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

                     ROBO-SIGNING, CHAIN OF TITLE,


                         IN MORTGAGE SERVICING



                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                           NOVEMBER 18, 2010


       Printed for the use of the Committee on Financial Services

                           Serial No. 111-166

63-124                    WASHINGTON : 2011
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                 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
WM. LACY CLAY, Missouri                  Virginia
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
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

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

                 MAXINE WATERS, California, Chairwoman

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

                            C O N T E N T S

Hearing held on:
    November 18, 2010............................................     1
    November 18, 2010............................................    75

                      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


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,


                         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 
    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 
    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 
    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 
    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.


    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 
    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 
    [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.


    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.


    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 
    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 
    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 
    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 
    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.


    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 
    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.

                     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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    Mr. Stevens. That is correct; specific cases, those 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Walsh. I don't believe that there have been any public 
actions against them.
    Chairwoman Waters. Have you threatened to revoke any 
    Mr. Walsh. No.
    Chairwoman Waters. Do you think the servicers really 
believe that you mean business if they don't have to fear any 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    We will start with you, Ms. Mairone.

                     OF AMERICA HOME LOANS

    Ms. Mairone. Thank you, Chairwoman Waters, and members of 
the subcommittee. Thank you for the opportunity to testify 
    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 
    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 
    Here are just a few of the things we are doing based on 
feedback from you and our customers as well as other 
    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.

                         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 
    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 
    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.

                   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 
    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.

                    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    [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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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.


    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 
    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/
    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 
    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 
    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.

                      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 
    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 
    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 
    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.
    Chairwoman Waters. We will now resume the hearing.

                    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.


    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 
    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 
    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 
    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