicers' progress in correcting deficiencies,
improving compliance, and extensive consultation with
servicers' senior management and assigned work groups.
While FHA was focused well before these recent revelations
on the mortgage servicing process as a whole, we have expanded
our lender review to look into specific compliance with the
foreclosure process. In order to fully evaluate servicers
compliance, FHA is conducting onsite servicer inspections.
Specifically, FHA is reviewing how servicers track affidavits,
security instruments, and promissory notes, and whether
servicers verify the validity of these documents and have
controls in place to identify failures in the process. Should
it become clear that these early indications are, in fact, part
of a much broader problem of unacceptable behavior on the part
of servicers participating in FHA programs, these servicers
will face the full strength of our enforcement authority. This
is all taking place as FHA is implementing the most sweeping
reforms to credit policy, risk management and consumer
protections in the Agency's history, and that includes lender
enforcement.
Since I became Commissioner, we have drawn approval for
over 1,500 institutions and imposing over $4.25 million in
civil money penalties and administrative payments to
noncompliant lenders. We are sending a signal that if you don't
operate ethically and transparently, we won't do business with
you, and we will not hesitate to act.
We appreciate the full support of the committee for giving
FHA the authority to increase its premiums and for supporting
broader FHA reform legislation that will provide additional
tools to hold lenders accountable.
Madam Chairwoman, we appreciate the lead you took on these
efforts, and we urge Congress to follow your lead to enact
these enforcement elements of that legislation as quickly as
possible.
So as you can see, the FHA is providing tools and
enforcement mechanisms essential to protecting families and
restoring trust in America's mortgage markets. And as I noted
at the outset, HUD protects consumers in additional ways
through RESPA and the SAFE Act and other provisions, but
government can't do the job alone. Throughout this controversy
and this crisis, the banks have lost an enormous amount of
trust from the American people. Whether it is reducing
principal for underwater homeowners, adopting responsible
underwriting practices that ensure fair access to credit or
ensuring greater transparency and accountability in their own
business practices, banks need to take steps to earn the trust
back.
With that, I thank you for the opportunity to testify.
[The prepared statement of Commissioner Stevens can be
found on page 328 of the appendix.]
Chairwoman Waters. Thank you very much.
Next, Mr. Walsh.
STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY,
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Walsh. Thank you. Chairwoman Waters, Mr. Neugebauer,
and members of the subcommittee, I appreciate the opportunity
to discuss improprieties in the foreclosure process and the
steps being taken by the Office of the Comptroller of the
Currency to address them. The OCC supervises most of the
Nation's large banks, including eight of the largest mortgage
servicers, so this is a matter of great concern to us.
Let me say clearly, the shoddy practices that have come to
light, including improperly executed documents and
attestations, are absolutely unacceptable. They raise questions
about the integrity of the foreclosure process and concerns
about whether some homes may have been improperly taken from
their owners. The OCC is moving aggressively to hold banks
accountable and to fix the problem.
As problem loans surged in recent years, the OCC's primary
focus was on efforts to prevent avoidable foreclosures by
increasing the bank's volume and sustainability of loan
modifications. The transparency and clarity provided by our
Mortgage Metrics project helped in that effort by providing
thorough, accurate data on the performance of mortgages and
modifications. When we saw, for example, that an inordinate
number of modifications initiated in 2008 were re-defaulting,
we directed national bank servicers to take corrective action.
Since then, we have seen a sharp increase in modifications that
lowered monthly payments and fewer delinquencies subsequent to
modification. While these efforts are helping some families
avoid foreclosure, many are still struggling and face the
prospect of losing their hone. We owe these homeowners our best
efforts to assure that they receive every protection provided
under law.
Foreclosures are governed by State law and the requirements
vary considerably across jurisdictions. As a result, most
nationwide servicers hire local firms familiar with those
requirements, and both Fannie Mae and Freddie Mac require
servicers to use law firms they pre-approve for a given
locality. The OCC reviews a bank's foreclosure governance
process to determine if it has appropriate policies,
procedures, and internal controls to ensure the accuracy of
information relied upon in the process in compliance with
Federal and State laws. We expect banks to test these processes
through periodic internal audits, and their ongoing quality
control function.
Examiners generally do not directly test standard business
processes or practices, such as the validity of signed
contracts or the process used to notarize documents absent red
flags that indicate systemic flaws in those business processes.
Unfortunately, neither internal quality control tests,
internal audits, nor data from our consumer call center
suggested foreclosure document processing was an area of
systemic concern. When problems at Ally Bank, which is not
supervised by the OCC, first came to light, we immediately
directed the eight largest national bank servicers to review
their operations and take necessary corrective action while we
prepared to launch onsite examinations at each of the major
servicers. Those exams are well underway and we have more than
100 national bank examiners assigned to that task.
In concert with other regulatory agencies, examiners are
reviewing samples of individual borrower foreclosure files from
judicial and non-judicial States that include both in process
and completed foreclosures. They will determine whether
foreclosed borrowers were appropriately considered for
alternative home retention actions such as loan modification.
In addition, examiners are looking for evidence that financial
information in affidavits is accurate and complies with State
laws and that the fees charged are correct. They will determine
whether the servicer has possession and control over critical
loan documents needed to support a legal foreclosure proceeding
and are seeking evidence that affidavits and documents were
independently and appropriately reviewed and that proper
signatures were obtained.
Turning to those that provide service to the servicers, the
OCC is heading an onsite interagency examination of the
Mortgage Electronic Registration System, or MERS, in
coordination with the Federal Reserve, the FDIC, and the
Federal Housing Finance Agency, and we are participating in an
examination led by the Federal Reserve of Lender Processing
Services which provides third-party foreclosure services to
banks.
Where we find errors or deficiencies, we are directing
banks to take immediate corrective action, and we have an array
of enforcement actions and penalties that we will not hesitate
to impose if warranted. These can include civil money
penalties, removals from banking, and criminal referrals. We
expect to complete our examinations by mid to late December,
and by the end of January, we hope to have our analysis of the
exams completed to determine what additional supervisory
actions may be needed, and enforcement as well.
Thank you again for the opportunity to appear today. I will
be happy to answer questions.
[The prepared statement of Acting Comptroller Walsh can be
found on page 336 of the appendix.]
Chairwoman Waters. Thank you very much.
And finally, Mr. DeMarco.
STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY
Mr. DeMarco. Thank you.
Good morning, Chairwoman Waters, Ranking Member Neugebauer,
Ranking Member Bachus, and members of the subcommittee. Thank
you for having me here today.
The recently identified deficiencies in 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 reported to the full committee, 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 Enterprise's losses on delinquent mortgages and help
homeowners retain their homes. Servicers and Enterprise
mortgages know that these tools are the first response to a
homeowner who falls behind on their mortgage payment, 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 the 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 their servicers a four-point policy framework
for handling these deficiencies. The four points are simply
stated: Verify that your foreclosure process is working
properly; remediate any deficiencies identified in foreclosure
processing; refer suspicions of fraudulent activity; and 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 servicer
problems. Only a small number of servicers have reported back
to the Enterprises as having some problem with their
foreclosure processing that needs to be addressed. Still, these
firms represent a sizable portion of the enterprises' combined
books and 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 Enterprise's
relationship with them is a contractual one.
As conservator of the Enterprises, FHFA expects all
companies servicing Enterprise mortgages to fulfill their
contractual responsibilities, which includes compliance with
both the Enterprise's 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 the
Enterprise's 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 this issue. Thus, identification of further actions or
regulatory responses should await the results of these
examinations and an evaluation of the information developed.
Thank you.
[The prepared statement of Acting Director DeMarco can be
found on page 186 of the appendix.]
Chairwoman Waters. Thank you very much for your testimony;
it was tremendously informative. And I certainly have a few
questions.
Let me start with Ms. Phyllis Caldwell, Chief,
Homeownership Preservation Office, U.S. Department of the
Treasury. I have a press release from November 30, 2009, from
the Treasury Department. The press release says, ``Servicers
failing to meet performance obligations under the servicer
participation agreement will be subject to consequences which
could include monitory penalties and sanctions.'' That was
November 30, 2009. Have you levied any penalties or sanctions?
Ms. Caldwell. Madam Chairwoman, thank you for that
question. We take the servicer performance under HAMP very
seriously--
Chairwoman Waters. I know you do, but have you levied any
penalties or sanctions?
Ms. Caldwell. We have. In terms of penalties to the
servicers, we have required that servicers go back and re-
solicit homeowners that they may not have solicited. We have
required servicers to change their process and reevaluate
homeowners for HAMP. In addition, we have required servicers to
suspend foreclosures--
Chairwoman Waters. Have you levied any penalties or
sanctions?
Ms. Caldwell. We have not levied monetary clawbacks--
Chairwoman Waters. Any penalties or sanctions, have you
levied any?
Ms. Caldwell. We have levied many non-monetary penalties on
the servicers.
Chairwoman Waters. Have you levied any penalties or
sanctions? I understand what you are saying; you have required
them to do some things.
Ms. Caldwell. Correct.
Chairwoman Waters. You have asked them to change some of
their procedures, etc., but my question is, have you levied any
penalties or sanctions?
Ms. Caldwell. We have not levied major monetary remedies
which--
Chairwoman Waters. So you have not levied any penalties or
sanctions; is that your answer?
Ms. Caldwell. That is not correct. We have given several
penalties under the servicer performance agreement.
Chairwoman Waters. Okay, fine, that is okay. Can you
describe those penalties to us?
Ms. Caldwell. As I described earlier, the remedies
available under the servicer performance agreement are limited
to directing servicers to do additional things, withholding
compensation for those permanent modifications that have been
made, or going back and clawing back incentives that have
already been paid. To date, we have not gone back to take back
incentives that have already been paid, but we have pursued
many of the nonmonetary remedies, including further actions and
evaluations and reevaluations.
Our focus in the first year of our compliance was making
sure that servicers were implementing the program correctly and
that homeowners had every opportunity to--
Chairwoman Waters. I understand that. I was just
interested, because of the press release that you released on
November 30, 2009, where you said servicers failing to meet
performance obligations under the servicer participation
agreement will be subject to consequences which could include
monetary penalties. There have been no monetary penalties from
what I am hearing from you, and no sanctions, but you have done
some work in instructing them that they have to change their
practices and procedures.
With over 1 percent of the money obligated to HAMP spent,
do you think servicers have met performance obligations?
Ms. Caldwell. As we go in and review the compliance, what
we have found is that less than 5 percent of the time,
servicers have not met those requirements. When they do, we
have instructed them that they may not decline a homeowner from
HAMP and that they must go back and fix the process. Again, in
the first year, our focus was making sure that homeowners had
every opportunity to be considered for HAMP modification.
Certainly, in the second year, we need to--
Chairwoman Waters. Thank you very much.
Let me turn to Mr. Walsh, Acting Comptroller of the
Currency, Office of the Comptroller of the Currency. Let me
read you a paragraph from a recent Washington Post article from
November 8th: ``When two banks, JPMorgan Chase and Wells Fargo,
declined to cooperate with the State banking investigation into
their foreclosure practices, the State officials asked the
bank's Federal regulator for help, according to a letter they
sent, but the Office of the Comptroller of the Currency, which
oversees national banks, denied the State's request saying the
firm should answer only to inquiries from Federal officials.
``But even as it closed the door on State oversight, the
OCC chose itself not to scrutinize the foreclosure operations
of the largest national banks, foregoing any examination of
their procedures and paperwork. Instead, the agency relied on
the bank's in-house assessments.''
Are you familiar with this?
Mr. Walsh. I read that story, yes. I don't agree with the
facts.
Chairwoman Waters. Besides reading the story, do you have
knowledge of what took place?
Mr. Walsh. I do. Would you like me to recount?
Chairwoman Waters. Yes. That is what I am asking you.
Mr. Walsh. Okay. At that period, the States had gone to one
bank seeking information about subprime loans and their
performance. We were in the process at that time of developing
what is now our Mortgage Metrics report, which involved a more
extensive body of information than what the States had asked
the banks about developing.
We, in fact, began gathering that information and releasing
a more detailed report of that information on a broader range
of information on mortgages. In fact, the report has become
sufficiently robust that in the Dodd-Frank Act, we were
directed by Congress to make that information available State
By State and on an aggregate basis, and we have been doing so.
Chairwoman Waters. I am going to turn to our ranking member
of the Financial Services Committee, Mr. Bachus, for questions.
Mr. Bachus. Thank you. I appreciate the testimony of the
regulators. And it does look as if you are doing a pretty
thorough review of the internal policies of the institutions at
this time.
I had this question: Members of Congress first learned
about these robo-signings, which I assume were used by the
mortgage companies to speed through the paperwork. But they are
a violation of procedures, so they are serious. We were not
aware of the news reports, and I think the news reports were
based on a deposition that someone was giving in response to
the deposition that they used robo-signing. Were you aware of
these problems before the news report? I may ask the Federal
Reserve, or just maybe from left to right. Were any of you
aware of it before you read it in the newspaper?
Ms. Duke. We were not aware of it significantly before we
read it in the newspaper. Right about that time, because we
supervise Ally, we had a meeting with Ally, so I am not sure
whether it was the same day or the day before, but it was about
the same time.
Mr. Bachus. And I am glad you read the newspapers.
Mr. Walsh. Just to follow up on that, it is the case that
we were not aware of the robo-signing issue until it came to
light, and that was the trigger then for proceeding to the
reviews.
Mr. Bachus. But in a way, they would have been visible to
you, or should have been, would they not? If they were visible
to the bank's internal controls, the regulators were also in
some of those banks looking. I wonder why they weren't visible.
Mr. Stevens. I think that is an absolutely valid question.
We were very concerned about servicers' compliance with the
entire foreclosure process, and we identified this through some
fairly in-depth reporting back in November. We actually sent
teams in this year to a number of the larger servicers to do
loan level reviews of their entire foreclosure processes on the
loss mitigation front. It didn't go up to the final check of
who is signing the affidavit, but it did indicate to us there
was some variability. We were not specific with the robo-
signing particular piece, but as this has broadened out, it
clearly is highlighting broader concerns that we had about how
servicers are handling the foreclosure process in total.
And we have already completed several in-depth research
reviews of several larger servicers, and we are working through
the process as to what kind of action that will result in.
Mr. Bachus. I think your main concern is the same concern
we have, which is that borrowers who are current or who should
not be foreclosed on, in other words, a wrongful foreclosure,
someone who was paying their mortgage or had the ability, and
procedural irregularities or the lack of documentation, as long
as the documentation of the mortgage is not current, I can see
why your main concern would be--and there have been, as I
understand, very few reports, at least to date, of people who
were current or almost current being foreclosed on; is that
true?
Mr. DeMarco. I believe it is for the Enterprise loans,
Congressman. I am not aware of people who are current being
foreclosed upon.
Mr. Bachus. Okay. I would say this; I think going forward,
we need to all look at this. I think one thing I hope you are
concerned about, which we are, is that maybe the lack of
documentation or these procedural irregularities--I will call
them those, as long as they don't indicate more--and I think,
Mr. Walsh, or Comptroller, you mentioned whether they affect
more significant problems within the mortgage financing. Are
you concerned that these disclosures may indicate that there
may be potential for a larger problem?
Mr. Walsh. Any time you identify a problem of this kind, it
makes you concerned about the integrity of the process within
the particular bank. Obviously, there are institutions that
were not complying with applicable requirements of State law,
so of course, that is the purpose of going in and doing this
sort of hard scrub of the process. We are not aware of a reason
to believe that there is some systematic or systemic reason to
doubt the functioning of the system, but certainly, there were
some systematic failures within the individual servicers.
Mr. Bachus. Okay. Thank you.
Let me just close by saying, I think we all agree and I
think the banks agree, obviously borrowers agree, regulators
and the Congress that the decision to foreclose on a homeowner
is very serious, it not only affects them, it affects their
families, and their neighbors. I think all our interests going
forward is to make sure that the foreclosure process is handled
properly, and that concern won't end today. I look forward to
working with all of you, with the institutions and in the next
Congress as we monitor this process and work through it.
Thank you.
Chairwoman Waters. Thank you very much.
Mr. Lynch.
Mr. Lynch. Thank you, Madam Chairwoman.
I am going to follow up on your questions from earlier. I
want to thank all the witnesses for their willingness to help
the committee with its work.
The Treasury has existing contracts with a large number of
mortgage servicers representing a majority of outstanding
mortgages in our country through the Making Homes Affordable
Program. Each of these contracts imposes various duties that
the chairwoman has pointed out on the financial institutions
that are parties to the agreements, and those including
requirements that they perform certain servicing duties in
compliance with applicable State and Federal law. And it also
says, as the Chair has noted, ``failure to adhere to the
agreement could result in the termination of the contract and
withholding of payments, reductions of payments, or recoupment
of payments already made.''
Now, however, I have a GAO report here that says that,
``Treasury has yet to fine any servicer for noncompliance or
even establish any specific penalties or consequences for
noncompliance.'' I am troubled by that. And I know you say that
you are reevaluating and doing things like that, but Ms.
Caldwell, do you have evidence that you are actually--GAO says
you are not penalizing, you are not--let me see what their word
is--``Treasury has yet to fine any servicer for noncompliance
or even establish any specific penalties or consequences for
noncompliance.'' Do you have evidence to refute that? Can you
share that with the committee?
Ms. Caldwell. Certainly. Treasury takes the compliance
under the Making Homes Affordable and HAMP programs very
seriously--
Mr. Lynch. Okay. I only have limited time. I understand,
you said that previously. And I respect that, I just need some
evidence of that.
Ms. Caldwell. I will speak about a few of the main things.
In January--
Mr. Lynch. No, no, no, no, no. I don't have that much time.
Off the record, can you just supply the committee with the
evidence that you actually are enforcing this and are providing
penalties, because I have another thing I want to ask you
about.
Ms. Caldwell. Yes, absolutely. In January of 2010, we told
servicers that they may not decline any homeowner from HAMP
until they have--
Mr. Lynch. No, no, no. That is not a penalty though. That
is not a penalty. You are readjusting things. I will reclaim my
time.
We do have a report here, back in, let's see, back in
September, Ambac Insurance sued Bank of America. Ambac had
conducted a review of 6,533 loans that it reviewed across 12
securitizations sponsored by Countrywide--this was before Bank
of America took over. They said that 97 percent of those 6,533
loans did not conform to underwriting guidelines. And here is
my question: Treasury is paying these servicers--that you are
not penalizing, you are also paying them enhanced payments in
connection with modifications and other services.
We are finding that there are gaps, gaps in the chain of
title, gaps in a lot of documents that are fraudulent. So what
I am asking you is, are you concerned that you are paying
servicers who don't actually own the properties that they are
modifying or foreclosing on; that there is no clear chain of
title for the properties, and you are paying--Treasury is
paying the servicers.
Ms. Caldwell. Our contract--Treasury's contract with the
servicers only pays when a loan is modified permanently. And
certainly we are very concerned about the issues regarding
chain of title in the mortgages in the foreclosure process.
However, none of those issues to date have been a part of the
servicers' contract with the homeowner to collect payments. And
our focus has been on making sure that the homeowner has an
opportunity to modify that payment agreement with the servicer
so that they may stay in the home and avoid foreclosure.
Mr. Lynch. You said something that was news to me. A
servicer only gets paid from Treasury if the modification is
made permanent?
Ms. Caldwell. Correct.
Mr. Lynch. So they don't get any of their work unless the
modification--
Ms. Caldwell. Unless the modification is permanent, and
then they only get partial payment. The HAMP program has a pay
for success design, the servicers are paid over 3 years, each
year that the modification remains current, and investors
retain all of the risk of eventual redefault.
Mr. Lynch. Okay. Thank.
Chairwoman Waters. Thank you very much. Mr. Neugebauer.
Mr. Neugebauer. Thank you, Madam Chairwoman. Just an
observation before I start my questioning here. I have sat here
for a number of years now and when we have had our regulators
come before this group during what has become called the
``financial crisis,'' the overriding theme is, we didn't know
that was going on. We didn't know that people were making these
kind of loans. We didn't know this, we didn't know that. To me
it gets a little frustrating that the people that we have put
in charge are supposed to know what is going on in the
financial markets, regulating the financial markets, continuing
to be their testimony is we didn't know. But when we bring you
in, then the testimony is, but we are on it now.
I think the American people have a greater expectation that
you know it before it happens rather than reacting to it after
it happens. And I would hope going forward that we can begin
to--we passed a historic financial regulation in this Congress.
And a lot of us felt that what we didn't need was more
regulation; we needed regulators who were doing their jobs. And
I think coming forward, I think one of the things that we are
going to have to ascertain is, do we have the competency level
in our regulatory structure, and do we have a regulatory
structure that can function as regulators and not necessarily
burden these financial institutions with more regulation.
Mr. DeMarco, recently I think the Florida Attorney General,
Mr. McCollum, launched an investigation into the allegations of
unfair and deceptive actions by a Florida law firm that has
been handling foreclosure cases. And I think that particular
firm is one of the Fannie Mae-retained attorney network
approved attorneys.
A couple of questions come to mind. How much money has
Fannie Mae paid this entity? And if it turns out that the
Attorney General can bring action on this, I am looking out
after the taxpayers here because as you know, they are on the
hook for whatever happens to Freddie and Fannie. And so I am
kind of wondering what kind of financial implication that is
going to have on the Enterprises.
Mr. DeMarco. Thank you, Congressman. Yes, in fact not just
Fannie Mae but Freddie Mac also had mortgages for which
servicers were utilizing this same law firm. I can't tell you,
sitting here today--I can try to get that information for you
in terms of how much this firm has been paid in the past. The
ultimate additional cost resulting from the failures of this
law firm are to be determined.
The one thing I could add in a positive way on this is that
we have been--both FHFA and the two Enterprises have been
working in close cooperation with the State Attorney General in
Florida on this matter. And we have a very good, cooperative
relationship with regard to the documents and with regard to
the ongoing investigation.
Mr. Neugebauer. One of the concerns is, I have read where
some of these attorneys general are trying to reach settlement
agreements where part of that settlement agreement is a write-
down of principal. The question I have is, if a law firm has
done something that is inappropriate or didn't follow the law,
and part of the settlement agreement is for a write-down in the
principal, who is going to pick up that tab?
Mr. DeMarco. All I know about that is a few things I have
seen in the newspaper, Congressman. The connection does seem a
bit tenuous to me. I think in terms of our work here, that law
firm is in a contractual relationship with the Enterprises, and
the remedies that we would seek would be those that are
available through the contract, if there is something there to
be recovered. But I can't speak to what the collection of State
Attorneys General are considering right now, and I have not
discussed any such thing with them at this point.
Mr. Neugebauer. On the same note of lawsuits, I
understand--I believe there was a securities fraud case that
was brought against Fannie Mae, Frank Raines, Timothy Howard,
and Leanne Spencer about the Ohio Public Employees Retirement
System in 2004, and to my knowledge that case has not been
resolved; is that correct?
Mr. DeMarco. That is correct.
Mr. Neugebauer. And do you know how much--are we still
paying the legal fees for Mr. Raines and Mr. Howard and Ms.
Spencer?
Mr. DeMarco. Fannie Mae is advancing legal fees to them.
Fannie Mae is advancing legal fees to them under an existing
indemnification agreement.
Mr. Neugebauer. Would you repeat that?
Mr. DeMarco. Yes. Fannie Mae is advancing legal fees to
those three individuals.
Mr. Neugebauer. Could you get me the amounts of money that
have been spent defending those folks, because obviously that
is another tab that the taxpayers are now picking up, and I
don't know if they are going to be excited about picking up the
tab of legal defense for those individuals. Can you furnish it
to us?
Mr. DeMarco. I certainly can, Congressman. I will be glad
to follow up with you with the context of that, because I share
a concern about what the implications of this are for the
taxpayers. But I would just like to assure you as a general
matter, this is something that has been carefully weighed at
the agency, and I will get back to you with that information.
Mr. Neugebauer. Thank you.
Chairwoman Waters. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman.
Mr. Walsh, in response to I think the ranking member or Mr.
Bachus earlier, you said that there was no systematic
operation, so you don't think there was any intent to do wrong.
Mr. Walsh. No, I didn't mean to imply that. I was--
Mr. Cleaver. I am not suggesting that you were. I just want
some clarification.
Mr. Walsh. Right. The distinction I was drawing there was
that there were clearly some systematic failures within
servicers to observe requirements of law that were necessary to
the effective completion of a foreclosure. I was simply
pointing out that we were not aware to this point of any
broader systemic issue associated with the kind of
nonperformance of these documents and processes, although that
is an issue that many have suggested should perhaps be looked
at more.
Mr. Cleaver. So the RICO method of dealing with this issue
would be inappropriate, going too far? The racketeering?
Mr. Walsh. That will depend on what the enforcement
agencies, including our own enforcement people and the State
AGs, determine in their investigation. I couldn't presume to
comment.
Mr. Cleaver. So do any of you believe that this issue or
this crisis has metastasized to the point where there is a need
for a deeper look, that there was intentionality to defraud? We
have been using a lot of words. Foreclosure fraud is probably a
better term. Do any of you think that goes deeper than what we
are discussing?
Ms. Duke. I don't think we have any information on that,
but I can assure you that we regularly refer cases to the
Justice Department when we find those in our examinations. So
if we found that, we would make those referrals.
Mr. Cleaver. Since we are communicating, do you support the
creation of a compensation fund similar to what was done in the
Gulf Coast after the oil spill that would make people whole?
Ms. Duke. I have heard some reports that is one of the
things that the 50 State AGs are looking at. And I think it
would be very positive if there was a mechanism to deal with
these problems as they came forward, and also to come to some
resolution so that the mortgage functioning and the housing
markets can continue. So yes, I would.
Mr. Cleaver. One final question. You had mentioned earlier
that there is the possibility of at least 4 million additional
foreclosures that are seriously moving toward foreclosure
between now and 2012. Do you believe that what we are trying to
find information about today, the foreclosure fraud, will have
any bearing at all on making the 4 million homeowners an
inextricable part of the mess that we are hoping to clear up?
Ms. Duke. I think the issues related to documentation would
probably impact the timing of those foreclosures more than the
number of the foreclosures. And you know, these are the
estimates that we are making based on the number of loans today
that are past due for nonperforming, as well as those that are
in some process of foreclosure.
Mr. Cleaver. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. Mr. Miller.
Mr. Miller of California. Thank you, Madam Chairwoman.
I enjoyed hearing from each of you, and I wish we had a lot
more time because I know there is a lot more that could be
discussed. It sounds like you are trying to deal with the
continuity of process where the system overall works as it
should. You are trying to make sure the misinformation is dealt
with, that foreclosure avoidance occurs when it can.
I guess one problem I am having is if fraud has been
committed on the part of lenders and as it applies to
foreclosures, they should be held independently responsible for
each and every one of them without a doubt. But the concept of
just arbitrarily assessing everybody who ever made a loan to
pay into a pool to fund something in the future is unreasonable
based on those who are trying to do the right thing. And the
concept that there hasn't been some cost or punitive action
towards everybody, whether it be a homeowner who took out a bad
loan, they pay tremendously. The individuals who made loans,
lenders, have paid tremendously. Investors have made huge
investments and they have paid tremendously through loss of
assets. Many who bought mortgage-backed securities at groups
like Countrywide tried to format to look like a GSE mortgage-
backed security, which it wasn't, those investors lost
tremendous amounts of money.
So there has been hardship on everybody throughout this, if
you want to call it a depression in the housing industry,
whatever you want to call it. This debacle that occurred,
everybody has paid a price. But if people are being
unreasonably foreclosed upon, those individuals who have made
those actions should be held accountable for those actions. And
the part of Freddie and Fannie who hired attorneys who did
something improperly, hopefully their errors and omissions
insurance requirements are so great and the damage assessed
against them are going to be enough that others in the future
would want to avoid that.
But we have to say things have gone wrong in the past. We
are dealing, trying to deal with them now. But how do we look
to the future?
Mr. Stevens, you and Mr. Walsh made some very good
comments. How much impact do you think your efforts are having
on the system today as applies to rectifying some of these
problems that have occurred?
Mr. Stevens. Thank you for the question. We have seen a
significant change in servicer behavior since we began our
reviews. And as these work through the process of our formal
procedures through the Mortgagee Review Board, I believe we
will see even greater response. To date, we have already fined
$4\1/4\ million dollars in penalties, we suspended--
Mr. Miller of California. For those responsible for
misdeeds?
Mr. Stevens. That is correct; specific cases, those
institutions.
Mr. Miller of California. I support that.
Mr. Stevens. And we have eliminated 1,500 other
institutions and it has without question elevated the awareness
of all institutions in this country about the need to adhere to
processes, just as clearly as has taken place right now through
what has happened with the recent state of news around robo-
signing and the various other issues.
Mr. Miller of California. You think your actions that are
taking place are effective and they are working?
Mr. Stevens. I think we need a trust-but-verify approach,
or at this point not even necessarily complete trust. I think
we are doing what we think is appropriate. We are sending teams
into the servicers right now, and we are expanding our reviews.
We are going to look at the remaining stages of the foreclosure
process beyond what we looked at at the last set of set of
reviews. And if they are not compliant, we will take our
authority, which we have some significant ability to assess
penalties legally, and we will take that authority.
Mr. Miller of California. You have to verify that your
actions and implementations have taken place and there will be
a consequence for that.
Mr. Stevens. That is correct.
Mr. Miller of California. Mr. Walsh, do you agree with
that?
Mr. Walsh. Certainly when we took action a couple of years
ago with the servicers to identify problems in their
modification programs, they greatly improved the quality and
effectiveness of the modifications. The examinations that we
are now undertaking on an interagency basis are going to just
grind right down to the most granular detail.
Mr. Miller of California. Good.
Mr. Walsh. We need to understand what has been going on in
the process, and to make sure the processes are remedied so
that they operate in a fair and legal manner. And to the extent
that there are systematic problems, there will be both
remediation and there may be penalties.
Mr. Miller of California. I applaud you on that.
Mr. DeMarco, I have a question for you. We had a debacle on
HVCC and appraisals in the past year we proved that that did
not work, and we put new guidelines in place, and FHFA
basically is liable with Freddie and Fannie to put out
conflicting guidance that applies to appraisal processes in the
future. And I am bothered by that because they are the largest
holder of the trust deeds. Why are they not complying with the
same performance we have placed upon banks?
Mr. DeMarco. Congressman, I am going to find out exactly
what this discrepancy is that you are concerned with. Fannie
and Freddie have maintained the positive elements of the HVCC.
Now that that has gone away, principally focused on appraiser
independence. The Federal Reserve has just recently--
Mr. Miller of California. But they have not done that, that
is my problem. I am out of time, but will you check into that
and get back, because from what I am hearing that has not
occurred.
Mr. DeMarco. Okay, I certainly will.
Mr. Miller of California. Thank you, sir.
Chairwoman Waters. Thank you. Mr. Green.
Mr. Green. Thank you, Madam Chairwoman. Dr. King reminded
us that for every complicated problem, there is a simple
solution that is usually wrong. And what I would like to do is
first examine how complicated this problem is and try to get
beyond the superficial solutions if at all possible.
At one time, we had a mortgage circumstance wherein we had
a borrower, a lender, and a lien or a mortgage. Currently that
has metamorphosed into a lender, the borrower, the lien, the
mortgage. But also we now have a sponsor who turns the mortgage
into a bond and then sells it to a depositor. We have a
depositor that sells the mortgage to a trust. And then the
trust hires a servicer. This doesn't include the MERS and other
entities that have become a part of this process. With all of
these various entities in the process, the question becomes:
Are there impediments to sustainable mortgage modifications
with reference to this current crisis?
And I would just like to mention a couple of issues that
have been called to my attention. Many of my issues have been
satisfied. I have had an opportunity to meet with some of the
witnesses and have some of my issues addressed, but these I
would like to just call to your attention this morning. The
first has to do with servicers holding junior liens. Does a
servicer holding a junior lien present an impediment to our
having sustainable mortgage modifications?
I will just start with, first, Ms. Caldwell. Can you give
me some intelligence on this, please?
Ms. Caldwell. Thank you for raising second liens. The
second liens, regardless of who they are held by, increase the
homeowner's debt on the property and can sometimes prevent a
sustainable modification. And so getting the second liens
addressed, particularly on those loans where the mortgage is
for more than the home is worth, it is a very, very important
part of the modification process.
We tried to address that with the second lien program in
HAMP, but we certainly need more focus on second liens to
sustain modifications.
Mr. Green. Ms. Duke, if you would please?
Ms. Duke. I would echo that the existence of the second
liens themselves, further complicates the process. I don't
think I would say anything different.
Mr. Stevens. I agree that the more investors involved in
the ultimate ownership of the obligations against a particular
home complicates the process further, because it is another set
of decisions that has to be concurred with when you are trying
to do a modification.
Mr. Green. Mr. Walsh?
Mr. Walsh. Certainly as described, the additional debt
burden would be an issue. But in terms of the second liens
themselves, as a supervisory matter we certainly insist that
the banks address the overall debt burden modification status
of the first lien and to take that into account in reserving
for and addressing the risks of the second lien. So we try to
make sure that it is not an impediment in that way.
Mr. Green. Mr. DeMarco?
Mr. DeMarco. Congressman, what I would say is that
overseeing, again, towards a first mortgage, a second means a
substantial problem for us and have been an impediment in some
of the modification activity. And I would go further to suggest
that as this committee considers housing finance reform in the
coming year, that since it is, as I understand, going to take a
comprehensive look at things, I would hope that we would
reconsider some of the practices that have been put in place
with regard to second liens.
Mr. Green. Now, quickly, because time is running out and I
have received intelligence indicating that we have had about
21, that is ``2-1,'' second lien modifications completed. But
tell me this with reference to the second liens. What
percentage are we dealing with with reference to the products
that servicers have to negotiate, what percentage would be
second liens?
Ms. Caldwell. I can--in the HAMP portfolio, about 50
percent of the loans have second liens. In terms of our second
lien program, which is voluntary, we have 17 servicers signed
up to participate. And in this program they, the servicers,
agree to modify the second loan, the second lien, when they get
knowledge that the first was modified.
Mr. Green. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. There is a vote
pending on the Floor, so this committee will be in recess so
that members may go vote and return in about 15 minutes. I
think I am going to forego the vote and I am going to stay. I
will be here when you return. This will give me an opportunity
to figure out a couple of things that have not been made clear
while we were in session. So, please, you may take your vote.
The panel will stay. We have not finished the questioning
of this panel, so this panel will be here when you return.
Thank you very much. While our members are voting, I would
like to raise some questions that take a little bit more time
to answer, that you may be able to help me with. How many of
you who are here today representing your agencies have ever
walked through a loan modification process? Do you know what
happens when the average citizen calls into their bank where
they thought their loan was being held at least, where they
think they are paying their mortgage to? How many of you know
what happens from the time that homeowner calls the bank? How
many have walked through that process?
Ms. Caldwell. Madam Chairwoman, I will start and say just
in terms of my role at Treasury, almost a year ago we had a
campaign where we sent Treasury staff on site to the servicer
shops to listen to the calls that came in and to try to address
issues and clarify guidance where possible.
But I would also add, more importantly on a personal note,
prior to joining Treasury I had to work with a family member to
renegotiate a very inappropriate mortgage product, subprime
product that had been sold to her and to many of the senior
citizens on her block, just devastating the neighborhood. And I
also had to walk another family through a short sale, and both
of those were very difficult and were part of why I made the
decision to join Treasury and try to address this.
Chairwoman Waters. I appreciate that.
How many people know what happens when you first call the
bank and you say, I am Ms. Jones, I have a problem, I lost my
job, or I don't have as much income. I would like to talk with
someone about a loan modification because I don't think I am
going to be able to make my payments. Maybe I can make my
payments for 1 month, 2 months, but I am not going to be able
to make them after 2 or 3 months. How many of you know what
happens at that point?
Mr. DeMarco. Madam Chairwoman, you have actually posed a
couple of different scenarios there, and so what happens
depends upon exactly what the scenario is. The borrower calls
and says, I have just lost my job, I am still current on my
mortgage. I have lost my job, I am going to have a disruption
in income. Then there is one script that is used, because that
is a particular situation.
In the situation where a borrower has missed several
payments--
Chairwoman Waters. No, I didn't go to where a borrower had
missed several payments yet.
Mr. DeMarco. That is fine, I just want to understand.
Chairwoman Waters. What I am saying is, Ms. Jones is
calling. She is saying, ``I have a problem, I may not be able
to or won't be able to make my payments after next month in the
same amount that I have been paying. Can you help me? I need to
talk with you about a loan modification.'' What happens then?
Mr. DeMarco. The servicer should have a script with a set
of questions to ask to understand the particular circumstances
of the borrower.
Chairwoman Waters. Who is the person talking to at that
point?
Mr. DeMarco. They may be talking to the mortgage servicer.
Chairwoman Waters. A what?
Mr. DeMarco. The servicer of their mortgage.
Chairwoman Waters. No, the person does not get to the
servicer of the mortgage on that first call. Are most of you
aware that there is a loss mitigation department that may
screen that call prior to it getting to a servicer, if they
ever get to a servicer? Are you aware of that?
Mr. DeMarco. Servicers have loss mitigation departments,
yes. The banks have loss mitigation departments.
Chairwoman Waters. Banks--when you call the bank with this
problem you go to the loss mitigation department first; is that
correct?
Mr. DeMarco. What different servicer companies call their
different departments, Madam Chairwoman, rather than get into
that, I think that the servicers should be well equipped to
direct the call to the right place--from a borrower.
Chairwoman Waters. Are you aware that it is almost
impossible for a homeowner to get to the servicer; that the
systems now have screeners, this first contact person, and they
have a cookie-cutter sheet, and they ask a number of questions.
And if they determine that the ratio of debt to earnings does
not comply with what they have on the sheet, that they can
never get to discuss that modification? They never get to the
servicers necessarily? Are you aware of these systems?
Mr. DeMarco. I am aware that servicers have instructions
from their various investors in terms of the series of
questions to ask, the information to gather, and the
assessments to make regarding those loans. And no, not everyone
that calls that has a problem with their loan is going to be
eligible for a particular modification program. There are many
variables at play here. What is the mortgage? Who is the
investor in the mortgage? Is this particular circumstance of
the borrower eligible for a HAMP or not? These are the
screening questions that are asked when an individual calls.
Chairwoman Waters. When the individual calls and they are
talking to this person who is not a service--who can not really
negotiate a modification, this person simply can go down the
questions that are prearranged to determine whether or not they
are meeting the investor's requirement, for example. So if Ms.
Jones would like to talk about a reduction in interest rates or
asked a question about reduction in principal, that person is
not able to discuss that with them. Are you aware of that?
Mr. DeMarco. How each individual servicer handles that
process, I wouldn't want to speak to there being a single
answer to that question.
Chairwoman Waters. If you knew and understood what takes
place when Ms. Jones first calls and Ms. Jones cannot discuss a
reduction in interest rate or principal outside of the cookie
cutter arrangement that the first person that they encounter
uses, what would you advise Ms. Jones to do?
Mr. DeMarco. I believe most of the major servicers
encourage borrowers and make available to borrowers home
counselors in their local area who can assist the troubled
homeowner in evaluating their entire situation and also to
assist them in working with their mortgage servicer with regard
to options that might be available to assist them with that
mortgage and to help facilitate the gathering of appropriate
and needed information for the mortgage servicer to do an
appropriate and full assessment of the alternative--
Chairwoman Waters. How many of you know that if Ms. Jones
would like to talk about a modification and ask questions about
a reduction in interest rates or write-down in principal, how
many of you know that Ms. Jones is being referred to someplace
else, some counselor somewhere for help? How many of you know
that is taking place?
Mr. Stevens. Madam Chairwoman?
Chairwoman Waters. Yes.
Mr. Stevens. Two things. One, you are highlighting a part
of the reason why we went through the servicer reviews we just
started, we just completed with the top five. You are
specifically addressing the disconnects that are occurring and
cause such delays for solving the problem. And I believe it is
an issue, we believe at FHA it is. And just to highlight it, in
many cases, actually the first call goes into a collections
department to determine if they can get payments made, and then
it might go from there to a loss mitigation area after that.
And while it varies by servicer in terms of how to
implement solutions, that is precisely why we did a servicer-
by-servicer loan-level review, on site in their operations, to
go through the process. We literally just completed that and we
are taking action on those servicers that are not meeting the
expectations, because to your point it is the frustration that
we get daily e-mails and phone calls from families who are
desperate.
We have a call center at FHA that is overwhelmed with calls
from families in crisis. And it is why we sent in teams to look
at that. And we do have monetary penalties provided to us by
Congress that can be ultimately treble damages for not
complying with the process to provide a solution to a family
early on in the early stages of delinquency. So we did not know
it until we sent our teams in.
We are now recognizing the gaps. And we have to be much
more vigilant and aggressive with the servicers that make it
hardest on families in crisis to connect the results, a
solution for them when they can have it provided to them
without having to go through all those calls.
Chairwoman Waters. How many of you know what banks have
their loss mitigations offshore? And that when American
taxpayers are calling their banks to get some help on a loan
modification, if they are first encountering the loss
mitigation department, how many of you know that they may be
talking to somebody in India?
Mr. Stevens. Just a quick--we do know it exists for some
servicers. FHA has a provision that does not allow any customer
service to be handled offshore, contracted out.
Chairwoman Waters. Treasury?
Ms. Caldwell. Treasury operates in partnership with the
Home Preservation Foundation, the 1-888-995 HOPE hotline that
is 100 percent onshore.
Chairwoman Waters. No, that is not my question. My question
is how many of you know that banks have loss mitigation
departments offshore? And this Ms. Jones that I am describing,
her first contact to discuss whether or not she is eligible for
a loan modification may be talking with someone in India,
Taiwan, or someplace.
Ms. Caldwell. I know that it exists within the servicing
industry. I can confirm whether or not it is a requirement in
the HAMP program or not.
Chairwoman Waters. I beg your pardon?
Ms. Caldwell. My understanding is the same as Mr. Stevens,
that within some of the servicing industry, calls are handled
offshore. I do know that in the Making Home Affordable hotline,
it is onshore. I don't know about the other servicers.
Chairwoman Waters. But don't forget Ms. Jones doesn't know
anything about anything. She is calling the bank where she
sends her payments and she is talking with someone whom she
thinks can help her with a loan modification. And it turns out
that she is talking with the call center offshore, with someone
with the cookie-cutter sheet that asks her some questions and
basically tells her she is not eligible for the loan
modification. How many of you understand that?
Ms. Caldwell. I think there is--I think we do understand
that and it is very, very frustrating. And the issue--
Chairwoman Waters. If you understand it, why can't you do
something about it?
Ms. Caldwell. One of the things that we continue to do--
first of all, it is endemic of the still lack of capacity to
respond to the magnitude of this crisis. But we have held--
recognizing the importance of person-to-person contact, we in
conjunction with HUD and some of the others have held outreach
events in over 50 cities where homeowners and servicers are on
site, they are meeting in person, and they have the opportunity
to talk about the modification one on one.
What continues to be very disturbing is that when we
survey, we still find many of the homeowners who stand in line,
who come to these events and meet with their servicer, the
first time they are making a connection with their servicer is
at that event. And so it is a daily reminder to us that there
continues to be some disconnect in the call and contact
environment.
Chairwoman Waters. Big disconnects.
Let me ask another question of you. When the contact person
for the bank, who is not a servicer, who is answering Ms. Jones
on this first call, looks at the debt and they look at the
income and they look at--they are looking at whether or not
this person qualifies for a loan modification. Basically Ms.
Jones now has a property that is underwater. It is not worth
what she purchased it for, what she thought they had purchased,
it is not the same thing. And so Ms. Jones really will never
qualify for a loan modification based on a difference in
income, less income.
And she wants to talk about what can she do with the income
that she has, that does not meet the criteria that the loss
mitigation person is describing. But she has income, and she
wants to stay in her house, so what should she do?
Ms. Caldwell. I will go ahead and start. Certainly within
the HAMP program, the servicer would have to see if Ms. Jones
or the person is eligible for a HAMP modification and in many--
and the median homeowner who gets a modification has had their
payment reduced by a third. In those cases where there is not
enough income, the servicer has to look for other home
retention opportunities--
Chairwoman Waters. This person Ms. Jones is talking to in
the loss mitigation department, are they going to say, oh, Ms.
Jones let me refer to you the HAMP program. Let me help you go
through a program by the Federal Government that may give you
an opportunity to pay what you can, I guess, for the first 3
months or so, and let's see if you can qualify for a loan
modification. Is that what this person is supposed to do?
Ms. Caldwell. If the servicer is participating in HAMP,
they are required--
Chairwoman Waters. Don't forget, Ms. Jones hasn't gotten to
a servicer yet, the screen now that is set up to keep Ms. Jones
from getting to a servicer so the servicer doesn't have to be
bothered with someone who does not meet the underwriting
criteria as they know it.
OCC, you have all of the major servicers, you have the
majors, you have the ``too-big-to-fail,'' you have all of them.
Do you know and understand what I am talking about?
Mr. Walsh. I certainly understand the situation that you
are describing and I have not myself walked through that
process, but we have examiners in the large banks who review
the servicing process. And, somewhat akin to the FHA project,
we did a horizontal review of mortgage modifications processes,
I guess in 2008, 2009, to look at the practices across the
firms where there were deficiencies. As a result, we issued a
letter to the CEOs of the banks indicating deficiencies in the
process and calling for improvements.
Certainly there has been a systemic effort to get the
institutions to bring on more staff and to train them and
otherwise make more service available to the people who are
calling. But the process, bank to bank, may vary. There may be
an intake process and there will be a loss mitigation process
that will be part of the overall servicing process.
Chairwoman Waters. Of course. Let me point you to page 13
of your testimony where you say, examiners generally do not
directly test standard business process or practices, such as
the validity of signed contracts or the processes used to
notarize documents or the actual physical presence of notes,
with document of custodians, unless there is evidence of a
material weakness or breakdown in governance and internal
controls.
I have a New York Times article from January 2008,
detailing how Countrywide was fabricating documents, and how
the Chapter 13 bankruptcy trustee in western Pennsylvania was
concerned about it. There are many, many articles like this,
and Members of Congress have been talking about the failures of
mortgage servicers for years. Was all of this evidence not
enough to qualify as a material weakness or breakdown?
Mr. Walsh. We very specifically went in and examined the
modification process and demanded improvements. That is not the
kind of routine matter that I was referring to on page 13. The
re-underwriting of a loan is a substantial issue for a bank; it
involves people with skill and understanding of the process. It
is part of the safety and soundness of a bank. That is not the
kind of technical matter that was referred to in that
statement.
Chairwoman Waters. What Members of Congress are trying to
figure out is why regulators are not able to pick up on,
identify these weaknesses and these big problems? What takes so
long, and why is it you don't know how these systems really
operate as regulators? That is the big question among Members
on both sides of the aisle.
Mr. Walsh. We--
Chairwoman Waters. Do you believe that Ms. Jones should be
able to get to a servicer who can really negotiate a loan
modification, or should she be stuck with a clerk who basically
follows this cookie-cutter sheet and tells her you don't
qualify, or unless you have X amount of dollars, I can't help
you? Do you think that really should happen that way?
Mr. Walsh. It would be hard to say, without understanding
the circumstance of the individual. But if someone is having
difficulty getting the relief that they think they should have,
as was mentioned. I think it is quite important to rely upon
counseling which is an important part of helping people
navigate the system. It is also the case at the OCC that if
someone feels the process is unfair or is not working, they can
file a complaint with our customer assistance group. And it is
true that mortgage complaints have become the number one--
Chairwoman Waters. They can file a complaint with whom?
Mr. Walsh. Our customer assistance group.
Chairwoman Waters. What is that?
Mr. Walsh. It is a unit that is based in Houston, Texas,
that has an 800 number and a Web site to assist people with--
Chairwoman Waters. How would Ms. Jones know about that?
Mr. Walsh. We are on the Internet. We periodically do
public service announcements about what we do. We have an 800
number.
Chairwoman Waters. So you think the average citizen really
knows that?
Mr. Walsh. The effort to create a nationwide point of
contact, the 1-800 number, was actually part of legislation
that was reported out of this committee, I believe in the last
Congress, to sort of expand upon this thought. And I think it
is kind of central to what the consumer bureau was about, to
have a single place where--
Chairwoman Waters. Do any of you require the loss
mitigation department or the bank or anybody to walk through
with Ms. Jones what she should do following the contact with
them? They can't go any further, that is all they can do. And
now, Ms. Jones, I am going to give you a telephone number, I am
going to point you in a direction, I am going to tell you how
you can get in touch with your servicer. Do any of you require
that?
Mr. Stevens. We do require it. It is mandatory to be an
approved FHA insurer that contact be made no later than 120
days, that loss mitigation programs provided by FHA are
offered, and we track them in detailed reporting that we have
created over the last year, by institution, by month, how many
have gone through the program of their delinquent borrowers,
and what the total outcome is. And there have been gaps as I
said earlier. And gaps do exist today, so that is why we are
using our authority in our reviews. And should we not get to
resolution, we will assess the penalties that are within our
legal rights and, again, granted by Congress recently, that can
be fairly damaging.
Chairwoman Waters. I asked--
Mr. DeMarco. Chairwoman Waters, if I could--
Chairwoman Waters. I asked earlier about whether or not
fines had been levied from the Treasury Department. Let me turn
to you, the OCC. Since we started experiencing the fallout from
the subprime boom, has the OCC taken any enforcement actions
against servicers?
Mr. Walsh. We have certainly issued supervisory
requirements on them, matters requiring attention and other
things--
Chairwoman Waters. Have you levied any fines?
Mr. Walsh. I do not believe that we have.
Chairwoman Waters. Have you issued any cease-and-desist
orders?
Mr. Walsh. I don't believe that there have been any public
actions against them.
Chairwoman Waters. Have you threatened to revoke any
charters?
Mr. Walsh. No.
Chairwoman Waters. Do you think the servicers really
believe that you mean business if they don't have to fear any
consequences?
Mr. Walsh. I think the consequences are quite clear and
present to them, in that we can compel action and the threat of
more serious penalties.
Chairwoman Waters. But you haven't done that, you haven't
done any of that. Why should they take you seriously?
Mr. Walsh. The supervisory process does not mainly happen
in the public spotlight. It happens in the dealings directly
with the institution through the process of examination,
matters requiring attention and other things. Only when a
particular problem is identified that rises to the appropriate
level do we get into the area--
Chairwoman Waters. Let's talk about examiners. If you have
examiners onsite, can you explain how you don't know about all
the problems that have recently come to light? What do the
examiners do?
Mr. Walsh. As I mentioned, our attention was focused on the
modification process. It would be quite unusual for us to be in
the room or present at the point where an affidavit is being
signed or a notarization is taking place. We do rely on the
systems and controls of the financial institution, its own
internal audit, and any red flags that arise, like through our
consumer complaint function. Unfortunately, those systems and
controls did not raise an alarm about this process.
Chairwoman Waters. I know that as top leaders in your
agencies, you are not doing day-to-day work. You don't
necessarily know details. But I think it is important for
somebody to understand how it really works. And I don't get the
impression in talking with most of you here today that you
really do understand what the homeowner is confronted with when
they are seeking help and loan modification and wishing to talk
with someone who can make decisions.
I think that if that was well understood, that you have the
power by which to help make systems work so that homeowners can
really get some assistance. This problem is so big, so many
families are devastated because they got into the subprime
loans, these exotic products, without knowing or understanding
thoroughly what they were all about. And some people would like
to say they are just irresponsible homeowners. But I have said
to anybody who would listen, you don't have this many Americans
all irresponsible; something happened in the system.
We all know what it is. We all know that these exotic
products, no documentation loans, these ARMs, these interest
only, all of these products came on to the market and simply
placed homeowners in the position of trying to follow the
American dream and get that home, because they are now told
that I can get you in a house, and they are following the lead
of those who are initiating the loans. And we have this problem
that has been going on for a long time and it is not getting
any better.
What can you tell us today that you can do to straighten
this out? What can you tell us? What is your answer?
Mr. DeMarco. Madam Chairwoman, I think that all of us have
made it quite clear that we have a lot of active targeted work
going on, examination work with regard to the specific matters
that have recently arisen, and that it is prudential for us to
complete that examination work so that we are operating with
facts, so we know the scope and magnitude of particular issues,
either generally, or particular firms. And at that point we
will be in a better place to make informed judgments about
appropriate responses.
But in the meantime, I think there has been a tremendous
amount of work done by all the agencies represented here to
stand up, develop, and enhance multiple programs to allow
troubled homeowners to retain their homes. And I think that
these particular matters about the foreclosure processing, we
are gathering this information and we will certainly have the
improvements in place once we have a firm grasp where the
problems are, and what they specifically are, and I am sure the
servicers will as well.
Chairwoman Waters. I would like to thank you for
basically--I am going to call on Mr. Miller. I would like to
thank you for basically just reiterating what you have said
over and over again, and what Mr. Neugebauer warned you about:
coming here saying we are working on it.
Yes, we are moving on it. And you can't show us that in
this length of time you have done anything to bring about
penalties or to levy fines or to show us that you are serious
about assisting the homeowners.
Mr. Miller, please.
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
I asked Secretary Geithner in September if the stress test done
early last year had taken into account potential liability by
the servicers of the residential mortgage-backed securities,
essentially the biggest banks, for put-backs. And at that time,
we were hearing more about underwriting, whether the
underwriting of the mortgages really met, really satisfied the
representations and warranties of the pooling and servicing
agreements or PSAs.
Since then, we have heard more about the documentation and
whether the documentation maintained by the servicers in the
files is sufficient under those representations and warranties
as well. Secretary Geithner said he wasn't sure. Since then, I
have heard from a variety of sources that they have been not
including from employees of the Fed.
Ms. Duke, earlier this week, I think just yesterday in
fact, the Board of Governors announced a new round of stress
tests, but it seemed to be geared towards capital requirements
under Basel III and to take into account macroeconomic forces.
There was not one word about potential liability.
And also, earlier this week, the Congressional Oversight
Panel issued a report that said that the Treasury's assurances
that there is no evidence that there was any systemic risk
arising out of the documentation issues was premature and
called for tests that would look specifically at potential
liability for put-backs.
Ms. Duke, will the new stress test examine potential
liability for put-backs either for underwriting failures or for
failures of proper documentation?
Ms. Duke. Yes. We are requiring 19 institutions to provide
capital plans and included in that would be estimates of losses
under stress scenarios, both scenarios that they developed and
scenarios that we have developed. And included in that would be
estimates of liability out there for put-back risk. We have
actually done some estimates on it.
Mr. Miller of North Carolina. I hope you are not taking
their word for it.
Ms. Duke. No. We are asking for their estimates and
comparing them to our estimates, but we are doing our own
independent estimates.
Mr. Miller of North Carolina. Are you examining the
collateral loan files or representative samples that are
selected at random and not by the servicers, to see if those
files have all the documents required under the PSAs?
Ms. Duke. In the exams we are doing right now, we are
pulling specific loan files both for loans that are in
foreclosure, have been foreclosed, and for loans that have not
been foreclosed, and requesting that they produce the
documentation for those loans that have not been foreclosed.
Mr. Miller of North Carolina. And those are all at random.
Are you comparing the documents that exist in the files, that
are in the files with the requirements of the PSAs?
Ms. Duke. I don't know whether that specific step is taken,
but can I check on that and get back to you?
Mr. Miller of North Carolina. That would be great.
I also understand the PSAs are very specific that the
failure to have that documentation does give rise to a
requirement to repurchase, a put-back right. Could you confirm
that as well, because one--I have heard or read in the press,
as most of us have, that the potential liability is enormous.
The banks say on one hand, this is all overblown, it is no big
deal, these are technical issues, this is all just little
paperwork stuff cross Ts, dotting Is, it will be easily
contained.
And then we hear, no, this is very serious and probably
threatens their solvency and presents systemic risk issues. It
very much reminds me the one-up to the financial crisis of 2
years ago and how important or how significant the subprime
mortgages were.
Mr. DeMarco, you sent 63 subpoenas, I think it was in July,
to the private label securitizers for the private label
mortgage-backed securities that the agencies purchased. Did
that go to documentation issues or did that go only to
underwriting issues?
Mr. DeMarco. The subpoenas were focused principally on
underwriting issues, and so we have issued that to gather the
data on these particular loans so that they can be reviewed and
evaluated.
Mr. Miller of North Carolina. Mr. Green asked a question
earlier about servicers holding second mortgages, and he talked
generally about the problems second liens created. But I think
the gist of Mr. Green's question was really about whether it is
a conflict of interest for servicers of firsts held by others
being serviced and also holding seconds on the same property.
What possible justification would there be for having that
alignment of interest, of having a server who has a fiduciary
duty to the beneficial owners of the first mortgages also
holding or being affiliates of companies that hold second liens
on the same properties? Is there any justification for it? It
appears to be a conflict of interest. Is there any
countervailing advantage in doing it that way?
Mr. Walsh, you seem to be--
Mr. Walsh. The question you are asking or the suggestion is
that, by virtue of the fact that they are holding the second,
that they would potentially not modify a first or--
Mr. Miller of North Carolina. Or just delay, extend and
pretend.
Mr. Walsh. As we supervise the loans, to the extent that a
company has a portfolio of first mortgages and second
mortgages, we look at the condition of the loans and the loss
experienced with the firsts and seconds. In the small number of
cases where, for example, there is a modified first and a
performing second, we would require the holder of the second to
mark down or to reserve against that second, even though there
are payments being received by virtue of the fact that there is
an impairment of the underlying.
Chairwoman Waters. Thank you.
Ms. Kilroy?
Ms. Kilroy. Thank you, Chairwoman Waters. I appreciate the
fact that you called this important hearing.
I also want to thank the panelists for coming today to help
our committee sort out these difficult issues.
Like many of my colleagues, I was deeply disturbed by
recent revelations of, at best, shoddy paperwork by mortgage
servicers working for the Wall Street banks that own an
overwhelming percentage of our residential mortgage market.
Some of the panelists have described this as a weakness in the
foreclosure process and also submit that it is a weakness or a
deliberate noncompliance with various State laws regarding the
recording of titles and liens that has definitely affected not
only the residential mortgage market but also perhaps affected
State and local governments and their efforts to send the
appropriate party the bill for property taxes and to collect
the same. And contrary to what some on Wall Street and even the
Administration have suggested, these problems, these robo-
signings are not superficial or harmless. They could, in the
worst-case scenario, put a cloud on the title to millions of
properties across the country and send more shock waves into
the residential mortgage-backed securities market.
It is important that Congress does what it can to ensure
that this does not happen and to make sure that the rules of
law and due process are given the respect that they are
entitled to in our country of laws, a country based on respect
for due process and the rule of law. That is why I think it is
more than just weakness in the foreclosure process. There is
something very fundamentally American at stake here.
But I don't want to focus entirely on the dangers that the
industry brought on itself with the slicing and dicing of
mortgages but on the homeowners. Homeowners are entitled to our
attention as well. The mortgage industry has complained in
recent years that the legal requirement of physically recording
each change of ownership in a piece of property needlessly
impedes its ability to innovate or modernize the real estate
market. That is not so. These laws exist to protect each
participant in the real estate market--the mortgage holders,
the servicers, the originators, the homebuyer, potential
homebuyers, homeowners, and other lienholders, including State
and local government.
In many cases, homeowners who are unable to keep up with
their payments will have inevitably faced foreclosure
regardless of the faulty paperwork. I certainly recognize that.
But servicers have been too quick to proclaim that each and
every foreclosure they pursued that suffered from robo-signing
and shoddy paperwork is legitimate. I believe we must verify
that no one unlawfully lost their homes because a corporate or
government bureaucrat cut a few corners or that homeowners in
the process of modification found themselves suddenly in
foreclosure. Any solution to this problem must ensure that
homeowners who are improperly foreclosed on are compensated for
their loss. These homeowners are entitled the full measure of
due process and equal protection of the law. So I am very
concerned, in terms of these various revamping, various
programs, of what the impacts are on these.
Mr. DeMarco, you indicated that it is the same law firm
that is involved in these issues, one law firm?
Mr. DeMarco. I indicated, in response to an earlier
question, that there is a particular law firm in the State of
Florida which was on the approved attorney network of Fannie
Mae and thus was processing foreclosures of Fannie Mae loans. I
observed that it was both Fannie Mae and Freddie Mac loans that
were being worked through that particular law firm. That is not
the only law firm in the State of Florida that is working on
foreclosures of Fannie Mae and Freddie Mac loans.
Ms. Kilroy. Thank you. I certainly did not hear that
earlier testimony along the same lines, so I appreciate that
clarification.
In terms of respecting the rule of law, homeowners now are
not able to protect their properties in the bankruptcy court.
They can't ask the bankruptcy court to align their various
debts or their payments and protect that home. Of course, they
could if they had a yacht or a boat or a vacation home, but
they are not able to ask the court to address their debts and
address that first mortgage.
Do any of the panelists believe that a bankruptcy court
would be in a good position to take a look at all of these
issues, help put pressure on the servicers of mortgagers and
others to engage in a modification but also that the court
would protect the rule of law and the appropriate mortgage--
Chairwoman Waters. Let's let them answer that question.
Ms. Kilroy. Nobody has an opinion on that?
Thank you, Madam Chairwoman.
Nobody chose to respond, which I think is interesting that
nobody has an opinion one way or another on that.
Mr. DeMarco. I am sorry. I will venture into this.
I think that there is reason to rethink some of this, but I
would suggest that if there was a change in longstanding
practice about mortgages being outside of the bankruptcy
process, it would have to be considered in a way in which the
fact that this is a secured lien would need to be greatly
respected, and that would include if the bankruptcy court
actually had access to the mortgage that there would be
guidance here to reflect the priority of lien and how that
would be managed by a bankruptcy judge. And that is not to say
that this should or shouldn't be done, but I would simply say
that if a change to longstanding practice were made I would
hope that it would be made with clear legislative direction
about the priority of a secured lien and also, within multiple
liens on a residence, the relative priority of position.
Chairwoman Waters. Mrs. Biggert.
Mrs. Biggert. Thank you, Madam Chairwoman.
I was going to wait for the next panel, but since this
issue just came up I wanted to ask something about it. And that
is, for quite a while I have been asking and questioning the
FHFA about the list of approved law firms that--some are now
labeled as foreclosure mills, and the chosen few firms that
Fannie Mae and Freddie Mac have picked to process foreclosures.
And, to this date, I haven't really gotten the answers to why
there are so few law firms. This obviously continues to be a
problem. So I introduced a bill last February to require the
FHFA Inspector General to report to Congress on this matter,
including the eligibility criteria used for such approval or
retention.
And then, in October or November, the Wall Street Journal
reported about the Florida law firm that had 1,000 employees
processing more than 70,000 foreclosures last year, and that
firm allegedly--whether they forged notarized documents and the
employees signed files without reviewing them. So is there
anything more that you can tell me, Mr. DeMarco?
Mr. DeMarco. I can tell you that both companies have been
expanding their network of law firms. In particular, in the
State of Florida, it had been capping the share of business
going to any one firm, so there is progress in that way.
I believe we have gotten back to you, but if we have not
gotten back to you with all the answers to your questions,
Congresswoman, I will make sure that we do and provide some
follow-up information for you with regard to the change that
has been taking place over the course of this year regarding
both the oversight of law firms and the expansion of the
approved networks of each company.
Mrs. Biggert. Do you think that we should have the
Inspector General report to Congress on this matter?
Mr. DeMarco. That would be your call, not mine. But I would
be happy to cooperate with my new Inspector General on any
inquiry that he has or that you all would like him to have.
Mrs. Biggert. Thank you. I yield back.
Chairwoman Waters. Is that a request that you are making,
Congresswoman?
Mrs. Biggert. Yes.
Chairwoman Waters. Without objection, that request is duly
recorded, and we would expect a response.
Do you have a timeframe by which you would like to hear
from them?
Mrs. Biggert. Two weeks.
Chairwoman Waters. Two weeks. Is that understood?
Mr. DeMarco. I will get back to Congresswoman Biggert in 2
weeks. Thank you.
Chairwoman Waters. Thank you.
I would like to thank the panel for being with us today.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
This panel is now dismissed, and I would now like to call
upon our second panel. Thank you very much.
Our first witness will be Ms. Rebecca Mairone, default
servicing executive, Bank of America. Our second witness will
be Mr. Thomas Marano, CEO of Mortgage Operations, Ally
Financial Incorporated. Our third witness will be Ms. Stephanie
Mudick, executive vice president, Office of Consumer Practices,
JPMorgan Chase. Our fourth witness will be Mr. Alan Jones,
manager of operations, Wells Fargo Home Mortgage Servicing. Our
fifth witness will be Mr. Harold Lewis, managing director, Citi
Mortgage. Our sixth witness will be Mr. R.K. Arnold, president
and CEO, Mortgage Electronic Registration Systems, Inc.,
commonly known as MERS.
Without objection, your written statements will be made a
part of the record.
I think that when you were asked to come, you were notified
that we may want to swear you in, so, before you begin your
oral testimony, I would like each of you, if you would, to
rise, raise your right hands, and answer the following by
saying, ``I do.''
[Witnesses sworn.]
Chairwoman Waters. Thank you. Would you please be seated?
You will now be recognized for a 5-minute summary of your
testimony.
We will start with you, Ms. Mairone.
STATEMENT OF REBECCA MAIRONE, DEFAULT SERVICING EXECUTIVE, BANK
OF AMERICA HOME LOANS
Ms. Mairone. Thank you, Chairwoman Waters, and members of
the subcommittee. Thank you for the opportunity to testify
today.
The economic downturn and sustained high unemployment,
coupled with the collapse of the housing market, have led to
challenges much more profound and complex than anyone
anticipated. For a borrower, the prospect of falling behind on
a mortgage payment due to loss of income would be a wrenching
personal situation in any times, but these are not normal
times.
Every day we talk to tens of thousands of customers who are
facing hardship and looking for our help. Importantly, more
than 86 percent of our customers are current on their mortgage
payments today. Unfortunately, others are not. At a foreclosure
sale, one in three properties are vacant, and there are far too
many abandoned properties, driving down home values in
neighborhoods across our country.
Helping customers remain in their homes, wherever possible,
is a top priority for Bank of America, as evidenced by nearly
725,000 modifications completed. We have reached a crossroads
between modification efforts now and the reality of
foreclosure. Despite our best efforts and numerous programs,
for some customers, foreclosure will be unavoidable. That has
driven an increase in the concerns that both we and you have,
and we are hearing from our distressed customers.
It is our responsibility to be fair and to treat customers
with respect as they transition to alternative housing. We, and
those who work with us in connection with foreclosure
proceedings, have an obligation to do our best to protect the
integrity of those proceedings. When and where that has not
happened, we accept responsibility for that, and we deeply
regret that.
When industry concerns arose with the foreclosure affidavit
process, we were the only servicer who stopped foreclosure
sales nationwide to review all of our procedures. We know
concerns aren't just those that are technical, and we are
taking this matter extremely seriously. We have confirmed that
the basis for our foreclosure decisions has been accurate, but
we did not find a perfect process. We are already moving
forward with needed improvements, but engagement of others is
also required.
As a servicer, we must follow the guidelines established by
our investors relating to modification and other foreclosure
alternatives. Where we can act to improve the process alone, we
will and we have. We will continue to innovate on behalf of our
customers.
Here are just a few of the things we are doing based on
feedback from you and our customers as well as other
stakeholders.
First, we will improve the communication with our
customers. A frequent source of customer frustration is when
they feel they do not speak to the same person twice or more
than twice. We are and have redesigned our loan modification
process to offer a single point of contact for every eligible
customer who desires modification. More than 140,000 customers
have already been assigned to a case owner to whom they can
always turn.
To reach more customers, we have held more than 500 housing
fairs throughout the United States, partnering with nonprofits
and Members of Congress. We have found that the opportunity for
customers to meet face to face is important and can enhance
both response from our customers as well as a successful
modification outcome. In particular, we value the leaders and
members of this committee who have provided their communities
to organize outreach efforts and look forward to working with
members in the future.
Second, we will provide greater clarity to customers going
through the process. Another source of frustration for our
customers is the parallel foreclosure and modification process
that is required by many investors. We want to partner with you
and other stakeholders, including the AGs, in looking for ways
to change this so-called dual track process and mitigate the
very real concerns that we have heard about that practice.
Third, we are making improvements to the foreclosure
process. We determined during our ongoing review that our
process for preparing affidavits of indebtedness in judicial
foreclosure States did not conform to the best practices in
some cases. We have introduced a new affidavit form and
additional quality controls. We are also implementing new
procedures for selecting and monitoring outside foreclosure
counsel. We are carefully restarting the affidavit process with
these and other new controls in place.
Our commitment at Bank of America is to ensure that no
property is taken to foreclosure sale until the customers are
given a fair opportunity to be evaluated for a modification or,
if that cannot be done, a short sale or a deed in lieu of
foreclosure happens. Foreclosure is the option of last resort.
Thank you.
[The prepared statement of Ms. Mairone can be found on page
300 of the appendix.]
Chairwoman Waters. Thank you very much.
Let us go to our next witness who is seated there, Mr.
Thomas Marano.
STATEMENT OF THOMAS MARANO, CEO OF MORTGAGE OPERATIONS, ALLY
FINANCIAL INC.
Mr. Marano. Thank you.
Chairwoman Waters, Ranking Member Biggert, and members of
the subcommittee, I thank you for the opportunity to appear
before you today. My name is Tom Marano, and I am the CEO of
Ally Financial's Mortgage Operations.
Ally's mortgage business is conducted through GMAC
Mortgage. As you have heard, there were certain unacceptable
flaws in our execution and notarization of certain affidavits
in the judicial foreclosure process. The errors we have found
should not have happened, and we have undertaken a significant
and expansive remediation effort.
Initially, our remediation efforts focused on those
affidavits. We then decided to go further. We have a dedicated
team, independent of the foreclosure department, that is taking
a second look at each loan to ensure that a homeownership
preservation option was offered. In addition, we have retained
national counsel to oversee the remediation efforts and to
review our policies and procedures related to foreclosure in
all 50 States. We also brought in PricewaterhouseCoopers to
evaluate those policies and procedures across-the-board. We
have increased staffing and provided additional training.
At this point in our review, we have not discovered a
single instance where the foreclosure sale was unjustified. By
that, I mean our ongoing review has shown that by the time a
case has gone to foreclosure, a borrower is in default, and we
have reached out to offer a homeownership solution.
I have long been an outspoken advocate of loan
modifications. I believe foreclosure is a last resort and is
not economically advantageous for anyone. It is devastating for
consumers and provides no additional benefit for servicers,
investors, or communities over a workout solution.
I brought my perspective on homeownership preservation to
GMAC Mortgage when I came to the organization in 2008. At that
time, GMAC Mortgage was a company in severe distress. Today, we
have turned the corner and continue to focus our efforts to
help consumers find an affordable and sustainable alternative
to default.
While some of the home preservation programs were in place
before I arrived, I have worked to increase these efforts. I
have always believed that we have a much better chance of
helping consumers stay in their homes when we reach a consumer
at the early stages of default, seek complete financial
information early in the foreclosure process, and work on
solutions at the early stage.
We can do better, and I have tried to instill a sense of
urgency in our company to find workout solutions where
possible. Since 2008, we have achieved 565,000 workout
solutions, which is more than 3 times the number of actual
foreclosure sales. Many of these families would have otherwise
lost their home. Even if a homeowner does not qualify for a
loan modification, there are many alternatives to foreclosure,
such as forbearance and repayment plans. With your help,
principal forgiveness may become a more widely available
solution.
Rest assured, I know this process is devastating for
homeowners. The paperwork required is cumbersome and the strain
of meeting monthly obligations can be difficult for a family
who has experienced financial hardship.
The most important objective for loans we service is to
work with consumers and our investors to achieve a solution
that reduces the risk of default and foreclosure. I am
committed to finding innovative ways to help streamline the
process and to assist even more borrowers. I regret the errors
that have occurred, and we have been working hard to fix them
across-the-board.
I also believe that we must work hard to avoid
foreclosures, particularly during the early stages of default.
Of course, there are still going to be times when foreclosure
is unavoidable. My 25 years of experience in the mortgage
industry has led me to believe that we must work harder to find
solutions for homeowners who want to remain in their homes or
sell their property. We reach out to homeowners several dozen
times throughout the lengthy foreclosure process to find a
workout option if one is available. I strive to ensure that no
American loses their home without an opportunity to obtain a
loan modification or an alternative to foreclosure.
Thank you.
[The prepared statement of Mr. Marano can be found on page
307 of the appendix.]
Chairwoman Waters. Thank you very much.
Next, we will have Ms. Stephanie Mudick, executive vice
president, Office of Consumer Practices, JPMorgan Chase.
STATEMENT OF STEPHANIE MUDICK, HEAD, OFFICE OF CONSUMER
PRACTICES, JPMORGAN CHASE
Ms. Mudick. Thank you.
Madam Chairwoman, Congresswoman Biggert, and members of the
subcommittee, thank you for inviting me to appear before you
today. My name is Stephanie Mudick, and I am the head of the
Office of Consumer Practices at JPMorgan Case.
JPMorgan Chase is committed to ensuring that all borrowers
are treated fairly and with respect, that all appropriate
measures short of foreclosure are considered, and that if
foreclosure is necessary, the process complies with all
applicable laws and regulations. We take these issues
seriously. As I discuss in detail in my written testimony, we
regret the errors in our affidavit processes, and we are
actively correcting those issues.
At the outset, I would like to emphasize that Chase
strongly prefers to work with borrowers to reach a solution
that permits them to keep their homes. Foreclosures cause
significant hardships to borrowers and to their communities.
Foreclosures also inevitably result in severe losses for
lenders and investors. Therefore, we always consider whether
there are viable alternatives to foreclosure.
Chase adopted its own modification program starting in
2007, and in 2009 was an early adopter of the government's HAMP
program. Our efforts to date have yielded significant results.
Since January of 2009, Chase has offered almost 1 million
modifications to struggling borrowers and has completed over
250,000 permanent modifications.
Sustainable modifications are not always possible. There
are some borrowers who simply cannot afford to stay in their
homes, notwithstanding the modification programs and other
foreclosure prevention alternatives. There are other borrowers
who are not seeking modifications.
While we make repeated efforts to modify delinquent loans,
sometimes we must proceed to foreclosure. A property does not
go to foreclosure if a modification is in process. But if the
foreclosure has begun and a borrower later begins the
modification process, our investors, including the GSEs, have
instructed us to allow the two processes to run at the same
time. However, we will not allow a foreclosure sale if a
modification is in progress.
I understand the folks at the committee today have reached
a decision to temporarily suspend foreclosures in a number of
States. It is important to note that the issues that have
arisen in connection with foreclosure proceedings do not relate
to whether those foreclosures were warranted. We have not found
issues that would have led to foreclosures on borrowers who are
current. In addition, we have substantial safeguards to ensure
that foreclosures are both a last resort and occur only in
appropriate cases. To be clear, we service millions of loans
and sometimes we make mistakes, but when we find them, we fix
them.
Our recent temporary suspension of some foreclosure
operations arose out of concerns about affidavits prepared by
local foreclosure counsel, signed by Chase employees, and filed
in certain mortgage foreclosure proceedings. Specifically,
employees in our foreclosure operations area may have signed
affidavits on the basis of file reviews and verifications
performed by other Chase personnel, not by the affiants
themselves. But the facts set forth in the affidavits with
respect to the borrowers' default and the amount of
indebtedness, the core facts justifying foreclosure, were
verified prior to the execution of the affidavits.
Let me repeat. We take these issues very seriously. Our
process was not what it should have been, and it did not live
up to our standards. While foreclosures have been halted, we
have thoroughly reviewed our procedures and undertaken a
complete review of our document execution policies. We have
also enhanced training for all personnel involved.
In addition to strengthening our procedures for future
foreclosure filings, we are also working to remedy any issues
with affidavits on file in pending matters. We are working
diligently to complete our review and strengthen our
procedures. We are committed to addressing these issues as
thoroughly and as quickly as possible.
I would be happy to answer any questions you may have.
[The prepared statement of Ms. Mudick can be found on page
316 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Alan Jones.
STATEMENT OF ALAN JONES, MANAGER OF OPERATIONS, WELLS FARGO
HOME MORTGAGE SERVICING
Mr. Jones. Thank you, Chairwoman Waters, Congresswoman
Biggert, and members of the subcommittee. I am Alan Jones, and
I manage operations for Wells Fargo Home Mortgage Servicing. I
appreciate the time to discuss our efforts related to the
housing crisis and keeping American families in their homes.
As a company, Wells Fargo has followed three fundamental
tenets: First, we view foreclosure as a measure of last
resort--in unfortunate cases where a customer simply cannot
afford their property even with a modification, we actively
look at other remedies, such as short sales, to prevent
foreclosure and protect the surrounding community; second, we
hold ourselves accountable for the quality of our foreclosure
data and work to ensure that our borrowers are protected from
wrongful foreclosures; and third, we understand the necessity
of having procedures that ensure our documents comply with the
laws and regulations that govern our industry.
As the economy has continued to present challenges, our
goal has been to keep customers in their home. Since January
2009, we have provided nearly 2.5 million customers with home
payment relief through refinances and modifications, including
more than $3.5 billion of principal reductions. More than 92
percent of our servicing portfolio has remained current on
their home payments, and fewer than 2 percent of our owner-
occupied servicing portfolio has gone to foreclosures now,
statistics that have remained the best among our peers over
time.
With the goal of exhausting all options before moving a
property to foreclosure sale, we have invested heavily in
hiring and training 10,600 home preservation staff, for a
current total of 16,000 people, and we expect all of them to
follow our policies and procedures 100 percent of the time.
Here are some key aspects of our approach:
First, we create an electronic system of record for each
mortgage customer that includes data such as the customer's
name, address, number of payments, and notes about home
retention efforts. We attempt to contact our customers on
average more than 125 times by phone and letter during the
period of first delinquency to foreclosure sale. Investors
often require that we initiate foreclosure proceedings at a
certain point in the loan delinquency, but we continue to work
with these customers on foreclosure prevention options.
When customers continue to work with us, we prevent
foreclosures for 7 of every 10 customers who are 60 days or
more past due. Unfortunately, some customers are in homes they
just cannot afford, even with substantially reduced payments.
In September, customers who completed foreclosure were, on
average, 16 months payments delinquent and could not sustain
their mortgage contracts.
When there is no reasonable alternative, we believe it is
best for people to transition to affordable housing, and we
repair and/or sell 25 percent of properties already vacant to
alleviate further burden on a community.
Wells Fargo has a rigorous system designed to ensure
quality in the data used to make foreclosure decisions. As
mentioned before, it includes an electronic system of record as
well as controls to lessen the chances of error. As just one
example, we pull a daily sample of the data we send
electronically to external foreclosure attorneys and do a
manual check for accuracy.
We continually work on improvements to reduce the
likelihood of errors and address all errors when found. For
example, we identified instances where we did not adhere to a
final step relating to the execution of foreclosure affidavits,
including a final review of the affidavit as well as some
aspects of the notarization process. While we do not believe
these issues resulted in foreclosures that should not have
otherwise occurred, we voluntarily opted to provide additional
assurance by executing supplemental foreclosure affidavits in
the judicial States. We retain and rely on the guidance
provided by outside foreclosure attorneys who are licensed by
each State to ensure that we comply with State law and
regulation.
In conclusion, Wells Fargo will continue to help homeowners
to stay in their homes, including better explaining the home
retention process. For example, earlier this year, we
introduced a one-to-one model to enable at-risk customers to
work with one person from beginning to end on their options.
Additionally, we have met face to face with 15,000 customers at
15 large-scale home preservation events and 25,000 customers at
our 27 home preservation centers across the country.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Jones can be found on page
252 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Harold Lewis.
STATEMENT OF HAROLD LEWIS, MANAGING DIRECTOR, CITI MORTGAGE
Mr. Lewis. Thank you, Chairwoman Waters, Congresswoman
Biggert, and subcommittee members. I am Harold Lewis, head of
Citi's Homeowners Assistance Program. I am pleased to speak
with you today about Citi's efforts to assist our distressed
homeowners.
At Citi, we are working tirelessly to help families stay in
their homes. Since 2007, we have helped more than 1 million
distressed borrowers in their efforts to avoid potential
foreclosure, but we know there is more to be done. We have
redoubled our efforts toward helping customers who are facing
financial challenges. We have a well-trained and dedicated
staff of approximately 5,000 employees who work with at-risk
borrowers to help them find solutions to avoid foreclosure. In
addition, we have partnered with a number of community groups
across the country to further these efforts, including NACA,
the National Council of La Raza, and NeighborWorks.
We believe we have been a leader in HAMP. We actively
identify eligible borrowers, conduct extensive outreach to make
contact, and then guide them through the process of applying
for trial modifications and obtaining permanent modifications.
We make housing counselors available to borrowers, provide
detailed instructions for completing required documents, and
follow up with applicants by phone, e-mail, text messages, and
in-home visits. By the end of September, 44 percent of our
eligible borrowers had obtained a permanent modification under
HAMP.
Further, Citi's re-default rate is well below that of our
peers. Borrowers who do not qualify for HAMP modification may
be eligible for one of Citi's proprietary programs to address
their specific challenges. For example, we have an Unemployment
Assist program that provides temporary lowered payments to
borrowers who have lost their jobs. Further, we offer a
supplemental modification program for eligible borrowers who
have completed a 3-month trial period. For those borrowers who
simply cannot sustain homeownership, we have in place short
sale and deed of lieu of foreclosure programs which provide
alternatives to foreclosures and allow families to relocate
with dignity.
All of us at Citi recognize the hardship that can be
suffered by a family losing its home. Indeed, foreclosures are
a terrible outcome for both families and communities. As such,
foreclosure is always the last resort for us. In the event that
a foreclosure cannot be avoided, we do everything possible to
make sure that the process for our customers is as smooth as
possible.
Now, regarding your specific concerns about the foreclosure
process, we undertook a thorough review of our process
beginning in the fall of 2009. Subsequently, we implemented a
series of steps to strengthen existing practices and add
additional resources to ensure foreclosures were being
processed correctly.
We centralized our foreclosure operations into one unit,
added staff, and enhanced training for greater efficiency and
control. We limited the volume of documents that staff is
permitted to process at any given time and now require our
employees to be recertified on proper procedures every year.
For their part, managers remain accountable for regularly
reviewing files to ensure that employees comply with the
procedures.
As an additional quality control measure, we have been
reviewing affidavits that were executed and pending judicial
foreclosures initiated prior to the full implementation of our
improved practices. We expect to re-file a number of our
affidavits. Should defects be found, no foreclosure will be
completed until a new affidavit is filed. This exercise will
help us to ensure that these affidavits are accurate and
properly executed.
The changes we have made this year give us confidence that
there are no systemic issues in our existing foreclosure
processes.
While we have made important progress in helping keep
Americans in their homes, there is more work to be done. As CEO
of Citi, Vikram Pandit, has said, we owe a debt of gratitude to
the American taxpayer for providing Citi with TARP funds. We
believe it is our responsibility to help American families in
financial distress. In particular, Citi remains committed to
helping our customers with homeownership challenges they face.
Thank you.
[The prepared statement of Mr. Lewis can be found on page
292 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Arnold.
STATEMENT OF R.K. ARNOLD, PRESIDENT AND CEO, MORTGAGE
ELECTRONIC REGISTRATION SYSTEMS, INC. (MERS)
Mr. Arnold. Chairwoman Waters, Congresswoman Biggert, and
members of the subcommittee, my name is R.K. Arnold, and I am
president and CEO of MERS. Thank you for this opportunity to
appear today.
MERS is a member-based organization made up of 3,000
mortgage lenders. It maintains a nationwide database that
tracks changes in servicing rights and ownership interests in
mortgage loans.
Today, MERS is keeping track of more than 31 million active
loans. That is about 50 percent of all the loans in the United
States.
The MERS database is important to the mortgage industry
because it is the only centralized registry in the industry
that uniquely identifies each mortgage loan.
The MERS database is important to individual borrowers
because it provides a free and accessible resource where
borrowers can locate their servicers and, in many cases, learn
who their note owner is.
The MERS database is important to communities because
housing code enforcement officers use it to identify who is
responsible for maintaining vacant properties.
The MERS database aids law enforcement in the detection of
fraud by tracking liens taken out utilizing the same borrower
name, Social Security number, and property.
MERS also performs another key function. It serves as the
mortgagee of record or the holder of the mortgage liens on
behalf of its members as a common agent. MERS is designated as
the mortgagee in the mortgage document, and this designation is
approved by the borrower at the closing by signing the
mortgage, and then the mortgage is recorded in the appropriate
local land records.
Serving as the mortgagee enables MERS to receive and
maintain updated information as loan servicers and loan holders
change over time because we are the central clearinghouse for
receipt of mail pertaining to the mortgage.
One thing that is always clear in a mortgage document is
that if the borrower defaults on his or her obligation, the
lender can foreclose. If MERS holds the mortgage lien,
foreclosures can occur in two ways: either the mortgage lien is
reassigned in the land records to the lender holding the note,
which is the vast majority of cases, and a lender initiates the
action on its own; or MERS initiates the action as the
mortgagee of record in the land records. Either way, the note
and mortgage come together at foreclosure.
To do this, MERS relies on specially designated employees
of its members called certifying officers to handle the
foreclosure. To be a MERS certifying officer, one must be an
officer of the member institution who is familiar with the
functions to be performed and who has passed an examination
administered by MERS. Generally, these are the same individuals
who would handle the foreclosure if the lender was involved
without MERS. The loan file remains with the servicer as it did
before MERS.
MERS is not a repository for mortgage documents or
promissory notes. MERS derives its revenues entirely from fees
charged to its members. It makes no money from foreclosures.
And MERS does not decide when to foreclose. Foreclosure must be
authorized by the note owner, and it must be done in accordance
with our strict rules and procedures which we regularly enforce
and refine. For example, it is a key rule that the note must be
presented in foreclosure, which some States do not require; and
we prohibit the use of loss note affidavits and foreclosures
done by MERS once we saw they were being used as an excuse not
to produce the note.
Earlier this year, when we became aware of the acceleration
in foreclosures, we asked for assurances; and when we did not
receive assurances that our rules would be followed, we
suspended relationships with some companies. When we discovered
that so-called robo-signers might be officers of MERS, we
suspended their authority until they could be retrained and
retested.
Madam Chairwoman, all of us at MERS keenly understand that
while owning your own home is a dream, the American dream,
losing that home is a nightmare. As professionals, we are
dedicated and deeply dismayed by the current foreclosure
crisis. We believe that MERS can be a national tool to better
access information about mortgages and provide transparency for
consumers.
Most of all, it doesn't just benefit financial
institutions, the broader economy, and the government; MERS
benefits real people, real homeowners.
Thank you for holding these hearings and inviting MERS to
participate.
[The prepared statement of Mr. Arnold can be found on page
91 of the appendix.]
Chairwoman Waters. Thank you all very much.
I would like to ask a few questions, and I yield myself 5
minutes to do that.
I have here a stack of depositions. In these depositions,
your employees--I think except for MERS; I don't think we have
MERS--admit to things, including robo-signing, false
notarizations, not being trained in how to prepare affidavits,
not having manuals to follow on how to complete foreclosure
paperwork. The list goes on and on. Each of these depositions
are dated well before you initiated your moratorium, started
your comprehensive reviews, or issued press releases about the
changes you have made to your systems.
My question is, these depositions were taken months ago.
What has taken so long to institute changes?
Could I just start with Bank of America? Why did it take so
long?
Ms. Mairone. Sure. Thank you, Madam Chairwoman.
For the last 2 years, our focus has clearly been on dealing
with the extreme volume and capacity requirements and staffing
requirements. As we have worked through these issues, our
primary focus has been around data and controls as well as
serving the customers and the modification as well as
foreclosure prevention space.
We were, as a management team, not aware of the
inconsistencies around the affidavit process until very
recently. Unfortunately, we did have associates who were
relying on upstream processes and data controls and ended up
signing high volumes of affidavits inappropriately. They did
not adhere to the procedures and policies, and we are changing
that process significantly as a result and taking this very
seriously.
We have also, at the same time, made the decision to halt
and pause foreclosures across the Nation in order to ensure
that we could do a fairly dramatic review in all State cases,
both judicial and non-judicial, to ensure that we are in
compliance.
Chairwoman Waters. Thank you very much.
I am not going to be able to get to each of you to ask you
why it has taken so long, but let the record show that it is a
real concern that it has taken so long when we have so many of
these problems that exist.
I want to put something up on the screen, if I could get
some help from the staff. I want to put a price sheet from
Lender Processing Services Subsidiary.
This price sheet advertises services like creating
collateral files, among other document creation services. We do
not know when this price sheet was drafted or for how long it
was used, but the very fact that it exists is very alarming.
I did want everyone to address this in their testimony, but
I didn't really get that feedback that I thought was necessary
to address it. Would you consider document creation in a
foreclosure case to be fraud?
Let me just go down really quickly and ask each one of you,
starting with Bank of America, just yes or no. Do you consider
document creation in a foreclosure case to be fraud?
Ms. Mairone. A new document creation to find files, I don't
believe that would be fraud.
Chairwoman Waters. Yes, right down the line.
Mr. Marano. You raise a good point. Again, we do not use
DOCX.
Chairwoman Waters. Okay. Next.
Ms. Mudick. Chase does not use DOCX. We have some companies
that we have acquired in the last 2 years, Washington Mutual
and Bear Stearns, who did, but even for those companies, we
stopped using DOCX a year ago.
Chairwoman Waters. So do you do document creation now? Are
you doing that with the companies that you have alluded to?
Ms. Mudick. No, we do not.
Chairwoman Waters. Would you consider it fraud?
Ms. Mudick. I think that the question about when documents
are replaced is very specific to the case involved.
Chairwoman Waters. Okay. Mr. Jones.
Mr. Jones. We also do not use DOCX for those things that
are listed on there, on the board. We used them for lien
releases for mailing documents, and that was it, and that
stopped in January.
Chairwoman Waters. Do you use any services to do document
creation?
Mr. Jones. I think you have to ask, as the previous witness
said, exactly what you mean by document creation. We don't
fabricate documents for foreclosure.
Chairwoman Waters. Let me just put it this way: Is creating
an entire collateral file fraud? Would you consider that fraud?
I will just move to Mr. Lewis. What about you?
Mr. Lewis. We do not use DOCX.
Chairwoman Waters. Do you use anybody to do document
creation?
Mr. Lewis. As the other members have said, it depends on
what you mean by doc creation.
Chairwoman Waters. Let me ask this: Is creating an entire
collateral file fraud?
Mr. Lewis. An entire collateral file that doesn't exist or
a reproduction from a database?
Chairwoman Waters. Let me go to MERS.
You see what the concern is, and we are basically out of
time. So let me just go to Mrs. Biggert.
Mrs. Biggert. Thank you, Madam Chairwoman.
I have one quick question for Mr. Lewis. You mention in
your testimony that you work with Neighborhood Assistance
Corporation of America, NACA.
Mr. Lewis. Yes, ma'am.
Mrs. Biggert. We have had some strange things happen in
DuPage County. Things have been coming to my office where we
received papers faxed to me, and it would be somebody's
mortgage papers, their Social Security, a lot of personal
information from them, and it has on it to call NACA. Has this
happened--these are formal papers for mortgages or for
foreclosures.
Mr. Lewis. I am not aware of what you are speaking of,
ma'am, but I would be happy to follow up and get some more
information.
Mrs. Biggert. If you could, since you work with them. But
it is information, and then the clients have signed off the
privacy, but this is something that is going around. And it is
as if we are supposed to be helping them with their mortgages.
Mr. Lewis. Just to make sure I am clear, the question that
I am following up on is why NACA would send private information
to your office?
Mrs. Biggert. That is correct.
Mr. Lewis. I will follow up with that.
Mrs. Biggert. Thank you.
Just a yes or no question: How many of you use Fannie and
Freddie?
Ms. Mairone. At Bank of America, we do, yes.
Mr. Marano. At GMAC Mortgage, we do as well.
Ms. Mudick. The same is true for Chase.
Mr. Jones. At Wells Fargo, we service loans for Fannie Mae
and Freddie Mac.
Mr. Lewis. Yes, we sell off to Fannie and Freddie and
service groups.
Mrs. Biggert. Maybe I should have asked, who doesn't?
Mr. Arnold. Fannie and Freddie are very large users of
MERS.
Mrs. Biggert. And you probably heard my question of Mr.
DeMarco asking for more information. Can any of you describe
the problems that you have had working with the--and what I am
concerned about is the very limited number of Fannie and
Freddie approved law firms that process for foreclosures.
Mr. Marano. I can take that.
We raised the issues with these law firms with both Fannie
and Freddie from the very beginning when the issues came to my
attention. The issues are really twofold. One issue is simply a
lack of capacity. There are a limited number of firms on their
list. One of the GSEs in particular has not added a substantial
number of firms in more than 2 years, the other GSE has added
firms, and now they are both actively adding firms.
The second issue appears to be one surrounding the behavior
of their firms. And I would say initially, while there was
oversight present, I don't think that they were fully aware of
all the activities. And once we assisted them in understanding
what our concerns were, they both reacted very quickly.
Mrs. Biggert. Anyone else? Nobody has any problems?
Mr. Jones?
Mr. Jones. We have experienced the same as the previous
witness.
Mrs. Biggert. In a Wall Street Journal article about the
issue, I am going to quote here that, ``While Fannie conducts
regular audits of its approved attorneys, it said that the
mortgage servicers that select the firms are ultimately
responsible for ensuring that foreclosures are done properly.
Fannie also said it was preparing to add more attorneys in
Florida.'' Would you think that is true, that it is the
mortgage servicers who are really responsible for the approved
attorneys?
Ms. Mairone?
Ms. Mairone. At Bank of America, we are requested to use
both Fannie and Freddie specific outside counsel. We do so at
their direction. We clearly are responsible ultimately for
quality of foreclosure, but we are directed specifically to
those firms.
Mrs. Biggert. Mr. Marano?
Mr. Marano. Mrs. Biggert, we take responsibility for our
actions. However, I would also say that we are using counsel.
They are referred to as directed counsel. And we are in a
constant battle of managing the timeline of our investors,
including Fannie Mae and Freddie Mac, and the needs of our
consumers. We do everything we can to facilitate what we can do
for the consumers, but it should not be lost on this committee
that our investors put enormous pressure on us to follow
timelines and processes, and we often push back very hard so
that we can meet the consumer's need.
Mrs. Biggert. Ms. Mairone, it also talks about your bank as
having suspended thousands of foreclosures. Was that due to the
limited attorneys or was that a different problem?
Ms. Mairone. We have suspended about 102,000 or more
foreclosures in judicial States primarily due to the affidavit
issue that came up and process improvements, but, at the same
time, we are looking at end to end, including foreclosure
counsel quality and controls.
Mrs. Biggert. Thank you. I yield back.
Chairwoman Waters. Thank you.
Ms. Kilroy.
Ms. Kilroy. Thank you, Madam Chairwoman. And thank you to
the witnesses for appearing here this morning. One of the
testimonies talked about the hard reality of homeowners who
can't afford the mortgages that they engaged in, and that maybe
implicitly in that statement is a comment that it really
doesn't matter whether the rule of law and due process were
filed in moving to foreclose against these homeowners.
I think there is also a hard reality that a lot of
investors bought toxic paper, paper that may have been rated by
a rating agency as triple A or a viable investment, sometimes
not depending on different tranches that were bought. But these
investors also are playing a role in the decision of whether to
foreclose or not to foreclose. And there are various people who
may have conflicting interests. And I think there's also a hard
reality here that the Wall Street banks--Lehman's, Goldman
Sachs, and others that were encouraging this securitization of
mortgages--also played a role in getting this to the place
where we are today here; and that perhaps some interests here,
like MERS, facilitated all of this to happen, making it easy to
get around State requirements for actually filing mortgages and
other liens.
My concern really is where should the public interest lie
in all of this; whether it should be the community which is
seeing mortgages and home values decline; people who maybe have
bought a house in these communities and are making their
payments, but nevertheless because of what's going on with
their neighbors in their neighborhood is finding that their
investments now are underwater.
Should we protect the homeowners or should we be looking to
be concerned with the investors who have invested in these
mortgages and now find those investments not paying off?
One of my concerns is this process of talking to the
homeowners about home modifications and engaging the homeowners
in making those payments, but at the same time engaging in a
dual track in which foreclosure proceedings are already begun
against that very same homeowner.
I'm curious about the response from Chase, and Citi, and
Bank of America as to whether or not you are engaging in this
track, and what you see as the value or who is hurt, who gains,
who loses in this dual-track process.
Ms. Mairone, do you want to start?
Ms. Mairone. Sure. And you have raised a number of very
valid concerns that we share as well. Specifically, to the
dual-track piece, our concerns are very specific and include
the customer experience along the way. From a customer's
perspective, as they move into the foreclose process and then
at the same time are reviewed for a modification, that can be
extremely confusing. We have worked hard, including putting
single point of contact in, and extra communications and to
help the customers understand, but nonetheless it continues to
be a problem.
At Bank of America specifically, we are re-reviewing the
process where we own those loans themselves, to reconsider how
we are handling that dual track, to make that potentially a
significantly better experience for the customers. Outside of
those loans that we own ourselves, which are nearly 80 percent
of our portfolio, we are directed by investor requirements to
do so. So we do that dual track.
Ms. Kilroy. So your role as a servicer with these mortgages
is one that goes one direction with the customer, but you have
a different obligation to the investors that requires you to
move faster on a foreclosure, despite the modification process.
Ms. Mairone. That's correct.
Ms. Kilroy. Mr. Marano?
Mr. Marano. As you did raise several good points, what I
would like to make sure is clear is that my firm and I believe
that foreclosure is a very poor choice in this entire equation.
The problem we have as an industry is that the mortgage market
is one where you have servicers who service for their own
portfolio and also for others. You have a long legacy of rules
and securitization processes that were not designed for the
current environment.
We actually only own less than 5 percent of the loans that
we service. So what we try to do is make sure that we serve the
consumer and encourage the investors to do what's right for
them, which is to prevent foreclosures.
In particular in the past year, I have attempted to notify
investors that the existing private label servicing contracts
need to be changed to give us even greater flexibility. We have
received virtually no support from that.
Ms. Kilroy. Do you think--
Mr. Marano. What I would hope is that through your efforts
and through the efforts of the chairwoman that we can begin a
process of rewriting these rules and moving this industry
forward. It has been 3 years of this. We need to change the
process.
Ms. Kilroy. Thank you.
Chairwoman Waters. Mr. Miller.
Mr. Miller of North Carolina. Thank you. I'm afraid I
missed your testimony earlier, I had to step out, but I
understand that the witnesses for servicers earlier this week
in the Senate Banking Committee testified that a major reason
there were not modifications that reduced principal was the
objections of investors, the holders of the residential
mortgage-backed securities.
I have heard no such thing from investors. They would like
nothing more than to reduce principal on mortgages if that
meant that you could avoid foreclosure. It would be far better
for them if that was the case. And they further say that they
believe the reason the servicers are not doing it is because
the servicers have interests that are different from theirs:
their interest in avoiding liability, their interest pertaining
to second liens. There are different interests in the failure
to foreclose--a failure, rather, to modify when it is in their
interest to modify is a violation of the fiduciary duty of the
servicers to the holders of the residential mortgage-backed
securities.
If you contend that investors' objections, that the
objection of an investor is a reason for not modifying and
reducing principal, can you identify for me and for the
committee the investors who have objected? And provide us with
documents with the letters that state their objections, with
memoranda that state their objections, with e-mails or whatever
documentation they have provided you, that they do object and
what their objections are. Can you do that for us, Ms. Mairone?
Ms. Mairone. Sure. On the modification side overall, what I
would say is--
Mr. Miller of North Carolina. No, I just want you to--would
you give us the names, identify those investors who have
objected?
Ms. Mairone. We can definitely get you the names of
investors who do not allow modifications and there are very,
very few of those. I think from a principal reduction
perspective, that's where it has gotten a little more difficult
in those discussions. At Bank of America overall, we do have
very specific principal reductions, but do not have it more
broadly outside of the HAMP program as well as the hardest hit.
Mr. Miller of North Carolina. If you could give us those
investors and the reason for their objection. As to the rest of
you, can you provide that information?
Ms. Mairone. Yes.
Mr. Miller of North Carolina. Okay, I have a lot of nodded
heads there that you would get that to us.
Second, there were questions before the last panel, which
I'm sure you heard about, whether there was a conflict of
interest for servicers of first held by others, owned by
others, beneficial owners or somebody else also to own on their
own or to be an affiliate of a firm that owned seconds on the
same property.
We have also heard about conflicts of interest for
servicers or trustees or others involved in servicing
securitized mortgages to be affiliated with firms that
securitize the mortgages in the first place. They have control
of information that's important for litigation that the
investors want access to. There should be a fiduciary duty to
those investors. They say that they are not getting that
information because the servicers or the trustees are
protecting affiliates.
Without addressing whether there is a conflict of interest
or whether it really results in a breach of fiduciary duties,
what possible advantage is there for a servicer being
affiliated with a securitizer? Is there--if there's any reason
at all not to have them be affiliated, if there is any possible
conflict of interest, what is the countervailing consideration
that should allow it? Does anyone have a reason? What's the
advantage?
Mr. Jones, the name of your firm is Wells Fargo Home
Mortgage Servicing. I assume you're an affiliated corporation
of Wells; is that correct?
Mr. Jones. That's correct.
Mr. Miller of North Carolina. Could you not perform all of
your functions as well if you were completely independent and
not an affiliate of Wells? What's the advantage of being
affiliated with Wells?
Mr. Jones. Thank you for your question. Wells Fargo is a
full financial services firm. And we offer our banking
customers loans, right?
Mr. Miller of North Carolina. Right.
Mr. Jones. And to do--and the securitization process is
important for us to be able to make that happen. We don't own
all the loans that we service. Therefore, those customers who
come to us, come to us in a bank branch, who have other
relationships, want a home loan, we are able to take care of
that home loan need and service that loan and work with the
bank to make that occur. So it is a customer convenience item
for us.
Mr. Miller of North Carolina. Customer convenience.
Mr. Jones. A customer convenience, absolutely, because our
customers who have mortgages with us have many other products
as well as banking, etc.
Mr. Miller of North Carolina. My time has expired.
Chairwoman Waters. Thank you very much. The Chair notes
that some members may have additional questions for this panel,
which they may wish to submit in writing. Without objection,
the hearing record will remain open for 30 days for members to
submit written questions to these witnesses and to place their
responses in the record.
Before dismissing this panel, I would like to say that this
hearing is but the tip of the iceberg. We did not get a chance
for all of our members to raise their questions they would like
to raise.
This business of document production is a serious question.
There are other serious questions about MERS and what authority
it operates under and whether or not it should be regulated,
but I think that we will consult with the chair of our
committee and others, so that we can continue to hold hearings
so that we can understand better what we can do to help our
citizens who are faced with the tremendous problems that they
have with foreclosures and other interactions with the bank's
financial institutions, the servicers in particular.
Thank you very much. This panel is now dismissed, and I
would like to welcome our distinguished third panel.
I am pleased to welcome our distinguished third panel and
thank you for being here and thank you for your patience. Our
first witness will be Mr. Adam Levitin, associate professor of
law, Georgetown University Law Center. Our second witness will
be Mr. Anthony B. Sanders, professor of finance, and
distinguished professor of real estate finance, school of
management, George Mason University. Our third witness will be
Ms. Julia Gordon, senior policy counsel, Center for Responsible
Lending. Our fourth witness will be will be Ms. Linda Fisher,
professor of law, Seaton Hall School of Law. And our final
witness will be Ms. Ann Anastasi, president, American Land
Title Association.
Let me just alert you that we're nearing the time when we
will be called to the Floor and we may have to leave the panel
for a short period of time, but let's get started and see how
far we can get. We'll start with Mr. Adam Levitin.
STATEMENT OF ADAM J. LEVITIN, ASSOCIATE PROFESSOR OF LAW,
GEORGETOWN UNIVERSITY LAW CENTER
Mr. Levitin. Good afternoon, Chairwoman Waters, and members
of the subcommittee. My name is Adam Levitin, and I am an
associate professor of law at Georgetown University where I
teach courses in bankruptcy, commercial law, contracts, and
structured finance. I also served as special counsel to the
Congressional Oversight Panel, but I'm testifying today solely
in my capacity as an academic.
In my prepared statement, I wish to make three points:
First, it's crucial that the committee understand that
mortgage servicer incentives are badly misaligned with those of
both investors and homeowners.
Second, there are real harms from procedural fraud that
should not be ignored. It is not a case of no harm, no foul.
And third, there is a very serious chain of title issue in
mortgage securitization that could pose an immense systemic
risk to the financial system.
Mortgage servicers' incentives are not aligned with that of
investors and homeowners. There are numerous conflicts of
interest, but perhaps the most fundamental is that investors
want to maximize the value of a loan, whereas servicers merely
want to maximize the amount of their fee income. And that fee
income does not correlate with the ultimate performance of the
loan. So unlike investors, mortgage servicers are indifferent
to the ultimate loss on the loan.
Servicers can often make more money in foreclosure than by
doing a loan modification. This gives servicers an incentive to
foreclose regardless of whether the modification would be
value-enhancing for investors. Moreover, servicers' fees and
reimbursements are paid off the top from any foreclosure sale
proceeds. This gives servicers a strong incentive to lard on
junk fees and to in-source foreclosure costs to their
affiliates at exorbitant markups. Countrywide, I would note,
recently settled with the FTC over precisely such issues.
Servicers are primarily in the transaction processing
business. That's a business that's all about automation and
economies of scale. There generally would be a stretch to
expect servicers to perform lots of successful loan
modifications, which require discretion and manpower. But when
one considers the misaligned incentives, it is no surprise that
loan modifications that depend on servicers have failed
miserably.
My second point is that the argument that foreclosure
irregularities cause no harm because borrowers are deadbeats is
fallacious. First, in many cases the only evidence that the
borrower is in default is the false affidavit, so we don't
actually know if the borrower is in default. The fact that the
servicer initiates a foreclosure action cannot create such a
presumption.
Second, there are borrowers in foreclosure who are not in
fact in default. And there are others who are in default only
because of servicer malfeasance such as misapplication of
payments or because of overpriced force placed insurance. We
simply don't know how many cases involve real defaults, how
many involve servicer-induced defaults, and how many don't
involve a default at all.
Third, there are very clear economic harms. The mortgage
bargaining involves a bundle of rights, including procedures in
the event of default. We know those procedural rights have
value because mortgages cost more in States with judicial
foreclosures than States with non-judicial foreclosures. In
essence, borrowers are paying more to get legal process in
judicial foreclosure States. Robo-signing cheats those
borrowers of that value, and rampant fraud ultimately
undermines confidence in markets generally.
In truth, economic harm is just irrelevant to the issue.
Violation of procedure rules is a harm to society that is never
excused by the substantive merits of a case. Even if we all
know that a defendant is guilty of a heinous crime, that can
never excuse perjury or lynching.
Earlier this week, the American Securitization Forum put
out a white paper on how residential mortgages are transferred
in the securitization process. The paper aims to soothe
concerns about chain-of-title issues. The analysis in the ASF
white paper is good as far as it goes. It argues that as a
generic matter there are two alternate ways mortgage notes
could have been transferred to securitization trusts under the
Uniform Commercial Code. Unfortunately, the ASF white paper
neglects to address that these generic processes are not what
actually control in securitization transactions, which leads to
four observations:
First, parties are allowed to contract around the Uniform
Commercial Code.
Second, residential mortgage-backed securities are issued
by trusts, and the transacting authority of those trusts is
limited by their trust documents.
Third, the trust documents set forth a more restrictive
legal standard than the generic one addressed by ASF.
And fourth, under New York law, which governs most RMBS
trusts, failure to comply with the trust documents voids the
transaction, meaning the transfer into the securitization trust
never occurred.
The trust documents usually require a complete chain of
endorsements that document every transfer of the mortgage note
before a final endorsement in blank. Unfortunately, it appears
that there is widespread noncompliance with the requirements
for transfers set forth in the trust documents. The full chain
of endorsements is often lacking on notes, and sometimes there
are no signatures whatsoever.
I emphasize that these signatures are no more
technicalities than that of the borrower on the note. And they
are in fact an important part of making the trust assets
bankruptcy remote.
Just this Tuesday, in a case captioned Kempf and
Countrywide Home Loans Incorporated, a Federal judge in the
United States Bankruptcy Court for the District of New Jersey
disallowed a securitization trust mortgage claim because the
note in question lacked an endorsement and was never delivered
to the trustee.
If I may conclude, I would suggest that I want to be clear,
I am not saying that there is a systemic problem, I'm saying
that there very well could be one, and Congress would do well
to be ahead of the ball on the systemic risk rather than behind
it. Thank you.
[The prepared statement of Professor Levitin can be found
on page 262 of the appendix. ]
Chairwoman Waters. Thank you.
Our next witness is Mr. Anthony B. Sanders.
STATEMENT OF ANTHONY B. SANDERS, PROFESSOR OF FINANCE, AND
DISTINGUISHED PROFESSOR OF REAL ESTATE FINANCE, SCHOOL OF
MANAGEMENT, GEORGE MASON UNIVERSITY
Mr. Sanders. Chairwoman Waters, and members of the
subcommittee, thank you for the opportunity to testify before
you today. The U.S. mortgage market grew at a phenomenal pace
from 1998 to 2009 with the GSEs, Fannie and Freddie, and the
Federal Home Loan Banks alone accounting for $5 trillion in
debt to fund mortgage growth.
As we sit here today, there are over 42 million mortgages
outstanding in the United States. Of the 42 million mortgages,
approximately 60 percent were securitized or assigned to
another party. Loan assignments have occurred in the United
States since before the Great Depression, yet only now have
Congress and the Administration taken notice of the loan
assignments.
What is particularly interesting is the myriad of Federal
housing agencies, pseudo agencies, and financial system
regulators that have been in existence since the Great
Depression. The Federal Government has ignored the fundamental
problem of loan assignment regarding location of title or other
potential document problems pertaining to foreclosure.
What is the economic harm to borrowers of alleged document
defects pertaining to foreclosure? The answer is none. First,
the loans are in default. Second, the average length of time
for foreclosure and liquidation is over 17 months. If each
borrower was living in the dwelling and not paying interest,
say $1,000 a month, that translates to $17,000 in lost earnings
to the lenders/investors.
Suppose that 3 million are in the foreclosure process. That
translates to a potential loss of $51 billion to lenders/
investors over and above the loss incurred by lenders/
investors.
Insofar as the foreclosure process takes 17 months,
lenders/investors are not receiving any payment for interest
and principal and are incurring transaction costs. In the
meantime, borrowers are not making payments on the house in
which they are still living, effectively receiving over a year
of housing rent free.
In the case of loan default, the lender has the right to
take the asset and sell it in order to recoup the amount owed
if possible. Document defects pertain to foreclosure if
material can slow down the foreclosure process. Therefore,
lenders/investors have the economic incentive to clear up any
material document defects pertaining to foreclosure as soon as
possible.
Any proposed solution such as a moratorium on foreclosures
with the Federal-State levels represents the dangers of the
stability of the housing market. Government intervention in the
housing market, such as HAMP and tax credits, have failed to
slow and have merely delayed defaults.
The housing market needs to heal and it can only do so if
defaulted loans can be brought to the market through
foreclosure. Preventing foreclosures extends losses to lenders/
investors, and allows nonpaying households to continue staying
in the dwelling.
If material document defects were pervasive in the economy,
why weren't our regulatory agencies on top of the problem
seeking solutions? It is notable that the leading thrifts that
securitized loans were Countrywide, Indy Mac, and WaMu, all
supervised by the Office of Thrift Supervision, OTS, which is
the regulatory body of the thrift industry.
As defaults and foreclosures mounted, OTS should have been
painfully aware that the problem of foreclosure could arise if
title and accurate supporting loan documentations could not be
produced. It should be determined if the OTS was aware of the
problem and considered it to be trivial. Or if there was a
problem, why did they choose to do nothing about it, or were
they just unaware of the problem?
Of course the same question should be asked of the FDIC,
the regulated State charter banks, the OCC that regulates
nationally chartered banks, and the Federal Reserve that
regulates State charter member banks. And then there are the
State and bank thrift regulators.
With so much regulatory power were the FDIC, the OCC, and
the Fed not investigating the potential foreclosure documents
and taking corrective action if it was material? For those
solutions I have, all relevant loan documents should be
immediately scanned and a digital file created. This file which
would be called ``securitization packet'' would travel with the
loan when it is sold. The digitized file could be kept either
at the Federal Reserve or private market enterprise with
regulatory oversight. The regulatory bodies, whether it's the
Federal Reserve, the FDIC or the OCC should develop
requirements for the assignment of loans requiring notification
of when an entity has purchased a loan or new service is
applicable.
That is, the regulatory bodies can either set the standards
or work with the industry on setting such standards that would
alleviate problems in the future regarding this loan
documentation issue. Thank you very much.
[The prepared statement of Professor Sanders can be found
on page 323 of the appendix.]
Chairwoman Waters. Thank you.
Ms. Gordon.
STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Ms. Gordon. Good morning, Chairwoman Waters, and members of
the subcommittee. Thank you for inviting me today. And I also
want to thank the chairwoman for your tireless attention to
these problems in mortgage servicing. If folks had been
listening to you all along, maybe we wouldn't keep having this
similar hearing over and over.
As we sit here, 2 million families are in the middle of
losing their homes. More than 3 million more are on the verge
of default. Over the next several years, the toxic combination
of unsustainable loans, high unemployment, and underwater
mortgages could mean a stunning total of more than 13 million
foreclosures. African-American and Latino families are much
more likely than Whites to lose their home. And we estimate
that communities of color will lose over $360 billion in
wealth.
The fate of foreclosed homeowners impacts all of us.
Foreclosures bring down home values across-the-board and
devastate communities and municipal budgets. Continued weakness
in the housing sector hangs like an albatross around the neck
of our economic recovery. Things did not need to be this bad.
If government had acted quickly and forcefully, we could have
significantly limited the fallout. But instead, some
policymakers believed servicers' early assurances that they
would handle the crisis on their own. When that turned out to
be wrong, we provided legislative tools such as the Investor
Safe Harbor, we added financial incentives through HAMP and
related programs. We cajoled and begged and threatened. None of
those strategies has worked. It's quite clear that servicers
will not do what needs to be done, unless someone makes them do
it. It may be that they can't do it at all under the current
structure.
Everyone agrees that homeowners not in default should not
lose their home. There is also little disagreement that
sustainable loan modifications can keep families in their homes
and provide greater returns to investors. Similarly, there is
consensus that for vacant homes and situations where the
homeowner cannot possibly remain, it is best to move a new
family into that home.
With all of this consensus, why are we here today? It's
because the servicing system is running an outmoded model,
crippled by cross-cutting incentives and overwhelming volume,
and it can no longer reliably sort out which foreclosure should
happen and which should not. How to get this done right is the
crucial question.
Under the exiting dual-track system, borrowers get
foreclosed on even when they are in the middle of being
reviewed for other solutions. Once in foreclosure, we now know
that servicers have been cutting corners and inventing
paperwork, sometimes because they simply don't have the
recordkeeping ability to do otherwise.
The principal government response to the foreclosure
crisis, HAMP, has proved very disappointing. In the face of
nearly 8 million foreclosure starts, the HAMP program has
produced fewer than half a million permanent modifications.
More than 60 percent of borrowers in trouble, though, have had
no evaluation of their situation at all, because the fact is
the HAMP program has not had what it needed to succeed.
A key part of the original Administration foreclosure
prevention plan was to involve the bankruptcy courts who serve
as our Nation's comprehensive resolution authority when debt
goes bad. Failed subprime originators got bankruptcy
protection. So did Lehman Brothers. Bankruptcy courts can
modify mortgages on vacation homes, farms, and commercial
properties.
If servicers knew that homeowners had bankruptcy court as a
backstop, that might have spurred the necessary workouts to
happen. But although this Chamber saw that need for reform
early, industry pressure derailed the effort. Those bankruptcy
laws should still be changed.
In the meantime, let's broaden and enforce a commonsense
practice, requiring servicers to review all loans for
alternatives to foreclosure, either loan modifications when
that makes financial sense, or short sales and deeds in lieu.
Most important, let's get that review done before foreclosure
proceedings are even started.
To make such a system work in practice, homeowners need a
chance to stop their foreclosure if they haven't been properly
reviewed. In many cases, homeowners will need access to legal
help to do so. Congress should appropriate the $35 million
authorized in the Dodd-Frank Act for foreclosure prevention
legal assistance. While this is a very small amount compared to
what will be spent on the corporate lawyers for the other side,
it will make a real meaningful difference for people who can't
afford an attorney. In addition, banking regulators should
enforce existing roles and establish any additional duties and
standards necessary to prevent predatory servicing practices.
I look forward to working with you to make our mortgage
servicing system work, both for families and for those who
invest in our economy. Thank you for your time and I look
forward to your questions.
[The prepared statement of Ms. Gordon can be found on page
219 of the appendix.]
Chairwoman Waters. Thank you very much.
As I mentioned earlier, we have votes, and we only have a
few minutes left. It's very important that our members get up
there. Unemployment benefits expansion is on the Floor.
If you would be so kind as to remain, we would like very
much to continue to hear from you and to raise some questions.
I would appreciate it very much. The committee is in recess.
[recess]
Chairwoman Waters. We will now resume the hearing.
STATEMENT OF LINDA FISHER, PROFESSOR OF LAW, SETON HALL
UNIVERSITY SCHOOL OF LAW
Ms. Fisher. I am a law professor at Seton Hall Law School
in New Jersey. Part of my duties include teaching a civil
litigation clinic in which third year law students and I
represent low- and moderate-income borrowers in urban north New
Jersey, particularly the Newark area, in cases involving
foreclosure defense, predatory lending, and mortgage fraud. I
am here largely in that capacity today.
My testimony will focus primarily on one point, and that is
a refutation of the argument that we have heard raised many
times in recent weeks, including earlier today by one of the
members, that it doesn't really matter if servicers committed
what are called technical violations of law because the
borrowers are in default anyway; so why not just foreclose so
they won't get a free house out of the deal.
This argument relies on a number of erroneous assumptions.
First, that virtually all of these people or no more than a
negligible number are actually in default. Many are not. We
don't know the exact numbers because the system is extremely
opaque, as Professor Levitin pointed out a little earlier.
There are many, many anecdotes out there. Just a recent media
search would raise a lot of those.
And, furthermore, we can reasonably infer from our
knowledge of the level of error in the system generally that
many more errors must have been made than have come to light of
late. Errors include, of course, listing arrears that don't
exist in part because payments are not credited in time or
inflated fees have been tacked onto amounts due.
As an example of that, a colleague of mine in New Jersey
told me just a couple of days ago that recently she has seen
many broker price opinions (BPOs) that is, quick appraisals
that are done on houses in foreclosure, periodically charged at
$800 per BPO when $200 until recently was the going rate.
Second, even if there are defaults, it is far from the end
of the story. The law is clear that a default alone does not a
foreclosure make. For example, I have recently had a couple of
cases where the wrong entity filed a foreclosure alleging it
held the note in a trust when it was not a trustee and that did
not prove to be the case.
Of course, nobody can deny it is not right that a nonowner
of a mortgage can collect on an obligation. Without legal
representation, however, I am afraid many of the mistakes are
never discovered.
Which leads to a further point, and that is that very, very
few borrowers in foreclosure are able to obtain counsel. Until
quite recently, well over 95 percent of all New Jersey
foreclosures were defaults because counsel was not involved.
The numbers have gone down into the 80-plus percent more
recently. A lot of this is because legal services offices are
overwhelmed, and most people in foreclosure just cannot afford
the legal representation that would be necessary to find those
valid claims and defenses that do exist.
Another set of examples illustrating what might appear on
its face as a default is not necessarily so, involve
origination fraud, which can render the obligation itself on
the loan void or voidable. Origination fraud was very, very
frequent during the peak subprime years of 2004 to 2007. We are
still seeing a lot of foreclosures resulting from this because
of ARMs resetting.
A few examples from my practice: A mortgage broker loan
officer fills in a mortgage application based on mostly
fictional information regarding income, assets, and employment
without consulting the borrower, resulting in a higher loan
amount than they can afford. The application is bolstered by an
inflated appraisal, which happened almost across-the-board in
the cases I have seen. The borrower doesn't discover this until
closing when they may also discover that the actual purchase
price of the property is higher than what had been quoted to
them. They are told at this point they have to go through with
the closing or be liable for the entire amount, which is of
course not the case legally. So, pressured, they continue. And
they are also told, you can refinance in a couple of years
anyway because housing prices always go up.
In conjunction with these practices, I also litigated many
claims in the Newark area over the last few years involving a
large predatory property flipping and loan operation in which
unscrupulous mortgage brokers worked with a developer, a local
developer, who would buy distressed houses and do a few shoddy
repairs and then flip them at much higher prices to
unsuspecting buyers.
In many of these instances, even when the repairs were not
done, the flipper would promise the buyers that he would make
the mortgage payments on the property until everything was
complete and the second and third units in these properties
could be rented out. He did not do that. Almost inevitably,
these people fell into foreclosure, yet almost all of them had
good claims and defenses based on origination fraud.
In appropriate cases, securitizers can be held liable for
this as well if they are not holders in due course.
While we did settle virtually all of those claims, it just
provides another set of examples of the sorts of things that
can go wrong here, and ultimately even if a default occurs,
provide valid defenses to foreclosure. These are not technical
violations, obviously.
So default is only the beginning of the story. And of
course we have heard much today, and in the Senate Banking
Committee the other day, about outright fraud in servicing
processes. The most prominent examples, of course, include
forged signatures and the like over and above legal violations
involved when a robo-signing occurs. As a result, I believe we
are not going to make any progress here unless serious mortgage
modifications are required, including principal write-down in
appropriate cases.
I think also independent auditors and monitors should be
appointed to review the foreclosure practices and sample loan
files of servicers, rather than having them do it themselves. I
did hear some testimony that that is starting to be done.
And then, finally, just as an example, a final example of
why the modifications are necessary. Last night, a cab driver,
when I was coming to my hotel here in D.C., told me he had been
trying to get a mortgage modification all year now since his
wife lost her job of 14 years late last year. He doesn't want a
principal reduction. He wants an interest rate reduction. He
can pay. He is making money as a cab driver. But he asked me
then, as he is handing a suitcase off to me and I am proceeding
to go into the hotel, ``Why did we bail out the banks with our
tax money when they won't even give us a break, homeowners
don't get a break? All I want is an interest rate reduction.
Why can't I get that?'' Why indeed?
Thank you.
[The prepared statement of Professor Fisher can be found on
page 213 of the appendix.]
Chairwoman Waters. Thank you very much.
We are going to now move to Ms. Anastasi. Thank you for
your patience.
STATEMENT OF ANNE ANASTASI, PRESIDENT, AMERICAN LAND TITLE
ASSOCIATION
Ms. Anastasi. Thank you. Madam Chairwoman and members of
the subcommittee, thank you for your patience today.
I am Anne Anastasi, president of Genesis Abstract, in
Hatboro, Pennsylvania. For the past 33 years, I have worked in
the land title industry, and I am the current president of the
American Land Title Association.
Integrity in real estate transactions is of the utmost
importance to the land title industry. I appreciate that you
have asked ALTA to testify today regarding the American system
of land ownership so that we may better understand the effects
of foreclosure irregularities and deficient documentation on
housing markets and property rights.
For centuries, our public recording structure has provided
transparency, efficiency, and security that is unimaginable in
countries where governmental approval is required for the
transfer of ownership from one owner to the next. Our system of
land transfer provides individuals with a strong protection of
their property rights within a relatively short settlement
transaction time, saving borrowers and sellers money. This
system, combined with the confidence that consumers and lenders
have in the work of the land title and settlement service
professionals, allows the United States to have the strongest
real property transfer system in the world.
The accuracy of the public records is extraordinarily
important for this confidence to exist. Land title and
settlement service professionals maintain accuracy in our
public record by curing defects to the benefit of sellers and
buyers and lenders and the public. Our research has found that
curing public record defects alone was necessary in over 35
percent of all transactions. This is one of the most valuable
services the land title industry offers and is an inherent part
of the underwriting process.
As we hear about document irregularities and question the
validity and credibility of foreclosures, it is important to
make the distinction that the reported problems are about how
safeguards that are already built in the legal system were
treated. To appreciate whether errors in the foreclosure
documentation extend to the public records and what can be
discovered in the preparation of a title insurance policy, one
must understand what documents are included in the public
record and what documents are not.
When consumers purchase a home and finance their purchase
with a mortgage loan, three major documents are executed. In
our country, real property is conveyed by a private contract
most commonly called a deed which conveys ownership from one
party to another. This document is publicly recorded. These
records are administered by public officials, and they give
notice that the property ownership is transferred.
The second document is the mortgage. In some of your
States, it is called a Deed of Trust. This document is also
recorded in the public records in order to secure the priority
of the lender's lien and to give notice to the world that there
is a debt on the property.
The third document is the promissory note. It is the
personal promise to pay the loan back. And within the
promissory note, the principal interest rate repayment schedule
and other terms of the loan are noted. The note is not put on
the public record for a variety of reasons, most importantly to
protect the purchaser's right to privacy.
Whether a property has gone through a judicial or a non-
judicial foreclosure, land title agents examine the recorded
documents before a title policy is issued. With many of the
issues in question today they are not discoverable by simply
reviewing the recorded documents.
It is important to note, however, that homeowners and
lenders who obtain title insurance are protected under their
policy if a claim arises. In addition, title insurers are
responsible for the cost of defense for those policyholders if
a claim arises.
Let me conclude by saying that while risks appear to be in
the foreclosure process, they do not appear to extend to the
public records and should not generate a systemic risk to the
title industry. However, the title industry, if a policy is
purchased, will be responsible to defend the homeowner's
property rights at the cost being borne by the title insurers.
It is one of the most important parts, most important
components of owning a title insurance policy.
In addition, we should not lose sight of the fact that our
property transfer system is successful because the work of the
land title industry provides the trust and confidence to allow
people to buy and sell homes. What is important to note is that
homeowners have to understand that buying a lender's title
insurance policy at the time they finance does not protect
them. They have to understand that in order to have the
protection of the industry, and in order to have an insurance
company defending their right, they need to have their own
owner's title insurance policy.
We are eager to serve as resources and so thankful to be
here today. Thank you, Madam Chairwoman.
[The prepared statement of Ms. Anastasi can be found on
page 76 of the appendix.]
Chairwoman Waters. Thank you very, very much.
And, again, I would like to thank you all for your patience
and your understanding and your willingness to come here to try
and help us figure out what this is all about and what we do,
what can we do.
I would like to take 5 minutes and ask a few questions.
I want to ask you to comment on this document production.
As I understand it, a lot of the servicers outsource to firms
that recreate or reproduce documents. Do you know anything
about this and what this means in terms of fraudulent materials
being produced in order to have documents that you can then
foreclose with because they are not in the system anywhere?
What do we know?
Does anybody know anything about this? If so, just speak
up. Have you had any experience with this fraudulent
documentation production? Do you know anything about it?
Ms. Fisher. I can answer some aspects of that question.
It is not susceptible of an easy answer. I am sure you
won't be too surprised to hear that. But in my own practice I
frequently litigate against securitized trusts that are
attempting to foreclose on my clients. Of course, in order to
prove that they have a right to foreclose, they need both, in
most cases, to show that they possessed the original note at
the time that they filed the foreclosure--otherwise, they lack
standing--as well that the mortgage was properly assigned per
our State's property law and that other State law, including
foreclosure law, was complied with.
I have had a very difficult time getting the documentation
in many cases. Sometimes when I do get it, say when I do see
the original note, its chain of custody is entirely unclear,
even apart from the question whether the PSA was complied with,
thus allowing the REMIC requirements to have been met and
bankruptcy remoteness to be met.
And apart from the question whether New York trust law was
violated, we don't even know whether the original note was
possessed at the time of foreclosure. In many cases, it is my
understanding that the original notes are kept in a warehouse
operated by the originator. The servicer may have access to
those. In many cases, the servicer is affiliated with the
originator, but that is not necessarily enough to confer
standing on a later trust that alleges that it acquired the
note and whose documents related to the PSA may indicate that
it acquired the note at the time of closing so that it can
foreclose.
These problems are enormously time consuming to address in
discovery in cases. Part of the reason foreclosures are being
held up is because of these. I have had a number of cases where
discovery has gone on for at least 2 years, notwithstanding
what seemed to be good-faith efforts by all to comply. The
level of complexity, the number of agents involved, a
servicer's inability to track where things are, where they
were, when they were there, so complicates the process that it
has almost broken down.
Chairwoman Waters. Yes?
Mr. Levitin. I just want to add a few points to that.
There are, I think, two distinct issues. One is whether
documents are lost and, therefore, need to be--there is just a
question whether documents are lost. And then secondly is the
problem of creation of documents.
The question of whether documents are lost, we have seen an
awful lot of so-called lost note affidavits being filed, saying
that the purported owner of the note had the note and somehow
lost it, ``the dog ate my homework'' kind of thing. It turns
out in a lot of cases the note isn't actually lost, even though
the servicer will file an affidavit saying so. It is often that
the servicer just doesn't want to bother getting the note.
Because the note is not usually in the servicer's custody.
Usually, it is in a warehouse in, as Professor Fisher was
saying, like Iron Mountain warehouse somewhere outside of
Denver. And the servicer doesn't want to have to pay $30 to get
the note, and the servicer also doesn't trust his attorneys
with the note.
There is very often substitution of counsel in foreclosure
cases, and what servicers are very concerned about is if they
give the precious original note to counsel and there is
substitution of counsel, that note is going to get lost in the
transfer and then they are going to have a bigger problem. So
rather than trying to solve this problem the correct way, which
would be maybe appearing themselves even, in some cases, it
seems that either servicers or their counsel have taken some
shortcuts and had actual notes counterfeited.
There are a pair of companies that have come to light in
this regard. One is a company called DOC-EX, that is ``D-O-C-E-
X.'' Now, DOC-EX, it is my understanding that it had some sort
of affiliation with a company called LPS. LPS is one of the
major sort of service providers to mortgage servicers. They
provide everything from the standard software platform used for
mortgage servicing to all kinds of document services. LPS
apparently shut down DOC-EX as soon as its activities came to
light. But you can see floating around on the Internet, and I
can't vouch for its voracity, but you can see a DOC-EX pricing
sheet. And that pricing sheet has lines for creation of note,
creation of mortgage. And $12.95 will buy you a counterfeit--
Chairwoman Waters. We have it up on the screen today, yes.
Mr. Levitin. You can actually see in the official--in the
county land records in--let's see which county it is--Nassau
County in Florida, you can see an assignment that includes the
words ``assigned to.'' Then it says, bogus assignee for
interventing assignments whose address is, and then there is a
chain of Xs. It seems that someone filed this assignment and
didn't bother removing the placeholder language of fill in
above the bogus name.
Additionally, there was--just this last week I saw a new
story that emerged--there seems to be another DOC-EX-like
company based in the Atlanta area which was actually using a
counterfeit notary seal made out in the name of the former
Fulton County recorder of deeds.
So here is the problem. There is definitely some
misbehavior going on in the servicing industry. We don't know
the extent of it. And that is kind of what is scary, that we
don't know if these are one-off cases or this is endemic.
Chairwoman Waters. Thank you very much.
Ms. Kilroy.
Ms. Kilroy. Thank you very much, Madam Chairwoman. I
appreciate the testimony. I thank all of you for joining us
this afternoon.
Again, I just see this as a continuing playing out of the
greed that Wall Street drove with the securitization, with the
rating agencies stamping triple A on stuff that turned out to
be junk, a lot of greed driving the system and a lot of
mortgages that probably never should have been written, and now
we have this big mess.
My State of Ohio is one of the hardest hit States in the
country. And it is affecting our local governments, our tax
revenues. It is affecting the safety of our communities. It is
affecting the values of my constituents whose home might be
their single biggest investment and seeing that even though
they are paying their mortgage lowered in price because of
problems that their neighbors might be having of problems with
this whole issue of servicing of mortgages and modifications.
I have engaged in some conversations and letter writing
with Treasury regarding the need for legal services, and I so
agree with that, Ms. Fisher, that we need to do something to
help fund legal aid. And it is a shame that Treasury will not
allow the hardest hit funds in all our States to apply some of
that money for legal services.
Representative Kaptur has a bill that would address that
issue. I hope she introduces it in the next Congress, and I
hope that it passes.
And I am also just stunned that, Professor Sanders, that
you would be so disregarding of due process and the rule of
law. This crisis was brought about when regulators frequently
looked the other way. The laws might have been there, but they
weren't enforced, that they didn't put real meaning into the
laws and regulations that Congress had passed and regulators
had enacted. We can't continue to just look the other way and
shrug our shoulders.
Yet think about if it had been the government that was
doing this and robo-signing stuff and taking property away from
individuals, there would be people who would be screaming about
that about denial of property rights and not protecting that
bedrock principle in our government, that you can't take
private property without due process.
But we do have this big mess here right now, and sometimes
I think that even though maybe it doesn't affect directly
because the borrower might actually be in foreclosure, it might
affect an investor who might have lost their investment as well
because of these affidavits and these robo-signings and the
lack of title and making up documents. So it is not just a
borrower in default that might be hurt by this.
And some of the investors, particularly those who hold the
most toxic paper, might be holding up loan modifications
because they want to get paid and that modification wouldn't
hit their lower tranche. And they might actually not have a
property interest in that mortgage, but they just don't know
who owns it, we don't know where all this paper is. So it
really disturbs me, all of this.
I greatly appreciate the suggestions from Ms. Gordon and
wholeheartedly wish we would have passed the cramdown that
would have allowed the bankruptcy courts to be able to put that
pressure on our banking industry to modify mortgages, but, if
they didn't, to allow the bankruptcy courts to marshal the
assets and to take a look at ownership and to hopefully get a
plan so that borrower could protect that home and be able to
make payments and stay in that home and do it within the rule
of law.
I think we need to fix--I urge Congress to fix the abuses
in the securitization industry, the conflict of interest in the
servicing industry, and to look for where is the public
interest in all of this. The public interest in our
communities, our local government, our taxpayers, the people
who borrowed money, the people who invested, our banking
industry, all of that. I think it is a huge task that we
undertake.
Again, I thank you so much for the suggestions that you
made. I certainly would like to understand from the panelists
if there is one thing that Congress could do in the next
Congress what would you suggest that be.
Mr. Sanders. Let me address this.
First of all, I agree with Mr. Levitin that--I am not
saying--being dismissive--that rule of law is not appropriate.
I just want to see what it is first. I want to see how many of
these loans went into foreclosure by accident. And if that is
true, that is terrible. If people were current on their loans
and went into foreclosure, that is not a good thing. I
absolutely agree. What I was trying to say is, to agree with
Chairwoman Waters, is that the government knew about a lot of
these problems coming up, although--
Ms. Kilroy. But I want to take a look at going forward.
Mr. Sanders. But I am saying that--
Ms. Kilroy. What should Congress undertake going forward to
address this?
Mr. Sanders. I would say a modernization of the lending
industry. We are still operating with a lending industry that
looks like the Bailey family's S&L in the movie, ``It's a
Wonderful Life.''
Ms. Kilroy. I agree with that. If the banking industry and
all these servicers had actually done that and advocated for
modernization, again, maybe there would have been a fix here
within the rule of law. But, instead, corners were cut and law
wasn't followed. To allow people to say that they, under
penalty of perjury, believe this to be true and just shrug our
shoulders at it, I am really bothered by that. But one
suggestion, Mr. Levitin?
Mr. Levitin. Take the servicers out of the modification
business. The servicers are just hopelessly compromised.
Ms. Kilroy. Who would do it?
Mr. Levitin. I think you have three possibilities. One is
bankruptcy courts, and that does not necessarily have to be
through Chapter 13.
Ms. Kilroy. Right.
Mr. Levitin. You could have a streamlined mortgage only
resolution process. That would be another way to deal with
bankruptcy courts.
The second possibility would be through a government
agency, something similar to what we had during the Depression,
the Homeowners Loan Corporation, except you don't necessarily
have to take the loans to do that.
And the third possibility would be conceivably finding some
unconflicted third parties that could--basically outsourcing
it, not to the existing servicers. I am not sure who that would
be, but in theory that would be a way to pursue it.
Ms. Kilroy. Thank you.
Ms. Gordon?
Ms. Gordon. What Congress can do is, short of giving the
job to someone else, make the servicers do their job. And which
form that takes--the bankruptcy reform is ideal, because it
solves every problem out there. It solves the second lien
problem. It solves the consumer back end debt problem. It
solves the need to have a third party in there overseeing the
whole thing. It solves any investor tranche-warfare-type
issues. It solves all of that. So it is ideal.
There may be ways to do it other than the way we tried.
Whether it is something other than Chapter 13 or there are a
bunch of other new ideas floating around there. But, aside from
that, we can still require that servicers conduct loss
mitigation prior to instituting foreclosure.
Ms. Kilroy. If we can let the other two quickly answer,
because I think I am out of time here.
Ms. Fisher. I can answer very quickly. I agree with all of
Ms. Gordon's suggestion and Mr. Levitin's as well; and, of
course, we do need to modernize the banking industry, as Mr.
Sanders suggested.
Chairwoman Waters. Thank you very much.
We are going to go to Mr. Miller now.
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
Mr. Levitin just used the term ``unconflicted third
party.'' There has been a lot of discussion earlier about
whether servicers in fact do have a conflict in servicing
mortgages for whom the beneficial lenders are someone else.
There seemed to be a lot of conflicts or potential conflicts in
all the various roles involved in securitization. At the very
least, the interests of the various parties are not identical.
Even if it is not always possible to tell exactly how the
conflict would play out, the servicer versus the beneficial
owners, the investors, who hold the mortgage-backed securities,
the trustees, the securitizers or sponsors, whatever the
current terminology is. There seems to be a great many
potential conflicts there.
What is the advantage? Why should a servicer be an
affiliate of a larger financial institution? Why should a
trustee be an affiliate of a larger--if they are going to be
the ones who control the information that the investors, the
people to whom they owe a fiduciary duty, must depend upon
information about whether they have a put-back claim against
the securitizer, the lender, what sense does it make for them
to be an affiliate of the company that may be the defendant in
that lawsuit? What advantage?
You heard Wells' representative earlier say that they like
to be a full service company, but do you see any advantages in
having the same firms play all those roles?
Mr. Levitin?
Mr. Levitin. Sure. There are several reasons, and I don't
want to represent that these are necessarily all of them. This
is just what comes to mind.
The first is that servicing is a countercyclical business
to loan origination, that when loan originations are down that
means refinancings are down which increases the value of
servicing rights. So that is a very good reason to combine
servicing with an origination practice.
Secondly, it doesn't necessarily mean you have to service
third-party loans. The second thing is to service--keeping
servicing secure when you securitize loans, but to keep a
pretty good revenue stream while moving the credit risk onto
someone else's books.
Another reason is that mortgage servicing rights are very
useful to banks as a way to smooth out earnings. Servicing
rights are very difficult to value, and, therefore, they are
quite easy to manipulate. So if a bank wants to increase
earnings in one quarter, it can basically increase the
multiples that it uses to calculate its servicing rights or
vice versa.
And, finally, there is an aspect of keeping a customer
relationship. That the bank may want to have further dealings,
often refinancing the homeowner. That was one thing we saw
during the housing bubble, was we make you a loan and we are
going to try and refinance you 3 months later and get fees on
that. And keeping that relationship I think is one reason that
servicing is often retained.
Mr. Miller of North Carolina. Not all those reasons sound
like wholesome reasons that we should encourage.
Mr. Levitin. They are not, especially mortgage servicing
right valuation. If you look at bank failures, quite often
there are vastly overvalued mortgage servicing rights on those
banks' books.
Mr. Miller of North Carolina. Ms. Gordon, do you see any--
what advantages do you see in allowing servicers to be
affiliated with companies doing other things than
securitization, most notably the securitizers themselves?
Ms. Gordon. I agree with Professor Levitin about the
reasons, and I do think that customer relationship is
important. It is also--in some instances in this environment we
are seeing a usefulness in that certain investors may be
unwilling to come down on the company for its servicing when it
is depending on them for originations.
What is missing in all of this is that in this business
relationship, unlike many other relationships, such as the
origination relationship, calling the homeowner the customer is
a little bit misleading. The homeowner does not have the
ability to switch servicers if they don't like their servicer.
So that is kind of a fundamental problem with using any kind of
market analysis here. The customers are just captive. And,
again, because this is the home loan which they have no rights
in bankruptcy court and there are very little other particular
powers, they are disadvantaged vis-a-vis all of the other
stakeholders.
Mr. Miller of North Carolina. Professor Levitin, I notice
you are also counsel to the Congressional Oversight Panel. It
is striking how much we are groping in the dark for information
about this, just as we were for the couple of years before the
financial crisis, about how big a deal subprime mortgages and
foreclosures really were going to be. The industry was telling
us it was nothing to worry about, it was a mild hiccup. And now
we are still trying to figure out 2 years later just how big a
deal this is. How big a deal are the documentation issues and
requirements in the pooling servicing agreements, the PSAs, and
the put-back liability that may result from not having the
documents required by the PSAs. And it again appears that the
information is controlled by a party that has some motive to
conceal information if it points to insolvency or significant
solvency issues for themselves or for an affiliate.
Is it a problem with systemic risk or identifying systemic
risk that the trustees and the servicers are affiliates of the
securitizers of the biggest banks?
Mr. Levitin. It certainly is. And there is a ``Groundhog
Day'' aspect of this hearing that we are facing the same issues
we have been facing for the last 4 years in dealing with
foreclosures. And it seems like servicers come up and say, look
at all the modifications we have made, even though I think they
often double count, the same loan might get multiple
modifications. But here we are. Every year we have another set
of hearings, and we can add another 2 million foreclosure sales
to the count.
I think there is a real problem, information problem, as
you identify, that the information that we need to evaluate
modification programs, to evaluate chain of title issues and so
forth is all in the hands of the servicers who are not going to
reveal any of it voluntarily. There is virtually no oversight
of servicers.
When you hear that there is a trustee, that is not like a
trustee for a child's college fund. These are corporate
trustees who have very, very narrow contractual duties and no
others. They are not general fiduciaries, and they are paid
almost nothing, and they have no incentive to look for trouble,
not least because they often have very close business
relationships with the servicers.
So we have a situation where we are not going to get the
information unless Federal regulators go after it, and there is
the problem. And here I very much agree with Professor Sanders.
Federal regulators don't want to get this information. They
don't want to see if there is a problem because they are too
scared that if there is a problem they are going to have to do
something about it. And that is rather disturbing. But,
basically, this is, let's stick our head in the sand and hope
there isn't a problem. Because the prime directive coming out
of Treasury is protect the banks. Don't let anything happen
that will prevent the banks from kind of recognizing their
losses over retained earnings over the next decade. And,
unfortunately, I am not sure that is a strategy that is really
good for the U.S. economy as a whole.
Mr. Miller of North Carolina. One of the lessons of the
financial crisis is that it is better to recognize problems
sooner than later. Thank you.
Chairwoman Waters. I would like to thank the members who
came back and stayed with the committee. I know that a lot of
our members are rushing out to get to those airplanes and to
get out of here, but I really appreciate your interest in the
time that you have put in.
I would really like to thank the panel. You have been here
for a long time. You have been very patient. You have been very
helpful to us. We recognize that a lot more has to be done, but
we want to thank you for looking at what we are attempting to
do with loss mitigation work and demanding our legislating,
attempting to legislate the work of the servicers.
One of the things that we are finding out that has happened
in this industry is, whether you are talking about servicers or
MERS, all of these ancillary type businesses popped up with no
regulation, and we don't know a lot about them and how they
operate, and we keep finding out more and more and more. So not
only do I appreciate the attention you have given us already,
we are going to call on you to help us as we try and figure
this out and make it right for our homeowners.
So thank you all again so very much.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
Before we adjourn, the written statements of the following
organization will be made a part of the record of this meeting:
The Council of State Bank Supervisors.
This hearing is now adjourned. Thank you all very much.
[Whereupon, at 3:05 p.m., the hearing was adjourned.]
A P P E N D I X
November 18, 2010
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