[Senate Hearing 111-317]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-317

 
   PRESERVING HOME OWNERSHIP: PROGRESS NEEDED TO PREVENT FORECLOSURES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE STATE OF THE HOUSING MARKET AND THE FEDERAL GOVERNMENT'S 
                    EFFORTS TO PREVENT FORECLOSURES

                               __________

                             JULY 16, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

        William D. Duhnke, Republican Staff Director and Counsel

               Jonathan Miller, Professional Staff Member

                    Deborah Katz, Legislative Fellow

                Mark Oesterle, Republican Chief Counsel

                    Jim Johnson, Republican Counsel

              Michael Passante, Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 16, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1
    Prepared statement...........................................    59
Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................     3
        Prepared statement.......................................    60
    Senator Johnson..............................................    60

                               WITNESSES

Herbert M. Allison, Jr., Assistant Secretary for Financial 
  Stability, Department of the Treasury..........................     5
    Prepared statement...........................................    61
    Responses to written questions of:
        Chaiman Dodd.............................................   250
        Senator Johnson..........................................   250
        Senator Corker...........................................   252
William Apgar, Senior Advisor to the Secretary for Mortgage 
  Finance, Department of Housing and Urban Development...........     8
    Prepared statement...........................................    65
    Responses to written questions of:
        Senator Johnson..........................................   252
Thomas Perretta, Consumer, State of Connecticut..................    41
    Prepared statement...........................................    69
Joan Carty, President and CEO, The Housing Development Fund, 
  Bridgeport, Connecticut........................................    43
    Prepared statement...........................................    70
    Response to written question of:
        Senator Shelby...........................................   255
Paul S. Willen, Senior Economist and Policy Advisor, Federal 
  Reserve Bank of Boston.........................................    44
    Prepared statement...........................................    73
    Responses to written questions of:
        Senator Shelby...........................................   255
Mary Coffin, Head of Mortgage Servicing, Wells Fargo.............    46
    Prepared statement...........................................   192
    Responses to written questions of:
        Senator Shelby...........................................   260
        Senators Corker and Vitter...............................   261
Curtis Glovier, Managing Director, Fortress Investment Group, on 
  behalf of the Mortgage Investors Group Coalition...............    48
    Prepared statement...........................................   195
    Responses to written questions of:
        Senator Shelby...........................................   262
Allen H. Jones, Default Management Policy Executive, Bank of 
  America........................................................    50
    Prepared statement...........................................   198
    Responses to written questions of:
        Senator Shelby...........................................   263
        Senators Corker and Vitter...............................   264
Diane E. Thompson, of Counsel, National Consumer Law Center, also 
  on behalf of National Association of Consumer Advocates........    51
    Prepared statement...........................................   202

                                 (iii)


   PRESERVING HOME OWNERSHIP: PROGRESS NEEDED TO PREVENT FORECLOSURES

                              ----------                              


                        THURSDAY, JULY 16, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee convened, pursuant to notice, at 9:34 a.m., 
in room 538, Dirksen Senate Office Building, Senator 
Christopher J. Dodd, Chairman of the Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. We gather 
here this morning to have a hearing on ``Preserving Home 
Ownership: Progress Needed to Prevent Foreclosures.''
    It is almost like Groundhog Day. One of the very first 
hearings I held 2 years ago with my friend Richard Shelby was 
on this very subject matter, back in February of 2007----
    Senator Shelby. Two-and-a-half years.
    Chairman Dodd.----two-and-a-half years ago now, and we had, 
I don't know the exact number, something like 30 hearings and 
so forth, a whole series of meetings we conducted over that 
period of time to try and convince people how serious the 
foreclosure issue would be. And here we are, two-and-a-half 
years later, back at the subject matter.
    So I am glad all of us could be here today. I am 
particularly thankful for our witnesses. But I have to be 
honest with everyone who is here this morning. I am 
frustrated--that is a mild word to use--that we even have to 
hold this hearing at all. This is disgraceful, where we are 
two-and-a-half years later.
    For over 2 years, this Committee has worked to stem the 
tide of foreclosures in America, Democrats and Republicans, 
both in the Committee, other committees have obviously been 
involved in it, as well. We have heard plans and proposals from 
the administration. We have passed legislation. Many changes 
have been asked of us and we have passed even more legislation. 
We have received assurance after assurance from the industry. 
Everyone agrees that the crisis in our mortgage market was the 
catalyst for the broader economic crisis. There were other 
factors, obviously, but it was the major catalyst, and everyone 
understands that getting out of this broader crisis requires 
that we stabilize our housing market and stem the tide of 
foreclosures in our country.
    So I am hoping that with the stakes this high, somebody can 
begin to explain to us why nothing has changed over the last 
two-and-a-half years.
    Today, the Associated Press is reporting, I quote, ``The 
number of U.S. households on the verge of losing their homes 
soared by nearly 15 percent in the first half of the year as 
more people lost their jobs and were unable to pay their 
monthly mortgage bills. Over 336,000 households received at 
least one foreclosure notice in June.''
    Why am I still reading about lost files, understaffed and 
undertrained services and hours spent on hold on the telephone? 
Why does the National Foreclosure Mitigation Program tell us 
that homeowners are waiting an average of 6 to 8 weeks--6 to 8 
weeks--for a response? Why are we still reading stories about 
homeowners, community advocates, even our own staffs acting on 
behalf of constituents, shuffled from voice mail to voice mail 
to voice mail to voice mail as they attempt to help people stay 
in their homes? Why are servicers and lenders refusing to 
accept principal reduction so that homeowners can start 
building equity and get the housing market moving again?
    Two years ago, I brought together in this very room banks, 
lenders, mortgage firms, regulators, consumer groups for a home 
owner or home ownership preservation gathering summit. We all 
agreed upon a statement of principles, which were the 
following.
    First--and these were everyone agreeing to this. This 
wasn't something being opposed. There were a number of days 
meeting to determine what these principles ought to be. First, 
that services should attempt to contact subprime borrowers 
before loans reset in order to identify likely defaults early 
enough for the loan to be modified. Second, modifications 
should be made affordable for the long term. And third, 
servicers should have dedicated teams of professionals to 
implement these modifications. And finally, we agreed that we 
needed real accountability, a system for measuring the 
progress.
    We were able to come to this agreement because all of us 
understood that nobody wins, obviously, when a home is 
foreclosed. Nobody wins, obviously, when a bank has to sell a 
house at auction for less than it would get it if simply were 
refinanced. And, of course, no one wins when a home loses at 
least $5,000 in value for every foreclosure on that city block 
or street block. And, of course, no one wins when foreclosure 
rates are the single biggest threat to economic recovery.
    So what has happened over this period of time and what are 
we doing differently? Today, I want some answers. Foreclosure 
is not an abstract concept. It is a very real pain for American 
families. It is not just the loss of a house, it is the loss of 
a home. It is the anguish of having to uproot your family. It 
is the sadness of feeling that you have let them down, that you 
no longer have that place that they can live in. And it is the 
terrible heartache caused by the violation of the sacred 
promise that has long defined the American middle class in our 
country, that if you work hard and play by the rules, that 
together we can build something better for you and your family.
    Most people in foreclosures work hard and play by the 
rules. They budgeted, they saved, they relied on brokers and 
lenders, professionals who are supposed to be experts, to help 
them achieve their dream of home ownership. But then someone 
lost a job. Someone got sick. Fifty percent of the foreclosures 
are caused by health care crisis in that family--50 percent of 
them. So in far too many cases, they discover they simply have 
been cheated, unfortunately.
    Last year, I met a woman named Donna Pierce, a grandmother 
from Bridgeport, Connecticut. By the way, in Bridgeport, 
Connecticut, there are 5,000 families in that city with 
subprime mortgages in danger of foreclosure. Donna was assured 
by her lender that she could refinance in 6 months. But he 
didn't mention the thousands of dollars in penalties that 
refinancing would cost, penalties she could not afford.
    People like Donna Pierce didn't deserve to lose their 
homes. Neither did the 10,000 families that before today ends 
will receive a foreclosure notice in our nation, or the 60,000 
families in my home State of Connecticut who find themselves in 
foreclosure over the next 4 years.
    So I know I speak for all of us here in this Committee, our 
colleagues, not just those on the Committee but others in the 
Senate and the House, people all across the country, when I say 
that I am glad to have the support of the administration and 
the industry in our effort to stem this dangerous tide, but a 
lot more needs to be done. What we don't have is results. So 
today, we sit here again and the American people are demanding 
to know why. So this morning, I hope we are going to get some 
answers.
    I happen to be one that believes that the idea of principal 
reduction makes a lot more sense than interest rate reduction. 
It is all about equity--all about equity. If people can 
increase their equity in a home or have an equity and a chance 
to regain their footing in equity, then it seems to me we can 
do a lot better in this than just sitting here monkeying around 
with interest rates. But that is my point of view. I know 
others have a different point of view on that. But nonetheless, 
that is where I believe we should be going with this, rather 
than the course we are on.
    With that, let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Today, the Committee will examine the state of our housing 
market and the Federal Government's efforts to prevent 
foreclosures in the midst of what is now the most severe 
recession in a generation.
    Problems in our housing market have been center stage since 
the start of this crisis, as Senator Dodd just reminded us. 
Rising default rates on subprime mortgages appear to have 
triggered the financial crisis nearly 2 years ago. Since then, 
default rates on all classes of mortgages have risen sharply 
and the precipitous declines in the value of mortgage-backed 
securities have crippled banks and led to the insolvency of 
Fannie and Freddie. As the economy has continued to worsen, 
millions of Americans have seen the value of their homes fall 
and many have lost or may lose their homes to foreclosure.
    In an effort to forestall unnecessary foreclosures, 
Congress and the Obama administration initially devised several 
programs. Nearly 1 year ago, Congress enacted the Hope for 
Homeowners program. This program aimed to keep homeowners in 
their homes by encouraging lenders and servicers to modify 
mortgages. Unfortunately, this program has only modified a 
handful of mortgages. While recently enacted changes to the 
program may help improve Hope for Homeowners, it is clear that 
the program needs a thorough reexamination.
    In many ways, I believe that this hearing could begin to 
put the horse back in front of the cart by undertaking some of 
the investigative work necessary to properly address the issues 
surrounding the housing market in this country. We have heard 
many theories about the causes of our difficulties. However, my 
hope is that with this hearing, we can bring together 
verifiable facts which will allow us to do our own analysis 
here. Homeowners in need will be better served if we actually 
identify the root causes of foreclosures and craft effective 
solutions rather than simply implementing policies to 
counteract what we think is the problem.
    As the Committee considers how to prevent foreclosures, I 
think we should begin by determining the following. First, and 
probably most important, is the degree to which escalating 
default rates can be attributed to unscrupulous lenders. If 
true predatory lending was as pervasive as some have argued, we 
should be able to easily document that fact. I must say, 
however, aside from anecdotal evidence, I don't think we have 
yet to see such data. I look forward to hearing what the 
administration believes is the reason for the rising default 
rates and what evidence they cite in support of their position.
    The second question we need to ask, I believe, is what is 
working? Unfortunately, existing modification programs have not 
been very effective. It is important to understand why they 
have not been working as expected and if there is anything we 
can or should do in response here.
    Finally, we should determine whether our policies are 
building the foundations for a stable and sustainable housing 
market or if they are merely delaying the inevitable. I have 
long criticized our housing policy for willfully ignoring long-
term financial consequences, especially with respect to the 
GSEs. Sustainable policies must be based on economic realities 
and facts, not wishful thinking.
    I hope today, as the Chairman has indicated, that we can 
begin to establish some of those facts by examining the 
research and experiences of our panelists. To the extent that 
we can clearly determine what caused this crisis, we will then 
be able to address it more effectively and also implement 
policies to avoid future crises.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    We have got a rather large second panel, so with my 
colleagues' indulgence, all of your opening statements will be 
included in the record and the like, and if you want to use 
your time to engage in that, that will be available to you, but 
let me get right to our witnesses, the two first witnesses.
    We are joined here first by two witnesses. Herb Allison is 
the Assistant Secretary for Financial Stability at the U.S. 
Treasury. Assistant Secretary Allison has been a leader in the 
U.S. financial markets, both in the public and private sectors, 
having served in top positions at Freddie Mac, TIAA-CREF, and 
Merrill Lynch.
    William Apgar is the Senior Advisor to the Secretary for 
Mortgage Finance of the Department of Housing and Urban 
Development. Previously, he was the Assistant Secretary for 
Housing. He has served in various positions as a lecturer and 
scholar at the Harvard Kennedy School of Government.
    We appreciate both of you being here this morning and we 
will accept your testimony here. Try and keep it down to five 
or 8 minutes if you can so we can get to the questions.
    Mr. Allison, you are up first.

 STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY FOR 
        FINANCIAL STABILITY, DEPARTMENT OF THE TREASURY

    Mr. Allison. Thank you very much, Mr. Chairman. Chairman 
Dodd, Ranking Member Shelby, and members of the Committee, 
thank you for this opportunity to testify about the Treasury 
Department's comprehensive initiatives to stabilize the U.S. 
housing market and to support homeowners. I will keep my 
remarks brief, as I have provided a more detailed review of the 
program's progress and challenges in my written testimony.
    A strong housing market is crucial to our economic 
recovery. The recent crisis in the housing sector has 
devastated families and communities across the country and is 
at the center of our financial crisis and economic downturn. 
Today, I want to outline the steps that Treasury and the 
administration have taken to address this crisis, help millions 
of homeowners, and lay the foundations for economic recovery 
and financial stability.
    This crisis was years in the making, and as a result, 
millions of homeowners have mortgage payments that they are 
unable to afford. Rising unemployment and recessionary 
pressures have impaired the ability of many otherwise 
responsible families to stay current on their mortgage 
payments. The result is that responsible homeowners across 
America are grappling with the possibility of foreclosure and 
displacement. Many analysts project that more than six million 
families could face foreclosure in the next 3 years if 
effective actions are not taken.
    This administration has moved with great speed to 
aggressively confront the economic challenges facing our 
economy and housing market by announcing and implementing an 
unprecedented mortgage modification program.
    Chairman Dodd. Mr. Allison, would you mind moving your 
microphone a little closer to you so we can hear you better? 
Thank you.
    Mr. Allison. Thank you. An initiative of this scale has 
never been previously attempted. On March 4, just 2 weeks after 
the President announced the program, the administration, 
working with the banking regulators, Fannie Mae and Freddie 
Mac, HUD, and the Federal Housing Finance Agency, published 
detailed program guidelines for MHA's Home Affordable 
Modification Program, or HAMP.
    On April 6, we issued detailed servicer guidance. Today, we 
have 27 servicers lined up to participate in MHA. Between loans 
covered by those servicers, as well as Fannie Mae and Freddie 
Mac, more than 85 percent of all mortgage loans in the country 
are now covered by the program.
    The initiatives include three key components. First, 
support for the Government Sponsored Enterprises, or GSEs. We 
have committed an additional $200 billion of capital to Fannie 
Mae and Freddie Mac to encourage low mortgage rates and help 
maintain mortgage affordability.
    Second, the Home Affordable Refinance Program, or HARP, 
expands access to refinancing for families whose homes have 
lost value and whose mortgage payments can be reduced at 
today's low interest rates. It helps homeowners who are unable 
to benefit from the low interest rates available today because 
price declines have left them with insufficient equity in their 
homes. We have recently expanded the program to help homeowners 
with mortgages up to 125 percent of current home value.
    Third, the Home Affordable Modification Program, or HAMP, 
which will provide up to $75 billion to encourage loan 
modifications that will provide sustainable, affordable 
mortgage payments for borrowers. Importantly, HAMP offers 
incentives to investors, lenders, servicers, and homeowners to 
encourage mortgage modifications.
    We have recently announced details of additional HAMP 
program features, including a second lien program, that can 
provide a more affordable solution for borrowers by addressing 
their total mortgage debt; measures to strengthen the Hope for 
Homeowners Program, which provides additional relief for 
borrowers with mortgage balances greater than the current value 
of their homes; a foreclosure alternatives program that will 
provide incentives for short sales and deeds in lieu of 
foreclosure, where borrowers are unable to complete the 
modification process; home price decline protection incentives 
that will encourage more modifications where home price 
declines have been severe.
    Today, I want to highlight some key points of success. 
Three-hundred-twenty-five thousand trial modifications have 
been offered under HAMP. Approximately 160 trial modifications 
are now underway, and that number is growing every week. While 
this number is not yet audited, we believe it is reasonably 
accurate, based on our discussions with the GSEs who administer 
the program. As servicers adjust their systems and new 
reporting capabilities become operational, we will continue to 
improve the accuracy and robustness of the data that we provide 
to you.
    At this early data, MHA has already been more successful 
than any previous similar program in modifying mortgages for 
at-risk borrowers to sustainably affordable levels and helping 
to avoid preventable foreclosures. Nonetheless, we recognize 
that challenges remain in implementing and scaling up the 
program. We are committed to overcoming those challenges and 
reaching as many borrowers as possible.
    In particular, we are focused on addressing challenges in 
three key areas: Capacity, transparency, and borrower outreach. 
We are taking a number of steps and working with servicers to 
expand nationwide capacity to accommodate the number of 
eligible borrowers who can receive assistance through MHA.
    Just last week as part of the Administration's efforts to 
expedite implementation of HAMP, Secretaries Geithner and 
Donovan wrote to the CEOs of all the servicers currently 
participating in the program. In this joint letter, they call 
on the servicers to devote substantially more resources to the 
program in order for it to fully succeed. They ask that all 
servicers move rapidly to expand servicing capacity and improve 
the quality of loan modifications.
    Specifically, this will require that servicers add more 
staff than previously planned, expand call center capacities, 
bolster training of representatives, enhance online offerings, 
send additional mailings to potentially eligible borrowers, and 
provide a process for borrowers to escalate their concerns 
about services' performance. The joint letter also requested 
that each CEO designate a senior liaison to attend a program 
implementation meeting with senior HUD and Treasury officials 
on July 28 to work directly with us in all aspects of MHA.
    As Secretary Geithner has noted, we are committed to 
transparency and better communications in all of Treasury's 
programs. Accordingly, we are planning to take three additional 
concrete steps in conjunction with the servicer liaison meeting 
to enhance transparency in the program.
    First, by August 4, we will begin publicly reporting 
servicers' specific results on a monthly basis. These reports 
will provide a transparent and public accounting of individual 
servicer performance by detailing the number of trial 
modification offers extended, the number of trial modifications 
underway, the number of official modifications offered, and the 
long-term success of modifications.
    Second, we will work to establish specific operational 
metrics to measure the performance of each servicer.
    Third, in order to minimize the likelihood that borrower 
applications are overlooked or that applications are 
inadvertently denied a modification, Treasury has also asked 
Freddie Mac in its role as compliant agent to develop a second 
look process for auditing a sample of MHA modification 
applications that have been denied.
    These additional measures will complement the steps we have 
already taken to increase transparency, such as expanding the 
efforts of the Federal Government to combat mortgage rescue 
fraud and put scammers on notice that we will not stand by if 
they prey on homeowners seeking help under the program.
    The third challenge we are tackling aggressively is 
borrower outreach. We are committing significant resources, in 
partnership with the servicers, to reach and inform as many 
borrowers as possible. We have already launched a consumer-
focused website, www.makinghomeaffordable.gov, with self-
assessment tools for borrowers to determine their potential 
eligibility for the MHA program. This website is in both 
English and Spanish and has already received over 22 million 
page views.
    We have established a call center where borrowers can reach 
HUD for approved housing counselors who can provide information 
and assistance in applying for the MHA program.
    And working closely with Fannie Mae, we have also launched 
foreclosure prevention workshops and borrower education events 
in areas of the country facing high foreclosure rates. The 
first outreach event was held in Miami and another is taking 
place today in Sacramento.
    Much more must be done. We will continue to work with other 
agencies and the private sector to reach as many families as 
possible.
    Finally, we recognize that any program seeking to avoid 
preventable foreclosures has limits, HAMP included. As 
President Obama noted when he launched the program in February, 
this program will not save every home. Even before the current 
crisis, when home prices were declining, there were hundreds of 
thousands of foreclosures a year. Therefore, even if HAMP meets 
our ambitious goals, we should still expect millions of 
foreclosures over the next several years. Some of those 
foreclosures will affect borrowers who, as investors, do not 
qualify for the program. Others will be borrowers who did not 
respond to our outreach, and others will be borrowers who 
bought homes well beyond what they could afford and would be 
unable to make their monthly payment even on a modified loan.
    Nevertheless, for millions of homeowners, HAMP will provide 
a crucial opportunity to stay in their homes. It will bring 
relief to the communities hardest hit by foreclosures. It will 
provide peace of mind to families who have barely managed to 
stay current in their mortgages, who have recently fallen 
behind in their payments. It will help stabilize home prices 
for all American homeowners, and in doing so aid the recovery 
of the U.S. economy.
    In less than 5 months, including the initial start-up 
phase, the Making Home Affordable Plan has accomplished a great 
deal and helped homeowners across the country. But we know that 
more is required to help American families during this crisis, 
so we will work tirelessly to build on these efforts.
    Sustained recovery of our housing market is vital to 
achieving financial stability and promoting a broad economic 
recovery. We look forward to working with you to help Americans 
stay in their homes, to restore stability in the U.S. housing 
market and grow the U.S. economy.
    Thank you very much, and I look forward to your questions.
    Chairman Dodd. Thank you.
    Mr. Apgar, go ahead.

STATEMENT OF WILLIAM APGAR, SENIOR ADVISOR TO THE SECRETARY FOR 
 MORTGAGE FINANCE, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Apgar. Chairman Dodd, Ranking Member Shelby, members of 
the Committee, thank you for the opportunity to testify.
    Secretary Allison has already provided you with a summary 
of the Making Home Affordable Program. I will focus my comments 
on the implementation of the Hope for Homeowners Program and 
others administration efforts to provide relief to homeowners 
and neighborhoods suffering from the effects of the foreclosure 
crisis.
    First of all, I want to commend Chairman Dodd and the other 
members of the Committee for your leadership in passing the 
Helping Families Save their Homes Act of 2009, signed into law 
by President Obama on May 20 of this year. This legislation 
makes important and much needed improvements to the Hope for 
Homeowners Program that we are now implementing.
    Due to several obstacles to participation, including steep 
borrower fees, costs, complex program requirements, and lack of 
operational flexibility in program design, the original Hope 
for Homeowners Program only served a handful of distressed 
owners. These legislative improvements that were enacted this 
year, combined with the integration of Hope for Homeowners into 
the Administration's Making Home Affordable Program, will help 
the program, Hope for Homeowners, become a less burdensome 
option for underwater borrowers who are seeking to refinance 
their home and regain equity in their home.
    Services participating in the Making Home Affordable 
Program will be required to offer the option for Hope for 
Homeowners refinancing in tandem with a Making Home Affordable 
modification. To ensure proper alignment of incentives, 
servicers and lenders will receive payments in the Hope for 
Homeowners refinancing option similar to those offered to the 
modification option. Though the Hope for Homeowners Program 
offers substantial benefits to underwater borrowers best served 
by an increase in equity position in their homes, treatment of 
second liens poses significant challenges to the implementation 
of the program.
    First, the presence of a second lien complicates the 
execution of a mortgage refinance program even under the best 
of circumstances. Since second liens tend to be held in the 
portfolio by several of the Nation's largest banking 
institutions while first liens are owned by a wider range of 
investors, coordinated communication and decisionmaking between 
these two separate financial interests can be logistically 
complex.
    Equally challenging is the determination of a fair 
allocation of payments to each of these two distinct investment 
interests. As you know, the basic program requires first lien 
investors to take a significant write-down in order to restore 
the borrower to an affordable mortgage with a meaningful level 
of equity in their home. Though initially resistant to the 
program, many first lien investors under the concept of one 
loss, one time, appear increasingly willing to accept the 
required haircut and execute a clean exit from the transaction.
    Unfortunately, the calculation of second lien-holders is 
more complex. Even in situations where the combined LTVs of the 
first and second liens exceed the market value of the home, 
second liens may have some value. In particular, 
representatives of banking institutions that hold sizable 
numbers of second liens on their portfolios report that in some 
situations, borrowers who are delinquent on their first lien 
continue to make payments on their second lien, providing some 
measure of benefit to second lien holders. Of course, where the 
first lien is underwater, once the property moves to 
foreclosure, the second lien is worthless.
    In light of these complex and often conflicting interests, 
determining the fair compensation system for holders of second 
liens is difficult. In this regard, the July 10 letter to the 
heads of five bank regulators jointly signed by you, Chairman 
Dodd, and House Financial Services Committee Chairman Frank, is 
illustrative. In assessing methods used to estimate the value 
of second liens held on the balance sheet of the Nation's 
largest bank, the letter expressed concern that loss allowance 
associated with these subordinated liens may be insufficient to 
realistically and accurately reflect their value, especially in 
light of the historically poor performance of first lien 
mortgages and the seriously diminished value of the underlying 
collateral. The letter goes on to observe that in situations 
where banks are allowed to carry these loans at potentially 
inflated value, they may be reluctant to negotiate the 
disposition of these liens and thus stand in the way of an 
increasing participation in Hope for Homeowners.
    To better understand these issues, HUD and Treasury are now 
working with the OCC and other regulators that supervise the 
activities of large national banking institutions that hold in 
portfolio the largest share of second liens. We hope these 
conversations will draw on the considerable expertise of the 
OCC and other regulators to help HUD craft an extinguishment 
schedule that will provide fair compensation to the holders of 
these second liens.
    Finally, HUD and the Administration are also working to 
implement several other initiatives to expand the reach of 
foreclosures throughout the country. These efforts are 
described in my written testimony and I would be happy to 
discuss them more at length during the question and answer 
period.
    In conclusion, once again, I would like to thank you for 
the opportunity to participate in the hearing and I am happy to 
answer any questions that you may have. Thank you.
    Chairman Dodd. Thank you very much, both of you. I 
appreciate your being here.
    Obviously, there is a lot of frustration in these numbers 
we hear this morning. We add to it, despite all of the efforts 
we have all made up here trying to put together something that 
works for people, and obviously we understand that not everyone 
you are going to be able to keep in their homes. I want to 
raise the issue with you about the principal reduction versus 
the payment reduction approach.
    But I think it is also important to point out that at some 
point, we need to come to conclusions about these. There are 
people we can help. There are people we cannot help. And when 
those issues arise, when you can't solve that problem, it seems 
to me then it is better to get that property up, get it 
auctioned off, and get it moving.
    I was listening to some people in my State not long ago who 
are in the real estate business who when they have had--they 
are not selling a lot of new homes, and in fact, some of the 
sales are foreclosure sales. And when there is a foreclosure 
sale, people show up to acquire the property. So striking that 
balance between trying to help out people we can, and as you 
point out in your testimony, Mr. Allison, there are some 
situations where we just cannot work it out despite the 
efforts, but you ought to make the effort, it seems to me, and 
then make that conclusion, and if that conclusion is the one 
that something can't be done, then to move the property along, 
as well.
    But let me get to the first issue, because----
    [Telephone ringing.]
    Chairman Dodd. I suspect that is my 7-year-old daughter. I 
will put that down. Hold on. I apologize for that.
    Let me ask you the question about the principal reduction 
versus the payment affordability approach which the 
Administration is taking. Others, including the Federal Reserve 
and others, have argued for the principal reduction approach. 
Now, you point out, Mr. Apgar, that the second mortgage issue 
raises issues, and I want to get to that in a minute. But which 
of those two approaches do you believe, Mr. Allison, is a 
better approach in terms of achieving the kind of outcomes we 
are looking for here and why are we not then moving on the 
principal reduction idea if, in fact, there is a better outcome 
there?
    Mr. Allison. Well, we actually are now offering----
    Chairman Dodd. You have got to get your microphone on and 
speak right into it.
    Mr. Allison. We actually, Senator, now are offering the 
Hope for Homeowners, which is a principal reduction program----
    Chairman Dodd. Right.
    Mr. Allison.----alongside the modifications, and it is 
important, first of all, to make home ownership affordable. And 
in solving for affordability, we are looking at each homeowner, 
that is the servicers are, and what they can afford to pay. 
There are incentives for both the servicer to modify a loan to 
an affordable level and for the homeowner then to make the 
payments on that modified mortgage loan.
    Chairman Dodd. So you agree that the principal reduction is 
the better way to go now?
    Mr. Allison. I believe that both ought to be looked at and 
both can be important. What is most important is to make the 
home affordable now. So the servicer is going to be looking at 
whatever method seems to work best for each individual 
homeowner.
    Chairman Dodd. How do you feel about this, Mr. Apgar? What 
do you think is the better approach?
    Mr. Apgar. I think that the evidence suggests that 
affordability is the key problem that homeowners face, that if 
you are able to get their mortgage payments down to some 
appropriate share of their income--31 percent of DTI is what we 
use in the program--that is the best way to help them 
maintain----
    Chairman Dodd. Well, I want them to get a better equity 
position in that home. If their equity position isn't going to 
improve, how are you going to convince that person to sort of 
stay, in effect?
    Mr. Apgar. I also understand that folks are deeply 
underwater, or underwater at all and need some additional help, 
and that is where the Hope for Homeowners feature comes in. So 
again, getting affordability, I think that is the lesson that 
the FDIC experience demonstrated, that by achieving that 31 
percent DTI, they could stabilize the family, avoid re-default, 
and help a large number of people, while at the same time we 
work on working to extinguish the overhang for people that are 
underwater. That is the Hope for Homeowners promise.
    Chairman Dodd. Do you also believe that if there is nothing 
that can be done for people, that we ought to then try to move 
that property? I mean, that is what I mentioned earlier, 
reaching a decision--some system in place where you arrive at a 
conclusion here. It seems to me we are sort of drifting.
    Mr. Apgar. Well----
    Chairman Dodd. Weeks go by and there is no resolution. 
There is no conclusion as to whether or not that situation can 
be resolved and the other one cannot, and then deciding on a 
course of action.
    Mr. Allison. Senator, we are going to be beginning to 
disclose on a servicer-by-servicer basis their performance, 
both how rapidly they are resolving issues on behalf of 
homeowners and how many modifications they are making. And we 
think that that type of disclosure, servicer by servicer, will 
be important to spurring greater activity on their part.
    Chairman Dodd. Let me get to the second mortgage issue. A 
witness on the second panel, an economist from the Federal 
Reserve in Boston, acknowledges that lenders have not been 
doing modifications over the past months and the modifications 
they have done have more often resulted in increased monthly 
payments. No surprise, then, that the re-default rates in those 
cases are very high. That is not a terribly enlightening 
statement, for obvious reasons.
    The homeowner can't afford the original payment. It is hard 
to see how they would be able to afford an even higher payment. 
This is consistent with findings by many other researchers, by 
the way, not just the Federal Reserve in Boston, including 
those at the Federal regulatory agencies.
    Mr. Willen, the witness I am talking about, goes on to 
argue that the reason that lenders aren't doing more 
modifications is because it is--his quote, ``it is simply 
unprofitable for them to do so.'' What is your view of this 
conclusion? Do you agree with Mr. Willen? Mr. Allison?
    Mr. Allison. Chairman Dodd, that information--I believe 
that study was based on past modification efforts. This one is 
substantially different. This one is geared to major reductions 
in the payments that homeowners are making. As you correctly 
pointed out, many of those prior modifications actually 
resulted in higher payments because the foregone previous 
payments were built into the future mortgage payments.
    This approach is the first large-scale modification effort 
where homeowners will see their monthly payments in many cases 
dramatically reduced So I would submit that the past data, 
while accurate for those past efforts, does not really apply to 
the program that we are undertaking today.
    Chairman Dodd. Well, I hope so. That just doesn't make any 
sense at all.
    Mr. Allison. Right.
    Chairman Dodd. My staff has been briefed regarding the 
errors in the Home Affordability Mortgage Program, the so-
called HAMP program, situations where people have been turned 
away, where upon a second look it turns out that they have been 
offered a modification. These errors are not uncommon, I am 
told. Why don't you make the elements that go into the 
modification decision, all the software, the net present value 
test, and the like public so that the foreclosure counselors 
can make sure people are treated fairly across the spectrum?
    That would make people like Joan Carty, by the way, who we 
are going to hear from on the second panel, who I would hope--
by the way, she is here in town for the day. She is a 
professional. She does an incredible job in Bridgeport, 
Connecticut, for us, really knows these issues. And I asked 
Joan. She says, ``I need a system. I need a reliable, 
predictable system.'' This is someone on the ground dealing 
with a massive amount of problems, and the sense is there is no 
system. There is nothing predictable and reliable about it.
    And when you have got people like Joan Carty out there who 
are feeling frustrated, who are dealing with these issues every 
day, not feeling confident about a system in place where you 
get answers, and so why don't we make this stuff public so we 
have more transparency?
    Mr. Allison. Mr. Chairman, let me address that in several 
ways. First of all, we will be working with the servicers to 
develop escalation procedures so that when homeowners believe 
that there is an unnecessary delay or they have a complaint 
about the way that their mortgage is being addressed, they can 
escalate that complaint to higher levels within the servicer. 
We also have the Hope Now website which has escalation 
procedures. Or they can go on the Fannie Mae or Freddie Mac 
websites.
    Also, as part of this program, Freddie Mac will audit the 
mortgage modifications to make sure, first of all, that people 
who are qualified for a modification are able to get one, and 
second, to make sure that we aren't producing modifications for 
those who are not qualified and also looking at people who have 
been foreclosed on to see whether they would have qualified for 
this and some redress should be made.
    Chairman Dodd. I would hope, Mr. Allison, it might even 
today at some point--I haven't asked her to do this, or you, 
but people like Joan and others, that you might spend a little 
time and hear what they are going through on the ground. It 
isn't just this woman in my State, there are people like her 
all across the country--and listen to them as to what they 
need, because they are the ones literally struggling every day 
to try and come to conclusions on some of these issues. So I 
think it would be really worthwhile to listen to people every 
day who are struggling with these systems and have to make them 
work.
    Last and very quickly, because I want to turn to my 
colleagues, is the issue on the second mortgage. Many of the 
big servicers agree to take some reasonable payouts for the 
second mortgage. They hold as the primary obstacle the use of 
the Hope for Homeowners program. You point out, as has been 
mentioned here already, the value of the home isn't even 
sufficient to cover the first mortgage, much less the second. 
Mr. Glovier in his testimony later this morning will point out 
that only 3 percent of second mortgages are current where the 
first mortgage is in a delinquency.
    Shouldn't such loans be sold for pennies on the dollar, in 
many ways it seems to me? What has been your experience with 
this? Are the lenders being reasonable? And if so, what can we 
do to extinguish these loans? That is the major blocking point 
in a lot of these areas, as you point out, Mr. Apgar. What, if 
anything, can be done? Can we do anything? Is there anything 
that Congress needs to do to try and deal with this problem of 
the second mortgage issue, if that is the major obstacle? Can 
you give me a quick answer on this?
    Mr. Apgar. Well, the key is offering fair loans and sorting 
out--fair offers and sorting out the instance where there is 
some value to the second liens and recognizing that and paying 
fair compensation, while not overpaying by not recognizing as a 
fact that many of these loans are deeply in distress and have 
limited economic value. As I mentioned, we are working with OCC 
and others with the Treasury team to come up with a fair 
compensation system. We have received maybe the initial Hope 
for Homeowners Program maybe didn't offer enough, especially in 
those cases where there was economic value, and got in the way 
of us moving forward on a wide range, recognizing the fact that 
in many instances it is pennies on the dollar is the right 
answer of what to pay for these second liens.
    Mr. Allison. Mr. Chairman, to add to Mr. Apgar's answer, as 
part of the new second lien program that we are rolling out, we 
have already signed up the five banks that together account for 
over 80 percent of the second liens. So they are pledging to 
work to solve for affordability of the second lien alongside 
the modification of the first lien, and we think this will go a 
long way to assure greater affordability for many more 
homeowners.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Steps to combat fraud--it is my understanding that the 
Special Inspector General for the Troubled Asset Relief Program 
made a number of recommendations to Treasury to address 
concerns about vulnerabilities in the Home Affordable 
Modification Program Senator Dodd was talking about, the HAMP. 
Among these recommendations were requiring third-party verified 
evidence that the applicant is residing in the subject 
property, requiring notarized signatures and a thumbprint of 
each participant, and mandatory collection, copying, and 
retention of copies of identification documents of all 
participants in the transaction at closing.
    Secretary Allison, what actions has the Department taken to 
address these specific recommendations? Additionally, describe 
broader efforts that Treasury is taking to prevent fraud in 
this program.
    Mr. Allison. Yes, sir. Senator, thank you for your 
question. It is a very important issue, making sure that in 
this program, where we are going to be spending a sizable 
amount of taxpayers' dollars, we are protecting the taxpayer, 
as well.
    That is one reason why we have been taking quite a bit of 
time and effort to make sure that we have fraud prevention 
built into this program by requiring appropriate verification 
and also why we have appointed Freddie Mac to audit this 
program, to look for signs of mortgage fraud. We have also been 
working with agencies across the government to assure 
enforcement. Where we find fraud, we are going to enforce the 
laws and the rules of the mortgages to the greatest extent 
possible.
    Senator Shelby. Mr. Apgar, since Hope for Homeowners was 
created last year by the Congress, the program, it is my 
understanding, has only refinanced one mortgage--one. Clearly, 
this is a regrettable policy failure. While recently enacted 
changes to the program will hopefully improve its success rate, 
it appears that the Hope for Homeowners will help far fewer 
borrowers than the hundreds of thousands that the program 
sought to help. Why has Hope for Homeowners not been more 
effective? In other words, why the failure?
    Mr. Apgar. Well, as I mentioned, the original formulation 
had complex servicer requirements that weren't standard to the 
industry and many servicers did not feel it was appropriate 
to----
    Senator Shelby. Explain what you mean.
    Mr. Apgar. Requiring additional borrower certifications. A 
particular instance was the servicer was required to verify 
that the borrower had not committed mortgage fraud for the last 
10 years. Many servicers said that they didn't have the 
capacity to verify that, and so in reform of the program, that 
particular feature was removed.
    In addition, I also believe that at the time, the industry 
was not ready to begin to recognize the depth of the crisis 
that we are encountering and many first lien investors were not 
prepared at that stage to take the necessary haircuts in order 
to make the program a go. As you know from the discussions of 
the revitalized Hope for Homeowners, that many of the first 
lien investors are now saying we prefer to take a haircut on 
the mortgage in the context of Hope for Homeowners refinancing 
in order to get a clean exit. What that does is give them cash 
now, minimizes any re-default risk they might encounter if they 
continue to work with that borrower, and avoid any further loss 
in property value should property values continue to decline.
    So we think that the Hope for Homeowners now is a program 
that will be embraced by first lien owners and will be more 
widely utilized.
    Senator Shelby. Without a huge haircut--Senator Dodd was 
talking about reducing it down to something people can pay, 
realistically afford--aren't we wasting our time here? In other 
words, as we continue to lose more jobs, the expectations of 
people making higher mortgage payments, that is an illusion, 
isn't it?
    Mr. Apgar. I think that any holder of these mortgages that 
believes that hanging on is a better strategy is a false 
promise. The program isn't demanding the haircut, the market is 
demanding the haircut. The values of these homes are 
discounted. The question is, what is the best that the investor 
can realize in terms of, as I said, getting a clean exit. Hope 
for Homeowners for many is the preferred exit strategy because 
it gets the borrower in a good situation and it gets them out 
of the loan at hopefully a fair approximation of the current 
market value and reduces the foreclosure cost of getting to it.
    Senator Shelby. But whatever we say or do policywise, or 
you implement the policy, if the market doesn't respond to it 
favorably, it is not going to work, is it?
    Mr. Apgar. You have to pay attention to the market 
interest. There is no doubt that we have seen a significant 
decline in housing prices. The housing prices then have made it 
difficult for the owners of these securities, and that is the 
reality that any program has to address.
    Senator Shelby. Secretary Allison, Treasury earlier this 
year released information stating that the Home Affordability 
Mortgage Program--I will just call it HAMP--will use $50 
billion in TARP funds to modify mortgages. It is also my 
understanding that Fannie and Freddie will provide additional 
money to assist homeowners with loans on their portfolios.
    My question is this. How did Treasury determine the amount 
of funding it would allocate through TARP to drive HAMP 
initiatives and incentives, and to what extent do you think 
more money may be needed than was originally allocated? Second, 
will you provide this Committee with the data and analysis that 
was used to determine the appropriate levels of funding that 
might help us understand what road we are going down?
    Mr. Allison. Senator, in answer to your last point, we will 
be glad to provide you with the underlying information. I think 
it is important to point out at the outset that this is a pay-
for-performance approach. We will pay servicers--most of their 
payments depend on their performance over time. Also, the 
incentives for individuals depend on their continuing to pay 
their new reduced mortgage rates going forward.
    We currently have set aside about $18.6 billion for the 
first loan modifications. We will be setting aside some 
additional amounts for the other programs that we are rolling 
out toward the end of this summer. We have based this on 
projections about what success might mean over time and the 
goals that have been set for this overall 3-year program. But 
again, I want to point out, this is a pay-as-you-go program.
    Senator Shelby. Mr. Apgar, will you share your data with 
this Committee?
    Mr. Apgar. For sure.
    Senator Shelby. OK. Last question. Mr. Chairman, thanks for 
your indulgence here. Mr. Apgar, given your role at HUD, you 
must spend a considerable amount of time analyzing what 
happened in our housing market over the last few years. Could 
you please discuss what you view as the primary reasons for the 
dramatic uptick in foreclosures as well as the broader cause 
for the escalation then subsequent deflation of home values? 
What is your view? You are into the depth of this.
    Mr. Apgar. Thank you. Prior to coming to HUD, of course, I 
worked for the Joint Center for Housing Studies and did 
extensive research on the housing foreclosure crisis and so I 
do have a view, both educated by that work and also from my 
experience now at HUD. My sense is that at the core of the 
problem was aggressive mortgage lending fueled by a strong 
demand for mortgage-backed securities on the part of Wall 
Street investors and others, and that in the rush to do these 
mortgage loans, some of the cautionary tales that are common in 
the mortgage lending business were put aside.
    People were placed into mortgages they neither understood 
nor could afford to pay. Prime mortgages, if they didn't reach 
the goal, were topped off with very risky second liens that 
took a prime loan that looked like it could be secured and 
turned it into a loan combination with a hundred or plus LTV at 
the beginning.
    Once those loans began to go bad, of course, the problem 
just radiated out, and it was the downward pressure on prices 
that came from the foreclosure and delinquencies of these 
difficult mortgages that was the seed that set off the 
financial crisis.
    Senator Shelby. It is going to be difficult to deal with, 
isn't it?
    Mr. Apgar. Putting Humpty Dumpty back together is a very 
difficult situation, there is no doubt about that.
    Chairman Dodd. Thank you, Senator Shelby.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. Apgar, your testimony suggests that the Administration 
is exploring a series of programmatic options that can help 
unemployed workers get the mortgage assistance they need, which 
suggests perhaps direct assistance to homeowners. There have 
been a couple of proposals. One is simply to avoid going 
through the servicer route and just subsidize individuals so 
they can pay their mortgages----
    Mr. Apgar. Mm-hmm.
    Senator Reed.----or some folks have proposed creating a 
mechanism where title might pass formally but the individual 
can stay indefinitely as a renter, paying a suitable rental 
fee.
    Two questions. One, what types of assistance are you 
thinking about, and second, given the record of the difficulty 
of getting these programs going, can we jump start any of these 
types of programs that you are contemplating?
    Mr. Apgar. Well, thank you for your question. We are, in 
fact, exploring other options relative to both unemployment and 
other elements to help keep folks in their home, as you 
suggest. Of course, one of the primary focuses on the 
unemployment thing is to make sure the economy returns to 
growth and that people don't experience unemployment because we 
have a growing job sector. Extending unemployment benefits can 
be a direct way of helping people tide over and not force the 
difficulties faced when folks have loss of income and therefore 
can't pay their mortgages and can't in some instances even 
qualify for a modification program because they don't have even 
sufficient income to support a drastically written-down 
mortgage.
    We are also exploring other options related to how to 
provide assistance to unemployed folks. Those are in the 
formative stage. I have nothing to report on that. But it is 
safe to say that unemployment is making the job of doing 
modifications more difficult and we recognize the importance of 
exploring those issues.
    On keeping people in their homes, there have been a lot of 
proposals of these so-called fast foreclosures, where the 
foreclosure happens but the homeowner stays in, and we know 
there are some proposals like that, that are being circulated. 
I get them on a regular basis. And so I just say on that that 
all proposals that will help provide relief to borrowers in 
their home and deal with the negative effects of foreclosures 
on communities are being explored. I wouldn't say that that set 
is particularly at the top of the list, but that all options 
are under review because we have to get a program that works.
    Senator Reed. Well, thank you very much. I think, as a 
comment, what is most frustrating, and indeed infuriating to 
people is that we did unprecedented things to help support the 
largest financial institutions in the country in order to sort 
of stem what we, I think reasonably believed could be a global 
financial meltdown. My perception today is this mortgage crisis 
is of the same scale in terms of threatening our economy and 
perhaps world recovery, and if we don't take such aggressive 
action, if we don't urge all the participants to take such 
aggressive action, we are not going to be able to stabilize the 
economy and foreclosures and unemployment back home are 
interrelated. We have got to move aggressively on both fronts.
    Mr. Allison, again, you indicated that these new programs, 
revised programs, have resulted in about 325,000 modifications. 
But unfortunately, it seems that the number of foreclosures are 
accelerating and that even with this improved performance, we 
are not catching up. What is your sense of that?
    Mr. Allison. Senator, first of all, let me correct the 
numbers. I was reporting that about 325,000 offers of 
modifications have been issued. The actual number of 
modifications now in a trial phase is about 160,000. It is 
growing very rapidly. And so as you point out, it seems likely 
that the foreclosure rate will increase, the numbers of 
foreclosures will increase. This program is also ramping up 
very quickly. It is actually only about 10 weeks since the 
servicers began offering this program and we already have 
160,000 mortgage modifications in the trial phase and we expect 
this number to continue growing rapidly for some time.
    We are not even stopping there. A number of these servicers 
are just starting to ramp up. We are meeting with them, as I 
mentioned, late next week, bringing them into Washington to 
talk about how they can further accelerate their programs and 
how we might help them. We are urging them to hire more people, 
to expand their call centers, to improve their systems. We are 
also creating--we are working with an outside systems firm that 
services most of the servicers, provides service platforms, so 
we can get streamlined input and keep closer track on the 
progress that the banks are making.
    So even though we are making rapid progress, we think we 
can do even more to accelerate and try to get out in front of 
this foreclosure problem, to the extent possible.
    Senator Reed. Thank you. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Reed.
    Senator Bunning.
    Senator Bunning. Thank you. Gentlemen, your reports are 
stunning, to say the least. Most of us who sit at this desk up 
here have watched this crisis from the very beginning. I don't 
know how long you have been in your jobs, but if you expect me 
to believe that Fannie and Freddie are watching the store when 
they are 100 percent kind of owned by the Federal Government, 
you are asking the impossible.
    Most of the problems with the economy stem from a law that 
was passed in 1994 when we, the Congress, gave the power to 
watch over mortgages, both banks and mortgage brokers, to the 
Federal Reserve, and for 14 years, not one regulation was 
written--14 years. Now, that is a pretty good time. They didn't 
do anything, zero. And you are sitting here and telling me all 
these wonderful things that you are doing, and I am like Jack 
Reed. The mortgage crisis is escalating, not rescinding. It is 
escalating.
    We had some numbers today, and Senator Dodd brought them 
out, about foreclosures, but they have projected an additional 
1.5 million foreclosures for just this year, in addition to the 
ones that we already have. So we are not even making a dent.
    So what does that mean? That means for our economy to 
recover, we have got to stop the spiral down and we have got to 
get credit. You can't get credit if you don't have a job. I 
mean, give me a break. You are telling me about the programs 
that you are having for people that don't have jobs. They can't 
pay anything unless they have saved a lot of money, and then 
they wouldn't have a problem with their mortgage if they saved 
a lot of money. We are talking about people who live from 
paycheck to paycheck, and when they don't have a paycheck, they 
can't pay a mortgage. So they are going to do the best they can 
to get in and out of a house with the least pain to that 
family. Now, there is going to be pain for everybody concerned, 
including the kids.
    So all those wonderful programs that you are talking about 
mean absolutely nothing to the American people that are still 
losing their houses. You may be stopping, as Mr. Allison said, 
you have 150,000 people that you are trying to service out of 
300,000-and-some, but that doesn't mean anything because we are 
losing 350,000 more foreclosures this month.
    So give me a break and tell me when you think you can stop 
the bleeding. When? When are these programs that this whole 
Committee put together and handed you and said, with your help, 
with your input, that these could help the people that were in 
stress, when are you going to stop the bleeding?
    Mr. Allison. Senator, we share your sense of urgency. This 
entire Administration is working very hard to deal with this 
crisis. And as you know, President Obama and the Administration 
announced and the Congress approved an $800 billion package 
aimed at economic recovery. That money will be expended over 
the next----
    Senator Bunning. So you used TARP money instead of the 
stimulus money?
    Mr. Allison. Sir, we are actually using the economic 
recovery package that the government has enacted, and also on 
top of that there is the----
    Senator Bunning. Will you please answer my question?
    Mr. Allison.----mortgage and homeowner affordability.
    Senator Bunning. When are you going to stop the bleeding?
    Mr. Allison. We are working very hard to accelerate this 
program. This program has actually been----
    Senator Bunning. When do you see the bleeding stop?
    Mr. Allison. We are moving as fast as we can to get out in 
front of the problem. We are well aware that there are about 
360,000 foreclosures a month and we expect this program to 
reduce that number----
    Senator Bunning. My last question. We just had a meeting 
with Sheila Bair, who is the head of the FDIC. She is a pretty 
honest lady and tells us like it is. She told us that unless 
something dramatic happens, that we could lose up to 500 more 
banks--up to. She didn't say that that was the exact number. 
But that means that those people that make mortgages in local 
places, local community bankers, bankers who are closest to the 
people that really could help in a foreclosure, will not be 
there.
    So 500 additional, besides this morning we learned that CIT 
is going to go financially bankrupt and that Citicorp is not 
far behind. Well, Citicorp is part of the solution, according 
to some of the documents that I have. If they are not there to 
help, where do we go? Where do we go for help?
    Mr. Allison. Senator, if I may, we recently, several months 
ago, reopened the capital purchase program for smaller banks in 
local communities. We are also concerned about making sure that 
lending is available to small companies throughout America.
    Senator Bunning. Well, it has been a failure.
    Mr. Allison. Well, it has actually--we have helped over 600 
banks that were viable banks----
    Senator Bunning. But there are 8,000-plus banks, so what 
about the rest of them?
    Mr. Allison. We have offered this program to all banks who 
are viable, and so far--and many are already well capitalized. 
I think that one of the issues you are talking about----
    Senator Bunning. Thank you for your patience, Mr. Chairman.
    Mr. Allison. Yes, sir.
    Chairman Dodd. Thank you, Senator.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman.
    I want to express my appreciation for both of you being 
here today. I thank you for that.
    I want to start out by going back to what Senator Shelby 
had talked about in his opening statement and that is about 
policies that result in a stable and sustainable marketplace. I 
think that is ultimately what we all want in the end. I know 
you could spend my entire 5 minutes talking about it, Mr. 
Allison, but I hope you could be as succinct as possible. Do 
the policies that we have in place right now, from your 
perspective, are they enough? Are they adequate to result in a 
stable and sustainable marketplace in the housing industry?
    Mr. Allison. Senator, we believe that the actions that we 
are taking can make a material difference, especially for 
working Americans. We are going to be reducing one of their 
largest monthly expenditures, those who are qualified, by 
reducing their mortgage payments. We are also offering 
refinancing approaches to many Americans, as well.
    Senator Tester. I understand that. The question is, have we 
done enough or are we kind of like a mole on an elephant at 
this point?
    Mr. Allison. Well, this, as I mentioned in my testimony, 
Senator, was a problem years in the making.
    Senator Tester. Yes.
    Mr. Allison. It is a huge crisis.
    Senator Tester. There is no doubt about it.
    Mr. Allison. We all appreciate that. We are taking what we 
think are well thought through, deliberate, and aggressive 
actions. This is already--we should point out again--the most 
successful modification program ever run and it is just 
beginning and we are intent on expanding this program 
dramatically, as fast as we can. This Administration inherited 
a huge problem----
    Senator Tester. You are right.
    Mr. Allison.----and it is doing its best to deal with it as 
rapidly as possible.
    Senator Tester. And I appreciate it, and it is not an easy 
task. I guess the question that I need to know from a policy 
standpoint, do you have enough tools in your toolbox at this 
point in time to adequately address the problem?
    Mr. Allison. Senator, I think we have enough tools. The 
challenge is to roll them out. We have got to reach as many 
Americans as possible, educate them about this program so that 
they understand what help is available, and we have to have the 
capacity to handle the demand. And we have been building 
capacity, working with the services as rapidly as possible. We 
are not satisfied.
    Do we have adequate tools? We think if we can roll this 
program out at the pace we expect, we will make this program 
available to all qualified homeowners who wish to avail 
themselves of it.
    Senator Tester. And the program you speak of is all three 
of them, or is there one in particular?
    Mr. Allison. Yes, sir.
    Senator Tester. All three of them?
    Mr. Allison. Yes, sir.
    Senator Tester. OK, which brings me to my next question. 
Can you give me a timeline for when they will be fully 
operational?
    Mr. Allison. Well, again, I want to be very careful about 
this, because one reason why we are bringing the servicers in 
at the end of this month is to ask those very same questions of 
them. How fast can they ramp up to serve the American public, 
and what can we do to help them further? We want to work with 
them as closely as possible. We are monitoring them every day. 
We are in continuous contact with the servicers. And I know 
that we are going to have much greater capacity every month for 
the next several months.
    Senator Tester. OK. In your opening statement, you talked 
about a myriad of outreach things that you were doing. I assume 
it is not only to homeowners, but also to servicers and maybe 
others.
    Mr. Allison. Yes, sir.
    Senator Tester. Are those outreach--number one, is it 
adequate? Do people that need help know that there is help 
available and know how to get through the myriad of, as with 
anything, the myriad of forms and people to get hold of and all 
that? And what is the best way, in your opinion, to reach out 
to the homeowners that have problems so that they know that 
there is help out there?
    Mr. Allison. Senator, I think that is a very important 
question and we have to reach homeowners in multiple ways. We 
are going out and holding events. At the event in Miami, we had 
several thousand people come and we were helping them to fill 
out the forms on the spot. We are doing the same, as I 
mentioned, in Sacramento today. We are going to other 
communities around the country. But that is just one measure. 
We have to work with local counseling agencies. We are using 
the Internet to get the word out, as well. We have to be on 
television. We have got to be doing as much as we can, many 
different approaches, and we have to reach people many times.
    Senator Tester. Can you tell me at this point in time what 
the rate of turn-down is in participation?
    Mr. Allison. I can't give you yet a really good estimate of 
that, and the reason is, as I mentioned, for instance, right 
now, we have, as I said, 325,000 offers right there. The number 
of trial modifications will lag the number of offers, as you 
can understand. So right now, we have about 160,000 trial 
modifications. We haven't yet completed any significant 
modifications because that takes 3 months in the trial period. 
So in August, we are going to start to see actual 
modifications. So this is still early and I think it is 
premature for me to give you a definitive answer to your very 
good question.
    Senator Tester. We would love to have it at some point in 
time.
    I am sorry, Mr. Apgar, I didn't fire more questions at you.
    I appreciate--these are difficult times and there is a 
level of frustration here that is high. We appreciate your work 
and we look forward to working with you to try to get this 
problem solved into the future. Thank you.
    Mr. Allison. Thank you.
    Chairman Dodd. That question that Senator Tester has raised 
with you about the tools in the toolbox, we need to know from 
you. There is no lack of willingness up here to step up if you 
give us some idea of what additional tools are needed. Our 
frustration is, we see these numbers continue to go up. We 
think we are trying to address the issue. We turn around and we 
watch the numbers get worse. And, of course, we are being asked 
every single day by our constituents and others, what is going 
on? You have got money you put into this. You crafted designs 
and programs to get things done and the numbers continue to 
rise.
    So you are getting a sense of the frustration we are 
feeling, and you feel it at the local level. As I say, you are 
going to hear from some people later today if you hang around 
who are out there at the street level that are as frustrated as 
we are, and they reflect those frustrations to us.
    So we need to know. You are not going to find unwilling 
members here to want to respond, and quickly, if there are 
things that we can do to assist you to get this done. But you 
need some clarity in the system. It needs clarity so that 
people know what the rules are and how to apply them and make 
it work, and that is going to be critical.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you, and I thank both 
of you for your service and for being here and for being 
involved in this really complex issue.
    I am going to take a little different tack. No doubt, I 
wouldn't be in this body, I don't think, if I had not been 
involved in trying to make sure that people had affordable 
housing as a young man, and that civic and nonprofit activity 
led me to this place, no question. So I want you to know I have 
tremendous empathy for people who especially have children and 
living in a home that have to vacate it because of foreclosure 
and loss of jobs, and I understand that is a tragedy for many 
people across the country.
    But I am going to take, again, a little different tack, 
because I am not under any illusion that you will ever really 
catch up with this. I know that you are trying hard. I talked 
to a lender yesterday who said one of the biggest problems is 
the program continues to change. So every time they get set up 
and ready to execute, there is a whole new set of rules, and 
that is because we are chasing this thing from behind, and I 
know this. It is very unlikely we are going to catch up, and I 
am under no illusion you are going to solve it. I think your 
efforts will improve. But I think the only thing that is going 
to resolve it is a turn-around in the economy and things 
stabilizing. But I thank you for your efforts, OK.
    The tack I want to take is this. I know that $50 billion is 
coming out of TARP for this. I know that most of us thought 
that the TARP money all was going to be repaid because we were 
going to invest in things that had value. And I realize there 
were clauses in here that allowed this to occur and I am not 
debating that. And I realize both Administrations have invested 
money out of TARP that is not going to come back, so I am not--
but the fact is, this $50 billion is gone once it is spent. I 
mean, it is not invested in something the taxpayers will get 
back.
    It seems to me that there are numbers of different 
classifications of borrowers. I mean, Mr. Apgar, you alluded to 
the fact, I think--I was daydreaming, I apologize, for a 
second--but you alluded to the fact that I think one of the 
biggest problems was 100 percent loan-to-value, and that is why 
we are having this problem. And so we had so many people in 
this country that put down 3 percent, and some of that was 
loaned to them or given to them by the seller. And so we had 
people that, in essence, were really renting houses. I mean, 
they didn't really own a home. They did in document, but they 
put no equity down. I think the staff have shown us, those 
people who put equity down, candidly, have not been foreclosed 
on in large.
    I am wondering if we should treat homeowners that were in 
essence renting their houses--they basically got somebody to 
give them a nonrecourse loan and nothing down--if we should 
focus on them the same way that we focus on those people who 
actually--and I know there are far less of these--actually had 
equity in their homes.
    And then I love--actually, just answer that briefly, if you 
would. I have one more question. I will stop.
    Mr. Apgar. Well, I will take it, Senator. I will take a 
shot at that. It is true that folks who have limited equity in 
their home or no equity, as you suggest, are more likely to 
quickly get in trouble in economic instability times and more 
likely to lose their home to foreclosure. We can't pick and 
choose which side of the line we work on because when a house 
goes to foreclosure, it provides such blighting influence on a 
neighborhood that the neighbors are harmed, as well. And as 
house prices go down, it is indiscriminate in terms of folks 
that once had good equity in their home are now underwater just 
along with the folks who had limited equity are underwater. So 
we have to work with both groups.
    I do believe that we need to think real hard about the role 
of low downpayment lending in whether or not that is a helpful 
path to home ownership.
    Senator Corker. And I hope that, at some point--I realize 
in the middle of a crisis, maybe that is not the time, but I 
think we should look at that, and I think that most of us 
realize that in a push to create affordable housing for 
everybody in America, we actually have created a big part of 
this problem because there was no equity. And then we have done 
away with the recourse side of loans, which has made it even 
worse, and I would like for us to focus on that at some point. 
I think that is a huge issue.
    But I want to ask my one last question. The reason I 
brought up the $50 billion and the reason I brought up the fact 
that so many of these people are basically renting a home, 
because they put no equity in it, OK, we are expending huge 
amounts of taxpayer monies in other ways, too. It is not just 
this $50 billion. And I wondered, Herb, if you might talk to us 
a little bit about the liabilities that you believe we are 
creating at the GSEs, Fannie and Freddie, because there 
potentially, the way I see it, is going to be a large trailing 
liability that we may be creating at those organizations by 
continuing to sort of chase this mortgage problem the way we 
are. If you would give us some insights into that. And I hope 
at some point--I think we will--we will look into that as a 
Committee, but if you could share that with us today, I would 
appreciate it.
    Mr. Allison. Thank you very much, Senator Corker. First of 
all, you have mentioned correctly that we may spend $50 billion 
on the homeowner affordability programs. These expenditures can 
be also viewed as investments that will have returns in the 
form of housing prices higher than they would have been had we 
had more foreclosures. So that is a type of return to the 
American public. And also, we are making payments to individual 
homeowners for successfully continuing to pay on their modified 
mortgage, which is also money they can be spending and putting 
back into the economy. So I think there is a kind of multiplier 
effect.
    Senator Corker. What I meant for the taxpayers, I am 
talking about like a return on investment----
    Mr. Allison. Yes, sir.
    Senator Corker.----which you are very familiar with in your 
previous life, so----
    Mr. Allison. Yes, and you are absolutely correct, Senator. 
Those are, from that standpoint, expenditures. We are not going 
to get a direct return back on those, but I think we will get 
an indirect return.
    As to the liabilities of the GSEs, I would answer it the 
same way. I want to point out, I think that the GSEs are 
performing an extremely vital role in this program and I think 
they are off to a very good start. They have--they account for 
about half the mortgages in the United States. They have great 
professionals there with great knowledge and a lot of 
capability.
    We are, as you know, the government has provided an 
additional $200 billion to the GSEs to assure that they can 
play an active role in the mortgage modification programs going 
forward. Again, I think that their ability to be actively 
involved in the modification program is going to provide 
returns to the American public.
    Senator Corker. I know my time is up, but it is further 
digging a hole for the GSEs to play the role they are playing 
in these mortgage modifications, isn't that correct?
    Mr. Allison. That is correct, sir, that there are 
additional expenses that they will be incurring as a result of 
this, but we have also provided about $25 billion available to 
the GSEs for their expenses in this program.
    Senator Corker. But that is, again, taxpayer money.
    Mr. Chairman, I do hope at some point we will look at the 
collateral damage that we are creating, just to sort of be able 
to tally up the true cost so that we ourselves will know, and I 
apologize for going beyond my time.
    Chairman Dodd. No, that is all right, and it goes to the 
point, I think, to speak for myself, I am prepared to make some 
of these investments provided we get some results. My 
frustration here is not so much that you are making these 
investments, that in fact we are getting the indirect return on 
the investment because we are keeping people in homes, the 
economy is stabilizing, the institutions are, I think that is a 
tradeoff I can make a case for. What is frustrating is that we 
make the investments and we see the problems continue to 
escalate. That is the frustration I feel in all of this to some 
degree. But obviously, it is an important question, and we need 
to look at it, and I have told Senator Corker that we will, in 
fact, have a public hearing on that issue, as well.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chairman, and 
thank you for your testimony.
    I wanted to get an overview here. Under Hope for 
Homeowners, I believe the testimony is that only a handful of 
new mortgages have been written. A handful is one, or is a 
handful a dozen, or is a handful a thousand?
    Mr. Apgar. I think it is safe to say that a handful is very 
few. The technical answer is that there were over 50 mortgages 
actually closed, but because of the processing delays and 
problems with the way in which the program was done, only one 
actually moved to actual insurance. So 50 homeowners got the 
benefit of the refinancing, but FHA only insured one mortgage.
    Senator Merkley. OK, so 1 to 50?
    Mr. Apgar. Yes. Not enough to talk about.
    Senator Merkley. All right. And under the HAMP program, the 
Home Affordability Mortgage Program, I believe the testimony 
was 160,000 modifications?
    Mr. Apgar. One hundred and sixty thousand completed trial 
modifications, yes.
    Senator Merkley. Why do you say trial modifications? What 
is that meant to signify?
    Mr. Apgar. Well, I will take a shot and I will turn it back 
to my colleague, but----
    Senator Merkley. Very brief, because I have lots of 
questions.
    Mr. Apgar. It takes 3 months to prove that the borrower can 
handle the new modification program, and then they go to a 
permanent modification.
    Senator Merkley. I see. OK, great. Then under the HARP 
program, the Home Affordable Refinance Program, how many 
refinancings have taken place under that?
    Mr. Allison. The total number of refinancings, this year, 
number at least two million. However, if you look at the 
modifications of loans with a loan-to-value ratio above 80 
percent, the program, that is about 43,000 so far. And the pace 
of refinancings depends heavily on interest rates. Recently, 
interest rates have risen somewhat on mortgages, which tends to 
slow the number of refinancings.
    Senator Merkley. So refinancing is about 43,000?
    Mr. Allison. With loan-to-value ratios above 80 percent, 
yes.
    Senator Merkley. OK. Let me lay out my frustration. If you 
take the roughly 200,000 families that have been assisted 
through this--and another question I have, and you may not know 
the answer but if you do I would like to know it--is kind of 
the cost that goes into each one of those, on average. Is it 
$10,000 per family? Is it $20,000 per family? But let us say it 
was $10,000 per mortgage in terms of costs to the citizen. We 
would be looking at roughly $2 billion that have been spent to 
assist homeowners.
    Now, $2 billion is a significant number, but the contrast 
is stark between an extraordinary, enthusiastic, eager, 
generous effort to assist our major financial institutions, 
which was extremely important in order to stabilize our 
economy, and what has just been a dragging through the mud, 
slow, difficult, we will try this, we will try this, and here 
we are at one mortgage under Hope for Homeowners and only about 
200,000 with the other two programs. There must--we need the 
same attitude with which we approached assisting our banks to 
assist our working families.
    I know that as you lay out the details it is complicated, 
it is difficult, but somehow, it is just hard to explain to the 
working families in America how it is we could move so fast 
with extraordinarily complicated deals with the huge financial 
institutions and we are moving so incredibly slowly, mired in 
paperwork, in rules. In talking to the banks back home, they 
are complaining that every couple of weeks, they get a 
different version of the rules and the citizens can't get 
through to folks who can make the modifications, and we just 
don't seem to be applying the same levers of government to move 
quickly for our families that we have moved on with our major 
financial institutions.
    Just kind of your thought about that contrast and how we 
can possibly get the same level of energy and effort to help 
our working families.
    Mr. Allison. Senator Merkley, thank you, because that is a 
question on everybody's minds, and we are as frustrated as 
anybody. This is a crisis that began about 2 years ago. This 
Administration has been in office now for 5 months or so. This 
program was announced early in the Administration. This is an 
all new, very aggressive, dramatic program. It was really 
launched in terms of actually beginning to work with homeowners 
about 10 weeks ago.
    Already, we have 160,000 modifications underway. I know 
that in comparison to the damage that has already resulted from 
this crisis, this seems like a small number. It is growing 
rapidly. We are doing all we can to grow it as fast as 
possible.
    You correctly point out that this is a complicated 
business. It has taken some weeks just to set up the program. 
Mortgages are very complicated. We have to work with many 
different servicers. We have to make sure that they are totally 
involved in this program, they are totally committed to it.
    I think as my colleague, Mr. Apgar, said, they are past the 
stage where they were wondering how much they needed to be 
involved. I think more and more, they are fully committed to 
this program and that should result in even faster roll-out.
    We want this to happen as rapidly as possible. I think even 
though this crisis is several years in the making already, we 
have to keep in mind that this program started just weeks ago. 
We all wish it had started a lot earlier. But here we are and 
we are trying to make it work as rapidly as we possibly can.
    Senator Merkley. Do you wish to add anything?
    Mr. Apgar. Well, with respect to the Hope for Homeowners 
Program, there is no doubt that 51 mortgages is not going to 
help the economy stabilize. That is why immediately in 
February, we proposed bold new reforms for the Hope for 
Homeowners Program, including taking this, what once was a 
stand-alone program and nesting it in the harder Making Home 
Affordable Program, so that people have the option to both get 
a modification or, where it made sense, a mortgage write-down 
under a Hope for Homeowners Program. We worked with the 
Congress to make sure we got that perfecting legislation. It 
has now been enacted, and we are busy rolling--putting that in 
place. We think that the new Hope for Homeowners will perform 
substantially better than the flawed program that we inherited 
at the beginning of the year.
    Senator Merkley. Well, I certainly wish you Godspeed in 
pursuing this and appreciate your effort to expedite it in 
every possible way.
    I would like to follow up, because my time is out, but 
follow up with my staff and get details on the 160,000 
modifications. One of the things I have been concerned about is 
that some modifications are better than others, and 
modifications that we saw early on, where simply a family was 
told, well, you don't have to pay for 3 months, but then you 
have got to make it up over the next 12 months, the payments 
actually went up, really didn't help the situation at all. I 
want to get a better understanding of what share of those 
160,000 modifications actually represent paths to avoid 
foreclosure and will be a solution.
    Mr. Apgar. Well, just a quick answer on that. One hundred 
percent of the modifications that are being done brings the 
homeowner to a 31 percent DTI. They are deep, true 
modifications, not the things that were passing off as 
modification which actually increased the borrower's payment in 
some of the earlier reports on modifications.
    Senator Merkley. That is excellent. Thank you.
    Senator Menendez.
    [Presiding.] Thank you.
    Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Secretary Allison, how many homes would be in foreclosure 
today? What would the total number be?
    Mr. Allison. I am not sure of the exact number, but it 
numbers--the numbers are far too high.
    Senator Johanns. And how many go into foreclosure every 
month?
    Mr. Allison. I think we are seeing several hundred thousand 
a month.
    Senator Johanns. Is that accelerating or is that declining, 
that monthly number?
    Mr. Allison. I think we are seeing that as unemployment has 
been rising, the rate of foreclosures has risen to an extent.
    Senator Johanns. I have an impression that as we have gone 
through this subprime mess, that part of what we are dealing 
with now, and I wouldn't know how to quantify it, I haven't 
even read any statistics about it, but that we are now moving 
into another phase of foreclosure-related problems related to 
unemployment rising and people, if they don't have a paycheck, 
even with unemployment, they are probably in a crisis very 
quickly. Would that impression be accurate?
    Mr. Allison. Well, we certainly are seeing that while early 
on, excessive speculation accounted for a lot of the 
foreclosures, now certainly unemployment is a major factor. And 
that is why the Administration has also introduced and the 
Congress has approved the Economic Recovery Program. That is 
the $800 billion of expenditures between now and the end of 
2010.
    Senator Johanns. Here is what I would suggest to you. I 
didn't vote for that because as a former mayor and a Governor, 
I couldn't figure out how there was any possibility that that 
would be a job creator. I just didn't see it. At least 
initially, we aren't seeing it. Some have even gone so far as 
to call it a flop. Whether it is or not, time will tell. But if 
that doesn't work, if, in fact, the three to four million jobs 
that were promised by the President don't occur, how much worse 
does this get?
    Mr. Allison. Well, I think all of us have to be intent on 
doing the best we can to ameliorate the problem, and I think 
that the Administration, with the support of the Congress, has 
enacted very, very bold programs to deal with this extremely 
serious crisis.
    Mr. Allison. Let me come at this from another angle. I look 
at these huge foreclosure numbers. I look at the really paltry 
amount of impact that you are having at this point, and it is. 
It is very, very small. And I understand the situation with the 
new Administration. But here is my struggle. I see these 
extravagant promises in just about everything that happens 
here--and I am new to this, too, myself--and then I see this 
terrible execution. You know, the stimulus money isn't getting 
out. You are not getting on top of the foreclosure numbers. And 
that has nothing to do with what you inherited. Execution is 
what you do every day.
    Tell me when you break through here. Tell me when you are 
up and running and going and the next hearing--when can we 
invite you back for a hearing where you say, boy, I know when 
we were here in July, it was pretty ugly, but now we are 
hitting on all cylinders and we are doing exactly what you want 
us to do. Is that a week away? Is that a month away? Is that a 
year away? When will you be able to assure us that the program 
is firing?
    Mr. Allison. Senator, my expectation is that sometime in 
the fall, we will probably be at the near capacity on this 
program in terms of scaling. We are working very hard to do 
that. But we will not rest even then. There will still be more 
we can probably do. We are constantly reevaluating the program, 
even at this very early stage, to see how we can do it better. 
We have got to be in touch with the American public, the 
community groups, the banking system, with the Congress, 
obviously. We have to be reporting to you, and beginning next 
month----
    Senator Johanns. So----
    Mr. Allison.----you are going to see more complete 
reporting on how well this program is working so we can all 
assess its effectiveness together.
    Senator Johanns. So if we say fall is October 15 and you 
are at capacity at that point, what is capacity? What can I 
write down on a sheet of paper here, and when you are invited 
back I can remind you that you told me by fall, and I picked 
the date October 15, that you are at capacity? Tell me what 
that number is.
    Mr. Allison. Well, what I mean is we have signed up now 
servicers representing about 85 percent of the total mortgages 
in the country. We can still reach more servicers to get at the 
rest of that 15 percent and we are going to try hard to do 
that. But with the 85 percent now covered, we want to make sure 
that these servicers are scaling as rapidly as possible so they 
can reach all of the eligible homeowners, and that is going to 
take some time.
    I want to point out again, this was intended to be a multi-
year program, as is the overall Economic Stimulus Program, and 
it is going to take time to implement, unfortunately, all of 
these programs.
    Senator Johanns. Here is what I would tell you, though. 
Those weren't the promises made. You know, the promises made 
were very vastly different on the economic stimulus package 
than what you are trying to sell me on today. And I am just 
saying to you that if you can't tell me how many homes will be 
impacted monthly by the time you are fully ramped up, I don't 
know what you are heading toward and I don't know how $50 
billion is therefore going to be effectively spent, and that is 
my point.
    I have started new administrations as a mayor and a 
Governor. Sir, you always inherit something, and you know what? 
You are going to leave something behind for the next people. It 
is just the reality of life. But it is the execution that I 
think is just desperately worrisome here. And if you can't 
articulate what the goal is, how do you even rally the troops 
back in your office to get to whatever?
    I walk away from this hearing not better informed about 
what that is going to be and I think that is a serious flaw in 
what you are doing.
    I am sorry I am out of time, but those are my thoughts. I 
just think if you can't tell us what you are headed to, what 
your goal is in terms of number of properties you are going to 
deal with each month, we will be flailing around with this 2 
years from now and it will be regarded as a failed program, a 
costly failed program. Thank you.
    Senator Menendez. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman.
    I wanted to, now that we have gotten around the horseshoe 
here, share a really typical story that I get in my office or 
when I am traveling the State and I think it is typical of what 
people on this Committee hear about every day, and this comes 
from David Croach of Aurora, Colorado, who is a former Air 
Force Security Police Officer.
    Last year, David was laid off. He found another job, but 
was laid off again and has been looking for full-time 
employment since March. From a part-time job, David makes about 
$20,000 a year, down from his former salary of $61,000 per 
year. In a letter to my office, he wrote:

        I have a 14-year-old son and am doing the best to make ends 
        meet. Unfortunately, ends aren't meeting anymore. I have 
        exhausted my savings, had to disburse my 401(k) to pay bills 
        and attempt to save my house.

    After calling the Colorado Foreclosure Prevention Hotline, 
David was referred to a HUD-certified counselor who recommended 
that he apply for a loan modification. Unfortunately, David was 
told by his mortgage lender that he made too much money to 
qualify for a loan modification. Instead, the bank offered to 
take his overdue balance and put the balance back into the 
loan, which would have increased his payments. The bank 
wouldn't consider any other options.
    In discussing his situation with my staff, he noted that 
every time he turned around, the answer from his lender was no. 
He filed for bankruptcy on May 28 and foreclosure remains a 
serious threat.
    We hear about these stories on a daily basis, and I 
appreciate your efforts, by the way. Thank you for your 
service. I am wondering, as this gets ramped up, as people need 
to hear the information that you are providing, the trips to 
Florida and to the Northwest you talked about, whether there is 
some way we can work with lenders to forestall some of these 
foreclosures as the program gets ramped up, to be able to, 
where possible, have some sort of moratorium that says we are 
not going to foreclose paying loans during this period of time.
    And I realize there are all kinds of unintended 
consequences of what I am talking about, but the shame here 
would be if the inability to be able to get the money out, the 
inability to be able to have people understand the procedures 
and processes leaves us in a situation where foreclosures that 
could have been avoided aren't. And as you were saying earlier, 
the effect of a foreclosure or a fire sale on an entire 
neighborhood, on the home equity value of tens and hundreds and 
thousands of other homeowners in the country are affected, 
potentially by foreclosures that never should have happened to 
begin with.
    And I wonder if you have any thoughts on that as a 
potential strategy that we could employ to make sure that we 
are beginning to get ahead of this massive problem rather than 
continuing to trail behind.
    Mr. Apgar. Well, thank you for that question. We just heard 
that one of the central issues is execution, and we hear 
hundreds of stories of the type you told us brought to you by 
your staff and by our community connections around the country 
and from our own personal visits in communities. In my sense, a 
lot of people are feeling and saying things that are true.
    When I hear that story, I think that whoever was on the 
other end of the phone from that individual was not executing 
the program as directed by our guidelines. That person sounds 
to me--without more details, I couldn't be sure--that they 
should be eligible. Certainly, they don't need more income to 
qualify--they don't have incomes that are too high to qualify. 
And so what is the question?
    That is the central focus of this effort, to bring the 
major--inform the major leaders, the CEOs of these companies to 
sort of say, tell us how that story could be happening in your 
company. What was the disconnect? Was it a lack of training? 
Was it a lack of resources on their part? Was it our problem, 
that the rules are too complex to implement? What is going on 
here? Because our sense is that many of these stories, in fact, 
reflect situations that could and should be corrected, that 
every time we miss one of those, somebody then goes into 
foreclosure and adds to the problem.
    And so it is execution, execution, execution, and that is 
the major focus of the next set of initiatives that Secretary 
Allison indicated. Let us figure out how to get the program 
working as it was designed.
    Mr. Allison. Senator Bennet, if I may add to Mr. Apgar's 
answer----
    Senator Bennet. Please.
    Mr. Allison.----under the rules of the program, a servicer 
in the program should not foreclose unless the servicer has 
first checked on whether the person is eligible. We are also 
going to be auditing this program, and that is Freddie Mac's 
role, to make sure that people who were eligible were offered a 
modification. And so we are aware of the problem and we hear 
these same complaints.
    That is one reason why we are calling in the servicers at 
the end of this month, to discuss this with them. We want to 
see better adherence to the program. We want to see the 
metrics. And we have--we are developing metrics for that very 
reason. We have got to surveil this program to make sure that 
the intention is being implemented by every servicer.
    Senator Bennet. I just would underscore what you have heard 
today, which is that the visibility and the urgency with which 
the issues in New York and Wall Street were addressed needs to 
not come in first in this race of urgency, because our 
homeowners are suffering tremendously, and whatever you can do 
to put in big block letters in the front offices of the 
providers that you are talking about, something that says, 
check twice and make sure you are doing whatever you can do to 
keep people in their homes, because it is in everybody's--it 
works to the benefit of everybody.
    This is one of those cases where no one wins if a 
foreclosure that could have been avoided isn't avoided. No one 
wins. The banks don't win. The other homeowners in the 
neighborhood don't win. The community doesn't win. And it just 
would be a shame if we are not doing everything we can possibly 
do to expedite this or to make sure that bad decisions are 
forestalled so that you have the opportunity to do the work you 
are trying to do.
    I, for one, and I am sure the rest of the Committee feels 
this way, would love to hear after your meeting next week or 
next month what the targets are and what the agreed upon steps 
are going forward so that we have some assurance that things 
are moving forward and that we have done everything that we can 
do. I would like to join the Chairman in saying, if there are 
things that we haven't done, let us know what those things are 
because this housing issue is a fundamental issue for our 
families and also our economic recovery depends on our getting 
this right.
    I appreciate your testimony. Thanks for being here. Thank 
you, Mr. Chairman.
    Senator Menendez. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I guess as you 
will conclude, that as the next-to-last, I have got to at least 
make a couple of quick comments about some of the comments made 
by my colleagues.
    One, I would echo Senator Corker's comments about I hope 
this Committee will have a chance to examine some of our past 
policies where we encouraged folks to get into homes with no 
documentation, no money down, no equity involved, no skin in 
the game, and clearly one of the things that generated this 
crisis.
    I do have to comment on Senator Johanns' comments about the 
stimulus. It was not perfect and I share concerns about some of 
the dollars getting out. But I have got to tell you, for a bill 
that has got north of $200 billion of tax breaks in it that is 
helping at least folks in my State and businesses, small 
businesses on 5-year look-backs, we have had testimony here of 
the one little brief upstart we had in housing purchases 
oftentimes generated by funds in terms of that $8,000 new 
purchasing tax credit, and I was a former Governor and I can 
assure you, at least in the Commonwealth of Virginia, and I 
would strongly believe that in every State around the country, 
there are thousands of teachers that have not been laid off 
because of Federal funds that are going into States to help 
ameliorate the budget crisis, thousands of construction workers 
working on roads right now that otherwise would not have been 
worked on, and literally millions of Americans, those who 
receive Medicaid payments still getting the health care they 
need because of that Federal assistance to States in crises 
where they still do have to balance their budgets, and I think 
that for many of those States, they have got the worst days to 
come in front of them.
    I want to follow up on Senator Bennet's comments, as well. 
I candidly believe that we have a potential flood of 
foreclosures waiting in the wings. At least in my State, many 
banks have kind of slowed the process on foreclosure, waiting 
to see the effects of these programs that are being rolled out, 
and I have the same sense of urgency of colleagues on both 
sides of the aisle that we appreciate the challenge you have 
got, but we have got to get this out sooner, quicker, faster, 
more expeditiously.
    We have the same kind of stories that Senator Bennet 
indicated and you are hearing, as well, that consumers are 
feeling like there is opaqueness in the program. A neighbor 
gets accepted. They get turned down. There seems to be no 
remedy.
    The question I have--my first question, and I will try to 
get both of them in--the first question is, we put in place a 
number of incentives and sweeteners to servicers to participate 
in the program. I hope as you bring these servicers in and you 
will look at which servicers are actually acting in good faith 
and which are not, we have used the carrots. Do we need some 
sticks? And what kind of actions are we going to be taking if 
we can find evidence of a pattern of those servicers who are 
not acting in good faith in terms of enacting this program. 
Have you thought about the sticks end?
    Mr. Allison. Senator, we first of all are going to be 
publishing on a servicer-by-servicer basis their performance, 
beginning next month. And since we made that known, we have 
seen the additional activity on the part of a number of 
servicers, which is welcome.
    Let me point out that we do have ambitious goals for this 
program. We want to achieve loan modifications numbering 
between three and four million over the next several years. We 
know we still have a long way to go, but this program is just 
getting started.
    We need to have the servicers working very hard with us. We 
are going to be meeting with them continuously. They are also 
not going to receive those payments unless they are performing. 
So they have a strong incentive to get out and try to modify as 
many eligible loans as possible.
    So I think a combination of public disclosure, having them 
come testify before your Committee, another powerful incentive 
to perform. We want to be working closely with you, getting 
more ideas about how we can do better. And we want to be out 
talking to the public, as well, to see how well the----
    Senator Warner. Well, I would only add that I think 
disclosure is important. Public embarrassment might be another 
step up.
    Mr. Allison. That is right.
    Senator Warner. But when people's lives are at stake, I 
hope you will think, as you thought creatively in creation of 
this program in terms of the carrots, that you think equally 
creatively in terms of potential sticks or penalties.
    And that would be my last question. It seems we are seeing 
some evidence that those servicers who still retain the loan, 
the whole loans, are acting in better faith--they obviously 
have more of a financial interest in some level of resolution--
and that those baskets of investor-backed loans where the 
servicer has no skin in the game, that there is still a much 
greater pattern of dumping of those properties and not as great 
of participation in terms of the modification program. Are you 
seeing that pattern, as well?
    Mr. Allison. I cannot tell you for certain that that is the 
case. I think that with the greater disclosure we are going to 
be making, that will become very abundantly clear over the next 
several months, whether that is the case or not. But I can't 
give you a specific answer to your question, Senator. We will 
be glad to look at that and come back to your office.
    Senator Warner. And again, I cannot urge you enough that 
whether there are additional incentives or potential penalties 
or sticks out there, you have got to come forward. I just am 
concerned with these kinds of stories that we are all hearing, 
and Lord knows you are hearing them directly, as well. The 
immediate hardship this provides upon a family or upon an 
overall neighborhood, maybe public embarrassment is not enough 
for some of the folks who are not acting in good faith in this 
program.
    Mr. Allison. Thanks for your suggestion, Senator.
    Senator Warner. Thank you, Mr. Chairman.
    Senator Menendez. Thank you, Senator.
    The Chair would be next, but I want to----
    Senator Schumer. No, please.
    Senator Menendez. I want to recognize----
    Senator Schumer. I need a few minutes to get--I would 
prefer a few minutes.
    Senator Menendez. OK, great. All right.
    Let me thank you for your testimony today. Look, I want to 
start off putting something in context here. I appreciate 
Senator Johanns' comments, but in March of 2007, we had a 
hearing here and there was a previous Administration, and at 
that hearing I said we are going to have a tsunami of 
foreclosures and the Administration looked at me and said, 
well, Senator, that is an exaggeration. Unfortunately, I wish 
they had been right and I had been wrong.
    If, in fact, we started working in March of 2007 to 
mitigate the tsunami of foreclosures that we had not fully seen 
the crest of, we would be in a much better position today. I 
think that is important to understand the total spectrum of 
what we are facing today. This Administration has had 
approximately 6 months since it took office, so, you know, I 
just want to put that in context.
    Having said that, however, let me say that as the Chair of 
the Subcommittee on Housing, I share Chairman Dodd's concerns 
that he expressed in my opening statement and I am not happy. I 
am not happy with where we are at. I think there is a lot more 
to be done.
    So let me start off by asking some questions here. What 
number of modifications do you--per month will you consider a 
success?
    Mr. Allison. Senator, we certainly aren't satisfied with 
the level that we have today. I think that the number will vary 
over time, but I think we need to be on a pace to achieve three 
to four million modifications by the end of 2012, and that is a 
major undertaking. No program has ever come close to that. And 
that will have a major impact on many families across the 
country and also help to preserve homeowners.
    Senator Menendez. If you did three to four million by 2012, 
that means roughly a little over a million a year, is that fair 
to say?
    Mr. Allison. Yes, sir.
    Senator Menendez. So if it is a million a year and you 
divide it by 12, you are talking about what a month, 100,000, 
roughly?
    Mr. Allison. Yes. It would be around 20,000 a week, and I 
can tell you that in the past few weeks, we have actually 
exceeded that number. But we are not satisfied even with that. 
We would like to achieve the home modifications as rapidly as 
possible.
    Senator Menendez. Well, we are looking at 2.4 million 
foreclosures just this year alone, and this is the problem. You 
know, time is not on our side. More importantly, it is not on 
the side for families of this country and the consequences in 
the economy. So this has to move much more significantly.
    If we are not at that level in this period of time that we 
are talking about ramping up, what is your Plan B?
    Mr. Allison. Well, we believe, first of all, that this 
program, because it has just gotten started, has not nearly 
reached its potential. We are encouraged by the rate of 
improvement week to week that we have been able to achieve over 
the last 10 weeks and we expect further improvement down the 
road. We are not just satisfied with doing the three or four 
million over 3 years. We would like to achieve that faster. And 
we need to, week by week, get a better sense of how the 
servicers are doing against the number of loans that each one 
of them has outstanding, and we are going to be comparing the 
rates at which they manage to contact as many of those eligible 
homeowners as possible.
    Senator Menendez. But let me ask you, I am not happy of 
where we are at with the servicers. I sent a letter to them in 
anticipation of this hearing. Let me ask you this. You know, 
one of the reasons I am asking you what is your rate of success 
is because we can't determine whether the servicers are doing 
the right thing unless we know what the rate of success is. I 
mean, we need a little transparency and we need some 
information here in order to establish what are the right 
benchmarks. I am all for having those who are not performing be 
publicly known, but that--I want to echo Senator Warner's 
remarks. That is not enough. There have to be consequences 
here. We have created incentives. There have to also be 
consequences here at the end of the day.
    And so I want to know what you are going to do with 
servicers if, in fact, they have signed a contract, we have 
created incentives, and they are not living up to it.
    Let me ask you this. When are those--will those with VA, 
FHA, and home equity loans be eligible for the program?
    Mr. Apgar. On the FHA front, yes. With the new authority in 
the recently enacted legislation, we are going to do an FHA 
modification program that is closely aligned with the overall 
Administration's plan. That program is ready to roll out and 
should be available very shortly. It will provide deep, true 
modifications of the type that FHA has not been able to do in 
the past and that will not only help those borrowers in 
distress, but also, because FHA already owns the mortgage risk, 
will probably turn a small profit back to----
    Senator Menendez. What is the timeframe for that?
    Mr. Apgar. The next couple weeks.
    Senator Menendez. The next couple of weeks. What about the 
VA and home equity loans?
    Mr. Apgar. The VA, I believe, is on the same pace. I am not 
sure about the question on the home equity loans. That is the 
second lien program, which also is close to rolling out in the 
next couple of weeks.
    Senator Menendez. Let me ask you, to what extent does the 
current foreclosure program depend on the borrowers being 
delinquent? You know, back at home in New Jersey, we have an 
enormous number of homeowners who tell us that their lenders 
tell them, perhaps incorrectly, that they first need to be 
delinquent on their mortgages to be eligible for the Federal 
programs. Having delinquency as a program requirement obviously 
gives borrowers bad incentives to default on their loans. What 
is the nature of that?
    Mr. Allison. Senator, people do not have to be delinquent 
to qualify----
    Senator Menendez. But we hear this all the time----
    Mr. Allison. Yes, sir----
    Senator Menendez. All the time, we hear people who tell 
us--and then they purposely--look, I have a woman who is here 
who serves the Senators in the Capitol. She is not my 
constituent per se, she doesn't live in New Jersey, but she 
told me her story. She was told that she had to be delinquent 
in order to qualify. Then she purposely becomes delinquent in 
order to qualify, and now she is having a hell of a time trying 
to get a modification. There is something fundamentally wrong 
with this. I mean, I understood the law to be very clear that 
you don't have to be delinquent.
    Mr. Allison. Right.
    Senator Menendez. How can any servicer or any lender say 
you have to be delinquent? There should be a consequence for 
that. It is false.
    Mr. Allison. Senator, we totally agree with you, and that 
is another reason why we are bringing the servicers in next 
week to talk to them about this. We want to make sure the 
information they are giving out is correct. Now, they have to 
do additional training of their representatives. We have to 
make sure that we are monitoring their actual performance and 
auditing to make sure that people who are eligible in their 
population of mortgage holders----
    Senator Menendez. Secretary, let me just say, and I will 
stop here.
    Mr. Allison. Yes, sir.
    Senator Menendez. Let me just say this. It is very simple. 
All the training in the world--there is one simple statement to 
anyone who works for you. You do not have to be delinquent in 
order to be eligible for the program. That is it. Now, how much 
training does that take? How much training does that take?
    Mr. Allison. Senator, we very much agree with you, but----
    Senator Menendez. This is why there have to be consequences 
if, at the end of the day, people are not doing the right thing 
under the law.
    Mr. Allison. Yes.
    Senator Menendez. Senator Schumer.
    Senator Schumer. Thank you, Senator Menendez, and thank you 
for chairing the hearing. I thank Senator Shelby. It is an 
important hearing, although a good part of me can't believe 
that two full years after the first signs of this crisis were 
becoming plain for all to see, we are still sitting here 
talking about how to prevent foreclosures.
    More to the point, 5 months after the Administration 
announced the Making Home Affordable Program, which was 
supposed to help between seven and nine million homeowners 
modify their mortgages, we are hearing only a few hundred 
thousand modifications have been offered and only a fraction of 
those loans have actually been modified.
    You know, when it was explained to me, I thought it was 
great, you know, focusing on the servicers, giving them 
incentives. Obviously, it would have been better to have the 
stick of bankruptcy involved, but that is not in the cards. And 
it is sort of befuddling as to why it is not working, but it 
clearly isn't working the way it should be and so you need to 
change things.
    Now, I have one proposal that might help here. I hear that 
one of the things that you are thinking about--one of the 
things that I am thinking about, anyway, I don't know if you 
are thinking about it--but one of the things I am thinking 
about is giving homeowners facing foreclosure the option as a 
last resort of renting their home for a period of time at a 
fair market rate. This wouldn't cost taxpayers any money, 
wouldn't bail out the lenders.
    Homeowners would be able to stay in their home even after 
defaulting on the mortgage, but they no longer own the home so 
there is little temptation to take advantage of this program 
unless all efforts at reworking the mortgage have failed.
    For banks, in many cases, it would be better and cheaper 
than foreclosure, particularly given how depressed our housing 
markets are now, and maybe in a year or two they would be 
better.
    Neighborhoods can ill afford more foreclosures. I have seen 
this throughout my State, downstate and upstate alike. It puts 
more pressure on vacant properties. The more foreclosures you 
have, the harder it is for housing markets to recover, which is 
an overall goal of this economy. And, of course, it helps 
preserve neighborhoods, because someone living in a home is a 
lot better than a vacant foreclosed home, and these foreclosed 
homes don't get sold too quickly given the housing market.
    So would Treasury consider this kind of program? If so, can 
you describe how it would work, what you think the pros and 
cons are, and what is the likelihood it could happen?
    Mr. Allison. Senator, we are going to be looking at that 
thought. That is a very thoughtful suggestion. I think we have 
to look at this, too, on a case by case basis. There are 
various programs we are rolling out right now for those who 
cannot afford to stay in their homes and those will include 
deeds-in-lieu as well as short sales of the property so they 
can extinguish the mortgage and we provide an allowance for 
them to seek housing that they can afford.
    The question you are raising is whether they ought to be 
able to stay in that house and rent----
    Senator Schumer. Yes. It would make sense.
    Mr. Allison. Yes, and it is certainly an idea that we are 
thinking about and perhaps Mr. Apgar can talk about that from 
the standpoint of HUD, as well.
    Senator Schumer. Go ahead, Mr. Apgar.
    Mr. Apgar. Yes. HUD is looking at a range of options. I 
mean, what we have is a lot of households that are losing their 
home and a lot of homes that have been lost, and figuring how 
to put those back together either by not letting the household 
depart the home through some continuing rental option, or if 
they do leave the home, get another renter or another reuse of 
that property. And so we are exploring a wide range of options, 
both through the Neighborhood Stabilization Program----
    Senator Schumer. So what would stand in the way of getting 
this done? I know you can always rent a home once it is 
foreclosed on. Banks do that----
    Mr. Apgar. Right.
    Senator Schumer.----if they can't sell it. But that, again, 
is going to involve finding a new tenant, vacancy, and all 
that. It is a lot easier to let the tenant stay in their home 
and then the value, a year or two later, maybe the market comes 
back up and you don't even need to foreclose on it.
    Mr. Apgar. Well, we are investigating and looking at other 
programs that have been like that around the country. Freddie 
Mac had an option like that.
    Senator Schumer. Well, give me off the top of your head----
    Mr. Apgar. One of the obstacles was, quite surprisingly, 
that the homeowner, having gone through the anguish of 
delinquency, foreclosure, and what, many of them said they 
didn't want to stay on as renters, which was surprising to us. 
So the question is, what is blocking that program----
    Senator Schumer. Yes, but what about----
    Mr. Apgar.----from working where it has been tried? We will 
figure that out and we will see if we can make it work.
    Senator Schumer. OK, but let us say--give me an objection, 
either Mr. Allison or Mr. Apgar, to a homeowner who said, I do 
want to stay in my home. I have lived here. I have all my stuff 
here. I don't know where I would move. I have my patterns. My 
kids go to school here. Whatever.
    Mr. Apgar. If you could figure out a fair rent, it seems 
like it would be a fair deal.
    Senator Schumer. OK. It doesn't seem to me to be too hard 
to figure out a fair rent. And I will bet, I don't know, that 
in many, many cases, the fair rent is less expensive to the 
bank--obviously, they are not going to get as much money as the 
mortgage was or we wouldn't be in that boat to begin with--than 
foreclosing.
    Mr. Allison. Well, we are----
    Senator Schumer. And then I have found in lots of 
foreclosed homes, the home gets in bad shape pretty quickly.
    Mr. Allison. Yes. Again, we agree that you have a very 
thoughtful suggestion. I think we owe you a response----
    Senator Schumer. Good.
    Mr. Allison.----as we complete our analysis.
    Senator Schumer. That would be great.
    Mr. Allison. Thank you.
    Senator Schumer. OK. Next question. I don't know what my 
time is here, since I am still on your time, Mr. Chairman, but 
I will take advantage.
    [Laughter.]
    Senator Menendez. I am surprised.
    Senator Schumer. Very funny, Bob.
    [Laughter.]
    Senator Schumer. The banks and servicers--ever since I 
persuaded him to take the DSCC, he has been less friendly to 
me. No, that is a joke.
    The banks and servicers complain that the Administration 
rolled out its plan too quickly without consulting them. They 
haven't had time to put the necessary resources in place to 
handle the volume of modification requests they are facing. But 
at least one bank, J.P. Morgan, has, according to our 
information, performed much better than the others, completing 
approximately half of all loan modifications completed so far.
    If it is just a matter of getting people and technology in 
place and preparing paperwork, why is one bank able to do a lot 
more than the others? Have you looked at seeing what their 
success is compared to the not very great success of a lot of 
the other major servicers?
    Mr. Allison. Senator, we have looked at their success and 
they should be commended for their rapid action and we are 
pressing others to act more rapidly----
    Senator Schumer. But what are they doing differently? That 
is my question. I am not asking to give them a gold star. I am 
rather trying to learn from their success and how we apply it 
to other institutions that are not getting as many 
modifications done.
    Mr. Allison. Yes, sir. Well, not speaking for J.P. Morgan, 
they can tell you directly, but I believe that they----
    Senator Schumer. Well, they don't know what is happening in 
the other banks. They know what is happening in theirs.
    Mr. Allison. They must have concluded that this crisis was 
going to be here for some time and it made much more sense to 
address it forthrightly and rapidly than allow it to continue 
to build.
    Senator Schumer. And you say the other banks, the other 
servicers, most of whom are major banks--as I understand it, 
two-thirds of the servicers of mortgages are major TARP 
recipients or something to that effect. I may have the number 
off, but a large percentage. Are the other banks sort of 
ignoring reality here?
    Mr. Allison. I think it is fair to say that some banks were 
slower to recognize the enormity of this problem and its 
potential longevity than others. And I think more and more, as 
Mr. Apgar testified earlier, have concluded that they must take 
action and we have created incentives for them to do so. And I 
think, again, publicizing their activities is going to have a 
major impact on the willingness of these companies to act 
rapidly.
    Senator Schumer. Finally--go ahead, Mr. Apgar.
    Mr. Apgar. Secretary Donovan invited the senior leadership 
of the J.P. Morgan Chase company in to explore what they were 
doing right in order to learn from that, and essentially they 
have a system of home ownership centers, calls, outreach, a 
more integrated system that clearly has ramped up----
    Senator Schumer. Well, are they willing and are you willing 
to share that with the other banks so that----
    Mr. Apgar. That will be part of the dialog at the end of 
the month, as we not only talk about what are the obstacles but 
what have been best practices other----
    Senator Schumer. Do you think many of the other banks would 
be willing to accept that kind of methodology?
    Mr. Apgar. We certainly hope so, because we believe that 
everyone shares the commitment to get this crisis under 
control.
    Senator Menendez. We have a second panel, so if you could 
wrap up----
    Senator Schumer. OK. Could I do one final question?
    Senator Menendez. Fine.
    Senator Schumer. Thank you. I apologize.
    I have been concerned for some time with the effect of 
predatory equity in the residential real estate market. That is 
when investors buy residential properties, often in affordable 
communities. They pay very high prices--that is happening less 
now, but still happening--with the help of massive amounts of 
leverage. And so in order to make a profit, they stop doing 
maintenance and upkeep. They make every effort to kick out low-
income tenants so they can renovate the apartments and raise 
rents. I find this a despicable practice and I have gone after 
the people who do it. But the people who enable them, who lend 
them the money, should equally be blamed, and I know that 
Secretary Donovan cares about this, because when he was HUD 
Commissioner, we worked on it together.
    Is Treasury or HUD currently working on programs that would 
address the problem that I have labeled predatory equity?
    Mr. Apgar. Yes, we have been working on this issue. I just 
would point out, of course, that not only is this an issue in 
New York, but nationwide, we are seeing over-leveraged 
buildings or buildings where, just like single-family homes, 
there is more--the value of the property is less than the value 
of the outstanding mortgages. What is troubling about this is 
many of these mortgages are on the balance sheets of some of 
the smaller community banks that we were talking about earlier 
and makes them specifically at risk, and so we are working on 
options to try to address this crisis, both talking with our 
colleagues in Treasury as well as throughout the 
Administration.
    Senator Schumer. Yes, and I will conclude now, but I think 
you need to talk to some of the bank examiners. The standards 
by which these loans were allowed to go forward were lax and 
unrealistic in terms of what kind of rents could pay back that 
kind of price that they paid for these buildings.
    Mr. Apgar. Mm-hmm.
    Senator Schumer. Thanks.
    Senator Menendez. Thank you, Senator Schumer.
    Thank you both for your testimony. I look forward to 
hearing back from you on some of the issues that the Committee 
has raised.
    With that, let me call up our second panel, invite them to 
come up to the table. As they come up, let me, to advance the 
time, introduce them.
    Let me welcome our second panel. Let me start off by 
welcoming Thomas Perretta. He is from Chairman Dodd's State of 
Connecticut. And if we could ask people to please, if you are 
finished with listening to the hearing, leave the room quietly. 
Thank you. Please, have a seat.
    Mr. Perretta is from Chairman Dodd's State of Connecticut. 
He has worked for the Connecticut Board of Education for 11 
years and he is going to share with us his story of how he 
tried to modify his mortgage. Mr. Perretta, I just want to say 
what you are doing here today, coming before the Committee to 
discuss a very personal life story is not only meaningful but 
courageous. I know I speak for all of our colleagues in saying 
that we are very grateful for your willingness to come and 
share your personal story.
    Let me welcome Joan Carty. She is the President and CEO of 
the Housing Development Fund in Bridgeport, Connecticut. Ms. 
Carty is a longtime community leader, having served as Director 
of the Bridgeport Neighborhood Fund and Stamford's Neighborhood 
Preservation Program. We are grateful to her for her hard work 
and years of experience that she brings before the Committee 
today.
    Next, I would like to welcome Paul Willen, who is the 
Senior Economist and Policy Advisor at the Federal Reserve of 
Boston. Mr. Willen is well published in the areas of financial 
management and mortgage markets. He recently finished some very 
interesting publications on the current foreclosure crisis.
    Next, I would like to welcome Mary Coffin, who is the head 
of Mortgage Servicing and Post-Closing at Wells Fargo Home 
Mortgage. In her capacity, she oversees an operation that 
reaches 7.9 million customers. She is a member of the Wells 
Fargo Executive Management Committee, where she helps to craft 
the company's overall strategic direction, and she has worked 
in the mortgage industry for more than 25 years. It doesn't 
appear so, but it looks like it according to the statement. It 
says 25 years.
    Let me welcome Mr. Curtis Glovier, Managing Director at 
Fortress Investment Group,. Mr. Glovier is a partner in 
Fortress's hybrid funds area, managing both government 
relations and private equity efforts. He brings with him many 
valuable years of experience working in the financial markets.
    Let me also welcome Allen Jones, who is the Default 
Management Executive at Bank of America. Mr. Jones manages Bank 
of America's strategy and interaction for default management 
and loss mitigation with public policy groups and with 
Congress. Before working with Bank of America, he worked with 
HUD and with KPMG.
    And last, let me welcome Diane Thompson, who serves as 
Counsel at the National Consumer Law Center. Prior to her 
current position, she served in the Land of Lincoln Assistance 
Foundation as a home ownership specialist and a supervising 
attorney. She belongs to many important boards, including the 
National Community Reinvestment Coalition's Board and the 
Consumer Advisor Council of the Federal Reserve.
    Welcome, all. We are going to have your full statements 
included in the record. Because this is a large panel and we 
want to get all of your testimony in before any votes, we are 
going to ask you to stick to the 5-minute timeframe that I 
think the Committee advised you that you would have so we can 
get everybody's testimony, hopefully some questions in, and go 
from there.
    With that, Mr. Perretta.

            STATEMENT OF THOMAS PERRETTA, CONSUMER, 
                      STATE OF CONNECTICUT

    Mr. Perretta. Good morning, Mr. Chairman and Ranking Member 
Shelby and everyone.
    My mortgage problems became evident when my wife, Susan, 
passed away June 1, 2008. We worked hard doing the best we 
could for our son, living within our means. We had vacations. 
We enjoyed ourselves. We stayed--I am going off the top of my 
head with this.
    We stayed at my in-laws for a year and a half, saving money 
for the downpayment for the townhouse. Tommy did well in high 
school. She was creative in getting him through college. He 
graduated from Quinnipiac last year and he was going to do 
physical therapy. He wanted to take a year off to be with Mom. 
Mom didn't make it.
    We worked all our lives. I am lucky. I have been working 
with the Stamford Board of Education for 11 years. I am in my 
twelfth year right now. I am very fortunate for that.
    After going through, getting Tommy through college, all the 
bills--she had taken care of the bills for the last 24 years--
Tommy, you have got to take the $2,000. Here is a check. Go pay 
the mortgage. We have got to do this. She was in a nursing home 
at Longridge, still writing out the checks. She was still 
paying the bills.
    When she passed away, I had to borrow money. I had no money 
to bury her. I borrowed--I just go done paying $16,000 from 
last year to bury her. A lot of friends, my in-laws, the 
funeral director was very understanding. I am on a--we had a 
large electric bill. I am on a yearly electric plan with CL&P. 
I have negotiated payments with my common charges. I took the 
cable box out for TV. I am on cell phone only. We don't have a 
regular phone. We have a computer on AT&T for my son. I am 
taking the car back. I can't afford the car payment.
    I started realizing the problems after the holidays this 
past year, that I was going to have to--I contacted Chase. I 
wanted to know what to do. I talked to a lady--they were always 
in touch with me--with the statement that we owed--my mortgage 
was $2,031. It went up a little bit with the taxes and 
everything. I kept getting a bill. My late charges had piled 
up. I tried to keep up. At one point, I paid the first payment 
I was late and then another $2,000 in 2 weeks. Income tax time 
came. I had money. I got some money back. I straightened out a 
little bit. I wanted to know if I could do something. I have to 
get this payment down. I can't afford it.
    I had gone over a formula two different times on the 
telephone with two separate people from Chase, 10 minutes. I 
had my little briefcase. I have everything I owe right next to 
me. I can do it on the telephone just like that. And their 
reply was, I don't qualify. I don't make enough to qualify. The 
common sense--it didn't make sense to me. If I could make 
enough, I wouldn't be in this jam I am in.
    Finally, Air Post Housing Development Fund. I was falling 
behind. They got the paperwork in to Chase on May 4. I didn't 
receive a reply. I lost my--God bless my wife.
    Now that my son has graduated college, he is going to start 
chipping in. He is on a business trip right now. He is going to 
come in. He is going to help me by paying off the big electric 
bill, which is $500 a month on top of what I regularly pay. We 
are halfway done with that. That was, like--she was 98 pounds. 
I had the heat on for the last two winters all the time. He is 
going to straighten out with me with the common charges. I am 
going to use his car a couple times when he takes the train to 
work. I can walk to work. I am close enough for that. And if I 
have to go somewhere, I get my father-in-law's truck on the 
weekend if I have to cut a lawn or something like that.
    All I was looking for was to get the mortgage payment down. 
I would have figured--another common sense--and I am sorry for 
going off like this--another common sense thing should have 
kicked in. I didn't want the sympathy for the fact that I lost 
my wife. I was looking for the understanding that we had gotten 
our mortgage with two incomes, mine and hers. Now once I 
notified them that I am missing her income, that we have to do 
something--I am behind five, 6 months with my mortgage and I 
sent paperwork in to them and everything. If not for Housing 
Development Fund, I don't know where I--I didn't know where 
else to go.
    And that is it. I am beside myself right now. I am just 
waiting for a response from them. I don't have the other 
income. I don't understand.
    Thank you very much for your time. I am sorry.
    Senator Menendez. No, thank you very much for sharing your 
story, and I am sorry for your wife's loss.
    Mr. Perretta. Thank you.
    Senator Menendez. Ms. Carty.

    STATEMENT OF JOAN CARTY, PRESIDENT AND CEO, THE HOUSING 
           DEVELOPMENT FUND, BRIDGEPORT, CONNECTICUT

    Ms. Carty. Good morning, Mr. Chairman. Thank you for 
inviting me to testify today. My name is Joan Carty. I am the 
President and CEO of the Housing Development Fund in 
Connecticut.
    Last year, because of the widespread and increasing 
problems with subprime lending, mortgage delinquencies, and 
rising foreclosures, HDF started an additional counseling 
program to assist families in our communities who are stressed 
with these problems. In the course of developing our program, 
we have reached out to many other partners: The Bar Association 
for Pro Bono Attorneys, the courts to establish working 
relationships with mediators, volunteers with financial and 
social services backgrounds to help us with the ever increasing 
volume of people who need guidance, and the banks, who in many 
cases control the outcomes of the situations facing people in 
foreclosure or mortgage delinquency.
    We are a HUD-certified counseling agency. We have 
personally experienced the kind of shadow boxing that occurs 
when a homeowner in distress calls their lender or servicer for 
help. Too often, their call is bounced to a call center across 
the globe or the call is bounced from department to department 
within the bank. On many occasions, after multiple periods of 
time on hold, they finally reach a live person, but it is a 
representative who is merely following a script. Often, the 
lender or servicer representative has no record of prior 
contact with the homeowner. It is a process that often feels 
futile.
    We have found that in too many cases, when we send clients' 
modification requests to banks or servicers, including the 
largest ones, that the modification package enters a black hole 
for months on end. These homeowners are in distress. Even a 30-
day timeframe can radically affect their credit profile. Once 
they slip behind on timely payments on their mortgage or any 
consumer debt, their credit score goes down and their monthly 
interest charges can go up. In many cases, cross-default 
provisions mean that default on one obligation will trigger 
higher monthly charges on all other debt, even if they are 
current on it.
    If we were to look for common themes as to why families are 
in distress, we often find that death, divorce, illness, or 
injury, in addition to predatory terms on many mortgages, have 
pushed families to the edge of the cliff. Imagine the 
multipliers and harm rendered when this limbo extends for 
months.
    I understand that the lenders and servicers need 
modification requests that are well documented and that contain 
a budget that has been carefully worked out so that the 
homeowner will succeed over the long term. That is the kind of 
service that we as a counseling agency provide to our clients. 
What our clients in turn need from the lenders and servicers is 
rapid response, responses before their lives continue to spiral 
downward.
    It is difficult to believe that the sophisticated automated 
platforms that have been in use by lenders and servicers for 
loan origination over the past decade cannot be retooled to 
generate effective loan modifications with greater frequency 
and within tighter timeframes.
    I would also suggest that rapid response will help in other 
ways. With delay comes added expenses, which often get added to 
the mortgage balance. Extensive delays in the mediation process 
often result in the lenders charging the homeowner multiple 
times for late fees, attorneys' fees, and updated appraisals.
    Denial of homeowners' requests lead to expensive 
foreclosure processes which hurt the families involved and the 
communities in which the homes are located. In many instances, 
these foreclosures do not ameliorate losses or generate profits 
for the banks, given the current declines in property values 
throughout the country.
    Additionally, it is critically important to create a system 
that rapidly responds to requests from homeowners who are still 
current on their mortgages but who know they will not be able 
to sustain their payments going forward.
    What we are building at our agency is a system that can 
carry homeowners from that initial request for assistance 
through assessment of their situation and development of a 
modification request that will have viability over the long 
term. What we need from the lenders and servicers is their 
commitment to building a system that will react promptly and 
predictably to these reasonable requests. Thank you.
    Senator Menendez. Thank you.
    Mr. Willen.

   STATEMENT OF PAUL S. WILLEN, SENIOR ECONOMIST AND POLICY 
            ADVISOR, FEDERAL RESERVE BANK OF BOSTON

    Mr. Willen. Senator Menendez, Chairman Dodd, Ranking Member 
Shelby, and members of the Committee, thank you for your 
invitation to testify. My name is Paul Willen and I am a Senior 
Economist and Policy Advisor at the Federal Reserve Bank of 
Boston, but I come to you today as a researcher and as a 
concerned citizen and not a representative of the Boston Fed or 
any other Reserve Bank or of the Board of Governors.
    My recent research has focused largely on understanding how 
we got here, why we had more foreclosures in one quarter in 
2008 in Massachusetts than in the 6 years from 2000 to 2005 
combined, and why millions of Americans have seen what is 
supposed to be one of the most positive experiences of their 
adult life, home ownership, turned into a nightmare.
    Let me talk first about some misconceptions about how we 
got here. These are important because most of the ineffective 
policy efforts over the last 2 years failed because they were 
based on incorrect theories of the crisis. One example is the 
idea that large changes in payments associated with the resets 
of adjustable rate mortgages caused the crisis. Every serious 
researcher, including us, who has looked at loan-level data has 
failed to find support for this. Most borrowers who default on 
adjustable rate mortgages do so long before the first change in 
their monthly payment.
    Another example is the claim that many borrowers who got 
subprime loans were steered into them and could have qualified 
for prime loans. We found in a large sample of subprime loans 
that only 10 percent met the combination of borrower credit 
history, downpayment, monthly income, and documentation 
necessary to qualify for a prime mortgage.
    In our most recent paper, we focused on the question of 
renegotiation of troubled mortgages. We followed borrowers in 
the year after their first 60-day delinquency and found that 
lenders gave payment reducing modifications to about 3 percent 
of the borrowers. The leading explanation for this is that 
securitization generates contractual complexity and fragmented 
ownership, which makes it impossible for borrowers and lenders 
to come together for mutual benefit. Our evidence refutes this 
claim. Servicers are just as reluctant to modify loans when 
they own them as when they service them on behalf of 
securitization trusts.
    The most plausible explanation for why lenders don't 
renegotiate is that it simply isn't profitable. I am using 
lenders loosely here to mean the bearers of the loss, the 
investors or their appointed representatives, the servicers. 
The reason is that lenders face two risks that can make 
modification a losing proposition. The first, which has been 
recognized as an issue by many observers and researchers, is 
re-default risk, the possibility that the borrower who receives 
a modification will default again and thus the modification 
will have only served to postpone foreclosure and increase the 
loss to the investor as house prices fall and the home itself 
deteriorates.
    The second risk, which has been largely ignored, is self-
cure risk, the possibility that the borrower would have repaid 
the loan without any assistance from the lender. About a third 
of the borrowers in our large sample are current on their 
mortgages or prepay 1 year after they become 60 days 
delinquent. An investor would view assistance given to such a 
borrower as wasted money.
    Some have suggested that our estimates overstate self-cure 
risk, but we would argue the opposite. The borrowers most 
likely to benefit from, for example, a 20 percent cut in 
payments are borrowers without substantial income loss or deep 
negative equity and are thus the ones most likely to cure 
without assistance from the lender.
    Let me say that my observations that servicers and 
investors may find modification unprofitable has no bearing on 
whether it is desirable for society at large and the economy. 
The private net present value to investors and the social net 
present value to society of a modified loan may well be very 
different.
    Let me conclude by talking about what we have always argued 
is the central problem in the foreclosure crisis but that 
policymakers have only recently recognized, borrower life 
events like job loss, illness, and divorce. People argue that 
life events could not explain the surge in defaults in 2007 
because there was no underlying surge in unemployment or 
illness that year. But that view reflects a misunderstanding of 
the interaction of house prices, depreciation, and life events 
in causing default.
    Foreclosures rarely occur when borrowers have positive 
equity for the simple reason that a borrower is almost always 
better off selling if they have to leave the house anyway. 
Thus, detrimental life events have no effect on foreclosures 
when prices are rising. But when home prices fall, some 
borrowers can no longer profitably sell and then the income-
disrupting life events take a toll. Thus, we did not need to 
see a surge in life events to get a surge in foreclosures, but 
rather a fall in house prices, which is exactly and 
unfortunately what we saw.
    Let me finally say that a key policy concern going forward 
is that economic recovery alone will not eliminate the 
foreclosure problem. Even in a healthy economy, 300,000 people 
file new claims for unemployment insurance every week. Without 
a substantial rise in home prices, many of these people will 
face the combination of negative equity and job loss that leads 
to foreclosure. The Massachusetts foreclosure crisis of the 
early 1990's did not end when the economy recovered in 1993 but 
when vigorous house price growth eliminated negative equity in 
1998.
    We hope that these findings add perhaps unexpected insights 
into your work as policymakers, and thank you again for the 
opportunity to appear before you today.
    Senator Menendez. Thank you.
    Ms. Coffin.

  STATEMENT OF MARY COFFIN, HEAD OF MORTGAGE SERVICING, WELLS 
                             FARGO

    Ms. Coffin. Chairman Dodd, Ranking Member Shelby, Senator 
Menendez, and members of the Committee, I am Mary Coffin, 
Executive Vice President of Wells Fargo Home Mortgage 
Servicing, and thank you for inviting me to speak today.
    Throughout this historic public and private sector 
collaboration, Wells Fargo has considered it our leadership 
responsibility to champion solutions. We have played a key role 
in creating streamlined, unified modification programs to help 
customers in need. A prime example of our work with the 
Administration is the new Homeowner Affordability and Stability 
Plan, which we fully support. Early indications are that HARP 
and HAMP are of great value and will benefit a significant 
number of families. In fact, we believe the Administration's 
goal to help as many as seven to nine million homeowners over 
the next few years is well within reach.
    In the first half of 2009, through lower rates, refinances, 
and modification, Wells Fargo alone has helped close to one 
million American homeowners. We refinanced three-quarters of a 
million customers through HARP and standard programs. And since 
our company represents approximately 20 percent of the market, 
we could estimate that close to four million Americans 
nationwide have already refinanced into lower mortgage 
payments.
    In these turbulent times, it is important to note that more 
than 90 percent of the borrowers remain current on their 
mortgage payments. To help those in need of assistance in the 
first half of this year, we have provided more than 200,000 
trial and completed modifications, an increase of over 100 
percent from the same period 1 year ago. And notably, last 
month, 83 percent of Wells Fargo's modifications resulted in a 
payment reduction.
    Acutely aware of the importance of speed, Wells Fargo 
worked with the government aggressively to develop and deliver 
HARP and HAMP. We did this in a way that was mindful of our 
responsibility to American taxpayers to execute solutions for 
those truly in need. Speed of execution was complicated by the 
multiple versions of the program, each with unique contractual 
requirements.
    On March 4, the Administration first announced the 
components of the Homeowner Affordability and Stability Plan. 
On April 6, we received the final HAMP guidelines from Fannie 
and Freddie and began implementing the program for these 
customers. On April 13, we were the first to sign a HAMP 
contract for loans we service for private investors, as well as 
the loans in our own portfolio. Further details for this 
program finalized by May 14, and we began offering it 9 days 
later.
    Since January, we have been providing loan workouts to 
Wachovia Option ARM customers who are struggling with their 
payments, and at the end of this month, we will add HAMP as yet 
another potential solution for those borrowers. With this 
addition, we will have fully executed HAMP for almost all of 
our at-risk borrowers. Since we, Wells Fargo, service one-third 
of the Nation's FHA loans, we are hopeful the government will 
soon provide this program, as well as the second lien program 
as it was initially described, since these borrowers are 
currently ineligible for a HAMP.
    As of June 30, Wells Fargo was in the process of finalizing 
52,000 home affordable modifications. When working with all of 
our seriously delinquent borrowers, 30 percent are not eligible 
for HAMP because they have an FHA or a VA loan, and another 15 
percent do not meet the basic program requirements. Of the 
remaining 55 percent, whom we have all contacted, we are 
actively working with half, and the other half have not yet 
chosen to work with us.
    For those borrowers who don't qualify for HAMP, we 
immediately seek to find another modification or alternate 
solution to avoid foreclosure. Before any home moves to 
foreclosure sale, we conduct a final quality review to ensure 
all options have been exhausted.
    We understand this time has been frustrating for at-risk 
customers and that they are anxious and in need of answers. 
With the President's February 18 announcement that refinance 
and modification programs would be forthcoming, we began to 
experience a large increase in customer inquiries. Knowing this 
would occur, we anticipated the influx and increased and 
trained team members to handle it. Yet it has been challenging 
to meet customer expectations as the various program details 
were provided to us over a period of 90 days.
    While we forecasted an increase in inquiries, including 
from customers current on their mortgage payments, our forecast 
turned out to be low. Historically, on a monthly basis, five to 
10 percent of inquiries for loan work-outs come from borrowers 
who are current. Since the announcement and the related 
increased focus on imminent default, this statistic has risen 
to nearly 40 percent. And, of course, not everyone who calls 
qualifies for imminent default.
    To manage this demand, we have implemented mandatory 
overtime. We have streamlined document processing. We are 
upgrading systems to handle escrow requirements for our home 
equity lines and loans. And most importantly, we have increased 
our trained staff by 54 percent over the first half of this 
year to 11,500 default team members, all whom are U.S.-based.
    In conclusion, we can certainly tell you we have been 
working very hard to responsibly execute these programs, and 
again, we fully support them.
    I will be glad to answer any questions.
    Senator Menendez. Thank you.
    Mr. Glovier.

   STATEMENT OF CURTIS GLOVIER, MANAGING DIRECTOR, FORTRESS 
  INVESTMENT GROUP, ON BEHALF OF THE MORTGAGE INVESTORS GROUP 
                           COALITION

    Mr. Glovier. Thank you for inviting me to testify today. My 
name is Curtis Glovier and I am a Managing Director at Fortress 
Investment Group. I am also a member of the Mortgage Investors 
Coalition, organized to provide policymakers with the mortgage 
investors' point of view. I am testifying today in my capacity 
as a member of the coalition.
    Allow me to start by commending the Committee for your 
leadership in pursuing every possible action to help keep 
Americans in their homes. We share your frustration with the 
slow pace of efforts to help homeowners. I also want to thank 
the Chairman for coauthoring with Chairman Frank a letter last 
week highlighting the Hope for Homeowners Program, or H4H, and 
to offer our support to facilitate American families' 
participation in this program so that they may be able to keep 
their homes and build equity. The discounted refinance program 
offered by H4H provides the best long-term solution for the 
homeowner and for the recovery of the U.S. housing market.
    The Mortgage Investors Coalition currently has 11 member 
firms with about $200 billion in total assets under management 
and over $100 billion in mortgage-backed securities. Investors 
in private label, that is non-Federal agency, mortgage-backed 
securities include asset managers, charitable institutions, 
hedge funds, insurance companies, municipalities, mutual funds, 
pension funds, universities, and others.
    Investors in securitizations and mortgages generally have 
no interaction with the homeowners--that is the job of the 
servicer--and also have extremely limited decisionmaking 
authority with respect to modifications, foreclosures, and 
other servicing actions. Very often, the original lender or its 
affiliate acts as servicer once the loans are securitized. Loan 
servicing is relatively concentrated. Fifty-five percent of all 
mortgages are serviced by the four largest banks. It is also 
important to note that there are $1.1 trillion of second liens, 
like home equity loans, in the residential mortgage market, and 
the vast majority of these are held on bank balance sheets as 
opposed to in securitizations.
    While the Federal Government's actions to bolster Fannie 
Mae and Freddie Mac and broaden the FHA's mandate have proven 
to be a critical stopgap measure during the housing and 
economic crisis, a revival of the non-agency market and return 
of private investors to the market is seen by many as the 
prerequisite to the recovery of the U.S. housing market and a 
return to normalcy in the capital markets.
    Returning homeowners to a positive equity position provides 
significant opportunity and motivation for at-risk homeowners 
to remain in their homes and communities. A short refinancing 
under H4H solves both the affordability and the negative equity 
problems plaguing homeowners at risk of foreclosure today. The 
program was created to reduce principal on the existing senior 
lien mortgage and to eliminate the existing subordinate, second 
lien, which can thereby prevent unnecessary foreclosures.
    The Coalition believes that a properly implemented Hope for 
Homeowners Program will not only provide stability for 
homeowners, but will also stem the declines in the housing 
markets and provide certainty for the fixed-income capital 
markets, which will bolster financial markets in general and 
promote increased lending and reinvestment in mortgages. We 
believe the program will prevent additional foreclosure 
inventory from adding to the overhang of bank-owned properties 
in the residential real estate market, thereby helping to 
establish a floor for housing prices. The best solution to our 
Nation's mortgage crisis is to significantly forgive principal 
on first and second lien mortgage debt in connection with the 
refinancing of the over-extended homeowner into a new low 
interest rate mortgage through the Hope for Homeowners Program.
    Investors seek sustainable mortgage restructurings that 
address the interests of all parties and the multiple factors 
that have contributed to homeowner re-defaults. Compared to a 
short refinance program, such as H4H, a modification approach, 
such as the Making Home Affordable Program, has a notable 
shortcoming: by not addressing negative equity, homeowners are 
trapped in a mortgage that cannot be refinanced and a house 
that cannot be sold. When the program ends in 5 years, the 
interest rate on both the first and second mortgage will reset 
higher. The outstanding balance of the combined mortgage debt 
is likely to still exceed the value of the home, and there 
could be a meaningful risk of a re-default. The low prices of 
securities in the mortgage market today in part reflect the 
great uncertainty of future cash-flows and values associated 
with such modified loans.
    While there are still operational hurdles to overcome in 
implementing a more effective H4H Program, the major impediment 
to the viability of the program is the volume of second 
mortgages or second liens outstanding. As indicated earlier, 
while a small percentage of second mortgages are sold to 
investors, the vast majority remain on the balance sheets of 
our Nation's largest banks. In fact, the four banks that 
service approximately 55 percent of mortgages held roughly $441 
billion of second liens on their balance sheets as of last 
year.
    Banks have favored loan modification programs, such as 
Making Home Affordable, that not only defer the recognition of 
losses on the second lien portfolios, but also better their 
second lien position at the expense of the first lien investors 
and to the detriment of the homeowner.
    How can Hope for Homeowners become a reality? It is an 
effort that will require participation and sacrifice by all 
interested parties to succeed. The government, financial 
institutions, and investors all share an important stake in the 
recovery of the American homeowner and must contribute actively 
to forge healthier housing and financial markets. Investors 
stand ready to make the sacrifice necessary to re-equitize 
homeowners at risk of foreclosure.
    Thank you for the opportunity to testify today.
    Senator Menendez. Mr. Jones.

    STATEMENT OF ALLEN H. JONES, DEFAULT MANAGEMENT POLICY 
                   EXECUTIVE, BANK OF AMERICA

    Mr. Jones. Good afternoon, Senator Menendez. I am Allen 
Jones, Bank of America's Default Management Policy Executive.
    Bank of America strongly supports the Administration's 
Making Home Affordable Program, and we stand ready to support 
our borrowers with a sense of urgency. Since the start of 
housing crisis, Bank of America has been at the forefront of 
Government and industry efforts to develop loan modification 
programs that work and help financially distressed customers 
remain in their homes.
    We know that more needs to be done. That said, we strongly 
support Administration's focus on affordability and loan 
modification and refinance processes in order to achieve long-
term sustainability for homeowners, and we are eager to 
constructively participate in the upcoming meeting at Treasury.
    Before getting into specifics, I want to highlight a couple 
of items.
    First, Bank of America exited subprime lending nearly 9 
years ago. Upon acquiring Countrywide, we have taken the steps 
to ensure our combined company is a leader in traditional 
mortgage products. Our April launch of the Clarity Commitment, 
a clear and simple one-page disclosure that accompanies every 
new and refinanced loan, is one demonstration of our focus on 
ensuring customers understand what loan they are getting and 
the associated costs.
    Second, Bank of America has been at the forefront to 
develop loan modification programs as a way of avoiding 
foreclosures and helping financially distressed customers 
remain in their homes. We modified 230,000 mortgages in 2008, 
and we report that year-to-date we have modified 150,000 loans.
    In recent weeks, the Administration's Making Home 
Affordable modification guidelines and supplemental guidelines 
have been rolled out. With the MHA program, our systems have 
been converted, and MHA has become the centerpiece of Bank of 
America's overall home retention efforts. Already approximately 
80,000 Bank of America customers are in the trial modification 
period or are responding to efforts we have made under Making 
Home Affordable. We have achieved this level of accomplishment 
by devoting substantial resources to this effort. Our servicing 
team has more than 7,400 associates dedicated to home 
retention, double what it was a year ago.
    Bank of America has also devoted significant resources to 
community outreach. Since the beginning of this year, we have 
participated in more than 120 outreach events in over 26 
States.
    Earlier this year, we announced our financial support and 
commitment to the Alliance for Stabilizing Communities, which 
is led by the National Urban League, the National Council of La 
Raza, and the National Coalition for Asian Pacific American 
Community Development.
    We understand the importance of being there for our 
customers when they call and are providing a timely response to 
their inquiries. My teammates respond to an average of 80,000 
customer calls a day and up to 1.8 million calls a month.
    Our customers have multiple entry points into our home 
retention team. Whether on an outbound call, inbound call, 
outreach event, or by mail, once we have made contact with the 
borrower, we diagnosed the financial challenge. We isolate 
short-term issues such as inability to pay because of a medical 
bill versus long-term challenges like a loss of job or 
underemployment. Short-term issues may be solved through a 
repayment plan. Longer-term financial challenges may be solved 
through a loan modification.
    In the event we cannot find a solution, we consider a short 
sale or deed in lieu of foreclosure. In the event neither of 
these offers work, we will work with the borrower to find a 
graceful exit and provide relocation assistance.
    Bank of America customers will not lose their homes to 
foreclosure while their homes are being considered for 
modification. The bank places foreclosure sales on hold while 
it determines a customer's eligibility for its home retention 
programs.
    With MHA, we believe there are additional opportunities for 
servicers to partner with the Administration and Congress to 
refine the program to help reach our mutual beneficial goal of 
helping as many borrowers as possible. We need to get this 
right to preserve the flow of mortgage credit to support 
sustainable homeownership, and at the same time protect 
communities and neighborhoods from avoidable foreclosures.
    We look forward to working with the Congress and the 
Administration to accomplish these goals. Thank you.
    Senator Menendez. Thank you.
    Well, Ms. Thompson, you get the final word here, at least 
at this point.

 STATEMENT OF DIANE E. THOMPSON, OF COUNSEL, NATIONAL CONSUMER 
LAW CENTER, ALSO ON BEHALF OF NATIONAL ASSOCIATION OF CONSUMER 
                           ADVOCATES

    Ms. Thompson. Thank you. Good afternoon, Senator Menendez. 
Thank you for providing me with the opportunity to testify 
today. My name is Diane Thompson. I am an attorney, current Of 
Counsel with the National Consumer Law Center. In my work at 
NCLC, I provide training and support to attorneys and housing 
counselors representing homeowners from all across the country. 
For nearly 13 years prior to joining NCLC, I represented low-
income homeowners at Land of Lincoln Legal Assistance 
Foundation in East St. Louis, Illinois. I testify here today on 
behalf of the National Consumer Law Center's low-income clients 
and on behalf of the National Association of Consumer 
Advocates.
    My comments today will focus on the barriers homeowners 
face in accessing sustainable modifications under the 
Administration's Home Affordable Modification Program, or HAMP.
    In preparing for this testimony, I reviewed my notes of 
conversations with hundreds of housing counselors and attorneys 
regarding HAMP since its rollout in early March. I also 
solicited updates from advocates as to their current experience 
with HAMP.
    What happened next was astonishing. For the last several 
days, I have had a steady stream of phone calls and e-mails 
from advocates all over the country. Their frustration is 
palpable. Over and over they ask me: How can I tell if the 
servicer is telling me the truth? I know that this modification 
is in violation of the HAMP guidelines, but when I raise that, 
the servicer stopped returning my phone calls. And, 
fundamentally, what can I do to help the borrowers I am working 
with to get a loan modification? They can pay. They want to 
keep the house. But the servicer says no.
    The housing counselors and attorneys I work with are on the 
front lines of our national foreclosure disaster. Many of them 
had high hopes for HAMP. Few, if any, now look to HAMP for 
assistance in their daily struggle.
    My written statement details the most common problems with 
HAMP. Implementation has been excruciatingly slow. Months after 
HAMP's rollout, servicers are still telling advocates that they 
do not have a process in place to review homeowners for HAMP 
modifications or that they have put such reviews on hold for 
one reason or another. In the meantime, servicers have 
continued to proceed with foreclosures and foreclosure sales, 
even for homeowners who are undergoing a current review and 
have submitted all documentation.
    Beyond delays in implementing the program, servicer 
noncompliance has been widespread. Participating servicers 
refuse to offer HAMP loan modifications, instead steering 
homeowners into more expensive, less sustainable loan 
modifications. Many servicers continue to require waivers of 
all legal claims and defenses. Some servicers have instructed 
homeowners to waive their rights to HAMP review in order to 
obtain any loan modification. There are reports of several 
servicers requiring downpayments usually in the range of 
thousands of dollars before they will consider homeowners for 
HAMP modification.
    We know that the Administration has allotted $15 billion to 
servicers for their participation in HAMP and will be 
disbursing those funds soon. We are very concerned that 
servicers may receive this money for non-HAMP-compliant loan 
modifications. HAMP is premised on servicer incentives. These 
incentives are unlikely to change servicer behavior without 
consequences for noncompliance.
    Homeowners and their advocates have no mechanism to 
challenge a servicer's denial of a loan modification or even to 
determine whether or not a servicer truly performed an accurate 
evaluation of the homeowner's qualifications for such a 
modification. The key driver of whether or not a homeowner gets 
a loan modification--the net present value test--is not public. 
Nor are servicers currently required to disclose to homeowners 
what numbers they put into the model or what the result of the 
test was.
    The net present value test measures whether or not the 
investor will profit more by modification or not. Many 
advocates report that servicers appear to have entered 
incorrect information into the net present value analysis or 
failed to follow it at all.
    HAMP must be modified to provide greater transparency and 
accountability. The NPV test for qualifying homeowners must be 
available to the public. Servicers must be required to report 
to homeowners what numbers they used in the analysis and what 
the results of that analysis were. Homeowners who are denied a 
loan modification or who encounter difficulties in obtaining a 
loan modification need access to an independent review process.
    Ultimately, we believe that, in order to be effective, HAMP 
may need to mandate principal reductions. With one out of five 
homeowners underwater, significant readjustment in principal 
balances are necessary for the economic stability of the 
country. Additionally, servicers must be required to halt all 
foreclosure proceedings upon commencement of a HAMP review and 
should not be able to proceed with a foreclosure without a HAMP 
review. Proceeding with the foreclosure during a review 
increases costs of any ultimate modifications and creates a 
real risk that a home will be sold in foreclosure before the 
review is completed.
    Staying foreclosures pending review will provide a powerful 
incentive to servicers to expedite HAMP reviews. Homes that can 
be saved should not be lost to foreclosure because a servicer 
failed to complete a HAMP review.
    If the data coming out in August and then this fall 
supports our experience that changes to HAMP in design and 
implementation cannot address the foreclosure crisis, mandated 
loan modifications, bankruptcy reform, and servicing 
legislation should be adopted by Congress.
    Thank you.
    Senator Menendez. Thank you, Ms. Thompson. Thank you all 
for your testimony.
    Let me start. I am disturbed at elements of your testimony, 
Ms. Thompson, that some servicers in violation of HAMP's rules 
are being asked to waive legal rights and others are being 
steered into non-HAMP modifications, despite representations to 
the contrary. Have you contacted Treasury about this? Have you 
shared the experiences you have had? And if so, what type of 
response have you gotten?
    Ms. Thompson. We did talk with Treasury. We were at a 
meeting with Treasury last week, actually, discussing the net 
present value test and our belief that that test must 
absolutely be made public, and we discussed briefly at that 
point the issue of compliance, and we were told that we would 
schedule a subsequent meeting at a later date to discuss in 
more detail our concerns regarding compliance.
    Senator Menendez. What was their response to you on the net 
present value issue?
    Ms. Thompson. Treasury indicated that they would be willing 
to discuss providing--requiring servicers to provide some 
information as to what the inputs into the net present value 
test were and what the outputs were. They were reluctant to 
provide the full net present value analysis or even to require 
servicers to provide the entire list of inputs.
    Senator Menendez. Ms. Coffin or Mr. Jones, any observations 
about some of this in terms of violation of HAMP rules being 
asked to waive legal rights, steering into non-HAMP 
modifications?
    Ms. Coffin. I will go first. We have actually trained and 
worked with all of our staff and created for our organization 
that HAMP is at the very top of the waterfall. Now, in my 
testimony, you will see the timeline of execution, so some 
customers that we have been working with before we had it fully 
executed have been moved forward, even in some more aggressive 
modifications than even the HAMP, particularly on our pick-a-
payment option ARM portfolio. But HAMP is at the very top of 
our waterfall, and I guess my comment to some of the statements 
made is that, you know, since the beginning of this, we have 
understood as servicers there is full transparency here, we 
would be fully audited, and we assume that all of our files and 
information have to be completely documented as to why we 
either chose or did not choose to do a modification. And in a 
conversation earlier, we know that we will be held accountable 
for that.
    So our actions are being documented. Whether the NPV model 
is disclosed or not, it is going to be known by Treasury and 
the audits that are done as to why we did or didn't do the 
modification and did we do it accurately.
    Mr. Jones. Senator Menendez, Bank of America fully supports 
the Making Home Affordable program, and as far as the 
challenges that we are facing, I am not aware, do not have an 
example to share with you, of any instance where we are not 
looking to do the best for our customer.
    And I would like to share that beginning last year, when we 
did 230,000 loan modifications, in the event a borrower applied 
for a modification that we could not do, we sent a decline 
letter, and we explained exactly why we could not do that 
modification.
    Going forward, while it is not a requirement, I do not 
believe, under Making Home Affordable, it is our intent to 
provide a similar declination letter. As Mary mentioned, we 
expect the process to be fully transparent, and I am happy to 
work with you and the members and walk you through our process.
    Senator Menendez. Let me ask, so neither of you are going 
to find in your servicers, the people who work for you, telling 
people that they have to be in default in order to be 
considered, right?
    Ms. Coffin. I would say from a historical perspective and 
the number of team members that we have, I could never 
blanketly tell you we have never told a customer that.
    Senator Menendez. Have you made it very clear to your 
employees that that is not the answer to someone?
    Ms. Coffin. Very clear. And we also record all of our phone 
calls, and if we hear that, we will go back and actually pull 
the calls, research them, and retrain and/or handle the 
employee appropriately in that circumstance.
    Senator Menendez. Mr. Jones, what is experienced by Bank of 
America?
    Mr. Jones. Bank of America's experience is the exact same.
    Senator Menendez. Well, I am going to share some cases with 
both of you.
    Let me ask you, Ms. Coffin and Mr. Jones, Mr. Glovier 
argues that you are holding second mortgages on your books at 
inflated values. As a result, your banks are refusing to accept 
reasonable payments for second mortgages and blocking 
homeowners from getting principal reduction through the Hope 
for Homeowners. How do you respond to that?
    Ms. Coffin. Go ahead. I will let you go first this time.
    Mr. Jones. Sure, thanks for the question, Senator Menendez. 
I was here earlier for panel one and listened very closely to 
former Commissioner Apgar's comments and Secretary Allison's, 
and where we are is we look forward to the Hope for Homeowners 
guidelines when they come out. Today we do not have guidelines 
that I can comment on. So I think the story was told, when 
Senator Merkley offered, that only one H4H loan has been 
created at this point.
    In addition, we await final guidance on second liens. Once 
we have those, we fully commit to supporting the Making Home 
Affordable second lien program.
    Ms. Coffin. I would second that Wells Fargo has been very 
actively engaged with the Administration on the HAMP program 
for our home equity loans. As a matter of fact, we are very 
anxious for it to be--and I heard today within 2 weeks--so that 
we can implement that.
    Knowing what we believe will be the parameters of that 
program, as we have co-loss-mitigated someone who we are 
working to find a solution for a borrower who has a first with 
us and we own the second, we have already aggressively and 
proactively gone ahead to mod that, as we believe the program 
will be administrated. That is, if we lower the interest rate 
on a first, we will take the second, we will lower it to the 
same level. If there is a principal forgiveness or forbearance 
done, we will also match that on a percentage basis.
    I will make one other statement as to home equity that I do 
not think most people believe, but it is a fact. In working on 
our own linked portfolio--that is, where we have the first, we 
are servicing the first, and we own the second--that in the 
small delinquency that there is, when the first is seriously 
delinquent, over more than half the time the second is current.
    So in our programs that we have been working on and our 
advice and expertise and our analytical research to the 
Administration in helping to develop a program, one of the 
reasons Hope for Homeowners that we brought to the attention is 
that it does not allow for a subordination, only requires an 
extinguishment of the second. And when you are sitting with a 
performing loan that is current, that, one, does not provide 
that to be a very good option; but, number two, and more 
importantly to Hope for Homeowners, I think we have to look at 
the nature of who that product is best served by.
    None of these programs serve blanketly all borrowers who 
are in need of assistance. Take Hope for Homeowners, for 
example. When you work through that program today, if you 
really have a struggling borrower who has an affordability 
issue, they could not afford the ending interest rate of that 
loan. It will be somewhere in the range of 8 to 10 percent.
    Now, when a modification today ends up in the range that it 
is being produced in a HAMP, they are not going to opt for a 
Hope for Homeowners modification--or a refinance, excuse me.
    Senator Menendez. Mr. Glovier or Ms. Thompson, any 
observations on those?
    Mr. Glovier. You know, I would just echo what Mr. Apgar 
said in his testimony, that the second liens are certainly an 
issue and that HUD is working on that. We do understand that 
HUD and Treasury are working with the large bank and bank-
affiliated servicers to work through that. But we have yet to 
see resolution on that process.
    Ms. Thompson. I would say that we have certainly heard from 
many homeowners that they have had trouble getting servicers 
who hold the second liens to agree to modify the second liens, 
even when the second liens were not performing; and that we 
also look forward to the new guidance under HAMP to see what 
happens.
    There is an additional point about affordability of loan 
modifications, and I agree with Mr. Apgar that affordability is 
certainly a problem. But there is more than one way to make a 
loan affordable, and you can do it by reducing the interest 
rate, or you can often do it by reducing the principal balance. 
If you reduce the principal balance, you have also effectively 
reduced the payments.
    When I was a practicing legal services attorney, all of the 
loan modifications that I agreed to had principal reductions as 
part of them, because I believe strongly that you need to have 
homeowners building equity, that you need to align the value of 
the loan with the value of the collateral. So I do not think 
that there is an opposition, which we sometimes set up, between 
affordability and principal reductions. I think principal 
reductions are often the most effective way to achieve long-
term affordability.
    Senator Menendez. You testified that servicers have 
incentives that keep them from forgiving principal, even when 
doing so might be better for the investor as well as the 
homeowner. How do you explain that?
    Ms. Thompson. Yes, I think it is true that--I think that 
the complex web of incentives for servicers--I am not sure that 
any servicer, that any of us fully understand it, that there 
are lots of different directions in which the incentives pull. 
But certainly servicers' primary income base is based on a 
percentage of what the principal balance on the loan pool is. 
So, by reducing principal balances, they are going to take a 
hit to their monthly servicing income.
    They may also take a hit in the residuals. Many servicers 
hold residual interests, and once the principal balance loss is 
recognized, the residual income may be cut off for them which 
they would otherwise be receiving.
    There are lots of other ways in which, depending on the 
nature of the pooling and servicing agreement, servicers can, 
in fact, lose money by doing principal reductions. Now, that 
has not prevented all servicers from doing principal 
reductions. Ocwen and Litton have done many loan modifications 
with principal reductions. But other servicers seem 
extraordinarily reluctant to do it, even when from a hard-
headed economic analysis it seems to make sense.
    Senator Menendez. You just mentioned one--I did not catch 
the name. Who is it that is----
    Ms. Thompson. Ocwen and Litton have both done quite a large 
number of principal reduction modifications.
    Senator Menendez. Are there any other servicers that are 
being more aggressive in offering principal reductions or 
deeper loan modifications?
    Ms. Thompson. My understanding is that Ocwen and Litton are 
leading the pack in the principal reduction modifications. I 
believe Carrington may as well be doing some principal 
reductions.
    Senator Menendez. Well, Mr. Willen, I appreciated your 
testimony. I know you are not here on behalf of the Federal 
Reserve, but there is a lot of great information in your 
findings. What policy responses do you think make sense based 
upon those findings?
    Mr. Willen. Several of my colleagues and I at the bank have 
made a proposal--which, again, is from us, not from the bank 
itself--in which we argued that the most effective way to help 
borrowers right now would be some sort of direct assistance to 
the borrowers rather than trying to incentivize servicers to 
help them.
    One of the things that we are doing right now, we put 
together a whole web of incentives, and I think, as Diane said, 
the servicer already faces a web of incentives, and we have 
just added a whole new one. And whether that will actually get 
them to help the people who we think deserve the help, and 
especially in light of the fact that Government money is 
already going into this in terms of the payments to the 
servicers, that doesn't seem like a very-- that seems like it 
is--it is not clear whether that will actually help the 
borrowers who we want to help.
    And so what we have advocated is targeting assistance to 
unemployed borrowers, either in the form of a grant or in the 
form of a loan. And one of the things that I think was 
appealing to us is that it is something you can do quickly, and 
it does not require setting up all kinds of structures with 
servicers. We already have a bureaucracy in place--the 
unemployment insurance system--that is in place to help 
unemployed borrowers, and this would just be one thing to add 
to that rather than going through the servicers.
    Senator Menendez. So in Mr. Perretta's case, you would 
advocate having the Government give him a direct grant and/or 
loan in order to meet his present challenge?
    Mr. Willen. I think that if such a program existed, we 
would have solved his problem by now.
    Senator Menendez. One last question to you, Ms. Thompson. 
Ms. Coffin has a pie chart which I found interesting in part of 
her written testimony that shows that mortgages associated with 
Government programs, such as Fannie Mae, Freddie Mac, and 
Ginnie Mae, constitute nearly 70 percent of all the mortgages, 
but only 32 percent of the seriously delinquent mortgages.
    Meanwhile, the mortgages not affiliated with those programs 
constitute about 30 percent of all of the mortgages in the 
universe, but a whopping 67 percent of all the seriously 
delinquent mortgages.
    Doesn't this tell us that a primary cause of the financial 
crisis is the unregulated mortgage brokers and lenders who did 
not worry about whether the mortgages they issued met Fannie or 
Freddie's guidelines and were good for borrowers? And doesn't 
that make the case for a Consumer Financial Protection Agency 
that spreads across the spectrum of financial entities beyond 
banks simply and looks at all of the interests of consumers 
among the predatory lenders that are out there?
    Ms. Thompson. I think there is no question but that 
complex, unregulated mortgages are what are driving the current 
foreclosure crisis. Any way that you look at the data, that is 
what the data shows. The adjustable rate mortgages, for 
example, are--it is absolutely true, as Mr. Willen said 
earlier, it is not the reset but the adjustable rate mortgages, 
these complex loans that were sold to people are absolutely 
driving the foreclosure crisis, and there is no question in my 
mind but that if we had had effective, comprehensive regulation 
of those products, we would not be where we are today.
    Senator Menendez. OK. Well, thank you all for your 
testimony, and we will be following up. As you heard, I think, 
from several of the members when we had the first panel, there 
is clearly a real concern about moving this process forward, 
getting more engaged, having our servicers be more aggressive 
as well as looking at what the Government's response is here. 
We look forward to a continuing dialog in this.
    Seeing no one else here and resisting the temptation to ask 
unanimous consent for something incredible, I will keep the 
record open----
    [Laughter.]
    Senator Menendez. For that would be the last time I would 
chair--keep the record open for 1 week for questions other 
members may have. If they are submitted to you, we really ask 
you to get a response to us as soon as you can. And with the 
thanks of the Chairman, this hearing is adjourned.
    [Whereupon, at 12:35 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
follow:]
           PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
    I'm glad you could all join us today, but I have to be honest with 
you: I am frustrated that we have to hold this hearing.
    For over 2 years, this Committee has worked to stem the tide of 
foreclosures in America. We've gotten plans and proposals from the 
Administration. We've passed legislation, made changes asked of us, and 
passed some more. We've received assurance after assurance from the 
industry.
    Everybody agrees that the crisis in our housing market was the 
catalyst for the broader economic crisis. And everybody understands 
that getting out of this broader crisis requires that we stabilize our 
housing market and stem the tide of foreclosures.
     So I'm hoping that, with stakes this high, somebody can explain to 
me why nothing has changed.
    Today the Associated Press is reporting ``The number of U.S. 
households on the verge of losing their homes soared by nearly 15 
percent in the first half of the year as more people lost their jobs 
and were unable to pay their monthly mortgage bills.''
    Why am I still reading about lost files, under-staffed and under-
trained servicers, and hours spent on hold?
    Why does the National Foreclosure Mitigation Program tell us that 
homeowners are waiting an average of six to 8 weeks for a response?
    Why am I still reading stories about homeowners, community 
advocates, even my own staff acting on behalf of constituents, shuffled 
from voicemail to voicemail as they attempt to help people stay in 
their homes?
    Why are servicers and lenders refusing to accept principal 
reduction so that homeowners can start building equity and get the 
housing market moving again? Two years ago I brought together banks, 
lenders, mortgage firms, regulators, and consumer groups for a 
Homeownership Preservation Summit.
    We all agreed, upon a statement of principles.

    First, servicers should attempt to contact subprime 
        borrowers before loans reset, in order to identify likely 
        defaults early enough for the loan to be modified.

    Second, modifications should be made affordable for the 
        long term.

    Third, servicers should have dedicated teams of 
        professionals to implement those modifications.

    And finally, we agreed that we needed real accountability, 
        a system for measuring the progress.

    We were able to come to this agreement because we all understood 
that nobody wins when a home is foreclosed upon.
    Nobody wins when a bank has to sell a house at auction for less 
than it would get if it simply refinanced.
    Nobody wins when a home loses $5,000 in value for every foreclosure 
on the block.
    Nobody wins when foreclosure rates are the single biggest threat to 
economic recovery.
    So what happened? And what are we going to do differently? Today, I 
want answers.
    Foreclosure is not an abstract concept. It's very real pain for 
American families. It's not just the loss of a house. It's the loss of 
a home. It's the anguish of having to uproot your family. It's the 
sadness of feeling like you let them down.
    And it's the terrible heartache caused by the violation of the 
sacred promise that has long defined the American middle class: that if 
we work hard and play by the rules, we can build something better.
    Most people in foreclosures worked hard and played by the rules. 
They budgeted, they saved, and they relied on brokers and lenders--
professionals who were supposed to be experts--to help them achieve 
their dream of homeownership.
    But then someone lost a job, gets sick, or, in far too many cases, 
discovered that they'd simply been cheated.
    Last year, I met Donna Pearce--a grandmother from Bridgeport, 
Connecticut, where there are 5,000 families with subprime mortgages in 
danger of foreclosure. Donna was assured by her lender that she could 
refinance in 6 months, but he didn't mention the thousands of dollars 
in penalties that refinancing would cost--penalties she couldn't 
afford.
    People like Donna didn't deserve to lose their homes. Neither do 
the 10,000 families that will receive a foreclosure notice today or the 
60,000 families in my home state of Connecticut that could find 
themselves in foreclosure over the next 4 years.
    I know I speak for my friend Senator Shelby and our colleagues on 
this Committee when I say I'm glad to have the support of the 
Administration and the industry in our effort to stem this dangerous 
tide.
    But what we don't have is results. And so here we sit. Again. And 
the American people are demanding to know why.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Thank you Mr. Chairman.
    Today, the Committee will examine the state of our housing market 
and the Federal Government's efforts to prevent foreclosures in the 
midst of what is now the most severe recession in a generation. 
Problems in our housing market have been center-stage since the start 
of this crisis.
    Rising default rates on sub prime mortgages appear to have 
triggered the financial crisis nearly 2 years ago.
    Since then, default rates on all classes of mortgages have risen 
sharply and precipitous declines in the value of mortgage-backed 
securities have crippled banks and led to the insolvency of Fannie and 
Freddie.
    As the economy has continued to worsen, millions of Americans have 
seen the value of their homes fall and many have lost or may lose their 
homes to foreclosure.
    In an effort to forestall unnecessary foreclosures, Congress and 
the Obama Administration initially devised several programs. Nearly 1 
year ago, Congress enacted the Hope for Homeowners program.
    This program aimed to keep homeowners in their homes by encouraging 
lenders and servicers to modify mortgages. Unfortunately, this program 
has only modified a handful of mortgages. While recently enacted 
changes to the program may help improve Hope for Homeowners, it is 
clear that the program needs a thorough reexamination.
    In many ways I believe that this hearing could begin to put the 
horse back in front of the cart by undertaking some of the 
investigative work necessary to properly address the issues surrounding 
the housing market in this country.
    We've heard many theories about the causes of our difficulties. 
However, my hope is that with this hearing we can begin to gather 
verifiable facts which will allow us to do our own analysis. Homeowners 
in need will be better served if we actually identify the root causes 
of foreclosures and craft effective solutions, rather than simply 
implementing policies to counteract what we think is the problem.
    As the Committee considers how to prevent foreclosures, we should 
begin by determining the following:

    First, and probably most important, is the degree to which 
        escalating default rates can be attributed to unscrupulous 
        lenders. If true predatory lending was as pervasive as some 
        have argued, we should be able to easily document that fact. I 
        must say, however, aside from anecdotal evidence, I have yet to 
        see such data.

    I look forward to hearing what the Administration believes is the 
reason for the rising default rates and what evidence they cite in 
support of their position.

    The second question we need to ask is: What is working?

    Unfortunately, existing modification programs have not been very 
effective. It is important to understand why they have not been working 
as expected and if there is anything we can or should do in response.

    Finally, we should determine whether our policies are 
        building the foundation for a stable and sustainable housing 
        market, or if they are merely delaying the inevitable.

    I have long criticized our housing policy for willfully ignoring 
long-term financial consequences, especially with respect to the GSEs. 
Sustainable policies must be based on economic realities and facts, not 
wishful thinking.
    I hope today we can begin to establish some of those facts by 
examining the research and experiences of our panelists.
    To the extent we can clearly determine what caused this crisis, we 
will then be able to address it more effectively and also implement 
policies to avoid future crises.
    Thank you Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    These are difficult times for homeowners no matter where you live. 
My State has been more fortunate than most in that our housing market 
didn't experience the boom that other parts of the country did and 
South Dakota banks didn't sell as many exotic loan products as bankers 
in other regions sold. That said, with the housing market still in free 
fall in parts of our country, and the unemployment rate ticking upward, 
the housing situation continues to be troubling. Even in places where 
home values have remained relatively stable during this period of 
turbulence are now experiencing the effects.
    We all know that widespread foreclosures have negative consequences 
on our communities. The Administration and Congress have taken many 
steps to create programs to aid financial institutions in helping keep 
responsible families in their homes--an important goal for preserving 
both neighborhoods and homeownership. Yet, we are still seeing rising 
foreclosure numbers. We need to know if the programs need to be 
improved and if the financial institutions need to do more. I look 
forward to hearing more from today's witnesses about the progress being 
made to modify and refinance home loans, including the successes and 
the challenges.
                                 ______
                                 
                PREPARED STATEMENT OF HERBERT M. ALLISON
Assistant Secretary for Financial Stability, Department of the Treasury
                             July 16, 2009

Introduction
    A strong housing market is crucial for our economic recovery. It is 
a fundamental source of wealth and well-being for individual families 
and communities and plays a key role in our financial system. The 
recent crisis in the housing sector has devastated families and 
communities across the country and is at the center of our financial 
crisis and economic downturn. Today, I want to outline the steps that 
Treasury and the Administration have taken to address this crisis, help 
millions of homeowners and lay the foundation for economic recovery and 
financial stability.
    This crisis took years in the making and as a result, millions of 
homeowners have mortgage payments they are unable to afford. The rapid 
decline in home prices of the past 2 years has had devastating 
consequences for homeowners, communities and financial institutions 
throughout the country. Moreover, rising unemployment and other 
recessionary pressures have impaired the ability of many otherwise 
responsible families to stay current on their mortgage payments. The 
result is that responsible homeowners across America are grappling with 
the possibility of foreclosure and displacement. Many analysts project 
that more than 6 million families could face foreclosure in the next 3 
years if effective actions are not taken.

The Administration's Efforts
    This Administration has moved with great speed to aggressively 
confront the economic challenges facing our economy and housing market 
by announcing and implementing an unprecedented mortgage modification 
program. Within a month of taking office, on February 18th, President 
Obama and Secretary Geithner announced the Making Home Affordable (MHA) 
Program, a critical element of Treasury's Financial Stability Plan. 
This program was broadly designed to stabilize the U.S. housing market 
and offer assistance to millions of homeowners by reducing mortgage 
payments and preventing avoidable foreclosures.
    An initiative of this scale has never been previously attempted. 
Just 2 weeks after the President announced the program, the 
Administration, working with the banking regulators, HUD, and the 
Federal Housing Finance Agency, published detailed program guidelines 
for MHA's Home Affordable Modification Program (HAMP). On April 6th, we 
issued detailed servicer guidance. Today, we have 27 servicers signed 
up to participate in MHA. Between loans covered by those servicers and 
the GSEs, more than 85 percent of all mortgage loans in the country are 
now covered by the program.
    The initiative includes the following three key components:

  (1)  The Home Affordable Refinance Program (HARP): HARP expands 
        access to refinancing for families whose homes have lost value 
        and whose mortgage payments can be reduced at today's low 
        interest rates. It helps to address the problems faced by 
        homeowners who made what seemed like conservative financial 
        decisions three, four or 5 years ago, but who have found 
        themselves unable to benefit from the low interest rates 
        available today because the value of their homes has sunk below 
        that of their existing mortgages.

    Initially, the program was able to help homeowners whose existing 
mortgages were up to 105 percent of their current home value. However, 
we moved to expand it to help those with mortgages up to 125 percent of 
current home value.

  (2)  The Home Affordable Modification Program (HAMP): HAMP will 
        provide up to $75 billion dollars, including $50 billion of 
        funds from the Troubled Assets Relief Program (TARP), to 
        encourage loan modifications that will provide sustainably 
        affordable mortgage payments for borrowers. Importantly, HAMP 
        offers incentives to investors, lenders, servicers, and 
        homeowners to encourage mortgage modifications.

  (3)  Support to the GSEs: The Administration is encouraging low 
        mortgage rates more generally by increasing support for the 
        Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie 
        Mac, through an expansion of Treasury's Preferred Stock 
        Purchase Agreements with the GSEs. To this effect, we have 
        committed up to an additional $200 billion of capital to the 
        GSEs.

    In addition, we have also announced the following additional HAMP 
measures:

    On April 28th, the Administration announced additional 
        details related to the Second Lien Program which will help to 
        provide a more comprehensive affordability solution for 
        borrowers by addressing their total mortgage debt. In addition, 
        this announcement included provisions to strengthen HOPE for 
        Homeowners Program, which provides additional relief for 
        borrowers with mortgage balances greater than the current value 
        of their homes.

    On May 14th, we announced additional details related to the 
        Foreclosure Alternatives Program, which will provide incentives 
        for short sales and deeds-in lieu of foreclosure where 
        borrowers are unable to complete the modification process. We 
        also announced additional details on Home Price Decline 
        Protection Incentives, designed to provide incentive payments 
        for modifications to partially compensate lenders and investors 
        for home price declines.

HAMP Design--Key Principles
    Now, I will discuss these programs in greater detail. Our 
initiatives are built around three core concepts.

    First, the program focuses on affordability. Building on 
        the insights of Chairwoman Bair of the FDIC, it is designed to 
        reduce mortgage payments to an affordable level based on 
        borrowers' gross monthly income.

    Second, HAMP's pay-for-success structure aligns the 
        interests of servicers, investors and borrowers in ways that 
        encourage loan modifications that will be both affordable for 
        borrowers over the long term and cost-effective for taxpayers.

    Third, the Program establishes detailed guidelines for the 
        industry to use in making loan modifications with the goal of 
        encouraging the mortgage industry to adopt a standard that 
        better suits borrowers and lenders, both in and out of MHA.

    In the past, a lack of agreed-upon guidelines has limited the 
number of loan modifications that are completed, even in instances 
where modifications would have been beneficial to all involved. Driving 
the industry toward standardized modifications based on HAMP should 
help increase the number of modifications.
    That will be good for borrowers, good for lenders, good for 
mortgage lending standards and good for improved stability of our 
overall financial system.

HAMP Design--Eligibility Criteria
    Next, I will discuss the eligibility criteria for the modification 
program, designed specifically to help responsible American homeowners 
with the greatest need for assistance and to provide that assistance at 
the least cost to taxpayers.
    Modifications are potentially available to all borrowers regardless 
of loan-to-value ratio, so borrowers can qualify no matter how much the 
price of their home has fallen.
    The modification plan was designed to be inclusive, with a loan 
limit of $729,750 for single-unit properties, and higher limits for 
multi-unit properties. At this level, over 97 percent of the mortgages 
in the country have a principal balance that might be eligible.
    Finally, because it is more effective to reach borrowers before 
they have missed a payment, the modification program includes 
incentives for the modification of loans where borrowers are current on 
their payments, but can demonstrate financial hardship or imminent risk 
of default.

HAMP Design--Modification Process
    Next, I will discuss the modification process.
    Under HAMP's loan modification guidelines, mortgage servicers are 
prevented from ``cherry-picking'' which loans to modify in a manner 
that might deny assistance to borrowers at greatest risk of 
foreclosure.
    Participating servicers are required to service all loans in their 
portfolio according to HAMP guidelines, unless explicitly prohibited by 
pooling and servicing agreements, and further must make reasonable 
efforts to obtain waivers of any limits on participation. Participating 
servicers are also required to evaluate every eligible loan using a 
standard net present value (NPV) test. The NPV test compares the net 
present value of cash-flows with modification and without modification. 
If the test is positive, the servicer must modify the loan.
    Under the program, servicers must reduce the borrower's first lien 
mortgage to a 31 percent debt-to-income (DTI) ratio, meaning that the 
monthly mortgage payment is no greater than 31 percent of gross monthly 
income. To reach this payment, the servicer must use a specified 
sequence of steps:

  1.  Reduce the interest rate, subject to a rate floor of 2 percent.

  2.  If the 31 percent DTI has not been reached, extend the term or 
        amortization period of the loan up to a maximum of 40 years.

  3.  If the 31 percent DTI still has not been reached, forbear 
        principal until the 31 percent ratio is achieved.

    Principal forgiveness may be applied at any stage. Additionally, 
each loan must be considered for a HOPE for Homeowners refinancing.
    The borrowers' modified monthly payment of 31 percent DTI will 
remain in place for 5 years, provided the borrower remains current, and 
following the modification the interest rate will step up each year to 
a specified cap that will be fixed for the life of the loan. We believe 
HAMP creates new fixed-rate loans that homeowners can afford and can 
understand.

HAMP Design--``Pay for Success'' Incentive Structure
    HAMP offers ``pay for success'' incentives to servicers, investors 
and borrowers for successful modifications. This aligns the incentives 
of market participants and ensures efficient expenditure of taxpayer 
dollars.
    Servicers receive an up-front payment of $1,000 for each successful 
modification after completion of the trial period, and ``pay for 
success'' fees of up to $1,000 per year, provided the borrower remains 
current. Homeowners may earn up to $1,000 toward principal reduction 
each year for 5 years if they remain current and pay on time.
    HAMP also matches reductions in monthly payments dollar-for-dollar 
with the lender/investor from 38 percent to 31 percent DTI. This 
requires the lender/investor to take the first loss in reducing the 
borrower payment down to a 38 percent DTI, holding lenders/investors 
accountable for unaffordable loans they may have extended.
    To encourage the modification of current loans expected to default, 
HAMP provides additional incentive to servicers and lender/investors 
when current loans are modified.

Signs of Progress
    Our progress in implementing these programs to date has been 
substantial, but we recognize that much more has to be done to help 
homeowners. Toady, I want to highlight some key points of success:

    We have signed contracts with 27 servicers, including the 
        five largest. Between loans covered by these servicers and 
        loans owned or guaranteed by the GSEs, more than 80 percent of 
        all mortgage loans in the country are now covered by the 
        program.

    325,000 trial modifications have been offered under the 
        program. Tens of thousands of trial modifications are underway.

    At this early date, MHA has already been more successful than any 
previous similar program in modifying mortgages for at risk borrowers 
to sustainably affordable levels, and helping to avoid preventable 
foreclosures.
    Nonetheless, we recognize that challenges remain in implementing 
and scaling up the program, and are committed to working to overcome 
those challenges and reach as many borrowers as possible. In 
particular, we are focused on addressing challenges in three key areas: 
capacity, transparency and borrower outreach.

Expanding Servicer Capacity
    We are taking a number of steps and working with servicers to 
expand nationwide capacity to accommodate the number of eligible 
borrowers who can receive assistance through MHA. I highlight some key 
measures below:
    One, we are also asking that all servicers move rapidly to expand 
servicing capacity and improve the execution quality of loan 
modifications. This will require that servicers add more staff than 
previously planned, expand call center capacities, provide a process 
for borrowers to escalate servicer performance and decisions, bolster 
training of representatives, enhance on-line offerings, and send 
additional mailings to potentially eligible borrowers.
    Two, just last week, as a part of the Administration's efforts to 
expedite implementation of HAMP, Secretaries Geithner and Donovan wrote 
to the CEOs of all of the servicers currently participating in the 
program. In this joint letter, they noted that ``there appears to be 
substantial variation among servicers in performance and borrower 
experience, as well as inconsistent results in converting trial 
modification offers into actual trial modifications.'' They called on 
the servicers ``to devote substantially more resources'' to the program 
in order for it to fully succeed.
    The joint letter to participating servicers also requests that the 
CEOs designate a senior liaison, authorized to make decisions on behalf 
of the CEO, to work directly with us on all aspects of MHA and attend a 
program implementation meeting with senior HUD and Treasury officials 
on July 28, 2009. Treasury also requested that each servicer detail the 
specific steps that the servicer will take toward effective 
implementation and compliance.
    Three, we are taking additional steps to expedite implementation, 
including more standardization of documentation and disclosure of the 
NPV evaluation.

Transparency and Accountability
    As Secretary Geithner has noted, we are committed to transparency 
and better communication in all of Treasury's programs. Accordingly, 
Treasury is focused on continued transparency and servicer 
accountability to maximize the effectiveness of HAMP. Specifically, we 
are planning to take three additional concrete steps in conjunction 
with the servicer liaison meeting to enhance transparency in the 
program:
    One, by August 4th, we will begin publicly reporting servicer-
specific results on a monthly basis. These reports will provide a 
transparent and public accounting of individual servicer performance by 
detailing the number of trial modification offers extended, the number 
of trial modifications underway, the number of official modifications 
offered and the long terms success of modifications.
    Two, we will work to establish specific operational metrics to 
measure the performance of each servicer. These performance metrics are 
likely to include such measures as average borrower wait time in 
response to inquiries, the quality of information provided to 
applicants, procedures for document processing and review, and response 
time for completed applications.
    We are also planning to deploy a data reporting tool that will 
contain over 130 data elements and will be able to provide a 
comprehensive assessment of the program at the loan, servicer, and 
mortgage market levels. This will enable the program to be effectively 
measured against specific performance benchmarks.
    Finally, we have asked Freddie Mac, in its role as compliance 
agent, to develop a ``second look'' process pursuant to which Freddie 
Mac will audit a sample of MHA modification applications that have been 
declined. This ``second look'' process will be designed to minimize the 
likelihood that borrower applications are overlooked or that applicants 
are inadvertently denied a modification.
    We have also expanded the efforts of the Federal Government to 
combat mortgage rescue fraud and put scammers on notice that we will 
not stand by while they prey on homeowners seeking help under our 
program.

Borrower Outreach
    The third challenge we are tackling aggressively is borrower 
outreach. We recognize the importance of borrower outreach and 
education and are committing significant resources, in partnership with 
servicers, to reach as many borrowers as possible. Here, we have taken 
a number of steps:

    We have launched a consumer focused website, www.MakingHome
        Affordable.gov, with self-assessment tools for borrowers to 
        evaluate potential eligibility in the MHA program. This website 
        is in both English and Spanish and already has over 22 million 
        page views.

    We have worked with an interagency team to establish a call 
        center for borrowers to reach HUD approved housing counselors, 
        so that they are able to receive direct information and 
        assistance in applying for the MHA program.

    Working closely with Fannie Mae, we have also launched an 
        effort to hold foreclosure prevention workshops and borrower 
        education events in cities facing high foreclosure rates. The 
        first such outreach event was held in Miami in June.

    Much more has to be done and we will continue to work with other 
agencies and the private sector to reach as many families as possible.

Program Limitations
    Finally, we recognize that any modification program seeking to 
avoid preventable foreclosures has limits, HAMP included. Even before 
the current crisis, when home prices were climbing, there were still 
many hundreds of thousands of foreclosures. Therefore, even if HAMP is 
a total success, we should still expect millions of foreclosures, as 
President Obama noted when he launched the program in February.
    Some of these foreclosures will result from borrowers who, as 
investors, do not qualify for the program. Others will result because 
borrowers do not respond to our outreach. Still others will be the 
product of borrowers who bought homes well beyond what they could 
afford and so would be unable to make the monthly payment even on a 
modified loan.
    Nevertheless, for millions of homeowners, HAMP will provide a 
critical opportunity to stay in their homes. It will bring relief to 
the communities hardest hit by foreclosures. It will provide peace of 
mind to families who have barely managed to stay current on their 
mortgages or who only recently have fallen behind on payments. It will 
help stabilize home prices for all American homeowners and, in doing 
so, aid the recovery of the U.S. economy.

Conclusion
    In less than 5 months, including the initial startup phase, HAMP 
has accomplished a great deal and helped homeowners across the country. 
But we know that more is required to help American families during this 
crisis and will aggressively continue to build on this progress. For 
example, we are taking additional steps to implement programs 
including:

  1.  the Second Lien Program;

  2.  the Foreclosure Alternatives Program;

  3.  Home Price Decline Protection incentives; and

  4.  strengthening of HOPE for Homeowners.

    Each of these supplemental programs is designed to increase the 
effectiveness and take-up of the basic modification plan.
    Sustained recovery of our housing market is critical to lasting 
financial stability and promoting a broad economic recovery.
    We look forward to working with you to help keep Americans in their 
homes, restore stability to the U.S. housing market and growth to the 
U.S. economy.
    Thank you. I look forward to your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF WILLIAM APGAR

                  Senior Advisor for Mortgage Finance,
              Department of Housing and Urban Development
                             July 16, 2009

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify on the progress that the Obama 
Administration is making to stabilize the U.S. housing market through 
the Making Home Affordable (MHA) program, the integration of the HOPE 
for Homeowners element into the larger plan, and other Administration 
efforts to provide relief to homeowners and neighborhoods suffering 
from the effects of the foreclosure crisis.
    My name is William Apgar and I serve as Senior Advisor for Mortgage 
Finance to HUD Secretary Shaun Donovan. In this capacity, I have worked 
closely on the development and implementation of the Administration's 
Making Home Affordable program which was announced on February 18, 
2009, the HOPE for Homeowners program, and other efforts intended to 
address the housing crisis.

Making Home Affordable: Progress and Challenges
    We are all aware that the U.S. is facing an unprecedented 
foreclosure crisis--with millions of Americans projected to lose their 
homes within the next few years. Working together, Congress and the 
Administration have undertaken a number of initiatives designed to 
prevent foreclosures and mitigate the impact of foreclosed and 
abandoned properties on local neighborhoods and the broader economy.
    At the center of the Administration's effort to address the housing 
crisis is the Making Home Affordable Program, a comprehensive program 
to stabilize the housing markets by providing affordable refinance and 
modification opportunities for at-risk borrowers. Since the launch of 
the program in March, 27 servicers--representing more than 85 percent 
of the market--have signed up. So far, these servicers have 
collectively extended trial modification offers to more than 325,000 
borrowers.
    Despite this significant progress, we recognize that more has to be 
done to reach additional homeowners facing, or at risk of, foreclosure 
and ensure that they are assisted in a timely manner. As with any new 
program, we have encountered a few difficulties in launching the Making 
Home Affordable Program. Many consumers have had trouble reaching their 
servicers and receiving a timely response from servicers after they 
have submitted applications for modification. Other consumers have 
complained of receiving inaccurate or misleading information from 
servicers. HUD is working with Treasury to quickly resolve issues 
surrounding program implementation and execution.
    For instance, we have had ongoing meetings and conversations with 
servicers to encourage them to be more responsive. To further 
underscore the importance of prompt servicer response, last week 
Secretaries Donovan and Geithner sent letters to the CEOs of the 
participating financial institutions urging them to add servicing 
capacity and improve the quality of execution necessary to reach the 
sizable number of homeowners at risk of foreclosure and to designate a 
senior official to serve as a liaison with the Administration and work 
with HUD and Treasury on the implementation of all aspects of MHA. By 
early August, we will be able to start reporting servicer specific 
results publicly.
    In addition, we are exploring a variety of mechanisms to enable 
servicers to leverage their relationships with nonprofits and other 
entities to help expedite the processing and approval of modification 
applications. HUD and Treasury are working to create a network of 
trusted advisors to guide borrowers through the application process, 
help them prepare complete application packages, and troubleshoot if 
the borrower appears to have been improperly deemed ineligible for the 
program. Moreover, HUD is also working with Treasury and the 
Homeownership Preservation Foundation to further train and utilize 
housing counseling to better resolve consumer complaints against 
servicers.

Evolving Nature of MHA
    The MHA program continues to evolve in order to respond to the 
changing nature and magnitude of the foreclosure crisis. For example, 
on April 28, the Administration announced the framework for a program 
that would facilitate the modification of second liens when a first 
lien is modified. Second mortgages can create significant challenges to 
helping borrowers avoid foreclosure because they can increase 
borrowers' monthly mortgage payments beyond affordable levels. Up to 50 
percent of at-risk mortgages have second liens, and many properties in 
foreclosure have more than one lien.
    Also, on July 1, Secretary Donovan announced an expansion of the 
Administration's Home Affordable Refinance Program (HARP) to include 
participation by borrowers who are current on their payments but have 
first mortgage loan-to-value ratios of up to 125 percent. Mortgage 
rates remain at near historic lows providing many homeowners with high 
rate mortgages the ability to refinance into lower rates and experience 
lower monthly payments. Unfortunately, millions of responsible 
homeowners have seen the value of their homes drop so dramatically that 
they are unable to take advantage of these lower rates. In many hard 
hit communities in California, Florida and Nevada, a large number of 
homeowners have experienced significant reductions in home values and 
have been unable to participate in the program. Under authorization 
provided by the Federal Housing Finance Agency, borrowers whose 
mortgages are currently owned or guaranteed by Fannie Mae or Freddie 
Mac will now be allowed to refinance those loans even in situations 
where the value of their first mortgage is as much as 125 percent of 
the current value of their home. By increasing this LTV cap from the 
previously authorized 105 percent, this new initiative will expand the 
ability of the program to aid many hard hit borrowers, particularly 
those in states suffering from the most extreme declines in home 
prices.
    Similarly, in recognition that the MHA program will not assist 
every at-risk homeowner or prevent all foreclosures, the Administration 
announced foreclosure alternatives for borrowers and HUD is working on 
a number of neighborhood stabilization initiatives. Under the details 
announced on May 14, MHA will provide incentives for servicers and 
borrowers to pursue short sales and deeds-in-lieu (DIL) of foreclosure 
in cases where the borrower is generally eligible for a MHA 
modification but does not qualify or is unable to complete the process. 
These options eliminate the need for potentially lengthy and expensive 
foreclosure proceedings, preserve the physical condition and value of 
the property by reducing the time a property is vacant, and allows the 
homeowners to transition with dignity to more affordable housing. The 
new details simplify the process of pursuing short sales and deeds-in-
lieu, which will facilitate the ability of more servicers and borrowers 
to utilize the program. The program provides a standard process flow 
and minimum performance timeframes and standard documentation. The 
final details of the program are being finalized, and will be announced 
as soon as completed.

New Legislative Authorities: HUD's Role
    In addition to efforts to improve the execution of the program that 
was first announced in February, the Obama Administration is now 
working to implement new and improved program features authorized by 
the ``Helping Families Save Their Homes Act of 2009'' signed into law 
on May 20, 2009. The legislation eases eligibility requirements and 
streamlines the application process for the HOPE for Homeowners (H4H) 
program and provides the Federal Housing Administration (FHA) with 
additional loss mitigation authority to assist FHA borrowers under MHA.
    We want to commend Chairman Dodd and other members of the Committee 
for your leadership in getting this important legislation enacted. When 
fully implemented, the improved H4H program is expected to provide 
relief to certain at-risk homeowners who are underwater on their 
mortgages and are not covered by other programs, including Fannie Mae 
and Freddie Mac programs. The new FHA loss mitigation program will 
enable homeowners with mortgages insured by the FHA to obtain 
assistance under terms roughly comparable to borrowers in other 
segments of the market, without increasing costs to the taxpayer.
    HOPE for Homeowners: As you know, H4H was initially authorized 
under the Housing and Economic Recovery Act of 2008 to provide a 
mechanism to help distressed homeowners refinance into FHA insured 
loans. The temporary program, established within the FHA, is premised 
on the view that the creation of equity for troubled homeowners is 
likely to be an effective tool for helping families keep their homes 
and avoid foreclosure. Unfortunately, due to several obstacles to 
participation, including steep borrower fees and costs, complex program 
requirements, and lack of operational flexibility in program design, 
the original H4H program has only served a handful of distressed home 
owners. We believe that the legislative improvements combined with the 
integration of the H4H into the Administration's MHA program will make 
the program a more attractive and less burdensome option for underwater 
borrowers seeking to refinance their loans and regain equity in their 
homes.
    The improved H4H program will provide a new program option for 
certain at-risk borrowers who are underwater on their mortgages and are 
not eligible to participate in the GSE refinancing program. When a 
borrower approaches participating servicers for assistance, the 
servicer will be required to offer the option for a H4H refinancing in 
tandem with a MHA Trial Modification option. The program only serves 
homeowners who do not own other homes, demonstrate their ability to 
meet their H4H mortgage payment obligations, have not intentionally 
defaulted on any other substantial debt in the last five years, and do 
not have other significant sources of wealth. To ensure proper 
alignment of incentives, servicers and lenders will receive pay-for-
success payments for Hope for Homeowners refinancings similar to those 
offered for Home Affordable Modifications. These additional supports 
are designed to work in tandem and take effect with the improved and 
expanded program
    Though the program promises substantial benefits to underwater 
borrowers best served by an increased equity position in their homes, 
treatment of second liens poses significant challenges to the 
implementation of H4H. First, the presence of a second lien complicates 
the execution of a mortgage refinance even under the best of 
circumstances. As the effort to offer consumers the option of modifying 
both first and second liens has demonstrated, since the second liens 
tend to be held in portfolio by several of the Nation's largest banking 
institutions, while first liens are owned by a wider range of 
investors, coordinating the communication and decision making between 
these two separate financial interests can be logistically complex.
    Equally challenging is the determination of a fair allocation of 
payments to each of these two distinct investment interests needed to 
facilitate the refinancing of an underwater mortgage. Under the 
improved and integrated H4H, HUD has flexibility to pay to extinguish 
second liens consistent with MHA guidelines, and the potential to 
provide investors a share of the price appreciation in exchange for 
taking a significant ``hair cut.'' Even in situations where there is 
little prospect of realizing any future appreciation, many first lien 
investors, under the concept of ``one loss--one time,'' appear 
increasingly willing to accept the required ``hair cut,'' and execute a 
clean exit from the transaction.
    Unfortunately, the calculation of second lien holders is decidedly 
more complex. Even in situations where the combined LTVs of first and 
second liens exceed the current market value of the home, seconds liens 
may have some value. In particular representatives of banking 
institutions that hold sizeable numbers of second liens in their 
portfolios report that that in some situations, borrowers who are 
delinquent on their first lien are continuing to make payments on their 
second lien, providing some measure of benefit to second lien holders. 
Of course, where the first lien is underwater, once the property moves 
to foreclosure, the second lien is worthless.
    In light of these complex and often conflicting interests, 
determining a fair compensation system for holders of second liens is 
difficult. In this regard the recent letter to the heads of the five 
bank regulators (FRB, OCC, NCUA, FDIC, OTS) dated July 10 and jointly 
signed by Senate Banking Committee Chairman Dodd and House Financial 
Services Committee Chairman Frank is instructive. In assessing methods 
used to estimate the value of second liens held on the balance sheet of 
the Nation's largest banks, the letter expressed the concern ``that 
loss allowance associated with these subordinated liens may be 
insufficient to realistically and accurately reflect their value, 
especially in light of the historically poor performance of first lien 
mortgages and seriously diminished value of the underlying 
collateral.'' The letter goes on to observe that in situations where 
banks are allowed to carry these loans at potentially inflated values, 
they may be reluctant to ``negotiate the disposition of these liens, 
and thus may stand in the way of increasing participation in the H4H.''
    To better understand these issues, HUD and Treasury are now working 
with the OCC and other regulators that supervise the activities of the 
large national banking entities that hold in portfolio the largest 
share of second liens. In addition to ensuring that current regulatory 
policy does not act to encourage banks to seek to delay the realization 
of portfolio losses by allowing these entities to carry assets at 
inflated valuations, these conversations will also draw on the 
considerable expertise of the OCC and other regulators to help HUD 
craft an extinguishment schedule that will provide fair compensation to 
the holders of the second lien assets.
    In sum, HUD remains committed to reissuing guidance on the 
operation of the reconstituted version of H4H program. The goal is a 
program that works--a program that provides real benefits to a group of 
homeowners best served by an increased equity position in their homes, 
while at the same time providing fair treatment to the interests of the 
investor/owners of first and second liens and adequate compensation for 
the other parties participating in the transaction.
    The FHA Modification Program: As noted above, HUD is also now 
working to finalize guidance implementing the Federal Housing 
Administration's (FHA) Home Affordable Modification Loss Mitigation 
Option which is an important complement to the MHA and will provide 
homeowners in default with greater opportunity to reduce their mortgage 
payments to sustainable levels. The FHA's long-standing Loss Mitigation 
Program has given lenders who provide FHA-insured mortgages the 
authority and responsibility to assist homeowners who have fallen into 
financial difficulties with their home mortgages. The new legislation 
will increase the number of distressed homeowners receiving assistance 
by expanding the authority of FHA to engage in foreclosure prevention 
by allowing the use of new tools. Under new authorities, FHA can offer 
a partial claim up to 30 percent of the unpaid principal balance as of 
the date of default combined with a loan modification. In addition, it 
permits loss mitigation tools to kick in for loans that face ``imminent 
default,'' rather than just for loans in default. Moreover, FHA is 
granted the authority to facilitate loan modifications through 
assignment of loans in order to address servicer loss mitigation 
disincentives relating to having to purchase loans from Ginnie Mae 
pools.

Additional Challenges
    Even as the Obama Administration is working to improve the 
execution of the Making Home Affordable and to deploy new program 
features authorized under the ``Helping Families Save Their Homes 
Act,'' we continue to examine new approaches to expand the reach of the 
foreclosure avoidance efforts and stabilize housing markets in 
communities around the country. As I noted in testimony before the 
House Financial Services Committee last week, the Administration stands 
ready to explore with Congress additional ideas to aid at-risk 
borrowers that may not qualify currently qualify for the MHA.

    The current very high level of unemployment is making the 
        already difficult task of helping families struggling to meet 
        their mortgage payment even harder. Initial efforts by the 
        government to prevent foreclosures were not primarily designed 
        to assist unemployed individual in some of the hardest hit 
        communities. As the economy has weakened, unemployment has 
        become an increasing cause of mortgage default and foreclosure. 
        Recognizing this, the Administration is now exploring a series 
        of programmatic options that can help unemployed workers get 
        the mortgage assistance that they need.

    Next, recognizing that there is an impending crisis in the 
        multifamily mortgage sector which could have devastating 
        effects for tenants, HUD Secretary Donovan has led the 
        Administration's review of potential means to expand access to 
        bond financing to assist State and Local Housing Finance 
        Agencies in continuing to pursue their important financing role 
        to increase both affordable homeownership and rental housing 
        opportunities. HUD has also created an internal task force to 
        develop a better understanding of this emerging crisis, has 
        reached out to Treasury and the Federal Housing Finance Agency 
        (FHFA) to explore new approaches to confront this situation, 
        and is now completing a top to bottom review of HUD's own 
        multi-family initiatives to identify new programmatic 
        alternatives. Building on these efforts, HUD looks forward to 
        working with the Committee to explore various options for 
        stabilizing the multifamily housing sector.

    Finally, Secretary Donovan has challenged HUD to do all 
        that we can to work with Congress and the Administration to 
        insure that the nearly $6 billion appropriated to date for the 
        Neighborhood Stabilization Program (NSP) plays its intended 
        role in helping to stabilize housing markets and combat blight. 
        In many communities, NSP is starting to generate real results, 
        but HUD will continue to monitor program activities, identify 
        strategies that produce real results, and work to make program 
        modifications that will help ensure that this funding is 
        deployed quickly, wisely, and well.

Conclusion
    Once again, I would like to thank you for the opportunity to 
participate in today's hearing. HUD shares your concerns about the 
progress of Administration's efforts to address the foreclosure crisis 
and can assure you that we are working to resolve issues related to 
implementation and execution of core programs and to implement new 
elements to improve and refine MHA in the near future. I am happy to 
answer any questions you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS PERRETTA
                     Consumer, State of Connecticut
                             July 16, 2009

    Good morning, Chairman Dodd and Ranking Member Shelby.
    My mortgage problems became evident when my wife, Susan, passed 
away in 2008.
    All our lives we were a hard-working couple, giving the best we 
could to our son, Tom Jr., and living modestly. In addition to our 
regular jobs, we each had various part-time jobs.
    Before we bought the town house in 2001, we lived for 1 \1/2\ years 
at my in-laws to save up money for that purchase, which would be a home 
for us and our son.
    I have been working with the Connecticut Board of Education for 11 
years and Susan worked for Stamford Health. In 2004 she found her ideal 
job at Sacred Heart School, where she was a guidance counselor in 
college placement. She was earning about $40,000 annually. With our 
joint incomes we were able to keep our family finances going smoothly 
and send Tom Jr. to Quinnipiac University.
    But in 2005, just as Sacred Heart was closing permanently, Susan 
was diagnosed with leukemia. In April she had chemotherapy which was 
followed by a bone marrow transplant October 21, 2005.
    My medical insurance covered her medical payments, although not the 
co-pays. Finally Susan began receiving Social Security disability of 
$1,400 monthly. As Tom Jr. had begun college in 2004, this helped but 
not enough.
    Throughout the years Susan had managed our finances and in order to 
keep Tom Jr. in college, we applied for a home equity loan from 
Wachovia and began increasing credit card debt. Susan helped Tom Jr. 
apply for student loans, and we also took out one parent-student loan.
    Because we had both worked all our lives, Susan even began looking 
for a job after her bone marrow transplant, even though she was still 
weak. In April 2008 Susan developed an infection and became extremely 
weak. While at a nursing home her health deteriorated and she never 
returned home.
    In order for her to have a proper funeral I borrowed $16,000 from 
friends. I have just finished paying that amount off. Suddenly after 25 
years in which Susan handled the bills, I was overwhelmed but I 
realized I had to keep paying the mortgages on the townhouse.
    We had a first with Chase and a second with Wachovia. I got a grip 
on some of these and started chipping away at our debt. I was making 
payments to Chase at the branch. At the beginning of 2009, as money 
became tight and I was worried about making payments I went to the 
Chase branch for help because I could not keep up.
    The Chase customer service representative told me someone would 
phone me, but no one did.
    At the beginning of 2009 I spoke to a Chase representative over the 
phone asking for help in a loan modification and her reply was that I 
did not make enough to qualify. I was unable to convey that I had just 
been through the tragic death of my wife and was trying to settle 
everything in a reasonable manner.
    In the past few months Chase collections has been calling me at 
work, but no one has ever suggested that they might help me, or 
proposed a single positive step for resolution. The last calls were 
just a few weeks ago.
    It seemed that Chase did not realize that people like me, who have 
just had an overwhelming event in their life, may still be honest 
responsible human beings who need help.
    I turned to a housing counselor at the Housing Development Fund and 
they are trying to help me negotiate with Chase since February. So far 
they also have not received a reply, even though my mortgage is a FNMA 
and should qualify for Make Your Home Affordable. A package with my 
request for a modification was sent to Chase on May 4th.
    I explained to the counselor that with all the bills piling on top 
of each other, I was unable to pay the common charges of my condo 
association and am now in a one-year agreement with them. I also have 
an agreement with the electrical company. Other creditors have worked 
with me, only Chase is still not doing that.
    Now that Tom Jr. graduated from college and is working he will be 
contributing to the household income. He will help me in paying off the 
past due common charges (the agreement is for $500 a month) and I am 
giving up my car which will lower my expenses by $300.
    With all these steps in place, some of which the counseling agency 
proposed, I can make payments of $1,400 if Chase/FNMA will work with 
me.
    People like me should be the ones the banks are helping. I am now 6 
months past due. I hope that Chase will give me a modification soon.
                                 ______
                                 
                    PREPARED STATEMENT OF JOAN CARTY
            President and CEO, The Housing Development Fund,
                        Bridgeport, Connecticut
                             July 16, 2009

    Good afternoon, Chairman Dodd and Ranking Member Shelby. Thank you 
for inviting me to testify today. My name is Joan Carty. I am the 
President and CEO of the Housing Development Fund (HDF) in Stamford, 
CT. HDF is a community development financial institution that has 
operated in Connecticut for the last twenty years. We provide financing 
to developers of affordable housing, technical assistance to local 
governments, homeownership counseling and down payment assistance to 
first time homebuyers. We have helped almost 5,000 people secure safe, 
decent and affordable housing. Less than 2 percent of our homebuyers 
are in delinquency or default. We credit that solid track record to the 
fact that they were counseled, educated, and that we only allowed our 
clients into 30-year, fixed rate first mortgages.
    HDF partners with the banking community, local housing authorities 
and municipalities in its core business. We have leveraged over $145 
million in first mortgages with our SmartMove and Homebuyer Assistance 
loan programs. HDF has worked with the Greenwich, Stamford and Darien 
housing authorities to help residents educate themselves about 
homeownership. HDF also worked with the cities of Stamford and Norwalk 
to put forth innovative and inclusive inclusionary zoning systems in 
these communities. We have partnered with developers to market their 
below market rate units as well. Last year, because of the widespread 
and increasing problems with subprime lending, mortgage delinquencies 
and rising foreclosures, HDF started an additional counseling program 
to assist families in our communities who were stressed with these 
problems. In the course of developing our program we have reached out 
to many other partners: the Bar Association for pro bono attorneys, the 
courts to establish working relationships with the mediators, 
volunteers with financial and social services backgrounds to help us 
with the ever increasing volume of people who need guidance, and the 
banks--who in many cases control the outcomes of the situations facing 
people in foreclosure or mortgage delinquency.
    We are a HUD certified counseling agency and down payment 
assistance lender. We have personally experienced the kind of shadow 
boxing that occurs when a homeowner in distress calls their lender or 
servicer for help. Too often, their call is bounced to a call center 
across the globe, or the call is bounced from department to department 
within the bank. On many occasions, after multiple periods of time on 
hold, they finally reach a live person but it is a representative who 
is merely following a script. Often the lender or servicer 
representative has no record of prior contact with the borrower. It is 
a process that often feels futile.
    We have found that in too many cases when we send clients' 
modification requests to banks or servicers such as JP Morgan Chase or 
Goldman Sachs-owned Litton, that the modification package enters a 
black box for months on end. These borrowers are in distress; even a 30 
day time frame can radically affect their credit profile. Once they 
slip behind on timely payments of their mortgage or any consumer debt, 
their credit score goes down, and their monthly interest charges can go 
up. In many cases cross default provisions mean that default on one 
obligation will trigger higher monthly charges on other debt, even if 
the borrower had remained current for that obligation. If we were to 
look for common themes as to why families are in distress, we often 
find that death, divorce, illness or injury, in addition to predatory 
terms on many mortgages, have pushed families to the edge of the cliff. 
Imagine the multipliers and harm rendered when this limbo extends for 
months.
    I understand that the lenders and servicers need modification 
requests that are well documented and that contain a budget that has 
been carefully worked out so that the borrower will succeed in the 
modification over the long term. That is the kind of service that we as 
a counseling agency provide to our clients. What our clients in turn 
need from the lenders and servicers is rapid response. Responses before 
their lives continue to spiral downward. It is difficult to believe 
that the sophisticated automated platforms that have been in use by 
lenders and servicers for loan origination over the past decade cannot 
be retooled to generate effective loan modifications with greater 
frequency and within tighter timelines.
    I would also suggest that rapid response will help in other ways. 
With delay comes added expenses, which often get added to the mortgage 
balance. Extensive delays in the mediation process often result in the 
lenders or servicers charging the borrower multiple times for late 
fees, attorneys' fees, and updated appraisals. Denial of 
borrowers'requests lead to expensive foreclosure processes, which hurt 
the families involved and the communities in which the homes are 
located. In many instances, these foreclosures do not ameliorate losses 
or generate profits for the banks given the current declines in 
property values throughout the country. Additionally, it is critically 
important to create a system that rapidly responds to requests from 
homeowners who are still current on their mortgages but who know they 
will not be able to sustain their payments going forward.
    What we are building at our agency is a system that can carry 
borrowers from that initial request for assistance through assessment 
of their situation and development of a modification request that will 
have viability over the long term.
    What we need from the lenders and servicers is their commitment to 
building a system that will react promptly and predictably to these 
reasonable requests.
    For two decades, HDF has proven it can deliver housing solutions 
that work for Connecticut--for families, for lenders, for developers, 
for neighborhoods. We believe that affordable housing is an investment 
in people--employees, parents, children, neighbors--without whom the 
state's whole economy would suffer. Strong markets and strong 
communities need a diverse mix of households. And that calls for a 
supply of housing and housing opportunities that low- and moderate-
income people can afford and remain in despite temporary setbacks.
Appendix
The Housing Development Fund Banking Partner:

Bank of America

Citibank, FSB

Commerce Bank

Fairfield County Bank

Fieldpoint Private Bank and Trust

First County Bank

Hudson City Savings Bank

Hudson United Bank

Milford Savings Bank

Naugatuck Savings Bank

Newtown Savings Bank

Patriot National Bank

People's United Bank

Savings Bank of Danbury

TD Banknorth

Union Savings Bank

U.S. Trust of Connecticut

Wachovia Bank, N.A.

Webster Bank
                                 ______
                                 

                                 
                   PREPARED STATEMENT OF MARY COFFIN
             Executive Vice President, Servicing Division,
                       Wells Fargo Home Mortgage
                             July 16, 2009

    Chairman Dodd, Ranking Member Shelby and Members of the Committee, 
I'm Mary Coffin, executive vice president of Wells Fargo Home Mortgage 
Servicing. Thank you for inviting me to speak today.
    Throughout this historic public and private sector collaboration, 
Wells Fargo has considered it our leadership responsibility to champion 
solutions. We have played a key role in creating streamlined, unified 
modification programs to help customers in need.
    A prime example of our work with the Administration is the new 
Homeowner Affordability and Stability Plan, which we fully support. 
Early indications are that the Home Affordable Refinance Program (HARP) 
and Home Affordable Modification Program (HAMP) are of great value, and 
will benefit a significant number of families.
    In fact, we believe the Administration's goal to help as many as 7-
9 million homeowners over the next few years is well within reach. In 
the first half of 2009, through lower rates, refinances and 
modifications, Wells Fargo alone has helped close to 1 million American 
homeowners.
    We refinanced three-quarters of a million customers through HARP 
and standard programs. And, since our company represents approximately 
20 percent of the market, we could estimate that close to 4 million 
Americans industry-wide have already refinanced into lower mortgage 
payments.
    In these turbulent times, it is important to note that more than 90 
percent of our borrowers remain current on their mortgage payments. To 
help those in need of assistance in the first half of this year, we 
have provided more than 200,000 trial and completed modifications, an 
increase of about 100 percent for the same period one year ago. 
Notably, last month, 83 percent of Wells Fargo's modifications resulted 
in a payment reduction which increases the probability customers will 
sustain these payments and, in turn, lowers re-default rates and 
foreclosures.
    Acutely aware of the importance of speed, Wells Fargo worked with 
the government aggressively to develop and deliver HARP and HAMP. We 
did this in a way that was mindful of our responsibility to American 
taxpayers to execute solutions for those truly in need.
    Speed of execution was complicated by the multiple versions of the 
program--each with unique contract requirements.

    On March 4, the Administration first announced the 
        components of the Homeowner Affordability and Stability Plan.

    By April 6, we received the final HAMP guidelines from 
        Fannie and Freddie, and began implementing this program for 
        these customers.

    On April 13, we were the first to sign a HAMP contract for 
        loans we service for private investors as well as for loans in 
        our owned portfolio. Further details for this program were 
        finalized by May 14, and we began offering it 9 days later.

    Since January, we have been providing loan workouts to Wachovia 
option ARM customers who are struggling with their payments and, at the 
end of this month, we will add HAMP as yet another potential solution.
    With this addition, we will have fully executed HAMP for almost all 
of our at-risk borrowers. It should be noted that the Administration 
has not yet made HAMP available for FHA, VA, and home equity borrowers.
    Since we service one-third of the Nation's FHA loans, we're hopeful 
that the government will soon provide this program, as well as the 
second-lien program as it was initially described to us.
    As of June 30, Wells Fargo was in the process of finalizing 52,000 
Home Affordable Modifications. When working with all of our seriously 
delinquent borrowers, 30 percent are not eligible for HAMP because they 
have an FHA or VA loan and another 15 percent do not meet the basic 
program requirements. Of the remaining 55 percent, we are actively 
working with half, and the other half has not yet chosen to work with 
us.
    For those borrowers who don't qualify for HAMP, we immediately seek 
to find another modification or alternate solution to avoid 
foreclosure. Before any home moves to foreclosure sale, we conduct a 
final quality review to ensure all options have been exhausted.
    We understand this time has been frustrating for our at-risk 
customers and that they are anxious and in need of answers.
    With the President's February 18 announcement that refinance and 
modification programs would be forthcoming, we began to experience a 
large increase in customer inquiries. Knowing this would occur, we 
anticipated the influx, and increased and trained team members to 
handle it. Yet, it has been challenging to meet customer expectations 
as the various program details were provided to us over a period of 90 
days.
    While we forecasted an increase in inquiries--even from customers 
current on their mortgage payments--our forecast turned out to be low. 
Historically, on a monthly basis, 5 to 10 percent of inquiries for loan 
workouts came from borrowers who were current. Since the announcement 
and the related increased focus on imminent default, that statistic has 
risen to nearly 40 percent. Of course, not everyone who calls qualifies 
for imminent default.
    To manage this demand:

    we have implemented mandatory overtime;

    we have streamlined the receipt, imaging and processing of 
        the required documents;

    we are upgrading systems to handle escrow requirements for 
        home equity loans and lines; and

    most importantly, we have increased our trained staff by 54 
        percent over the first half of this year to 11,500 default team 
        members--all of whom are U.S. based.

    In conclusion, we can sincerely tell you we have been working very 
hard to responsibly execute these programs and fully support them. We 
will continue to work with the government, consumer counselors, non-
profit agencies and others to reduce foreclosure, save homes, and 
quickly maintain, sell and donate foreclosed properties in order to 
stabilize our economy.
    Our sincere thank you for all you've done to help us drive home 
retention by making the Nation aware of the options available to those 
in need. I'd be glad to answer any questions you may have.





                                 ______
                                 
                  PREPARED STATEMENT OF CURTIS GLOVIER
             Managing Director, Fortress Investment Group,
          on behalf of the Mortgage Investors Group Coalition
                             July 16, 2009

Mortgage Investors Coalition Testimony
    Thank you for inviting me to testify today. My name is Curtis 
Glovier and I am a Managing Director at Fortress Investment Group. I am 
also a member of the Mortgage Investors Coalition, which was organized 
to develop investor consensus on current public policy initiatives and 
to provide policy makers with the mortgage investor's point of view. I 
am testifying today in my capacity as a member of the Mortgage 
Investors Coalition.
    Allow me to start, Chairman Dodd, by commending you, Ranking Member 
Shelby and the other members of the Committee for your leadership for 
well over two years, going back to before the financial crisis, in 
trying to pursue every possible action to help keep Americans in their 
homes. We share your frustration with the slow pace of efforts to help 
homeowners get out of bad mortgages and into mortgages that will allow 
them to stay in their homes and build equity at the same time.
    I also want to thank you particularly, Mr. Chairman, for co-
authoring with Chairman Frank a letter last week highlighting the need 
to help families keep their homes and avoid foreclosure. We agree with 
your diagnosis of the Hope for Homeowners program (``HFH'') and offer 
our support to assist American families' participation in this program, 
so they may be able to keep their homes and build equity. The 
discounted refinance program offered by HFH provides the best long term 
solution for the homeowner and for the recovery of the U.S. housing 
market.
    My testimony today represents the views of the Mortgage Investors 
Coalition, as well those of other mortgage investors whose thoughts I 
have obtained through numerous conversations I have had in the course 
of my professional dealings and my participation in industry groups. 
The Mortgage Investors Coalition was formed in April 2009 and currently 
has 11 member firms with about $200 billion in total assets under 
management and over $100 billion in current outstanding principal 
balance of investments in residential mortgage backed securities. In my 
testimony, I will briefly describe the composition of the mortgage 
market and some of the inherent conflicts that could be contributing to 
the difficulty in showing sufficient progress in stemming foreclosures.
    Investors in private-label (non-Federal agency) mortgage-backed 
securities include asset managers, charitable institutions, endowments, 
foundations, hedge funds, insurance companies, investment banks, 
municipalities, mutual funds, pension funds, trusts, sovereign wealth 
funds, universities and others. Thus, many of the beneficiaries of 
these investments are ordinary American citizens--people with pensions, 
people with life insurance policies or mutual fund investments, and 
people who benefit from services provided by charities, universities, 
and state and local governments.
    First, I'd like to briefly describe the residential mortgage 
market. The mortgage market consists of approximately $11 trillion in 
outstanding mortgages. Of that $11 trillion, $5.4 trillion are held on 
the books of the GSE's as agency mortgage-backed securities (issued by 
one of the agencies) or in whole loan form. Another $3.6 trillion are 
on the bank balance sheets as whole loans or securities in their 
portfolios, of which $1.1 trillion are second liens (home equity loans/
lines of credit or closed end second mortgages). Of the $1.1 trillion 
outstanding second mortgages, only 3.7 percent of the total (or $41 
billion) is held in securitized form. The remaining $1.8 trillion in 
first lien mortgages reside in private label mortgage-backed 
securities. The Residential Mortgage Backed Securities (RMBS) market 
has efficiently provided mortgage financing for millions of American 
families and has served as a means to extend credit throughout the 
American economy and the world. While the Federal government's actions 
to bolster Fannie Mae and Freddie Mac and to broaden the FHA's mandate 
have proven to be critical stopgap measures during the housing and 
economic crisis, a revival of the RMBS market and a return of private 
investors to that market is seen by many as a prerequisite to the 
recovery of the U.S. housing market and a return to normalcy in the 
capital markets. The Federal government cannot by itself provide the 
liquidity necessary to finance the national housing markets.
    The process by which residential mortgage-backed securities are 
created begins when a borrower obtains a mortgage loan from a lender. 
After the loan is made, the loan is pooled together with other mortgage 
loans and placed into a trust. The trust is administered by a trustee 
and one or more servicers, who are the face of the trust to homeowners. 
Investors in the trust generally have no interaction with the 
homeowners, and also have extremely limited decision-making authority 
with respect to modifications, foreclosures and other servicing 
actions. Very often, the original lender, or its affiliate, acts as 
servicer once the loans are securitized. Loan servicing is relatively 
concentrated. Roughly 88 percent of subprime loans and 69 percent of 
all residential mortgage loans are serviced by 18 servicers, and 55 
percent of all mortgages are owned by or serviced by the 4 largest 
banks.
    Returning homeowners to a positive equity position provides 
significant opportunity and motivation for at-risk homeowners to remain 
in their homes and communities. A short refinancing under HFH solves 
both the affordability and negative equity problems plaguing homeowners 
at risk of foreclosure today. The program was created to reduce 
principal on the existing senior lien mortgage and to eliminate the 
existing subordinate second lien, which can prevent unnecessary 
foreclosures. The Mortgage Investor Coalition believes that a properly 
implemented Hope for Homeowners program will not only provide stability 
for homeowners, but will help stem the declines in the housing markets 
and provide certainty for the fixed income capital markets, which will 
bolster financial markets in general and promote increased lending and 
reinvestment in mortgages. We believe the program will prevent 
additional foreclosure inventory from adding to the overhang of bank 
owned properties in the residential real estate market, thereby helping 
to establish a floor for housing prices.
    I would like to reiterate what we, the Mortgage Investors 
Coalition, have been stating--from Capitol Hill, to the Departments of 
Treasury and Housing and Urban Development, and with Community Housing 
Advocates. The best solution to our Nation's mortgage crisis is to 
significantly forgive principal on first and second lien mortgage debt 
in connection with the refinancing of the overextended homeowner into a 
new, low interest rate mortgage through the Hope for Homeowners 
program. The burden of solving the housing crisis should not fall 
squarely on the shoulders of any one stakeholder, and investors are 
willing to do our part by making a significant sacrifice in reducing 
mortgage principal.
    Investors seek a sustainable mortgage restructuring program that 
works in the best interest of all parties and addresses the multiple 
factors that have contributed to homeowner re-defaults. The solutions 
that have been offered to date have been sub-optimal for the homeowner 
in that they fail to address the entire consumer debt burden, and 
overlook the pernicious effects of negative equity. Compared to a short 
refinance program such as HFH, a modification approach, such as the 
Making Home Affordable Program, has a notable shortcoming: by not 
addressing negative equity, homeowners are trapped in a mortgage that 
cannot be refinanced and a house that cannot be sold. When the program 
ends in five years, the interest rate on both the first and second 
mortgage will reset higher, the outstanding balance of the combined 
mortgage debt is likely to still exceed the value of the home, and 
there could be a meaningful risk of a re-default. The low prices of 
securities in the mortgage market today in part reflect the great 
uncertainty of future cash flows and values associated with such 
modified loans.
    It is our understanding that the Committee would like to examine 
the reason more Hope for Homeowners refinancings have not occurred. The 
following is our analysis of what has happened since this Committee 
created and Congress passed the Helping Families Save Their Homes Act, 
modifying the Hope for Homeowners program.
    While there are still operational hurdles to overcome in 
implementing a more effective program, the major impediment to the 
viability of the program is the volume of second mortgages or second 
liens outstanding. The second lien problem exists because many banks 
and their affiliated servicers offered additional forms of financing to 
consumers, such as home equity loans and second mortgages. As indicated 
earlier, while a small percentage of second mortgages were sold to 
investors, the vast majority remain on the balance sheets of our 
Nation's largest financial institutions. In fact, the four banks that 
service approximately 55 percent of mortgages held roughly $441 billion 
of second liens on their balance sheets as of December 31, 2008. Banks 
have favored loan modification programs such as Making Home Affordable 
that defer the recognition of losses on the second lien portfolios. 
That program improves the cash flow available to the second mortgage at 
the expense of the first mortgage and defers the immediate loss that 
would be recognized in a foreclosure, short sale or short refinance. In 
these negative equity scenarios, the second lien would receive no 
proceeds in a foreclosure action; on the other hand, the modification 
program allows this uncollateralized obligation to remain outstanding 
and on the books of the financial institution as a performing asset, 
even though the homeowner has no equity in their home. The second lien 
is subordinate to the first lien and often has a higher interest rate. 
In the vast majority of cases, when a first mortgage is delinquent, so 
is the second lien. Our analysis of 44.1 million first lien loans from 
a primary credit bureau database indicated that of all second lien 
mortgages, only 3 percent are current with a corresponding first lien 
mortgage that is delinquent.
    We believe the current accounting treatment of second liens on the 
banks' balance sheets makes them particularly unwilling to take this 
loss to complete a refinance, resulting in 1) unsuccessful 
modifications that are prone to quickly re-default and 2) more 
importantly, only a handful of Hope for Homeowners refinances. The 
ideal scenario for a borrower who owns a home that is worth less than 
its outstanding mortgage debt, referred to as being ``underwater'', is 
to refinance into a Hope for Homeowners mortgage. Such a refinancing 
would result in the Borrower having a new, affordable mortgage with an 
equity investment in his or her home and an incentive to stay in the 
home and build additional equity. In addition this homeowner could 
eventually sell the home in a normal market transaction as opposed to 
the selling into the current market of bank auctions and foreclosure 
sales.
    As I previously explained, the refinancing of mortgages through 
Hope for Homeowners is the preferred solution for borrowers and 
investors in mortgage loans. Given that investors want more mortgage 
refinancings and an increased use of the Hope for Homeowners program, 
why can't investors just tell the servicers to refinance more loans?
    Unfortunately, even though the loans backing the investments are 
held for the benefit of investors, the investors are limited in the 
influence they can exert over those who administer the trusts. The 
contracts governing the Administration of the trust that issued the 
mortgage-backed securities were generally written in a manner that 
creates various barriers to investor control. Thus, although investors 
want servicers to be more responsive to borrowers and to significantly 
increase the penetration of the Hope for Homeowners program, forcing 
that behavior on the servicers is extremely difficult.
    What is the solution? It is an effort that will require 
participation and sacrifice by all interested parties to succeed. The 
government, financial institutions and investors all share an important 
stake in the recovery of the American homeowner and must contribute 
equitably to forge a healthier, more stable housing market, financial 
market and economy. The solution lies in providing positive equity and 
affordable payments for homeowners. Investors stand ready to make the 
sacrifice necessary to re-equitize the homeowners at risk of 
foreclosure.
    The Congress and the Administration should be diligent in their 
prodding of bank-affiliated servicers to offer HFH refinancings. HUD 
and Treasury are actively working to reach out to all stakeholders, 
including the banks and servicers who hold second liens, to arrive at a 
solution that can lead to more refinancings under the Hope for 
Homeowners program. It is unclear at this point whether HUD and 
Treasury have made progress on the second lien issue. If necessary, 
additional capital could be allocated to this effort as TARP funds are 
repaid to the government. When the Emergency Economic Stability Act of 
2008 first passed, a significant portion of the TARP money was to have 
been reserved for foreclosure avoidance. Government funds could be used 
to more aggressively compensate second lien holders as their 
investments are extinguished in the short refinance process of HFH.
    Fundamentally, for this problem to be solved, everyone must share 
the burden. Solutions cannot be a windfall for certain stakeholders and 
terrible for others. We must get homeowners out of underwater mortgages 
and into mortgages that have positive equity and are properly 
underwritten, affordable, fair, and sustainable. Contributions must be 
made by all participants.
    Based on all the available options, it seems the best solution is 
the Hope for Homeowners program. This means that investors like us will 
have to be prepared to take an immediate and substantial hit on the 
outstanding principal amount of the mortgage as loans are refinanced 
out of the securitization trust at a discount. It is necessary for 
borrowers to emerge from their underwater positions and begin to build 
positive equity for the housing market to recover. Given today's 
unprecedented economic conditions, mortgage investors stand ready to 
contribute to the re-equitization of homeowners by reducing principal 
on first lien mortgage debt to facilitate the refinance of these loans 
into stable thirty-year, amortizing, fixed-rate government loans.
    In creating the Hope for Homeowners program, Congress has created 
the framework for a successful solution to the housing crisis, and the 
funding necessary to provide sustainable mortgages for many American 
families at risk of losing their home to foreclosure. Mortgage 
Investors are prepared to make the appropriate contributions to 
preserve homeownership and call on the Committee to provide support in 
effectuating a workable program with the other stakeholders, including 
financial institutions that control the servicing and origination of 
residential mortgages.
    Mr. Chairman, we thank you for the opportunity to testify today--
and for your and your colleagues' efforts to help families not only 
achieve the American dream but also to keep their homes and avoid 
foreclosure during these turbulent times. We look forward to working 
with you to provide hope for homeowners and to doing our part to solve 
the housing and mortgage market crisis.
                                 ______
                                 
                  PREPARED STATEMENT OF ALLEN H. JONES
          Default Management Policy Executive, Bank of America
                             July 16, 2009

    Good morning, Chairman Dodd, Ranking Member Shelby and Members of 
the Committee. I am Allen Jones, Bank of America's Default Management 
Policy Executive. Thank you for the opportunity to appear and update 
you on the efforts of Bank of America to help families avoid 
foreclosures wherever possible and stay in their homes.
    Let me start by making two important points on which I will 
elaborate later in the testimony.
    First, as you will recall Bank of America exited subprime lending 
nearly nine years ago. Upon acquiring Countrywide, we have taken the 
steps to ensure our combined company is a leader in traditional 
mortgage products. Our April launch of the Clarity Commitment--a clear 
and simple one page disclosure that accompanies every new and 
refinanced loan--is one demonstration of our focus on ensuring 
customers understand what loan they are getting and the associated 
costs.
    Second, Bank of America has been at the forefront of government and 
industry efforts to develop loan modification programs as a way of 
avoiding foreclosures and helping financially distressed customers 
remain in their homes. We modified 230,000 mortgage loans in 2008, and 
we are pleased to report that in the first six months of this year, 
modification offers have been accepted or rate relief has been provided 
for more than 150,000 customers.
    In recent weeks, as the Administration's Making Home Affordable 
modification program guidelines have been completed and our systems 
have been converted, Making Home Affordable has become the centerpiece 
of Bank of America's overall home retention efforts. Already, 
approximately 80,000 Bank of America customers are in the trial 
modification period or are responding to modification offers we have 
extended under Making Home Affordable.
    We have achieved this level of success by devoting substantial 
resources to this effort. Our Home Loans business has more than 7,400 
associates dedicated to home retention. This team has nearly doubled 
since this time one year ago. They respond to an average of 80,000 
customer calls a day--and more than 1.8 million calls a month. In 
addition to personnel, we have devoted substantial systems, training 
and other resources to our loan modification efforts.
    Our country is slowly emerging from the worst economic crisis since 
the Great Depression, the impacts of which have been felt deeply by 
consumers because at its center has been the deterioration in value of 
an asset important to individual wealth and stability--the home. Home 
values in some areas of the country have depreciated to less than half 
their value at the market's peak, and unemployment continues to rise--
recently hitting a 26 year high.
    Against this backdrop, millions of families are struggling. As one 
of the country's leading mortgage lenders and servicers, Bank of 
America understands and fully appreciates its role in helping borrowers 
through these difficult economic times. We want to ensure that any 
borrower who has sufficient income and the intent to maintain 
homeownership has the ability to do so using any and all resources we 
have available.
    With that introduction, let me describe more specifically how we 
are leveraging Making Home Affordable and other programs to help 
borrowers, and provide some suggestions for improvement.
Support for Administration's Foreclosure Relief Efforts
    Bank of America supports the Obama Administration's Making Home 
Affordable refinance and loan modification programs for their potential 
to help millions of homeowners who otherwise may have faced certain 
foreclosure.
    The program's focus on affordability of payment in the loan 
modification and refinance processes is consistent with the approach we 
have successfully developed for our customers, and we appreciate the 
opportunity we have had to work with the Administration in developing 
guidelines for its Making Home Affordable programs.
    While our primary focus here today is loan modifications, it's 
important to recognize the benefits of the Making Home Affordable 
refinance program and its role in helping more Americans retain their 
homes.
    Bank of America was one of the first lenders to process refinance 
applications through the Making Home Affordable program. We have taken 
more than 90,000 Making Home Affordable refinance applications (the 
majority of which have locked) and funded nearly 40,000 refinances 
since launching the program.
    Responsiveness to borrowers. We understand the importance of 
responding promptly when our customers call, and providing clear, 
timely answers to their questions. As noted earlier, our home retention 
division responds to an average of 80,000 customer calls daily. We seek 
to answer calls from customers in 90 seconds or less--and in the second 
quarter we met that goal more than 80 percent of the time.
    Making Home Affordable Modification Process. Our process for 
evaluating Making Home Affordable modifications generally works as 
follows: A customer is contacted through solicitation or offer letters 
or they contact us, and we perform an analysis of their financial 
situation, focusing primarily on their income and expenses and any 
hardships they may be suffering. In many cases, particularly where we 
have delegated authority from our investors to modify their loans, the 
customer can be pre-qualified for the Making Home Affordable program 
over the phone.
    A pre-qualified customer receives a trial modification plan in the 
mail to execute and return within 30 days, along with supporting 
financial documentation and their first trial period payment. During 
the trial period, the customer's documentation is evaluated to ensure 
compliance with program guidelines. A customer who meets all program 
requirements, including timely making of all payments during this three 
or four month period, will receive a second agreement that must be 
signed and promptly returned to receive a final modification.
    We continually strive to make our processes efficient and customer-
friendly. We have established new processes for, among other things, 
verifying borrower income and expenses, managing trial modification 
periods, securing the payment of mortgage insurance pre-claims at the 
time of modification so as to enable more borrowers to qualify for 
modifications, and working with third party contractors engaged by the 
GSEs.
    Delays in Foreclosure Sales. Bank of America customers will not 
lose their homes to foreclosure while their loans are being considered 
for a modification. The Bank places foreclosure sales on hold while it 
determines a customer's eligibility for its home retention programs.
Bank of America's Home Retention Operations
    While the focus of today's hearing is on Making Home Affordable 
modification implementation, we also want to highlight our early 
leadership to address avoidable foreclosures. As the largest servicer 
in the United States, servicing one in five mortgages, or a total of 14 
million loans, we understand our responsibility to help our customers 
sustain homeownership. Before the government's announcement of Making 
Home Affordable earlier this year, Bank of America had proactively put 
in place industry-leading assistance programs for distressed borrowers. 
We continue to leverage those programs to ensure that we consider every 
potential solution for our customers.
    National Homeownership Retention Program. Shortly after acquiring 
Countrywide, Bank of America announced the creation of our National 
Homeownership Retention Program for nearly 400,000 borrowers with 
discontinued Countrywide subprime and pay option ARM products. Outreach 
under the program began in December 2008. Like Making Home Affordable, 
our National Homeownership Retention Program focuses on affordability 
and sustainability, while providing a streamlined loan modification 
process.
    Hope for Homeowners. Bank of America believes the Hope for 
Homeowners program provides another useful tool for assisting 
borrowers. We have not been able to implement the program as we are 
still awaiting final guidance from the Department of Housing and Urban 
Development. The program, as originally rolled out, had a series of 
unique requirements which were very different from standard FHA 
programs, and presented serious implementation challenges for lenders. 
The Helping Families Save Their Homes Act signed into law by President 
Obama in May of 2009 includes helpful changes to Hope for Homeowners 
that are designed to make the program more consistent with standard FHA 
practices. We understand the Department of Housing and Urban 
Development is hard at work on developing final Hope for Homeowners 
guidance that will provide lenders with the tools they need to move 
forward and implement the program. It is important to note that once 
final guidelines are issued, it will still take lenders several months 
to implement the program.
    Community Outreach and Partnerships. We have also devoted 
significant resources to community outreach. Since the beginning of 
this year, we have participated in more than 120 community outreach 
events in 26 states. We have reached more than 5,000 borrowers through 
these events, with about 50 percent of whom we had no prior contact in 
the last 60 days.
    We have partnered with the National Council of La Raza, National 
Urban League, and the National Coalition for Asian Pacific American 
Community Development in the creation of the Alliance for Stabilizing 
Communities, and we provided $2.5 million in funding to support this 
national coalition dedicated to assisting individuals facing 
foreclosure. The Alliance will hold 40 housing rescue fairs over the 
next two years in 24 communities hardest hit by the foreclosure crisis.
    In addition, Bank of America partners with 440 HUD-approved non-
profit counseling agencies. Empowering the counselors with knowledge 
about Bank of America Home Loans and the Making Home Affordable 
modification program is significant because counselors can educate 
borrowers and assist in the modification application process. This 
year, we have trained over 500 counselors in sessions across the United 
States.

Making Home Affordable Challenges and Improvements
    Bank of America appreciates the opportunity we've had to work 
closely with members of the Administration in developing the Making 
Home Affordable program. We all understand there is still more work to 
be done on various aspects of the program to improve its success and 
the success of those homeowners that rely on it for assistance during 
these difficult economic times.
    We would like to take this opportunity to offer some suggestions 
for improvement:

    Announcement of Program Changes or Guidance. Communications by 
Treasury to servicers and at-risk homeowners regarding program features 
and effective dates could be improved. Advanced notification to loan 
servicers once new guidelines or program changes are determined (but 
before they become effective) would enable servicers to establish early 
necessary systems and practices to better address customer inquiries. 
The current method of publicly announcing new guidelines or changes 
concurrently with their effective dates creates immediate demand with 
insufficient lead time for operational readiness. This can lead to 
negative customer experience and, ultimately, public backlash against 
the programs.
    We also would suggest that new or revised guidelines not be issued 
until they have been reviewed with industry representatives and their 
details have been completed. For example, while we appreciate the 
spirit in which it was done, the issuance by Treasury of its brief and 
limited guidelines for the second lien and short sale programs months 
before their comprehensive rules have been finalized or even drafted 
has led to a great deal of confusion and delay in the industry and with 
the public.
    Promoting uniform interpretations of program guidelines. 
Consistency in the creation and interpretation of program guidelines 
between Treasury and the GSEs, as well as consistent guidelines for 
Fannie Mae- and Freddie Mac-owned or securitized loans, also would 
reduce homeowner confusion and simplify servicers' ability to 
operationalize these programs as they evolve. Similarly, it is 
important to encourage states to limit modification-related legislation 
which may complicate participation in federal programs such as MHA. And 
there also should be consistency among the various federal regulators 
and agencies as to the options servicers should utilize and the process 
servicers should follow for implementing Making Home Affordable.
    Requirement of complete documentation. One of the benefits of the 
MHA program is the trial modification period. Servicers can approve 
trial modifications almost instantly and use the trial period to 
collect the necessary documentation to complete the modification. One 
factor that slows down the process during the trial period is that many 
borrowers initially provide incomplete information. We hope to work 
with the Administration to address the challenges we are experiencing 
with some of the required documentation returned by customers by 
reinforcing through the media and other communications the importance 
of complete and accurate documentation. Servicers also should have some 
flexibility to determine the materiality of the incomplete response, 
such as whether we can accept an electronically filed tax return 
without a signature.
    No program for the unemployed. As a general matter, we would 
welcome the opportunity to work with Treasury on a program that would 
offer short term relief while unemployed borrowers seek re-employment. 
This is already a significant population, and a growing need.

Customer Impacts
    Despite problems in the economy, most of our customers continue to 
pay their mortgages on time; and less than 375,000 loans, or fewer than 
3 percent of the 14 million loans in our servicing portfolio, face 
foreclosure. While foreclosures are a relatively small percentage of 
our portfolio, we recognize that the impact they have on our 
communities, neighborhoods and customers is significant. That is why we 
have exhausted and will continue to exhaust every possible avenue to 
help families stay in their homes.
    Despite our best efforts, there are limits to what we can do. With 
unemployment at a 26-year high, even the most ambitious modification 
plan will not help when there is no income. Often the largest 
impediments to completing loan modifications are the changed 
circumstances of the borrower, such as unemployment, divorce, illness, 
or dissatisfaction with the property that may make a loan modification 
unattainable. We can only modify loans where the borrower has the 
ability and willingness to repay.
    Our goal is to keep as many families in their homes as possible. 
Often we will succeed, but regardless, we believe every customer 
deserves to be treated with compassion and respect, and we work to 
provide a dignified process for everyone.

Bank of America Mortgage Lending Update
    We strongly believe that long-term recovery in the economy and 
housing markets relies upon lenders responsibly and effectively 
providing loans to creditworthy borrowers. To that end, in April we 
launched Bank of America Home Loans, which is built on a brand promise 
to always be a responsible lender and help create successful 
homeowners.
    At that time, we introduced several new tools in response to 
valuable customer feedback. One such tool--the Clarity Commitment--is a 
one-page summary of a borrower's loan terms in plain English. We have 
it in place on 95 percent of our products, and it has been very well 
received by our customers and community partners. Since we introduced 
it, already 400,000 customers have received this document with their 
loan papers.
    We are making new mortgage loans available to eligible customers 
for buying homes and refinancing their current mortgage loans. On 
Friday, July 17, Bank of America will report second quarter earnings. 
In the first quarter of 2009, we generated:
    More than $85 billion in first mortgage production--representing 
more than 382,000 customers who purchased homes or saved money on the 
home theyalready own.
    More than $4 billion in home equity and reverse mortgage 
production, representing almost 23,000 customers.
    One in four of these loans were to low- and moderate-income 
customers.

Conclusion
    I want to thank you for the opportunity to describe our ongoing 
home retention efforts. We recognize there is still much more to be 
done. The ongoing economic crisis demands expedient, affordable loan 
modifications that help borrowers within the framework of our 
contractual obligations to investors.
    This is a critically important undertaking that must be done right 
if we as a country are going to preserve the flow of mortgage credit to 
support sustainable homeownership and at the same time protect 
communities and neighborhoods from avoidable foreclosures. We look 
forward to working with Congress and the Administration to accomplish 
these goals. I would be happy to answer any questions you might have.

                                 ______
                                 
                PREPARED STATEMENT OF DIANE E. THOMPSON
            National Consumer Law Center, also on behalf of

               National Association of Consumer Advocates
                             July 16, 2009

I. Introduction
    Chairman Dodd, Ranking Member Shelby, and members of the Committee, 
thank you for inviting me to testify today regarding the barriers 
encountered by homeowners attempting to access the Making Home 
Affordable program and the Hope for Homeowners program.
    I am an attorney, currently of counsel to the National Consumer Law 
Center (NCLC).\1\ In my work at NCLC I provide training and support to 
hundreds of attorneys representing homeowners from all across the 
country and consequently have heard many, many reports of the 
difficulties encountered by advocates and homeowners attempting to 
obtain sustainable loan modifications. For nearly 13 years prior to 
joining NCLC, I represented low-income homeowners at Land of Lincoln 
Legal Assistance Foundation in East St. Louis, Illinois. In that 
capacity, I became intimately familiar with the difficulties in 
arranging a loan modification, even when it was clearly in the 
investor's best interests.
---------------------------------------------------------------------------
    \1\ The National Consumer Law Center, Inc. (NCLC) is a non-profit 
Massachusetts Corporation, founded in 1969, specializing in low-income 
consumer issues, with an emphasis on consumer credit. On a daily basis, 
NCLC provides legal and technical consulting and assistance on consumer 
law issues to legal services, government, and private attorneys 
representing low-income consumers across the country. NCLC publishes a 
series of eighteen practice treatises and annual supplements on 
consumer credit laws, including Truth In Lending (6th ed. 2007) and 
Cost of Credit: Regulation, Preemption, and Industry Abuses (3d ed. 
2005) and Foreclosures (2d ed. 2007), as well as bimonthly newsletters 
on a range of topics related to consumer credit issues and low-income 
consumers. NCLC attorneys have written and advocated extensively on all 
aspects of consumer law affecting low-income people, conducted training 
for thousands of legal services and private attorneys on the law and 
litigation strategies to deal with predatory lending and other consumer 
law problems, and provided extensive oral and written testimony to 
numerous Congressional committees on these topics. This testimony was 
written by Alys Cohen, Staff Attorney, and Diane E. Thompson, Of 
Counsel, to NCLC.
---------------------------------------------------------------------------
    I testify here today on behalf of the National Consumer Law 
Center's low-income clients. On a daily basis, NCLC provides legal and 
technical assistance on consumer law issues to legal services, 
government and private attorneys representing low-income consumers 
across the country. I also testify here today on behalf of the National 
Association of Consumer Advocates.\2\
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    \2\ The National Association of Consumer Advocates (NACA) is a non-
profit corporation whose members are private and public sector 
attorneys, legal services attorneys, law professors, and law students, 
whose primary focus involves the protection and representation of 
consumers. NACA's mission is to promote justice for all consumers.
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    We are facing in this country a foreclosure tsunami, which 
threatens to destabilize our entire economy, devastate entire 
communities, and destroy millions of families. Large-scale, sustainable 
modifications are widely recognized as an essential component of 
restoring economic health to our country and hope to our homeowners.
    There are three major Federal programs designed to prevent 
foreclosures and preserve homeownership: Hope for Homeowners, the 
Making Home Affordable refinance program, and the Making Home 
Affordable modification program, or the Home Affordable Modification 
Program. My comments will focus on the modification prong of the Making 
Home Affordable program. Far more of the homeowners facing foreclosure 
are eligible for modification under the Home Affordable Modification 
Program than for refinance under either Hope for Homeowners or the 
refinance prong of Making Home Affordable. Recent changes to both 
programs should increase eligibility and may increase participation. 
Still, restrictions on both programs are likely to continue to limit 
their reach.
    Both Hope for Homeowners and the refinance prong of Making Home 
Affordable are designed to offer some relief to homeowners who owe more 
than their homes are worth. This is an important goal and an essential 
component of any solution to the foreclosure crisis. As described in 
Chairman Dodd's letter of July 10, 2009, Hope for Homeowners, in 
particular, could play an important role in moving us forward by 
mandating principal reductions. We remain concerned, however, that 
neither program effectively eliminates negative equity. The refinance 
prong of Making Home Affordable permits the refinancing of excess debt 
and so may permit homeowners to lower interest rates. Absent market 
appreciation, however, it does not reduce the negative equity. Although 
Hope for Homeowners mandates principal reductions, many mortgage 
holders and servicers continue to be unwilling to agree to this write-
down as the price for participation in the program, even with the 
possibility of an increased share in future appreciation.\3\ Nor is it 
clear that even the recent improvements to the Hope for Homeowners 
second lien program will be sufficient to remove second liens in any 
significant number.
---------------------------------------------------------------------------
    \3\ The requirement that future appreciation be shared with HUD 
also reduces homeowners' investment in their property and may have 
adverse unintended consequences if homeowners respond to that reduced 
equity by defaulting.
---------------------------------------------------------------------------
    The recent improvements to FHA and RHS are also beyond the scope of 
my testimony. We would like nonetheless to take this opportunity to 
congratulate Congress and the Administration on the important steps 
forward in these programs. In addition to improving Hope for 
Homeowners, S. 896 also increased the ability of homeowners with FHA 
and RHS loans to access partial claims, a special form of principal 
forbearance. This, too, is an important step to increase the long-term 
affordability of mortgages for many of our most vulnerable homeowners. 
Having negotiated partial claims with FHA servicers on behalf of low-
income homeowners, I personally know how important the partial claim 
option can be to preserving homeownership. We at NCLC and NACA applaud 
Congress and the Administration for their efforts to expand the 
modification options available under the government-insured programs: 
FHA, RHS, and VA.
    The Home Affordable Modification Program (HAMP) announced by 
President Obama's administration on March 4, 2009, is a laudable 
attempt to overcome long standing reluctance by servicers to perform 
large numbers of sustainable loan modifications. HAMP seeks to change 
the dynamic that leads servicers to refuse even loan modifications that 
would be in the investors' best interests by providing both servicers 
and investors with payments to support successful loan modifications. 
Several months into the Home Affordable Modification Program (HAMP), 
however, homeowners and their advocates report that the program is not 
providing a sufficient number of loan modifications to homeowners, the 
modifications offered often do not meet the guidelines of the program, 
and the program itself still presents serious barriers to mass loan 
modifications.
    HAMP, despite its lofty goals, has not yet been able to contain the 
foreclosure tsunami. To date, implementation of the program by 
servicers has been slow and sporadic. The Administration's efforts to 
hold servicers accountable \4\ are a welcome and necessary step 
forward. Further steps to reform HAMP and ensure servicer compliance 
are needed if the program is to reach its goal of reducing 
foreclosures. Particularly problematic is the lack of any mechanism to 
ensure that homeowners are, when appropriate, offered a loan 
modification prior to foreclosure sale. A timeline should be set to 
evaluate whether HAMP, along with other existing programs, can 
sufficiently address foreclosures. If it becomes clear they can not, 
more stringent measures, as discussed below, should be adopted. The 
structure of the servicing industry makes it unlikely that existing 
measures will be adequate; currently available information confirms 
that prognosis.
---------------------------------------------------------------------------
    \4\ Renae Merle, White House Prods Banks: Letter Tells Chiefs To 
Start Backing Mortgage Relief, Wash. Post, July 10, 2009, available at 
http://www.washingtonpost.com/wpdyn/content/article/2009/07/09/
AR2009070902928.html?nav=rss_business.
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A. Problems with Servicers' Implementation of HAMP Plague Homeowners 
        Seeking Loan Modifications.
    --Participating servicers violate the HAMP guidelines:

    Servicers still require waivers.

    Some participating servicers offer non-compliant loan 
        modifications.

    Some participating servicers refuse to offer HAMP 
        modifications.

    Servicers charge fees to homeowners for the modification.

    Servicers are continuing to initiate foreclosures and sell 
        homes at foreclosure sales while the HAMP review is pending.

    --Servicer staffing and training still lag behind what is needed.

    Homeowners and counselors report waits of months to hear 
        back on review for a trial modification, followed by very short 
        timeframes to return documents.

    Staff of participating servicers continue to display 
        alarming ignorance of HAMP.

    Non-participating servicers continue to represent 
        themselves as participating in HAMP.

    --Lack of transparency and accountability is resulting in summary 
denials and other unreasonable acts by servicers.

B. Certain HAMP Policies Must Be Changed to Provide Sustainable 
        Modifications and Save Communities.
    --Transparency must be improved.

    The Net Present Value model for qualifying homeowners must 
        be available to the public.

    The layers of documents governing HAMP, the guidelines, the 
        Supplemental Directives, the various FAQ's, and the servicer 
        contracts, should be consolidated, reconciled, and clarified.

    Participating subsidiaries must be clearly identified.

    --Mechanisms for enforcement and compliance should be adopted.

    All foreclosure proceedings must be stopped upon the 
        initiation of a HAMP review, not just at the point before sale.

    Homeowners should be provided with an independent review 
        process when denied a loan modification.

    Homeowners should have access to an ombudsman to address 
        complaints about the process.

    Denials based in part on a borrower's credit score should 
        be accompanied by an adverse action notice under the Fair 
        Credit Reporting Act.

    --The HAMP guidelines should be adjusted to provide more meaningful 
relief to homeowners without reducing their existing rights.

    Homeowners need principal reductions, not forbearance.

    Homeowners suffering an involuntary drop in income should 
        be eligible for a second HAMP loan modification.

    Homeowners in bankruptcy should be provided clear access to 
        the HAMP program.

    Mortgages should remain assumable as between spouses, 
        children, and other persons with a homestead interest in the 
        property.

    Fair lending principles must be ensured throughout the HAMP 
        process.

    HAMP application procedures should better recognize and 
        lessen the impact of exigent circumstances.

    The trial modification program should be further formalized 
        and clarified, such that homeowners receive assurances of the 
        terms of the permanent modification and homeowners are not put 
        into default on their loans if they are current at the onset of 
        the trial modification.

    The final modification agreement should make clear that the 
        homeowners do not waive any rights nor are required to reaffirm 
        the debt in order to enter into the modification.

    The second lien program should be further developed to 
        promote coordination with first lien modifications; servicers 
        should be required to participate in both programs.

    --Data collection and reporting should provide broad, detailed 
information in order to support the best HAMP outcomes.

II. Foreclosures Far Outweigh Loan Modifications.
    Goldman Sachs estimates that, starting at the end of the last 
quarter of 2008 through 2014, 13 million foreclosures will be 
started.\5\ At the end of the first quarter of 2009, more than 2 
million houses were in foreclosure.\6\ Over twelve percent of all 
mortgages had payments past due or were in foreclosure and over 7 
percent were seriously delinquent--either in foreclosure or more than 3 
months delinquent.\7\
---------------------------------------------------------------------------
    \5\ Goldman Sachs Global ECS Research, Home Prices and Credit 
Losses: Projections and Policy Options (Jan. 13, 2009), at 16; see also 
Rod Dubitsky, Larry Yang, Stevan Stevanovic & Thomas Suehr, Credit 
Suisse Fixed Income Research, Foreclosure Update: Over 8 Million 
Foreclosures Expected 1 (Dec. 4, 2008) (predicting 9 million 
foreclosures for the period 2009-2012).
    \6\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4 
(2009) (reporting that 3.85 percent of 44,979,733, or 1.7 million, 
mortgages serviced were in foreclosure). Roughly half of these were 
serviced by national banks or Federal thrifts. See Office of the 
Comptroller of the Currency & Office of Thrift Supervision, OCC and OTS 
Mortgage Metrics Report: Disclosure of National Bank and Federal Thrift 
Mortgage Loan Data, First Quarter 2009, at 8 (June 2009), available at 
http://files.ots.treas.gov/482047.pdf (reporting that 884,389 
foreclosures were in process by national banks and Federal thrifts at 
the end of the first quarter of 2009). The estimate of more than 2 
million homes in foreclosure is achieved by extrapolating from the MBA 
numbers. The MBA survey only covers approximately 80 percent of the 
mortgage market. Thus, (44979733*3.85 %)/0.8=2.16 million.
    \7\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4 
(2009).
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    These spiraling foreclosures weaken the entire economy and 
devastate the communities in which they are concentrated.\8\ Neighbors 
lose equity; \9\ crime increases; \10\ tax revenue shrinks.\11\ 
Communities of color remain at the epicenter of the crisis; targeted 
for subprime, abusive lending, they now suffer doubly from 
extraordinarily high rates of foreclosure and the assorted ills that 
come with foreclosure.\12\
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    \8\ See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors, Fed. 
Reserve Sys., Address at the Federal Reserve System Conference on 
Housing and Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12; Ira 
J. Goldstein, The Reinvestment Fund, Lost Values: A Study of Predatory 
Lending in Philadelphia, at 62/-/63 (2007), available at 
www.trfund.com/resource/downloads/policypubs/Lost_Values.pdf 
(discussing disastrous community impact left behind by failed subprime 
lenders).
    \9\ See John P. Harding, Eric Rosenblatt, & Yao Vincent, The 
Contagion Effect of Foreclosed Properties (July 15, 2008), available at 
http://ssrn.com/abstract=1160354; Letter, Senator Dodd to Senator Reid 
(Jan. 22, 2008) (describing cycle of disinvestment, crime, falling 
property values and property tax collections resulting from 
foreclosures), available at http://dodd.senate.gov/multimedia/2008/
012308_ReidLetter.pdf; Staff of the J. Economic. Comm., 110th Cong., 
1st Sess., The Subprime Lending Crisis: The Economic Impact on Wealth, 
Property Values and Tax Revenues, and How We Got Here (2007), available 
at http://jec.senate.gov/
index.cfm?FuseAction=Reports.Reports&ContentRecord_id=c6627bb2-7e9c-
9af9-7ac7-32b94d398
d27&Region_id=&Issue_id= (projecting foreclosed home owners will lose 
$71 billion due to foreclosure crisis, neighbors will lose $32 billion, 
and state and local governments will lose $917 million in property tax 
revenue); Dan Immergluck & Geoff Smith, The External Costs of 
Foreclosure: The Impact of Single-Family Mortgage Foreclosures on 
Property Values,  17 Housing Pol'y Debate 57, 69, 75 (2006) (``for each 
additional conventional foreclosure within an eighth of a mile of a 
house, property value is expected to decrease by 1.136 percent''; 
estimating total impact in Chicago to be between $598 million and $1.39 
billion); William C. Apgar, Mark Duda, & Rochelle Nawrocki Gorey, The 
Municipal Cost of Foreclosures: A Chicago Case Study (Hous. Fin. Policy 
Research Paper 2005), at 1, available at www.995hope.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf; John P. Harding, Eric Rosenblatt, & 
Yao Vincent, The Contagion Effect of Foreclosed Properties (July 15, 
2008), available at http://ssrn.com/abstract=1160354; Letter, Senator 
Dodd to Senator Reid (Jan. 22, 2008) (describing cycle of 
disinvestment, crime, falling property values and property tax 
collections resulting from foreclosures), available at http://
dodd.senate.gov/multimedia/2008/012308_ReidLetter.pdf.
    \10\ See, e.g., J.W. Elphinstone, After Foreclosure, Crime Moves 
In, Boston Globe, Nov. 18, 2007 (describing Atlanta neighborhood now 
plagued by house fires, prostitution, vandalism and burglaries); Dan 
Immergluck & Geoff Smith, The Impact of Single-Family Mortgage 
Foreclosures on Neighborhood Crime, 21 Housing Stud. 851 (2006), 
available at www.prism.gatech.edu/di17/housingstudies.doc (calculating 
that for every 1 percent increase in the foreclosure rate in a census 
tract there is a corresponding 2 percent increase in the violent crime 
rate).
    \11\ See, e.g., Staff of the J. Economic Comm., 110th Cong., 1st 
Sess., The Subprime Lending Crisis: The Economic Impact on Wealth, 
Property Values and Tax Revenues, and How We Got Here (2007), available 
at http://jec.senate.gov/index.cfm?FuseAction=Reports.Reports&Content
Record_id=c6627bb2-7e9c-9af9-7ac7-32b94d398d27&Region_id=&Issue_id= 
(projecting foreclosed home owners will lose $71 billion due to 
foreclosure crisis, neighbors will lose $32 billion, and state and 
local governments will lose $917 million in property tax revenue); 
William C. Apgar, Mark Duda, & Rochelle Nawrocki Gorey, The Municipal 
Cost of Foreclosures: A Chicago Case Study (Hous. Fin. Policy Research 
Paper), 2005, at 1, www.995hope.org/content/pdf/
Apgar_Duda_Study_Full_Version.pdf.
    \12\ See, e.g., Michael Powell & Janet Roberts, Minorities Affected 
Most as New York Foreclosures Rise, N.Y. Times, May 15, 2009; Mortgage 
Foreclosure Filings in Pennsylvania: A Study by the Reinvestment Fund 
for the Pennsylvania Department of Banking 36 (Mar. 2005), available at 
www.trfund.com/policy/pa_foreclosures.htm; Paul Calem, Kevin Gillen & 
Susan Wachter, The Neighborhood Distribution of Subprime Mortgage 
Lending, 29 J. Real Estate Fin. & Econ. 393 (2004); Ira Goldstein, The 
Reinvestment Fund, Predatory Lending: An Approach to Identify and 
Understand Predatory Lending (2002) (showing that areas within the city 
of Philadelphia that are predominately African American or Latino also 
tended to have higher concentrations of foreclosure sales and were more 
vulnerable to predatory lending); cf. AARP Pub. Pol'y Inst., A First 
Look at Older Americans and the Mortgage Crisis 5 (2008), http://
assets.aarp.org/rgcenter/econ/i9_mortgage.pdf (African Americans and 
Hispanics are foreclosed on at roughly three times the rate of white 
Americans).
---------------------------------------------------------------------------
    Modifications have not made a dent in the burgeoning foreclosures. 
A recent paper in the Boston Federal Reserve Bank's Public Policy 
series found that less than 8 percent of all the loans 60 days or more 
delinquent were modified during 2007-2008\13\ Professor Alan White, in 
examining pools of securitized mortgages, found that the number of 
modifications varied dramatically by servicer, ranging from servicers 
who modified as many as 35 percent of the loans in foreclosure to as 
few as 0.28 percent of the loans in foreclosure in November 2008.\14\ 
Even at the high end of 35 percent of all mortgages in foreclosure, the 
modification rate is not enough to reduce the foreclosure rate to pre-
crisis levels.\15\ HAMP has not yet improved the situation: although 
modifications increased during the first quarter of 2009, all data 
indicate that the number and rate of total modifications fell back 
during the second quarter.\16\
---------------------------------------------------------------------------
    \13\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't 
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization 35 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
    \14\ Alan M. White, Deleveraging the American Homeowner: The 
Failure of 2008 Voluntary Mortgage Modification Contracts, Conn. L. 
Rev. 12-13 (forthcoming 2009), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1325534. 
    \15\ See Ben S. Bernanke, Chairman, Bd. of Governors, Fed. Reserve 
Sys., Address at the Federal Reserve System Conference on Housing and 
Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12 
(noting that the number of foreclosures has more than doubled from pre-
crisis levels).
    \16\ See, e.g., Gretchen Morgenson, Fair Game--So Many 
Foreclosures, So Little Logic, N.Y. Times, July 4, 2009 (reporting that 
modifications peaked in February 2009 and have since declined while the 
number of foreclosures and delinquencies has continued to rise); 
California Reinvestment Coalition, The Ongoing Chasm Between Words and 
Deeds: Abusive Practices Continue to Harm Families and Communities in 
California (2009) (reporting observations by housing counselors that 
loan modifications declined in the second quarter); Home Foreclosures: 
Will Voluntary Mortgage Modification Help Families Save Their Homes?: 
Hearing Before the Subcomm. on Commercial and Administrative Law of the 
H. Comm. on the Judiciary, 111th Cong. (2009) (testimony of Alan M. 
White).
---------------------------------------------------------------------------
    Worse, the modifications offered pre-HAMP (and presumably still by 
servicers not offering HAMP modifications) were overwhelmingly ones 
that increased the borrower's payment and principal balance. Only about 
3 percent of the delinquent loans studied in Boston Federal Reserve 
Bank paper received modifications that reduced the payment.\1\17 
Professor White's data shows that, in the aggregate, modifications 
increase the principal balance.\18\ While the first quarter 2009 data 
from the OCC and OTS shows that a majority of the modifications 
(excluding short term payment plans or forbearance agreements) 
decreased the payment, most of those modifications also increased the 
principal balance by capitalizing arrears.\19\ Unsurprisingly, 
redefault rates on loan modifications remain high.\20\
---------------------------------------------------------------------------
    \17\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't 
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-4, 
July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/
ppdp0904.pdf.
    \18\ Alan White, Rewriting Contracts, Wholesale: Data on Voluntary 
Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham 
Urb. L. J. 20 (forthcoming 2009), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1259538# 
    \19\ Office of the Comptroller of the Currency & Office of Thrift 
Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of 
National Bank and Federal Thrift Mortgage Loan Data, First Quarter 
2009, at 5 (June 2009), available at http://files.ots.treas.gov/
482047.pdf.
    \20\ Office of the Comptroller of the Currency & Office of Thrift 
Supervision, OCC and OTS Mortgage Metrics Report: Disclosure of 
National Bank and Federal Thrift Mortgage Loan Data, First Quarter 
2009, at 6 (June 2009), available at http://files.ots.treas.gov/
482047.pdf.
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    The official numbers available to date on the HAMP program reflect 
a modest start at best.\21\ The good news is that, on paper at least, 
75 percent of all the loans in the country should be covered by 
HAMP.\22\ The bad news is that only 55,000 trial modifications have 
been offered and only 300,000 letters with information about trial 
modifications have been sent to homeowners. As the President 
acknowledges, foreclosures still outnumber modifications under the 
program.\23\ The 300,000 letters containing information about trial 
modifications are obscured by the more than 2 million homeowners in 
foreclosure and the over 770,000 new foreclosure starts in the first 
quarter alone.\24\
---------------------------------------------------------------------------
    \21\ United States Department of the Treasury, Making Home 
Affordable Progress Report, May 14, 2009, available at http://
www.treas.gov/press/releases/docs/05142009ProgressReport.pdf.
    \22\ United States Department of the Treasury, Making Home 
Affordable Progress Report, May 14, 2009, available at http://
www.treas.gov/press/releases/docs/05142009ProgressReport.pdf.
    \23\ Tami Luhby, Obama mortgage plan needs work: Many borrowers are 
not getting help under president's modification or refinancing plan, 
CNN Money.com, July 8, 2009; Press Conference by the President, The 
White House, Office of the Press Secretary (June 23, 2009), available 
at http://www.whitehouse.gov/the_press_office/Press-Conference-by-the-
President-6-23-09/ (``Our mortgage program has actually helped to 
modify mortgages for a lot of our people, but it hasn't been keeping 
pace with all the foreclosures that are taking place,'').
    \24\ Mortgage Bankers' Ass'n, Nat'l Delinquency Survey Q109 at 4 
(2009) (reporting that 3.85 percent of 44,979,733 mortgages surveyed 
were in foreclosure in the first quarter and that 1.37 percent of 
mortgages surveyed had foreclosure starts in the first quarter; the MBA 
survey data covers 80 percent of the mortgage market, so the numbers 
are extrapolated by dividing the MBA numbers by 80 percent).
---------------------------------------------------------------------------
    Servicers are still staffing up to deal with homeowners in 
distress.\25\ Administration officials have admitted that the industry 
is not yet up to the task.\26\ The progress servicers have made in 
hiring loan modification staff, although real, is not keeping up with 
the numbers of foreclosures filed by those same servicers.
---------------------------------------------------------------------------
    \25\ See, e.g., Peter S. Goodman, Promised Help Is Elusive for Some 
Homeowners, N.Y. Times, June 3, 2009.
    \26\ Peter S. Goodman, Paper Avalanche Buries Plan to Stem 
Foreclosures, N.Y. Times, June 29, 2009) (quoting Michael Barr, 
Assistant Secretary for Financial Institutions at the Treasury 
Department: ``They need to do a much better job on the basic management 
and operational side of their firms . . . What we've been pushing the 
servicers to do is improve their infrastructure to make sure their call 
centers are doing a better job. The level of training is not there 
yet.'').
---------------------------------------------------------------------------
    We do not yet have any data on the characteristics or performance 
of the HAMP loan modifications. However, extensive reports from 
advocates around the country show that the quality of loan 
modifications offered too often does not comport with HAMP guidelines. 
Advocates for homeowners continue to report problems with 
implementation of the program.\27\ Servicers are all too often refusing 
to do HAMP modifications, soliciting a waiver of homeowners' rights to 
a HAMP review, and structuring offered modifications in ways that 
violate HAMP. These violations may be harder to detect than the gross 
failure of servicers to date to process a meaningful number of 
modifications, but they will vitiate HAMP just as surely.
---------------------------------------------------------------------------
    \27\ See, e.g., California Reinvestment Coalition, The Ongoing 
Chasm Between Words and Deeds: Abusive Practices Continue to Harm 
Families and Communities in California (2009); Peter S. Goodman, Paper 
Avalanche Buries Plan to Stem Foreclosures, N.Y. Times, June 29, 2009.
---------------------------------------------------------------------------
III. Servicers' Lack of Alignment with the Interests of Investors or 
        Homeowners Contributes to the Failure to Do Loan Modifications.
    As discussed above, despite widespread calls for more 
modifications, the number of modifications remains paltry compared to 
the number of foreclosures. And investors are losing mind-boggling 
large sums of money on foreclosures.\28\ The available data suggests 
that investors lose ten times more on foreclosures than they do on 
modifications.\29\
---------------------------------------------------------------------------
    \28\ Home Foreclosures: Will Voluntary Mortgage Modification Help 
Families Save Their Homes? Hearing Before the Subcomm. on Commercial 
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong. 
(2009) (testimony of Alan M. White) (65 percent loss severity rates on 
foreclosures in June 2009).
    \29\ Home Foreclosures: Will Voluntary Mortgage Modification Help 
Families Save Their Homes? Hearing Before the Subcomm. on Commercial 
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong. 
(2009) (testimony of Alan M. White).
---------------------------------------------------------------------------
A. Servicers Have Different Interests Than Investors.
    In attempting to make sense of this puzzle, we should remember that 
servicers are not investors. Investors hold the note, or a beneficial 
interest in it, and are, in general, entitled to repayment of the 
interest and principal. Servicers collect the payments from the 
homeowners on behalf of the investors. The bulk of their income comes 
from a percentage payment on the outstanding principal balance in the 
pool; the bulk of their net worth is tied to the value of the mortgage 
servicing rights they purchased. A servicer may or may not lose money--
or lose it in the same amounts or on the same scale--when an investor 
loses money. And it is servicers, not investors, who are making the 
day-to-day, on the ground, decisions as to whether or not to modify any 
given loan.
    Servicers continue to receive most of their income from acting as 
largely automated pass-through accounting entities, whose mechanical 
actions are performed offshore or by personified computer systems.\30\ 
Their entire business model is predicated on making money by skimming 
profits from what they are collecting: through a fixed percentage of 
the total loan pool, fees charged homeowners for default, interest 
income on the payments during the time the servicer holds them before 
they are turned over to the owners, and affiliated business 
arrangements. Servicers make their money largely through lucky or 
strategic investment decisions: purchases of the right pool of mortgage 
servicing rights and the correct interest hedging decisions. Performing 
large numbers of loan modifications would cost servicers upfront money 
in fixed overhead costs, including staffing and physical 
infrastructure.
---------------------------------------------------------------------------
    \30\ See, e.g., In re Taylor, 2009 WL 1885888 (Bankr.E.D.Pa. Apr 
15, 2009).
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B. Servicers' Business Model Involves As Little Service As Possible.
    As with all businesses, servicers add more to their bottom line to 
the extent that they can cut costs.\31\ Servicers have cut costs by 
relying more on voicemail systems and less on people to assist 
homeowners, by refusing to respond to homeowners' inquires and by 
failing to resolve borrower disputes. Servicers sometimes actively 
discourage homeowners from attempting to resolve matters. As one 
attorney in Michigan attempting to arrange a short sale with Litton 
reports, the voice mail warns ``If you leave more than one message, you 
will be put at the end of the list of people we call back.'' Recent 
industry efforts to ``staff-up'' loss mitigation departments have been 
woefully inadequate.\32\ As a result, servicers remain unable to 
provide affordable and sustainable loan modifications on the scale 
needed to address the current foreclosure crisis. Instead homeowners 
are being pushed into short-term modifications and unaffordable 
repayment plans.
---------------------------------------------------------------------------
    \31\ See Joseph R. Mason, Servicer Reporting Can Do More for 
Modification than Government Subsidies 17 (Mar. 16, 2009), http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1361331 (noting that 
``servicers' contribution to corporate profits is often . . . tied to 
their ability to keep operating costs low'').
    \32\ Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, & 
Eileen Mauskopf, The Incentives of Mortgage Servicers: Myths and 
Realities 9-10 (Fed. Reserve Bd. Fin. & Econ. Discussion Series Div. 
Research & Statistical Affairs Working Paper No. 2008-46); State 
Foreclosure Prevention Working Group, Analysis of Subprime Mortgage 
Servicing Performance, Data Report No. 3 at 8 (2008), http://
www.csbs.org/Content/NavigationMenu/Home/SFPWGReport3.pdf; Preston 
DuFauchard, California Department of Corporations, Loss Mitigation 
Survey Results 4 (Dec. 11, 2007); cf. Aashish Marfatia, Moody's, U.S. 
Subprime Market Update November 2007 at 3 (2008) (expressing concern as 
to servicers' abilities to meet staffing needs).
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    Creating affordable and sustainable loan modifications for 
distressed homeowners on a loan-by-loan basis is labor intensive.\33\ 
Under many current pooling and servicing agreements, additional labor 
costs incurred by servicers engaged in this process are not compensated 
by the loan owner. By contrast, servicers' costs in pursuing a 
foreclosure are compensated. In a foreclosure, a servicer gets paid 
before an investor; in a loan modification, the investor will usually 
continue to get paid first. Under this cost and incentive structure, it 
is no surprise that servicers continue to push homeowners into less 
labor-intensive repayment plans, non-HAMP loan modifications, or 
foreclosure.
---------------------------------------------------------------------------
    \33\ Joseph R. Mason, Mortgage Loan Modification: Promises and 
Pitfalls 7 (Oct. 3, 2007), available at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1027470.
---------------------------------------------------------------------------
    Post hoc reimbursement for individual loan modifications is not 
enough to induce servicers to change their existing business model. 
This business model--of fee-collecting and fee-skimming--has been 
extremely profitable. A change in the basic structure of the business 
model to active engagement with homeowners is unlikely to come by 
piecemeal tinkering with the incentive structure. Indeed, some of the 
attempts to adjust the incentive structure of servicers have resulted 
in confused and conflicting incentives, with servicers rewarded for 
some kinds of modifications, but not others,\34\ or told both to 
proceed with a foreclosure and with a modification. Until recently, 
servicers received little if any explicit guidance on which 
modifications were appropriate and were largely left to their own 
devices in determining what modifications to make.\35\ In the face of 
an entrenched and successful business model, fragmented oversight, and 
weak, inconsistent, and post hoc incentives, servicers need powerful 
motivation to perform significant numbers of loan modifications. 
Servicers clearly have not yet received such powerful motivation.
---------------------------------------------------------------------------
    \34\ See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors of the 
Federal Reserve System, Speech at the Federal Reserve System Conference 
on Housing and Mortgage Markets: Housing, Mortgage Markets, and 
Foreclosures (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm (``The 
rules under which servicers operate do not always provide them with 
clear guidance or the appropriate incentives to undertake economically 
sensible modifications.'').
    \35\ American Securitization Forum, Discussion Paper on the Impact 
of Forborne Principal on RMBS Transactions 1 (June 18, 2009), available 
at http://www.americansecuritization.com/uploadedFiles/
ASF_Principal_Forbearance_Paper.pdf.
---------------------------------------------------------------------------
    Servicers may make a little money by making a loan modification, 
but it will definitely cost them something. On the other hand, failing 
to make a loan modification will not cost the servicer any significant 
amount out-of-pocket, whether the loan ends in foreclosure or cures on 
its own. Until servicers face large and significant costs for failing 
to make loan modifications, until servicers are actually at risk of 
losing money if they fail to make modifications, no incentive to make 
modifications will work. What is lacking in the system is not a carrot; 
what is lacking is a stick.\36\ Servicers must be required to make 
modifications, where appropriate, and the penalties for failing to do 
so must be certain and substantial.
---------------------------------------------------------------------------
    \36\ See Helping Families Save Their Homes: The Role of Bankruptcy 
Law: Hearing Before the S. Comm. on the Judiciary, 110th Cong., 2nd 
Sess. (Nov. 19, 2008), available http://judiciary.senate.gov/hearings/
testimony.cfm?renderforprint=1&id=3598&wit_id=4083 (statement of Russ 
Feingold, Member, Sen. Comm. on the Judiciary) ( ``One thing that I 
think is not well understood is that because of the complex structure 
of these securitized mortgages that are at the root of the financial 
calamity the Nation finds itself in, voluntary programs to readjust 
mortgages may simply be doomed to failure.'').
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C. Servicers Maximize Income in Ways that Hurt Both Homeowners and 
        Investors.
    Servicers are designed to serve investors, not borrowers. Despite 
the important functions of mortgage servicers, homeowners have few 
market mechanisms to employ to ensure that their needs are met. Rather, 
in the interest of maximizing profits, servicers have engaged in a 
laundry list of bad behaviors, which have considerably exacerbated 
foreclosure rates, to the detriment of both investors and 
homeowners.\37\
---------------------------------------------------------------------------
    \37\ See National Consumer Law Center, Foreclosures, Ch. 6 (2d ed. 
2007 & Supp.) (describing the most common mortgage servicing abuses).
---------------------------------------------------------------------------
    Most servicers derive the majority of their income based on a 
percentage of the outstanding loan principal balance.\38\ For most 
pools, the servicer is entitled to take that compensation from the 
monthly collected payments, even before the highest-rated certificate 
holders are paid. The percentage is set in the PSA and can vary 
somewhat from pool to pool, but is generally 25 basis points for prime 
loans and 50 basis points for subprime loans.\39\ This compensation may 
encourage servicers to refuse principal reductions and to seek 
capitalizations of arrears and other modifications that increase the 
principal balance.
---------------------------------------------------------------------------
    \38\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K), at 3 
(Mar. 17, 2008) (typically receive 50 basis points annually on the 
total outstanding principal balance of the pool).
    \39\ Anthony Pennington-Cross & Giang Ho, Loan Servicer 
Heterogeneity & The Termination of Subprime Mortgages 2 (Fed. Res. Bank 
of St. Louis Working Paper No. 2006-024A); 26 NCLC Reports, Follow the 
Money: How Servicers get Paid May/June 2008.
---------------------------------------------------------------------------
    Servicers also receive fees paid by homeowners and the ``float''--
the interest earned on funds they are holding prior to their 
disbursement to the trust.\40\ For many subprime servicers, late fees 
alone constitute a significant fraction of their total income and 
profit.\41\ Servicers thus have an incentive to push homeowners into 
late payments and keep them there: if the loan pays late, the servicer 
is more likely to profit than if the loan is brought and maintained 
current. Float income encourages servicers to delay turning over 
payments to investors for as long as possible.
---------------------------------------------------------------------------
    \40\ See generally In re Stewart, 391 B.R. 327, 336 (Bankr.E.D.La. 
2008) (overviewing servicer compensation).
    \41\ See, e.g., Ocwen Fin. Corp., Annual Report (Form 10-K), at 3 
(Mar. 17, 2008); Kurt Eggert, Limiting Abuse and Opportunism by 
Mortgage Servicers, 15 Housing Pol'y Debate 753, 758 (2004).
---------------------------------------------------------------------------
    For servicers, their most important asset is the value of their 
mortgage servicing rights. Whether or not the servicer made the correct 
speculative investment decision when it bought the mortgage servicing 
rights to a pool of mortgages does more to shape its profitability than 
any other single factor. A servicer's performance has only a marginal 
impact on the performance of the loan pool; the way a servicer 
increases its net worth is not by doing a top-notch job of servicing 
distressed mortgages but by gambling on market trends. Servicers with 
thin margins may need to squeeze all they can out of increasing 
performance from delinquent loans; servicers with stronger pools are 
likely to be less invested in the performance of the loans they 
manage.\42\ This dynamic leaves many servicers indifferent to the 
performance of the loans they service and unmotivated to hire and train 
the staff needed to improve performance.
---------------------------------------------------------------------------
    \42\ Vikas Bajaj & John Leland, Modifying Mortgages Can Be Tricky, 
N.Y. Times, Feb. 18, 2009 (reporting views of Credit Suisse analyst 
that ``[s]maller companies . . . that are under more financial pressure 
and have more experience in dealing with higher-cost loans have been 
most aggressive in lowering payments'' than larger companies, who offer 
weaker modifications).
---------------------------------------------------------------------------
D. The Possibility of Cure Does Not Explain Servicers' Failure to Make 
        Loan Modifications in the Current Market.
    A recent paper co-authored by my fellow panelist this morning, Paul 
Willen, confirms that extremely few loan modifications are being done 
and, in an attempt to solve the puzzle, propounds an economic model to 
explain the dearth of loan modifications.\43\ Under the terms of that 
economic model, investors recover more if a borrower brings the loan 
current or refinances than if the lender modifies the loan. This is a 
commonsense and unobjectionable observation. Both the FDIC Loan Mod-in-
a-Box NPV test and the HAMP NPV test build in the likelihood of cure in 
determining whether a loan modification or foreclosure is the more 
profitable path for investors.
---------------------------------------------------------------------------
    \43\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't 
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization 35 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf. In addition to the overall limitations of a 
theoretical economic model to explain the complex web of interacting 
motivations impacting the numbers of loan modifications, there appear 
to be some errors in the model, even as a theoretical exercise. For 
example, the model assumes that the value of the unmodified loan is the 
greater of the unpaid principal balance or the value of the home, after 
adjusting for the costs of the foreclosure. But, in fact, it should be 
the lesser of the two. A foreclosing lender cannot legally recover more 
than the unpaid principal balance and is practically unlikely to 
recover more than the net foreclosure value of the home. This error 
results in an overstatement of the value of foreclosure, particularly 
in a market where home prices are declining, and thus undervalues 
modifications.
---------------------------------------------------------------------------
    In more normal times, it is surely rational for a servicer to spare 
itself the time and expense of modifying a loan in favor of the 
possibility of cure. In normal times, when cure rates exceeded 
foreclosure rates, an investor would have little objection to the wait-
and-see-approach.\44\ However, this model cannot explain the failure to 
perform loan modifications when we observe real world conditions: 
dropping cure rates, due in part to the restricted ability to 
refinance, even for homeowners with high credit scores;\45\ homes so 
deeply underwater that investors lose 65 percent of the mortgage debt 
on average in foreclosure;\46\ and a lack of other, more attractive 
places, to invest funds. If we take the 30 percent cure rate documented 
for loans during 2007 and 2008 in the paper co-authored by Mr. Willen, 
assume, as the FDIC did in its NPV calculations, that 40 percent of all 
loan modifications will end in redefault, and assume loss severity 
ratios of 60 percent if the loan is foreclosed on immediately or 70 
percent if it is foreclosed on after a redefault (to reflect the 
dropping home prices and potential loss of upkeep by a struggling 
homeowner), investors will still save money if loan modifications 
reduce the current present value of the loan by as much as 20 
percent.\47\
---------------------------------------------------------------------------
    \44\ Alan White, Rewriting Contracts, Wholesale: Data on Voluntary 
Mortgage Modifications from 2007 and 2008 Remittance Reports, Fordham 
Urb. L. J. 17-18 (forthcoming 2009), available at http://
papers.ssrn.com/sol3/papers.cfm?abstract--id=1259538#; see also Aashish 
Marfatia, Moody's, U.S. Subprime Market Update November 2007 at 5 
(2008) (reporting that half of all active loans facing reset in the 
first three-quarters of 2007 refinanced; more than one-quarter of all 
remaining loans refinanced after reset); State Foreclosure Prevention 
Working Group, Analysis of Subprime Mortgage Servicing Performance, 
Data Report No. 3 at 8 (2008), http://www.csbs.org/Content/
NavigationMenu/Home/SFPWGReport3.pdf (reporting that 23 percent of 
closed loss mitigation efforts in May 2008 were either refinancings or 
reinstatements in full by the borrower).
    \45\ David Streitfeld, Tight Mortgage Rules Exclude Even Good 
Risks, N.Y. Times, July 10, 2009.
    \46\ Home Foreclosures: Will Voluntary Mortgage Modification Help 
Families Save Their Homes? Hearing Before the Subcomm. on Commercial 
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong. 
(2009) (testimony of Alan M. White).
    \47\ These numbers are derived from an analysis by Professor Alan 
White. His comment on the study is Attachment E of this testimony.
---------------------------------------------------------------------------
    Mr. Willen and his co-authors suggest that the lack of outcry by 
investors against servicers demonstrates that servicers are acting in 
what the investors perceive as their best interest.\48\ First, the 
premise that investors have been silent is not correct. Leading groups 
representing investors have urged more and deeper loan 
modifications.\49\ Second, to the extent that some investors have been 
silent, we cannot assume that their silence means that they are happy 
with servicers' actions. Given the lack of effective control investors 
exercise over servicers, it would be wrong to construe that silence as 
agreement with servicers' decisions to decline modifications in favor 
of a chimerical cure. The large, private-label pools that contain most 
subprime loans are passive investment vehicles. Trustees, on behalf of 
the trust, can in exceptional cases fire a servicer, but this right is 
rarely invoked, usually only when the servicer is no longer able to pay 
the advances due on the borrowers' monthly payments.\50\ Thus, although 
servicers are nominally accountable to investors, investors are, in 
most cases, no more powerful than borrowers to provide direction to a 
servicer.\51\
---------------------------------------------------------------------------
    \48\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't 
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization 24 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
    \49\ See, e.g., American Securitization Forum, Statement of 
Principles, Recommendations, and Guidelines for the Modification of 
Securitized Subprime Residential Mortgage Loans 2 (June 2007).
    \50\ Indeed, PSAs usually allow a trustee to increase its 
monitoring of a servicer only in the case of a narrowly circumscribed 
list of triggering events, primarily financial defaults. Michael 
Laidlaw, Stephanie Whited, Mary Kelsch, Fitch Ratings, U.S. Residential 
Mortgage Servicer Bankruptcies, Defaults, Terminations, and Transfers 2 
(2007).
    \51\ See, e.g., Joseph R. Mason, Servicer Reporting Can Do More for 
Modification than Government Subsidies 14 (Mar. 16, 2009), http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1361331 (``The point is, 
the investor has to completely trust the servicer to act in their 
behalf, often in substantially unverifiable dimensions.'').
---------------------------------------------------------------------------
    The work of Mr. Willen and his co-authors is an important 
contribution to understanding the nature and quantity of the loan 
modifications performed. The study does not tell us why loan 
modifications are not being done, however. The study does not run 
actual net present value analyses on actual loans: many loans that it 
would not make sense to modify in a market with rising home prices, 
easy refinancing, and plentiful alternative investment channels do make 
sense, purely from the standpoint of financial return to investors, to 
modify in today's economic market. The paper presents no hard data on 
whether or not servicers, in this climate, are serving the best 
interests of investors in refusing to modify loans. Servicers, 
moreover, may have different incentives than investors, and it is not 
clear that servicers do always make loan modification based upon the 
best interests of the trust as a whole.
    What we know from this study is that servicers are not making 
modifications. We believe that more modifications could be made that 
would serve the interests of both investors and homeowners, as well as 
the national economy. As Professor Alan White noted in his testimony 
last week before a House subcommittee,\52\ and as the authors 
acknowledge,\53\ there may be compelling public policy reasons to 
increase the number of modifications. Foreclosures impose high costs on 
families, neighbors, extended communities, and ultimately our economy 
at large.\54\ It would be short-sighted indeed to fail to act.
---------------------------------------------------------------------------
    \52\ Home Foreclosures: Will Voluntary Mortgage Modification Help 
Families Save Their Homes? Hearing Before the Subcomm. on Commercial 
and Administrative Law of the H. Comm. on the Judiciary, 111th Cong. 
(2009) (testimony of Alan M. White).
    \53\ Manuel Adelino, Kristopher Gerardi & Paul S. Willen, Why Don't 
Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and 
Securitization 8 (Fed. Reserve Bank of Boston Pub. Pol'y Paper No. 09-
4, July 6, 2009), available at http://www.bos.frb.org/economic/ppdp/
2009/ppdp0904.pdf.
    \54\ Ben S. Bernanke, Chairman, Bd. of Governors, Fed. Reserve 
Sys., Address at the Federal Reserve System Conference on Housing and 
Mortgage Markets (Dec. 4, 2008), available at http://
www.Federalreserve.gov/newsevents/speech/bernanke20081204a.htm#f12.
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IV. HAMP Design and Implementation Present Substantial Barriers to High 
        Volume, High Quality Loan Modifications
    HAMP offers real hope for increasing both the quantity and the 
quality of loan modifications made. By mandating a take-one, take-all 
policy, requiring servicers of GSE loans to modify loans, and 
standardizing the loan modification process, HAMP should increase the 
total number of modifications. By mandating affordable payments, 
limiting the fees charged, and permitting principal reductions, HAMP 
will increase the quality of the loan modifications offered.
    HAMP is a significant step forward from previous loan modification 
programs. Yet the program has significant limitations both in design 
and implementation. HAMP's ability to guarantee an increase in 
sustainable modifications is dependent on voluntary servicer 
participation in the program. Several large servicers are still not 
participating, and the patchwork coverage is confusing to homeowners 
and their advocates alike.
    More seriously, homeowners have no leverage to obtain a HAMP loan 
modification from even a participating servicer. It is unclear if the 
Administration's compliance efforts will be able to detect and remedy 
servicer noncompliance. Similarly, whether or not HAMP's equalization 
of the incentives between principal and interest rate reductions will 
be enough to boost the number of modifications that reduce principal 
remains to be seen. Since loan modifications with principal reductions 
appear to have the lowest redefault rates,\55\ HAMP's long-term success 
may be contingent on increasing the number of loan modifications with 
principal reductions and its great weakness in ensuring sustainable 
modifications may be its failure to mandate principal reductions.
---------------------------------------------------------------------------
    \55\ See, e.g., Roberto G. Quercia, Lei Ding, Janneke Ratcliffe, 
Loan Modifications and Redefault Risk: An Examination of Short-Term 
Impact (Center for Community Capital, March 2009), available at http://
www.ccc.unc.edu/documents/LM_March3_%202009_final.pdf.
---------------------------------------------------------------------------
A. Problems with Servicers' Implementation of HAMP Plague Homeowners 
        Seeking Loan Modifications.
    Servicers' compliance with HAMP is, at best, erratic. There is 
widespread violation of the HAMP guidelines across many servicers. The 
lack of compliance arises in part from obvious and persistent short 
falls in staffing and training. Yet some of the violations of HAMP are 
embodied in form documents, perhaps reflecting a more conscious attempt 
to evade the HAMP requirements. Lack of transparency prevents 
homeowners from identifying violations. Lack of accountability prevents 
homeowners from obtaining any redress when violations are identified.

1. Participating servicers violate existing HAMP guidelines.
Waivers of claims and defenses are still being required by servicers.
    The HAMP rollout language prohibits waivers of legal rights. Yet 
servicers still are seeking waivers from homeowners or an admission of 
default.\56\ We have learned of many instances in which servicers 
require homeowners to waive all claims and defenses in order to obtain 
a loan modification or even a loan modification review. Servicers also 
have asked homeowners to waive their right to a HAMP loan modification 
review in favor of a non-HAMP loan modification.\57\ Not only does this 
violate HAMP rules but it demonstrates bad faith. Some servicers also 
are requiring homeowners to sign a waiver that states that any HAMP 
loan modification will be suspended if the homeowner subsequently files 
for bankruptcy.\58\ These are form documents and thus unlikely to 
represent a random mistake by a line-level employee.
---------------------------------------------------------------------------
    \56\ See Attachment A, Ocwen Loan Servicing Loan Modification 
Agreement dated June 1, 2009 (seeking waiver of all legal rights by 
homeowner) Attachment B, Aurora Loan Services ``workout agreement'' 
dated May 20, 2009 (seeking homeowner admission of default and stating 
that the trial payments will not remove the homeowner from 
delinquency).
    \57\ See, e.g., Attachment C (Chase Agreement seeking to obtain 
waiver of homeowner's right to a HAMP loan modification in favor of a 
non-HAMP loan modification offered prior to March 4, 2009).
    \58\ See, e.g., Attachment D (WaMu HAMP trial plan agreement 
requiring waiver of HAMP loan modification if homeowner later enters 
bankruptcy).
---------------------------------------------------------------------------
Some participating servicers offer non-compliant loan modifications.
    All homeowners who request a HAMP review are entitled to one. 
Homeowners may elect a non-HAMP modification, but that should be the 
borrower's choice, informed by disclosure of all modification options.
    Nonetheless, some servicers have told homeowners that they are 
providing a HAMP modification, only to provide documents that do not 
comport with the HAMP guidelines. These loan modifications are usually 
significantly less sustainable than a HAMP modification would be and 
often have higher costs. In addition to the waiver issue discussed 
above, advocates have been told that homeowners must pay large advance 
fees before a modification will be considered, homeowners have been 
required to complete hefty repayment plans before a review is 
conducted, and homeowners have been offered, as HAMP modifications, 
modifications limited to 5 years, with no limitation on interest rate 
increases after that time. Aurora, for example, represented to one 
advocate that it does not have the ``right documents,'' although they 
have been publicly available for months, and so instead offered the 
borrowers old forms that contain waivers and are otherwise not HAMP 
compliant. Select Portfolio Servicing has insisted that a New York 
borrower make payments at a 44 percent debt-to-income ratio instead of 
the 31 percent mandated by HAMP.
Some participating servicers refuse to offer HAMP modifications.
    The HAMP servicer contracts require that participating servicers 
review all homeowners in default for HAMP eligibility and that any 
borrower who requests a HAMP review be granted one, even if the 
borrower is not yet in default. Homeowners not yet in default but who 
are at imminent risk of default are eligible for a HAMP modification. 
Servicers may only refuse to perform a HAMP review if the pooling and 
servicing agreement (PSA) forbids modification. In that case, servicers 
are still expected to use all reasonable efforts to obtain an exception 
to the PSA.
    Staff at some participating servicers routinely refuse to do HAMP 
loan modifications.\59\ For example, in a New York case, the employee 
stated that the investor did not permit loan modifications, yet refused 
to produce a copy of the PSA or even identify the investor, much less 
attempt to obtain a release from the restrictions as required by HAMP. 
One California advocate pursuing a HAMP modification for a loan 
serviced by Wells Fargo was told repeatedly that the holder did not do 
modifications. After protracted discovery, the servicer identified the 
holder as Wells Fargo Home Mortgage. Wells Fargo Home Mortgage, of 
course, is owned by Wells Fargo Bank, a participating servicer under 
HAMP. In another case, a Select Portfolio Servicing representative said 
that the PSA prevented a HAMP modification, but could not provide the 
PSA due to ``system errors.'' Other times servicers tell homeowners 
that they are not participating or that they are only participating for 
GSE loans. Bank of America has told homeowners in both Pennsylvania and 
Florida that it is only modifying loans that are owned by the GSEs.\60\ 
Bank of America is a participating servicer under HAMP and therefore 
required to evaluate all loans for modification under HAMP. Some 
servicers have asserted that loans held by the GSEs require a higher 
debt-to-income ratio than HAMP, despite the implementation of nearly 
identical programs by both Fannie Mae and Freddie Mac. Advocates in 
both Ohio and Florida have been driven to file court documents to 
compel Wells Fargo to do a HAMP review and stay foreclosure 
proceedings, after Wells Fargo failed to complete a HAMP review.\61\
---------------------------------------------------------------------------
    \59\ See, e.g., Home Foreclosures: Will Voluntary Mortgage 
Modification Help Families Save Their Homes? Hearing Before the 
Subcomm. on Commercial and Administrative Law of the H. Comm. on the 
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss) (Saxon 
Mortgage ``simply reject[s] homeowners for consideration under HAMP, 
for no reason that is in any way connected with the program 
requirements, with no notice of any kind to the homeowner or to her 
counsel.'').
    \60\ See, e.g., Home Foreclosures: Will Voluntary Mortgage 
Modification Help Families Save Their Homes? Hearing Before the 
Subcomm. on Commercial and Administrative Law of the H. Comm. on the 
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss).
    \61\ Motion to Set Aside the Judgment, Modify the Loan, and Dismiss 
the Foreclosure, U.S. Bank National Ass'n as Trustee HEAT 2006-1 v. 
Pitman, No. 2008-CV-337 (Greene County, Ohio, 2009); Motion to Stay/
Abate, Deutsche Bank Nat'l Trust Company, as Trustee for HIS Asset 
Securitization Trust 2007-HE1 v. Hoyne, No. 42-2009-CA-002178 (Marion 
County, Fla., 2009).
---------------------------------------------------------------------------
    HAMP may even be causing a drop off in loan modifications. Loan 
modifications rose through the first quarter of the year, but fell 
after HAMP's roll out in March.\62\ Bank of America informed an 
advocate that future HAMP modifications are put on hold while Treasury 
reviews Bank of America's version of the Net Present Value calculation. 
Other advocates and homeowners have been told more generally that their 
servicer is participating but that the servicer does not yet have a 
program to evaluate homeowners for HAMP. Ocwen, for example, told an 
advocate on July 1 that it did not know when it would be rolling out 
its HAMP modifications. Ocwen signed a contract as a participating 
servicer on April 16, two and a half months earlier. One Brooklyn, New 
York advocate was told that the investor was not allowing any 
modifications because they were waiting for the Federal Government to 
act. In the meantime, of course, foreclosures continue.
---------------------------------------------------------------------------
    \62\ Gretchen Morgenson, Fair Game--So Many Foreclosures, So Little 
Logic, N.Y. Times, July 4, 2009.
---------------------------------------------------------------------------
Servicers charge fees to homeowners for the modification.
    HAMP forbids any upfront payments as a precondition to review or 
trial modification. Several homeowners have reported being told by 
various servicers that they must make payments before being considered 
for HAMP.\63\ Sometimes these payments take the form of a special 
forbearance agreement or lump-sum payment of arrearages; other times it 
is less clear what the payment is for.
---------------------------------------------------------------------------
    \63\ See, e.g., Attachment A, Ocwen Loan Servicing Loan 
Modification Agreement dated June 1, 2009.
---------------------------------------------------------------------------
    A Bank of America loss mitigation representative informed a 
Pennsylvania homeowner's counsel that if the homeowners paid $2,200.00 
to Bank of America, then Bank of America would ``consider'' a loan 
modification. America's Servicing Company, a division of Wells Fargo 
Home Mortgage, told a New York borrower that only upon completion of a 
3-month repayment plan, followed by a balloon payment of $18,000, could 
the borrower be considered for HAMP. Select Portfolio Servicing 
representatives demanded a payment in the amount of the original 
mortgage payment in order to enter the trial period agreement in order 
to demonstrate the borrower's ``good faith.''

Servicers are continuing to initiate foreclosures and sell homes at 
        foreclosure sales while the HAMP review is pending.
    HAMP requires that no foreclosures be initiated and no foreclosure 
sales be completed during a HAMP review, although existing foreclosure 
actions may be pursued to the point of sale. Reports from around the 
country indicate that servicers are routinely placing homeowners into 
foreclosure during a HAMP review and, far worse, selling the home at 
foreclosure while the homeowner is waiting on the outcome of the HAMP 
review.
    Servicers often negotiate loan modifications on a separate track 
from the personnel pursuing foreclosure. This structure results in 
homeowners being placed in foreclosure, and being subject to a 
foreclosure sale, while HAMP review is occurring.

2. Servicer staffing and training still lag behind what is needed.
Homeowners encounter numerous bureaucratic barriers in attempting to 
        negotiate a loan modification.
    Homeowners' loan files are routinely lost.\64\ Counselors report 
waits of months to hear back on review for a trial modification. In one 
case, Select Portfolio Services advised counsel for a New York borrower 
on three separate occasions over 6 weeks that the necessary broker 
price opinion had been canceled due to ``system errors'' and a new 
request would have to be submitted. A Florida homeowner had his HAMP 
trial modification canceled by Citimortgage for non-compliance, despite 
having submitted all required documents and payments as required, only 
to receive a HAMP solicitation letter the same day. His lawyer, in 
describing the situation to us, wrote, ``It is driving the poor guy 
bananas.''
---------------------------------------------------------------------------
    \64\ Peter S. Goodman, Paper Avalanche Buries Plan to Stem 
Foreclosures, N.Y. Times, June 28, 2009.
---------------------------------------------------------------------------
    To add insult to injury, homeowners are expected to return the 
documents within days of receipt. Homeowners in both New York and 
Florida have reported receiving the trial modification agreements the 
same day the servicer required their return. One Illinois homeowner 
received her trial modification agreement 3 days after she was required 
to return the agreement.

Staff of participating servicers continue to display alarming ignorance 
        of HAMP.
    Staff of participating servicers have told homeowners that HAMP 
does not exist. Several homeowners have reported being told to contact 
HUD since HAMP is a government program. HUD, of course, does not 
administer HAMP; participating servicers do. Bank of America apparently 
told the homeowners in one case that they were not eligible for HAMP 
because they were not in default.\65\ This misinformation was given to 
the homeowner despite the fact that servicers are given an additional 
$500 incentive payment for modifying a loan prior to default. In 
another case, Bank of America refused to modify a first lien position 
home equity line of credit, apparently under the belief that 
modifications of home equity lines of credit were banned as second 
liens, whether or not they actually were junior liens.
---------------------------------------------------------------------------
    \65\ Freda R. Savana, Some Banks Not With the Program, Bucks County 
Courier Intelligencer, July 14, 2009.
---------------------------------------------------------------------------
    In one case, Select Portfolio Servicing (SPS) claimed that it could 
only take 80 percent of the applicants' gross income into 
consideration, regardless of HAMP guidelines and that the clients would 
have to reduce their debt obligations by $300 to be considered for a 
modification. The representatives appeared to be operating under SPS's 
standard screening process for non-HAMP modifications and were not 
familiar with the HAMP standards. In the same case, another SPS 
representative claimed that the investor on the loan would only allow 
for payment modifications at 44 percent debt-to-income ratio, not the 
31 percent mandated by HAMP. In many cases, it is not clear if staff 
are applying the net present value test or if they are applying it 
correctly.\66\
---------------------------------------------------------------------------
    \66\ See, e.g., Home Foreclosures: Will Voluntary Mortgage 
Modification Help Families Save Their Homes? Hearing Before the 
Subcomm. on Commercial and Administrative Law of the H. Comm. on the 
Judiciary, 111th Cong. (2009) (testimony of Irwin Trauss) (discussing a 
case involving Wells Fargo).
---------------------------------------------------------------------------
    A recent blurb from Mortgage Servicing News Bulletin captures the 
problem: ``Confused About the Rescue Plan?'' \67\ Apparently many 
servicers are.
---------------------------------------------------------------------------
    \67\ Mortgage Servicing News Bull., July 14, 2009.
---------------------------------------------------------------------------
Non-participating servicers continue to represent themselves as 
        participating in HAMP.
    Some servicers give conflicting information on whether or not they 
participate in HAMP. American Home Mortgage Servicing, for example, 
conveyed on its website, automated answering service, and through its 
loan modification staff that it was a participating servicer under 
HAMP. Yet at least some of the loan modifications it offered were not 
HAMP-compliant, nor is it, as of July 13, 2009, listed as a 
participating servicer.

3. Lack of transparency is resulting in summary denials and other 
        unreasonable acts by servicers.
    Even when servicers do a HAMP review, they sometimes use the wrong 
numbers, which advocates are only able to uncover after a protracted 
battle. In one case involving a New York borrower, Select Portfolio 
Servicing representatives initially advised that the clients were 
ineligible for a HAMP loan modification, based on their budget. When 
asked for clarification about the grounds for this determination, SPS 
representatives claimed that the clients' expenses exceeded their 
income, making it impossible for them to afford their mortgage. Upon 
further discussion, it was revealed that SPS was using the clients' 
original mortgage payment as an input value for these calculations, 
rather than the proposed modified payment amount that would have made 
their mortgage affordable.
    Some servicers are scrutinizing homeowner expenses and using back-
end ratios as a basis for denying HAMP loan modifications. Back-end 
ratios, the ratio between all of the borrowers' fixed monthly 
obligations and income, should not disqualify a borrower under HAMP 
unless the reduced payment will cause the borrower severe financial 
hardship; instead, homeowners with back-end ratios above 55 percent are 
to be referred to HUD-certified housing counselors. In other cases, 
homeowners are turned down for loan modifications without any 
explanation.
    Servicers refuse to provide the final payment amounts even when the 
borrower provides all verified information before the beginning of the 
trial modification period. In one case, 3 days after the servicer had 
supplied the borrower with the first set of trial modification 
documents and nearly 2 months after the borrower had submitted verified 
income information, the servicer increased the monthly payment amount, 
without any apparent justification.
    The permanent modifications offered often include arrears that are 
undocumented and apparently overestimated. While HAMP permits 
arrearages and some fees to be capitalized, HAMP does not permit unpaid 
late fees to be capitalized. Given the widespread practice by servicers 
of padding fees in foreclosure or bankruptcy,\68\ homeowners and their 
advocates have good reason to seek review of the legitimacy of the 
fees.
---------------------------------------------------------------------------
    \68\  See, e.g., In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 
2008); In re Sacko, 394 B.R. 90 (Bankr. E.D. Pa. 2008); In re Prevo, 
394 B.R. 847 (Bankr. S.D. Tex. 2008); In re Porter, 399 B.R. 113 
(Bankr. D. N.H. 2008); Katherine Porter, Misbehavior and Mistake in 
Bankruptcy Mortgage Claims, 87 Tex. L. Rev 121 (2009).
---------------------------------------------------------------------------
    Some servicers claim they are doing a large volume of modifications 
for homeowners not eligible for HAMP, as well as many HAMP loan 
modifications. Whether or not the homeowners with the non-HAMP 
modifications were in fact eligible for HAMP is uncertain. As discussed 
above and exemplified in Attachment C, some servicers are requiring 
homeowners to waive their eligibility for a HAMP review in order to 
obtain any modification. The lack of public accountability makes it 
impossible to know how many of those reported as ineligible for HAMP 
were, in fact, ineligible, and how many were simply steered away from 
HAMP modifications.
    In addition, determining whether or not any individual servicer is 
or is not participating is not trivial. As discussed above, some 
servicers represent themselves on their websites as participating, but 
fail to provide any HAMP review. As discussed below, confusion as to 
coverage of affiliated servicers is widespread.

B. Certain HAMP Policies Must Be Changed To Provide Sustainable 
        Modifications and Save Communities.

1. Transparency must be improved.

The NPV model for qualifying homeowners must be available to the 
        public.
    A homeowner's qualification for a loan modification under HAMP is 
determined primarily through an analysis of the Net Present Value 
(``NPV'') of a loan modification as compared to a foreclosure. The test 
measures whether the investor profits more from a loan modification or 
a foreclosure. Most investors require that servicers perform some 
variant of this test prior to foreclosure.\69\ The outcome of this 
analysis depends on inputs including the homeowner's income, FICO 
score, current default status, debt-to-income ratio, and property 
valuation, plus factors relating to future value of the property and 
likely price at resale. Participating servicers are required to apply 
this analysis to all homeowners who are 60 days delinquent and those at 
imminent risk of default. Homeowners and their advocates need access to 
the program to determine whether servicers have actually and accurately 
used the program in evaluating the homeowner's qualifications for a 
HAMP modification. Without access to the NPV analysis, homeowners are 
entirely reliant on the servicer's good faith.
---------------------------------------------------------------------------
    \69\ American Securitization Forum, Statement of Principles, 
Recommendations and Guidelines for the Modification of Securitized 
Subprime Residential Mortgage Loans (June 2007), available at http://
www.americansecuritization.com/uploadedFiles/
ASF%20Subprime%20Loan%20Modifi
cation%20Principles_060107.pdf.
---------------------------------------------------------------------------
    The lack of NPV transparency makes servicer turndowns hard to 
counteract. NPV turndowns must be detailed and in writing, and based on 
a transparent process that conforms to HAMP guidelines.

The layers of documents governing HAMP, the guidelines, the 
        Supplemental Directives, the various FAQ's, and the servicer 
        contracts, should be consolidated, reconciled, and clarified.
    Homeowners, their advocates, and servicers have no one source of 
guidance on HAMP. The initial guidelines differ slightly from the 
Supplemental Directives, and the FAQs provide different 
interpretations. All of this complicates compliance.

Participating subsidiaries must be clearly identified
    Participating servicers may, but need not, require their 
subsidiaries to participate, so long as the subsidiary is a distinct 
legal entity. However, if the subsidiary is not a distinct legal 
entity, then the subsidiary must participate. The public list of 
participating servicers still does not make these distinctions clear. 
One example of the confusion is Wells Fargo. On financialstability.gov, 
Wells Fargo Bank is listed as a participating servicer. Wells Fargo 
Bank, N.A., is, according to the National Information Center maintained 
by the Federal Reserve, the parent company of Wells Fargo Home 
Mortgage. The contract posted on financialstability.gov variously 
represents the covered servicer as Wells Fargo Bank, N.A. (when giving 
the address for notices) and Wells Fargo Home Mortgage, a division of 
Wells Fargo Bank, N.A. (above the signature lines). Does this contract 
mean that both Wells Fargo Bank, N.A., and Wells Fargo Home Mortgage 
are covered? And is America's Servicing Company, a division of Wells 
Fargo Home Mortgage also covered? The answer to both questions appears 
to be yes but has not been uncontested. Asking homeowners and 
counselors to wade through these legal relationships invites confusion 
and frustration.\70\
---------------------------------------------------------------------------
    \70\ We understand and appreciate that the Treasury Department is 
working on this issue. As is apparent, providing full information to 
the public on participating servicers is essential.
---------------------------------------------------------------------------
2. Mechanisms for enforcement and compliance should be adopted.
All foreclosure proceedings must be stopped upon the initiation of a 
        HAMP review, not just at the point before sale.
    While many servicers are placing homeowners in foreclosure and 
proceeding to sale in violation of HAMP guidelines (as described 
above), even compliance with the current rule is pushing homeowners 
into costlier loan modifications and tilting the scales toward 
foreclosure. In judicial foreclosure states, servicers are aggressively 
pursuing foreclosures while reviewing homeowners for loan 
modifications. As a result, homeowners are incurring thousands of 
dollars in foreclosure costs. Servicers either demand these payments 
upfront (an apparent violation of HAMP) or capitalize the costs without 
permitting any review by the homeowner. In either event, these costs 
make it harder to provide an affordable loan modification and the 
continuation of the foreclosure causes homeowners great stress. All 
foreclosure proceedings should be stayed while HAMP reviews occur. 
Staying the foreclosures during the pendency of a HAMP review would 
encourage servicers to expedite their HAMP reviews, rather than 
delaying them.

Homeowners should be provided with an independent review process when 
        denied a loan modification.
    It seems unlikely that all servicers will always accurately 
evaluate the qualifications of every homeowner who is eligible for 
HAMP. Homeowners who are wrongly denied must be afforded an independent 
review process to review and challenge the servicer's determination 
that the borrower does not qualify for HAMP.

Homeowners should have access to an ombudsman to address complaints 
        about the process.
    Homeowners currently have no resource for addressing complaints, 
whether with a servicer's failure to return phone calls or offer of a 
non-compliant modification. Any forum for addressing homeowners' 
complaints must adhere to timelines for addressing complaints and 
provide public accounting as to the nature of the disputes and their 
resolution.

Denials based in part on a borrower's credit score should be 
        accompanied by an adverse action notice under the Fair Credit 
        Reporting Act.
    The Fair Credit Reporting Act requires that if an adverse action in 
the provision of credit is taken based in part on the borrower's credit 
score that the borrower be advised of that adverse action and of the 
credit score upon which the decision was based.\71\ The reason for that 
requirement is that credit scores often have errors, which a borrower 
may correct--but only if the borrower is aware of the error.
---------------------------------------------------------------------------
    \71\ 15 U.S.C.  1681m.
---------------------------------------------------------------------------
    The Net Present Value test relies on credit scores to determine 
default and redefault rates. It is at least possible that those credit 
scores could result in the failure of the NPV test and the denial of a 
loan modification. Absent full transparency regarding the NPV 
calculation, homeowners are unlikely to know of the program's reliance 
on their FICO score or, if they do, whether or not their FICO score was 
the cause of their denial for a HAMP modification. An adverse action 
notice alerts homeowners to the possibility that an incorrect FICO 
score--which could be corrected--might be the reason their servicer 
denied a HAMP modification. Without an adverse action notice homeowners 
have little opportunity to address any potential problems.

3. The HAMP guidelines should be adjusted to provide more meaningful 
        relief to homeowners without reducing their existing rights.
Homeowners need principal reductions, not forbearance.
    Principal forgiveness is necessary to make loan modifications 
affordable for some homeowners. A significant fraction of homeowners 
owe more than their homes are worth.\72\ The need for principal 
reductions is especially acute--and justified--for those whose loans 
were not adequately underwritten and either 1) received Payment Option 
Adjustable Rate Mortgage loans that negatively amortize until as much 
as 125 percent of the original balance is owed; or 2) obtained loans 
that were based on inflated appraisals. As a matter of equity and 
commonsense, homeowners should not be trapped in debt peonage, unable 
to refinance or sell.
---------------------------------------------------------------------------
    \72\ See Renae Merle & Dina ElBoghdady, Administration Fills in 
Mortgage Rescue Details, Wash. Post, Mar. 5, 2009 (reporting that one 
in five homeowners with a mortgage owe more on their mortgages than 
their home is worth).
---------------------------------------------------------------------------
    Practically, principal reductions may be key to the success of 
HAMP. Being ``underwater'' increases the risk of default, particularly 
when coupled with unaffordable payments.\73\ Built into the HAMP NPV 
calculations is an assumption that default increases as a function of 
how far underwater the homeowner is. Existing data on loan 
modifications shows that loan modifications with principal reductions 
tend to perform better.\74\ In order to bring down the redefault rate 
and make loan modifications financially viable for investors, principal 
reductions must be part of the package.
---------------------------------------------------------------------------
    \73\ See, e.g., Kristopher Gerardi, Christopher L. Foote, & Paul S. 
Willen, Negative Equity and Foreclosure: Theory and Evidence (Fed. 
Reserve Bank of Boston Pub. Pol'y Paper No. 08-3, June 2008); Andrey 
Pavlov & Susan Wachter, Aggressive Lending and Real Estate Markets 
(Dec. 20, 2006), available at http://realestate.wharton.upenn.edu/
newsletter/pdf/feb07.pdf.
    \74\ Roberto G. Quercia, Lei Ding, Janneke Ratcliffe, Loan 
Modifications and Redefault Risk: An Examination of Short-Term Impact 
(Center for Community Capital, March 2009), available at http://
www.ccc.unc.edu/documents/LM_March_%202009_final.pdf.
---------------------------------------------------------------------------
    The Federal Reserve Board's loan modification program directly 
requires principal reductions for those homeowners most underwater. 
Under that program, principal reductions are mandated when the 
outstanding loan balance exceeds 125 percent of the home's current 
market value. Not incidentally, under the most recent revisions to the 
Making Home Affordable refinance program, once the mark-to-market loan-
to-value ratio is 125 percent, a homeowner may refinance. Thus, once 
the loan value is reduced to 125 percent of current market valuation, 
there is, at least for some homeowners, the possibility of refinancing. 
While a loan-to-value ratio of 125 percent still leaves homeowners 
underwater and restricts their options, it gives them some hope, as it 
permits the possibility of refinancing or even sale, after several 
years of payments or subsequent to a market rebound. A reduction only 
to 125 percent is still sufficiently harsh that it is likely to contain 
any moral hazard problems, yet it puts a finite bound on the 
homeowner's debt peonage.
    HAMP permits principal reductions, but does not mandate them, not 
even in the most extreme cases. HAMP does require forbearance, but only 
as a method for reducing payments. While forbearance provides 
affordable payments, it prevents a homeowner from selling or 
refinancing to meet a needed expense, such as roof repair or college 
tuition, and sets both the homeowner and the loan modification up for 
future failure. For all of these reasons, the HAMP guidelines should be 
revised so that they at least conform to the Federal Reserve Board's 
loan modification program by reducing loan balances to 125 percent of 
the home's current market value.

Homeowners suffering an involuntary drop in income should be eligible 
        for a second HAMP loan modification.
    Even after a loan modification is done successfully and is 
performing, homeowners may still become disabled, lose their jobs, or 
suffer the death of a spouse. These subsequent, unpredictable events, 
outside the control of the homeowner, should not result in foreclosure 
if a further loan modification would save investors money and preserve 
homeownership. Foreclosing on homes where homeowners have suffered an 
involuntary drop in income without evaluating the feasibility of a 
further HAMP modification is punitive to homeowners already suffering a 
loss and does not serve the interests of investors.
    Some servicers provide modifications upon re-default as part of 
their loss mitigation program. This approach should be standard and 
mandated, and should include continued eligibility for HAMP 
modifications rather than only specific servicer or investor programs.

Homeowners in bankruptcy should be provided clear access to the HAMP 
        program.
    As a result of the HAMP guidelines providing servicer discretion on 
whether to provide homeowners in bankruptcy access to HAMP 
modifications, homeowners generally are being denied such 
modifications. In at least one instance, a servicer is reported to have 
refused a modification on the basis of a former bankruptcy, a clear 
violation of the HAMP guidance. The HAMP guidelines should provide 
clear guidance on instances where a loan modification should be 
provided to homeowners in bankruptcy. The HAMP guidelines should 
explicitly provide that servicers must consider a homeowner seeking a 
modification for HAMP even if the homeowner is a debtor in a pending 
bankruptcy proceeding.
    Some servicers have explained their reluctance to do loan 
modifications in bankruptcy by citing a fear of violating the automatic 
stay in bankruptcy. Neither the automatic stay nor the discharge order 
should be a bar to offering an otherwise eligible homeowner a loan 
modification. HUD, in recent guidance to FHA servicers, has explicitly 
recognized that offering a loan modification does not violate the 
automatic stay or a discharge order.\75\
---------------------------------------------------------------------------
    \75\ HUD Mortgagee Letter 2008-32, October 17, 2008.
---------------------------------------------------------------------------
    Servicers should be required, upon receipt of notice of a 
bankruptcy filing, to send information to the homeowner's counsel 
indicating that a loan modification under HAMP may be available. Upon 
request by the homeowner and working through homeowner's counsel, 
servicers should offer appropriate loan modifications in accordance 
with the HAMP guidelines prior to discharge or dismissal, or at any 
time during the pendency of a chapter 13 bankruptcy, without requiring 
relief from the automatic stay, and, in the case of a chapter 7 
bankruptcy, without requiring reaffirmation of the debt. The bankruptcy 
trustee should be copied on all such communications. All loan 
modifications offered in pending chapter 13 cases should be approved by 
the Bankruptcy Court prior to final execution, unless the Court 
determines that such approval is not needed. If the homeowner is not 
represented by counsel, information relating to the availability of a 
loan modification under HAMP should be provided to the homeowner with a 
copy to the bankruptcy trustee. The communication should not imply that 
it is in any way an attempt to collect a debt.
    Two changes to the modification rules should also be made to 
facilitate access for homeowners in bankruptcy. First, the payment 
rules should take into account the fact that payments may be passed 
through the bankruptcy trustee, rather than directly from homeowner to 
servicer. Supplemental Directive 09-03 requires that the servicer 
receive a payment by the end of the first month that the trial plan is 
in effect. If the servicer does not receive the payment, the trial 
modification is terminated and the homeowner is disqualified from a 
permanent modification under HAMP. There is often an initial lag 
between passing the payments from the bankruptcy trustee to the 
servicer; homeowners should not be penalized for a delay over which 
they have no control and which is occasioned solely by their exercise 
of their right to file bankruptcy.
    Second, the modification documents should explicitly prohibit 
servicers from requiring homeowners to reaffirm mortgage debts. 
Although the guidance and supplemental directive appear to allow 
homeowners not to reaffirm in bankruptcy, the form modification 
agreement requires reaffirmation by its terms in paragraph 4E. The 
modification agreement should be amended to restate explicitly that the 
borrower does not waive any claims by entering into the modification 
and that no reaffirmation of the debt is required. Because 
reaffirmations of home mortgages have the potential to deny homewners a 
fresh start, many bankruptcy judges refuse to approve them. Congress 
recognized this concern with an amendment to the Bankruptcy Code in 
2005 that permits mortgages to be serviced in the normal course after 
bankruptcy even if the mortgage has not been reaffirmed. These 
purported reaffirmation agreements made outside the mandatory notice 
and review procedures of section 523(c) and (d) of the Bankrutpcy Code 
have no effect, are not enforceable, and the government should not be 
involved in encouraging the practice.

Mortgages should remain assumable as between spouses, children, and 
        other persons with a homestead interest in the property.
    Federal law, the Garn-St Germain Depository Act of 1982, 
specifically forbids acceleration when the property is transferred from 
one spouse to another and permits a spouse or child to assume the 
mortgage obligations.\76\ Such transfers are most likely to occur upon 
death or divorce. They may also occur in the context of domestic 
violence. Freddie Mac has long allowed mortgage assumptions by 
relatives as one method of working out delinquent mortgages.
---------------------------------------------------------------------------
    \76\ 12 U.S.C. 1701j-3(d)(6) (2008) (transfer from borrower to 
spouse or children); 12 U.S.C.  1701j-3(d)(7) (2008) (transfer to 
spouse pursuant to divorce decree or legal separation agreement).
---------------------------------------------------------------------------
    Following these policies, the HAMP program should allow mortgages 
for certain homeowners to be assumable. Homeowners who have recently 
suffered the death of a loved one should not find themselves 
immediately faced with foreclosure or suddenly elevated mortgage 
payments.

Fair lending principles must be ensured throughout the HAMP process.
    Incentive payments for pre-default homeowners are aimed at the 
necessary policy of ensuring that homeowners already facing hardship 
obtain sustainable loans, yet the additional funds for such reviews may 
implicate fair lending issues. The home price decline protection 
program may result in payments focused more on non-minority areas and 
should be reviewed for fair lending concerns. Servicer incentive 
payments based on reductions in the dollar amount of a payment also may 
raise fair lending considerations. Moreover, hardship affidavits and 
paperwork must be made available in appropriate languages to ensure 
wide access to the program. Data on loan modifications and applications 
are essential to ensuring equitable access to the program; these data 
must all be available as of fall 2009. Any further delay will limit 
transparency and delay accountability.

HAMP application procedures should better recognize and lessen the 
        impact of exigent circumstances.
    Aspects of the loan modification procedures, or gaps in current 
guidance, create hurdles for certain homeowners. For example, victims 
of domestic violence are unlikely to be able to obtain and should not 
be required to obtain their abuser's signature on loan modification 
documents. While predatory lending and predatory servicing can create 
default and an imminent risk of default, as recognized by the HAMP 
plan, the hardship affidavit does not contain an explicit reference to 
either category. Thus, at present, a loan modification would be 
available only to a homeowner who realizes that the fraud and predatory 
behavior that resulted in unreasonable levels of debt are legitimate 
grounds for seeking a modification and who is able to articulate and 
defend that categorization to a line-level employee of the servicer who 
may be relying in a formulaic way on the categories contained in the 
hardship affidavit or may be outright hostile to claims of predatory 
behavior.

The trial modification program should be further formalized and 
        clarified, such that homeowners receive assurances of the terms 
        of the permanent modification and homeowners are not put into 
        default on their loans if they are current at the onset of the 
        trial modification.
    The trial modification program currently complicates matters for 
participating homeowners by increasing costs and failing to maximize 
the chances for long-term success. Moreover, by binding homeowners but 
not servicers, it may further discourage some homeowners from 
participating.
    Payments received during the trial modification period should be 
applied to principal and interest, not held in suspense until the end 
of the trial period. Trial modification payments should be applied as 
if the modification, and any capitalization, occurred at the outset of 
the trial period, with payments allocated accordingly between principal 
and interest. The policy of capitalizing arrears at the end of the 
modification period, including any difference between scheduled and 
modified payments, penalizes homeowners (including those not in default 
at the time of the trial modification) by raising the cost of the 
modification and increasing the chances that some homeowners will not 
pass the NPV test. The use of suspense accounts and capitalizing 
arrears after the trial period render meaningless the term 
``modification'' in ``trial modification.''
    In addition, homeowners who are not delinquent at the start of the 
trial period and who are making payments as agreed under the trial plan 
currently are reported to credit bureaus as making payments under a 
payment plan; this may register as a black mark against their credit. 
Homeowners should not face decreased credit scores simply because they 
are seeking to attain a responsible debt load. For homeowners in 
bankruptcy, the new rules defining when trial payments are ``current'' 
fail to take into account the delay in initial disbursement that may 
occur when payments are made through the chapter 13 trustee.
    Finally, homeowners need some assurance at the time of the trial 
modification that, if their income is as represented upon approval of 
the trial modification, the servicer will provide a final modification 
on substantially similar terms. Homeowners are bound by the trial 
modification; it is not clear that servicers are.
    The borrower is required to sign the trial modification documents, 
but the servicer is not. This onesided contract discourages some 
homeowners and advocates. Homeowners may decide that the costs of a 
trial modification--the capitalized interest, the sunk payments, the 
potential adverse credit reporting--are not worth the uncertain benefit 
of a permanent modification. Some servicers compound this problem by 
telling homeowners seeking modifications that they are under no 
obligation to offer a permanent modification. Indeed, the trial 
modification agreement itself, in paragraph 2F, appears to allow 
servicers to choose not to complete a permanent modification. According 
to paragraph 2F, homeowners are not entitled to a permanent 
modification if the servicer fails to provide the borrower with ``a 
fully executed copy of this Plan and the Modification Agreement.'' 
Should a servicer fail to provide the borrower with a fully executed 
copy, the borrower is left without a permanent modification and without 
any recourse, while the servicer may then retain the payments made and 
proceed to a foreclosure. Faced with this uneven exchange, many 
homeowners will rationally refuse to complete a trial modification, 
even if they would qualify for and benefit from a permanent 
modification.

The final modification agreement should make clear that the homeowners 
        do not waive any rights nor are required to reaffirm the debt 
        in order to enter into the modification.
    Although the HAMP guidelines prohibit waiver of claims and 
defenses,\77\ the language in paragraph 4E of the modification 
agreement, ``[t]hat the Loan Documents are composed of duly valid, 
binding agreements, enforceable in accordance with their terms and are 
hereby reaffirmed,'' could be construed as a waiver of some claims, 
particularly claims involving fraud in the origination or execution of 
the documents. In addition to the problems posed by reaffirmation of 
the debt in bankruptcy, reaffirmation of the debt and loan documents 
outside of bankruptcy could be construed as a waiver of defenses to the 
debt. Servicers, as discussed above and demonstrated by the 
attachments, are seeking even stronger waivers of legal rights; the 
form documents should give such unauthorized behavior no shelter. The 
modification agreement should clearly state that the borrower does not 
waive any claims and defenses by entering into the agreement and that 
the borrower is not required to reaffirm the debt.
---------------------------------------------------------------------------
    \77\ Supplemental Directive, 09-01, at 2, available at 
hmpadmin.com.
---------------------------------------------------------------------------
The second lien program should be further developed to promote 
        coordination with first lien modifications; servicers should be 
        required to participate in both programs.
    Servicers continue to express ignorance of the second lien program 
and widely refuse to modify second liens. For example, Bank of America 
told a Pennsylvania borrower that a home equity line of credit could 
not be modified because it was ``written'' as a second lien, even 
though it was the primary, and only, lien against the property. 
Servicers will often service both the first and second liens. 
Frequently, servicers themselves hold the second lien. Yet often 
servicers refuse to address the second lien, despite the incentives in 
HAMP to do so. Servicers who hold second liens may prefer to gamble on 
a market recovery rather than accept the incentive payments under HAMP 
and recognize their losses now. Many servicers will choose not to 
participate in the second lien program absent a Federal mandate.
    The second lien program should work in concert with the primary 
lien modification program to the greatest extent possible. Only such 
coordination will result in maximizing the potential of the program to 
save homes and communities.

4. Data collection and reporting should support the best HAMP outcomes 
        possible.
    The maximum amount of data should be made available to the public, 
including data on a loan-by-loan basis. The data should be made 
available in user-friendly formats that are easy to obtain and that 
allow for additional and varied processing and analysis. The data 
should be made available on a basis as close to real time as possible. 
Data collected by the government and disclosed to the public, including 
HAMP monitoring data and other data, should enable the government and 
the public to compare the performance of HAMP against specific 
benchmarks. The data should enable the government and the public to 
assess the extent to which HAMP is serving equitably those most heavily 
targeted for high risk loans (especially African-American, Latino and 
older borrowers).

V. Benchmarks for Performance, Mandatory Loan Modification Offers, and 
        Other Servicing Reforms Should Be Required If the Program Does 
        Not Produce Sufficient Results in Short Order.
    Creating affordable and sustainable loan modifications for 
distressed homeowners is labor intensive. It is no surprise, then, that 
servicers continue to push homeowners away from HAMP loan modifications 
or delay the process substantially.
    Initial data collection will make a more exact review of the HAMP 
program possible within the next few months. Freddie Mac already is 
engaged in substantial oversight. Our work nationwide on behalf of 
homeowners facing foreclosure and unaffordable loans tells us that many 
qualified homeowners are being unnecessarily turned away from HAMP, 
those receiving loan modifications often obtain terms quite different 
from HAMP, and even the HAMP-compliant modifications are limited in 
what they can do for homeowners with high loan principals.
    We anticipate that the data will reflect the experience of hundreds 
of homeowners and their advocates, showing that the program is too 
narrow and too hard to implement. When the data substantiates our 
necessarily impressionistic description of the failures of HAMP, 
Congress should enact legislation to mandate loan modifications where 
they are more profitable to investors than foreclosure. Loss 
mitigation, in general, should be preferred over foreclosure. 
Additionally, Congress should revisit the question of bankruptcy 
relief. First-lien home loans are the only loans that a bankruptcy 
judge cannot modify.\78\ The failure to allow bankruptcy judges to 
align the value of the debt with the value of the collateral 
contributes to our ongoing foreclosure crisis.
---------------------------------------------------------------------------
    \78\ Second liens can be modified if they are, as many are in the 
current market, completely unsecured because the amount of the first 
lien equals or exceeds the market value of the property.
---------------------------------------------------------------------------
    Basic problems in the structure of the servicing industry need to 
be addressed in order for the homeowner-servicer relationship to be 
functional. From the homeowner's perspective, one of the biggest 
obstacles to loan modification is finding a live person who can provide 
reliable information about the loan account and who has authority to 
make loan modification decisions. Federal law should require that 
mortgage servicers provide homeowners with contact information for a 
real person with the information and authority to answer questions and 
fully resolve issues related to loss mitigation activities for the 
loan. While the Real Estate Settlement Procedures Act currently 
requires servicers to respond to homeowners' request for information 
and disputes within 60 days, in practice many such inquires go 
unanswered. Despite this failure to respond, servicers are still 
permitted to proceed to collection activities, including foreclosure. 
Essential changes to this law governing servicers should ensure that 
homeowners facing foreclosure would no longer be at the mercy of their 
servicer. There should be transparency in the servicing process by 
allowing the homeowner to obtain key information about the loan and its 
servicing history. Servicers should be prohibited from initiating or 
continuing a foreclosure proceeding during the period in which an 
outstanding request for information or a dispute is pending.
    Further reform of the tax code to simplify the exclusion of 
discharge of indebtedness income would also be of assistance to many 
homeowners, particularly homeowners with significant refinancing debt 
whose servicers are persuaded to do sustainable principal 
reductions.\79\
---------------------------------------------------------------------------
    \79\ See generally 2008 Nat'l. Taxpayer Advocate Ann. Rep. at vi--
vii (summarizing recommendations regarding changes to the treatment and 
reporting of cancellation of debt income in the mortgage context).
---------------------------------------------------------------------------
VI. Conclusion
    Thank you for the opportunity to testify before the Committee 
today. The foreclosure crisis is continuing to swell. We are drowning 
in the detritus of the lending boom of the last decade. The need to act 
is great. The HAMP program must be strengthened. Homeowners who qualify 
must have the right to be offered a sustainable loan modification prior 
to foreclosure. Passage of legislation to allow for loan modifications 
in bankruptcy, to reform the servicing industry, and to address the tax 
consequences of loan modifications also would aid in protecting 
homeowners from indifferent and predatory servicing practices and 
reducing the foreclosure surge. Together, these measures would save 
many homes and stabilize the market. We look forward to working with 
you to address the economic challenges that face our Nation today.




RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM HERBERT M. 
                          ALLISON, JR.

Q.1. One issue that was brought to my attention recently 
concerned servicer advances, that is, scheduled principal and 
interest payments and other costs that servicers must advance 
to the trust when the borrower fails to make a monthly payment. 
As you may know, these servicer advances play a critical role 
in any successful mortgage modifications.
    Independent servicers use outside financing to provide 
these advances, traditionally at low costs due to the minimal 
credit risk involved. However, given the current liquidity 
shortages in the market, financing such advances has become 
prohibitively expensive. And while the Term Asset Loan Facility 
(TALF) includes servicer advances as eligible collateral under 
the program, servicers tell me that the TALF is hamstrung by 
stringent rating requirement, particularly incompatible to HAMP 
modification process. Indeed, HAMP's prolonged modification 
timeline creates inherent risk for the creditors, lowering the 
credit rating on the assets backed by servicer advances 
accordingly.
    Has this issue been brought to the Treasury's attention?

A.1. Yes, Treasury is aware of the issue. Servicer advances 
play an important role in the residential mortgage backed 
securities market as well as in the HAMP program. This was a 
consideration when the Federal Reserve elected to make servicer 
advances TALF eligible. Subsequently, based on the state of the 
residential market, rating agencies have required a greater 
level of subordination by the servicer advance firms in order 
to obtain an AAA-rating and make them TALF eligible. Treasury 
recognizes higher levels of subordination can result in a 
higher cost of funds for some servicers, but Treasury does not 
have any influence on the rating agency opinions and decisions.

Q.2. How serious do you think this issue is?

A.2. Although the issue may be of concern for an affected firm, 
it is not clear that the issue is widespread. Treasury has 
received reports that a servicer has already obtained the 
required AAA-rating and issued TALF-eligible securities.

Q.3. What plans do you have to address it?

A.3. Treasury has examined the issue, but at this time Treasury 
believes the TALF program is providing a viable financing 
solution to independent servicers and therefore, does not 
believe the program requires significant modifications.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON FROM HERBERT 
                        M. ALLISON, JR.

Q.1. Are a proportionate number of rural homeowners facing 
foreclosure as in urban or suburban areas?

A.1. The proportion of homeowners facing foreclosure is higher 
in urban and suburban areas than in rural areas. Particularly 
hard hit are newer subdivisions on the outer edges of 
metropolitan areas. Many of the homes in these areas were 
purchased in the last three or 4 years prior to the housing 
crisis, and therefore their owners suffered greater home price 
declines. Proportionately, these suburban homeowners also took 
out a higher number of subprime mortgages. Another difficult 
segment has been urban areas where homes values are slightly 
below the state average while the income level of the residents 
is significantly below the state average. Regarding rural 
housing, conclusive research on rural mortgage lending is 
hampered by the limitations on Home Mortgage Disclosure Act 
data and the difficulty of getting comprehensive local data of 
all varieties in smaller communities. Still, we are well aware 
that rural areas have not been immune from foreclosures. For 
definitive figures on foreclosure data for rural, urban, and 
suburban homeowners, we suggest that you please refer to the 
Department of Housing and Urban Development (HUD).

Q.2. Are they seeking refinancing and modifications at the same 
rate?

A.2. We do not have reliable data on the rate that rural 
homeowners are seeking refinancings and modifications relative 
to urban and suburban homeowners.

Q.3. During the hearing, both of you talked about your outreach 
programs to help with modifications. What specific outreach is 
being done to prevent home foreclosures and educate homeowners 
about the programs that are available through Hope for 
Homeowners (H4H) and Making Home Affordable in rural areas?

A.3. Reaching delinquent borrowers to encourage their 
participation in the Making Home Affordable program is a key 
responsibility of participating servicers, who are expected to 
have written procedures for outreach attempts until 
constructive borrower contact is established. These 
requirements are the same, regardless of the location of the 
borrowers. Often, repeated attempts using alternative contact 
methods are required to reach borrowers. At a minimum the 
written contact procedures should include:

  a. Evaluation of Delinquent Borrowers--Within 30 days of 
        execution of a Servicer Participation Agreement and 
        monthly thereafter, identify all borrowers in the 
        servicing portfolio that meet the basic HAMP 
        eligibility criteria (owner occupant, loan originated 
        before January 1, 2009, loan amount within GSE loan 
        limits, borrower is at least 60 days delinquent) and 
        send solicitation letters similar in format to those 
        posted at www.hmpadmin.com.

  b. Written Contact Attempts--Send a minimum of three letters 
        in varying formats such as email, courier services, and 
        hand delivery.

  c. Telephone Contact Attempts--Initiate no less than four 
        telephone contact attempts per borrower.

    In addition, the Making Home Affordable website and the 
HOPE Hotline (1-888-995-HOPE), the two main points of entry for 
inquiring about the MHA program, are available to everyone 
regardless of their location.
    The Hope for Homeowners program is administered by the 
Department of Housing and Urban Development, which would be in 
a better position to address specific outreach related to that 
program.

Q.4. Are you seeing any other foreclosure trends in rural areas 
that are worth noting before this Committee?

A.4. Smaller, community-based financial institutions such as 
those that are more prevalent in rural areas appear to be less 
likely to foreclose on their borrowers than the large money-
center institutions that predominate in urban and suburban 
areas. This may be because of the more personal nature of 
banking in smaller institutions.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER FROM HERBERT 
                        M. ALLISON, JR.

Q.1. The Obama administration is now considering a proposal 
that would allow people to rent back a property when they have 
defaulted. The question is, won't this cause more damage to the 
secondary market for mortgages? Investors buy MBS for a stream 
of payments securitized by real property. They do not buy them 
to become landlords. Negating the trust agreement by forcing 
investors to rent rather than be made whole on their investment 
will only further damage the value of MBS in the United States 
and harm future home buyers.

A.1. While the Obama administration is considering a number of 
options to address the growing number of foreclosures, the 
Treasury Department is very cognizant of the need to respect 
contractual rights of investors. This is evident in how 
Treasury designed and operates the Making Home Affordable loan 
modification program, which has been guided in its underlying 
principles by the contractual relationships between servicers 
and investors.

Q.2. I have heard reports that the GSEs have tightened 
underwriting criteria for condominiums and townhome 
communities. I know in certain areas there were significant 
losses on loans where these projects were overbuilt, especially 
in Florida; clearly adjustments were necessary. But I'm hearing 
the guidelines are going beyond this and are making it hard for 
creditworthy borrowers living in established, healthy 
developments to get mortgages. What's the right balance on 
this? Given the need for prudential management at these 
institutions, what is this Administration's plan to make sure 
we don't go so far as to actually hurt healthy homeowners while 
we're trying to help them? Is there a review process that looks 
at what all the regulators, the GSEs and FHA are doing to make 
sure we are getting at this problem in a coordinated fashion? 
We shouldn't operate at cross purposes with some trying to be 
prudently flexible and others using the wrong tools.

A.2. The Treasury Department defers to the Department of 
Housing and Urban Development, the Federal Housing Finance 
Agency, and the Federal Housing Administration on this 
question.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON FROM WILLIAM 
                             APGAR

Q.1. Are a proportionate number of rural homeowners facing 
foreclosures as in urban and suburban areas?

A.1. Although conclusive research on rural mortgage lending is 
hampered by the limitations on Home Mortgage Disclosure Act 
data and the difficulty of getting comprehensive local data of 
all varieties in smaller communities, based on the available 
data it appears that the proportion of homeowners facing 
foreclosure is higher in urban and suburban areas than in rural 
areas. Particularly hard hit are newer subdivisions on the 
outer edges of metropolitan areas. Many of the homes in these 
areas were purchased in the last three or 4 years prior to the 
housing crisis, and therefore their owners suffered 
proportionately higher home price declines. Proportionately, 
these suburban homeowners took out a higher number of subprime 
mortgages. Another particularly hard hit area has been in urban 
areas where homes values are slightly below the state averages 
in terms of value while the income level of the residents are 
significantly below the state average income levels.
    We understand from our HUD field office in South Dakota 
that the mortgage default rate in South Dakota is very low. 
According to data published by the Mortgage Bankers 
Association, South Dakota had the second lowest rate of 
foreclosure filings and the fourth lowest percentage of home 
loans in foreclosure in second quarter 2009. As noted above, 
the number of foreclosures and sub-prime mortgages in South 
Dakota are substantially less than other areas around the 
country. However, according to data located on HUD's NSP 
website, there are a number of foreclosures and sub-prime 
mortgages that do exist with the highest concentration in the 
Sioux Falls Metropolitan Statistical Area (MSA) and Rapid City 
HUD Metro FMR Area (HMFA). Minnehaha, Pennington, and Meade 
counties have the highest estimated number of foreclosures.
    However, like other communities around the Nation, rural 
areas in South Dakota have not been immune from foreclosures. 
In fact, some rural counties in South Dakota are experiencing 
high percentages of foreclosure. According to HUD data, the 
counties of Shannon, Buffalo, Dewey, and Ziebach have the 
highest percentage rate of foreclosures in the state with rates 
of 10 percent or greater at the end of 2008.

Q.2. Are they seeking refinancing and modifications at the same 
rate?

A.2. We do not have reliable data on the rate that rural 
homeowners are seeking refinancings and modifications relative 
to urban and suburban homeowners.

Q.3. During the hearing both of you talked about your outreach 
programs to help with modifications. What specific outreach is 
being done to prevent home foreclosures and educate homeowners 
about the programs that are currently available through Hope 
for Homeowners (H4H) and Making Home Affordable in rural areas?

A.3. Although the Making Home Affordable program and Hope for 
Homeowners Programs have not specifically targeted rural areas 
for outreach efforts, the steps that servicers are expected to 
take to reach at-risk borrowers is the same regardless of the 
location of the borrower. Reaching delinquent borrowers to 
encourage their participation in the MHA program is a key 
responsibility of participating servicers. Often, repeated 
attempts using alternative contact methods are required to 
reach borrowers. Servicers that participate in the program are 
expected to have written procedures for outreach attempts until 
constructive borrower contact is established. In addition, the 
Making Home Affordable website and the HOPE Hotline (1-888-995-
HOPE), the two main points of entry for inquiring about the MHA 
program, are available to everyone regardless of their 
location.
    Earlier this summer in Miami, the Administration launched a 
nationwide campaign to promote the Making Home Affordable 
Program (and HOPE for Homeowners which has been incorporated 
into the overall MHA program) in communities most in need. The 
campaign involves a series of outreach events to engage local 
housing counseling agencies, community organizations, elected 
officials and other trusted advisors in the target markets to 
build public awareness of Making Home Affordable, educate at-
risk borrowers about available options, prepare borrowers to 
work more efficiently with their servicers and drive them to 
take action. HUD leverages local housing partners who are on 
the ground and on the front lines with at-risk borrowers to 
help broaden our outreach efforts and keep more people in their 
homes.
    In addition, HUD, in partnership with many nonprofit 
counseling agencies, provides housing counseling assistance to 
the record number of homeowners at risk of foreclosure, 
particularly those preparing to take advantage of the 
foreclosure prevent programs made available under this 
Administration. HUD-approved counseling agencies are located 
across the Nation (in rural and urban communities) and provide 
distressed homeowners with a wealth of information and 
assistance for avoiding foreclosures. The counselors provide 
assistance over the phone and in person to individuals seeking 
help with understanding the Making Home Affordable program and 
often work with borrowers eligible for the Administration's 
refinance or modification program to compile an intake package 
for servicers. These services are provided free of charge by 
nonprofit housing counseling agencies working in partnership 
with the Federal Government and funded in part by HUD and 
NeighborWorks' America. The list of approved HUD 
counselors can be found at: http://www.hud.gov/offices/hsg/sfh/
hcc/fc/.
    In South Dakota, HUD field staff participate in various 
events, sponsored by realtors, mortgage bankers and consumer 
organizations, to provide information on FHA program, including 
benefits of refinancing into FHA products.

Q.4. Are you seeing any other foreclosure trends in rural areas 
that are worth noting before this Committee?

A.4. Smaller, community-based financial institutions such as 
those that are more prevalent in rural areas appear to be less 
likely to foreclose on their borrowers than the large money-
center institutions that predominate in urban and suburban 
areas. This may be because of the more personal nature of 
banking in smaller institutions.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY FROM JOAN CARTY

Q.1. In your testimony you mention many common themes as to why 
families are in distress as you discuss the need for quicker 
action. In addition to mortgage terms, you mention many life 
events. This seems to at least partially support Dr. Willen's 
studies that have shown life events to be one of the primary 
causes of the financial difficulties that have lead to 
foreclosure.
    As you counsel these families, what steps do you encourage 
them to take that will allow them to remain current on their 
mortgages following a loan modification?

A.1. Thank you for your interest in our work. As we counsel 
families following a loan modification, we encourage them to 
take the following steps:

  1. Always pay family necessities (food and current medical 
        bills expenses), then housing related bills, including 
        real estate taxes and insurance if they are not 
        included in your mortgage bill.

  2. Also pay child support and income tax debt. Not 
        addressing these debts can result in very serious and 
        expensive problems.

  3. Concentrate on paying secured debt until their finances 
        allow them to start paying unsecured debt.

  4. Develop an action plan where the goal will be to save at 
        least 8 months of living expenses in case of 
        emergencies. Client could save money by budgeting. A 
        counselor could help the client identify areas where 
        client can save money.

  5. If client has high credit card debt, client can work to 
        get all debt consolidated at a lower interest rate and 
        lower payments.

  6. Work to rebuild a good credit history: It's important 
        that a client rebuilds his/her credit history because 
        the credit score will determine the future interest 
        rate that client will be charged on both secured and 
        revolving credit. Also, most insurance companies charge 
        a higher premium to people who have poor credit scores.

  7. After saving for at least 8 months of living expenses, 
        client could do the same to save for a car, repairs on 
        the house, and for any long term and short term 
        expenses.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM PAUL S. 
                             WILLEN

Q.1. In previous hearings, we heard many times that large 
percentages of sub-prime borrowers would have actually 
qualified for traditional mortgages. In your testimony you 
said, ``most borrowers who got subprime mortgages would not 
have qualified for a prime mortgage for that transaction.''
    As you noted the assumption that people were steered toward 
subprime mortgages has been at the center of a lot of policy 
debates in this area. Could you expand a bit on why your 
research finds this assumption to be inaccurate?

A.1. In our research, we showed that prime lenders would not 
have underwritten the vast majority of subprime loans \1\--in 
other words, that subprime borrowers weren't steered to 
subprime loans but rather would have been rejected by prime 
lenders. Our analysis used the following criteria for 
qualifying for a prime loan--that the borrower have a FICO 
score above 620 and a debt-to-income ratio less than 40 percent 
and that the combined loan-to-value ratio fell below 90 percent 
and that the borrower fully documented income. By our count, 
less than 10 percent of the subprime loans made in 2005 and 
2006 passed all these tests. Furthermore, we found that 
fraction had actually declined over time.
---------------------------------------------------------------------------
    \1\ Just the Facts: An initial analysis of the subprime crisis, 
With Chris Foote, Kris Gerardi and Lorenz Goette. 2008. Journal of 
Housing Economics, 17(4):291-305.
---------------------------------------------------------------------------
    Previous claims by some that the data showed steering into 
subprime loans were based on a misunderstanding of what 
constitutes a subprime loan. A much-cited Wall Street Journal 
article from December of 2007 purported to show that a large 
and increasing number of subprime borrowers would, in fact, 
have qualified for prime loans. However, the analysis focused 
exclusively on FICO scores, and was based on the erroneous 
assumption that anyone with a FICO score above 620 
automatically qualified for a prime loan. It is true that a 
FICO below 620 generally renders a borrower ineligible from a 
prime loan, but the converse is not true: to get a prime loan 
one needs a high FICO score and to pass the other tests noted 
above. The Wall Street Journal article was correct in its claim 
that the number of borrowers with FICO above 620 in subprime 
pools had grown over time--in our data it grew from less than 
40 percent in 2000 to more than 70 percent in 2006. What the 
article failed to mention was that the fraction with, for 
example, very high LTV score had increased dramatically over 
the same period.
    The steering claim is at least partly based on a 
misunderstanding of what a subprime loan is. Most of what makes 
subprime loans different from prime loans involves the 
characteristics of the transaction and the borrower. There are 
three ways to see this. The first involves the fact that the 
small subset of subprime borrowers who would have qualified for 
prime treatment got loans that were virtually indistinguishable 
from the equivalent prime borrowers: two-thirds had fixed rate 
mortgages with an average interest rate of 6.6 percent. The 
second involves the fact that prime and subprime loans with 
similar characteristics perform similarly in the data. A 90 
percent LTV subprime loan to a borrower with a 620 FICO score 
is not significantly more likely to default than an otherwise 
identical prime loan. Finally--and contrary to common 
assumption--our research shows that subprime loans were not any 
more likely to have ``risky features'' like interest-only or 
negative amortization payment options.

Q.2. In your testimony and your papers you discuss impact of a 
downturn in housing prices on the default rates. Specifically, 
while discussing the role of life-event on default rates, your 
testimony states ``when home prices fall, some borrowers can no 
longer profitably sell, and then income-disrupting life-events 
really take a toll.'' You further state that ``foreclosures 
rarely occur when borrowers have positive equity.'' I believe 
that this is an important point and one must be in the center 
of a discussion about what happened to cause the downturn in 
our housing market and subsequently in our economy.
    Given the importance of equity in a home to prevent 
foreclosures, do you believe that relaxed down payment 
standards, which allowed people to purchase homes with little 
or no down payment, left homeowners more vulnerable to these 
life-events?

A.2. Yes I do. The reason that lenders view home mortgages as 
safe and the reason that borrowers pay low interest rates is 
that the loan is secured by the property, and thus the lender 
is not as exposed to the borrower's ability or willingness to 
repay the loan. For the borrower, the whole logic of buying a 
home with a mortgage depends on the ability of the borrower to 
sell the property if his or her circumstances change. I think 
the willingness of lenders to make zero-down loans, and the 
willingness of borrowers to take them out, resulted from the 
belief that house prices would continue to rise and that the 
borrower would quickly build equity. Going forward, it will be 
important for both borrowers and lenders to take the 
possibility of substantial price declines into account, no 
matter how improbable such a decline may appear at the time.

Q.3. Other testimony submitted to the Committee seemed to 
indicate that the primary reasons the loan modifications have 
not been occurring at a faster pace are largely logistical 
reasons within the leaders. You seem to suggest that this is 
not the reason, but rather, contrary to popular belief, there 
simply economic factors that prevent the modifications from 
moving forward.
    Please respond to this, as well as the criticism that your 
research was not relevant because it analyzed loan modification 
programs in existence prior to the efforts of the past year.

A.3. The claim that the problems are ``logistical'' does not 
make economic sense. For a profitable opportunity, firms can 
and will increase capacity. In the fall of 2008, there was a 
dramatic increase in refinancing activity, which initially 
caused problems because lenders were understaffed. Within 
weeks, lenders were able to overcome this and refinance record-
breaking numbers of loans. If loan modification were highly 
profitable for lenders, they would hire lots of staff. The 
foreclosure crisis started in 2007, so the idea that lenders 
were still struggling to ``staff up'' in 2009 must be 
erroneous, in my opinion.
    Our claim in the paper is that a logical explanation for 
the paucity of modifications is that they aren't profitable for 
lenders. Whether loan modifications are socially useful is a 
completely separate question which we do not address in the 
paper. That said, we do argue essentially that making social 
policy based on the assumption that it is in the interests of 
lenders to modify loans--i.e., that the interests of lenders 
and society are perfectly aligned--is mistaken.

Q.4. In their recently released white paper, the Administration 
suggests that certain type of products should be construed as 
``plain vanilla'' and therefore safe for all consumers, while 
other loans should presumably carry a warning symbol, or 
perhaps be banned outright.
    Based on your research and experience, are there times when 
a 30-year fixed mortgage could be more dangerous than an 
adjustable rate mortgage? As you stated in your testimony, 
doesn't the characteristics of the borrower drive the success 
or failure of the loan generally?

A.4. I personally would strongly disagree with the (original) 
suggestion. Fixed-rate mortgages have performed better than 
adjustable rate mortgages in the crisis, but that statement is 
entirely relative. According to the Mortgage Bankers 
Association, between the first quarter of 2007 and today, the 
fraction of subprime adjustable rate mortgages that were more 
than 90 days delinquent grew from 4 percent to 17 percent, 
which is, of course, dismal. Would the figures have been 
dramatically different if those borrowers got fixed-rate 
mortgages? The evidence does not suggest it would have. The 
percentage of subprime fixed rate loans that were more than 90 
days delinquent rose from 3 percent to 13 percent.
    Features like adjustable rates, interest only, negative 
amortization payment options, and low documentation are risk 
factors--but in my view they only account for a small 
percentage of the risk associated with a loan. Identifying a 
fixed rate mortgage as unquestionably ``safe'' would, I believe 
be a disservice to consumers. A borrower with problematic 
credit buying a house with little or no money down is a risky 
proposition regardless of what type of loan the borrower uses--
and to identify such a mortgage as ``inherently safe'' simply 
because certain features like adjustable rates are absent would 
be thus irresponsible.

Q.5. Your testimony indicates that a plausible explanation for 
lenders reluctance to renegotiate loans is that it simply isn't 
profitable because of ``re-default risk'' and ``self-cure 
risk.''
    What do you believe is the best way forward with respect to 
the mortgage problems facing the country?

A.5. I think that there are two things we need to do. The first 
is to focus government efforts on helping unemployed borrowers. 
I have, along with several colleagues in the Federal Reserve 
System, circulated a proposal to provide loans or grants to 
unemployed homeowners.\2\ As I argued in my testimony, most 
borrowers default because of the combination of negative equity 
and a life-event like job loss. But because unemployed 
borrowers, unlike speculators, may be quite committed to living 
in the home they own, lenders may view them as having high 
``self-cure risk'' and thus be unwilling to help them by easing 
the terms of their debt. A government program to tide committed 
homeowners through troubled times would prevent foreclosures.
---------------------------------------------------------------------------
    \2\ A Proposal to Help Distressed Homeowners: A Government Payment-
Sharing Plan by Chris Foote (Boston Fed), Jeff Fuhrer (Boston Fed), 
Eileen Mauskopf (Board of Governors) and Paul Willen (Boston Fed).
---------------------------------------------------------------------------
    All that said, the number of preventable foreclosures is in 
my view far lower than many have assumed. Ultimately, and 
unfortunately, the best foreclosure prevention program 
imaginable will not prevent more than 20 percent of the 
foreclosures we can expect. Thus, I think the second key policy 
initiative should be to minimize the effects of foreclosures 
both on borrowers and communities. This means making sure that 
adequate rental housing is available for displaced families, 
and that foreclosed properties transition to committed 
homeowners who are able to afford them as soon as is 
practicable.

Q.6. Your testimony casts serious doubts about the 
effectiveness of loan modification programs. If job-loss is 
driving foreclosures, it appears that government programs to 
pay servicers and borrowers to modify mortgages will not help 
many homeowners. It will, however, cost the taxpayers a lot.
    Is the best way to prevent foreclosures to simply make sure 
we have solid economic growth and a vibrant job market?

A.6. Yes and no. There is no question that a vibrant job market 
would help mitigate the foreclosure problem. The 482,000 people 
filing new claims for unemployment insurance in the week ended 
January 15, 2009 are all candidates for foreclosure if they 
have negative equity in their homes. Reducing that number will 
reduce foreclosures. The problem is that even when times are 
good, the mix of jobs and firms changes continuously and so 
large numbers of people lose jobs. In the last forty years, in 
spite of several vigorous expansions and vibrant job markets we 
have rarely seen a week with fewer than 300,000 new claims for 
unemployment insurance, far fewer than today, to be sure, but 
still a significant number. As I said in my testimony, we 
expect foreclosures to remain elevated for a considerable 
period, regardless of what happens to the labor market. In 
Massachusetts in the 1990s, foreclosures persisted at high 
levels long after a vigorous economic recovery started.

Q.7. During previous hearing this Committee has heard testimony 
that had lenders given borrowers sustainable loans rather than 
sub-prime loans, we would not be now facing a foreclosure 
crisis.

   LDo you agree with this conclusion?

   LWhat types of borrowers typically received sub-
        prime loans?

   LCould most sub-prime borrowers qualified for prime 
        loans?

A.7. No, I do not agree with the conclusion. In a recent paper, 
two co-authors and I addressed exactly this question. The 
dramatic fall in house prices we observed over the last 3 years 
would have caused a crisis with or without subprime lending. We 
showed that falling house prices we observed for 2005 house 
buyers would have caused a dramatic increase in foreclosures 
even for the 2002 vintage of buyers, almost none of whom 
received subprime loans. By contrast, the subprime-heavy 2005 
vintage would have faced almost no foreclosures if house prices 
appreciated as they did earlier in the decade.
    The main risk factors in a loan are the credit score of the 
borrower and the amount of equity the borrower has in the 
house. Other things, like whether the loan is labeled subprime 
or whether the loan was interest-only do matter, but only 
marginally. In most cases, the only way a lender could have 
prevented a subprime foreclosure was by refusing to do business 
with the borrower. A 100 percent LTV loan to a borrower with 
600 credit score will always be a risky proposition.
    Some have attributed the run-up in house prices and the 
subsequent fall to subprime lending, but there is little 
evidence in the data to support this claim. Robert Shiller 
dates the house price boom in the United States to 1998, 
whereas subprime did not start to grow rapidly until 2004.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MARY 
                             COFFIN

Q.1. Hope for Homeowners and the Making Homes Affordable 
Programs are both based on the idea that if we are able to 
modify a borrowers loan and thus decrease that person's monthly 
debt to income ratio, homeowners will be able to keep up with 
their payments. This will in turn reduce the number of 
foreclosures and stabilize our housing market.While you are 
probably not yet able to speak to statistics regarding these 
programs, however, historically, have you seen that reducing a 
borrower's monthly debt to income ratio alone has a high 
success rate in keeping that borrower current in his or her new 
loan?

A.1. Every borrower faces fairly unique circumstances and the 
economic environment continues to shift, so it is difficult to 
make broad statements of a general nature. It has been my 
experience that reducing the borrower's monthly expenses 
overall, whether those are related to debt or other living 
expenses, and the borrower staying within that new budget will 
increase that borrower's chances of staying current with his or 
her mortgage payments. As mortgage servicers, we only can 
impact the mortgage payment component of a customer's overall 
obligations, so when we do reduce that payment we are doing our 
part to help bring their expenses in line with their income.
    We will even work to reduce the mortgage payment when we 
believe it will help the customer keep their home even if the 
mortgage debt is not the source of the financial difficulties. 
A meaningful portion of our borrowers come to us with housing 
payment-to-gross income ratios less than 31 percent before 
modification. We find the majority of these customers have 
problems with their overall debt and expense levels, and their 
mortgage delinquency is really a symptom of a larger financial 
problem. Such customers do not appear to need help with their 
first mortgage and they are not eligible for HAMP, but many 
will lose their home through foreclosure without a 
modification. As a result, first mortgage investors, such as 
Freddie Mac and Fannie Mae, have been approving retention 
modifications with characteristics similar to HAMP for 
customers who fail to qualify for HAMP; primarily those with 
pre-modification HDTI ratios below 31 percent and/or those who 
need to go below 31 percent HDTI to achieve overall 
affordability targets.

Q.2. We face a bit of a dilemma with how to inform the public 
about these programs. If we believe that loan modifications are 
truly the best way to stabilize our housing market, then we 
must make sure the public is aware of the programs. However, at 
the same time, we risk setting unrealistic expectations for the 
public as it relates to the sacrifices necessary for the 
program to be effective. What have been your experiences with 
customers seeking loan modifications before and after the 
government made them a priority? Are we in fact reaching more 
of the most vulnerable? Are the expectations of the public 
realistic?

A.2. One issue that servicers have faced is a gap between 
consumer expectations regarding the availability of Home 
Affordable Modification Program and our ability to actually 
implement the program. The original announcement about the 
program was made by the Administration on February 18, but 
program guidelines weren't available for 2 to 3 months after 
that and changes were being made to HAMP as late as July. In 
addition, there was no HAMP available for FHA borrowers until 
mid August and guidelines for the second lien HAMP have not 
been released as of the beginning of September. As a result, 
customers heard about the program and contacted their servicers 
about their potential to benefit from HAMP before--and 
sometimes months before--the program could be made available to 
them.
    We believe the priority should be to assist those who have 
been hardest hit by the economic downturn and are not able to 
afford their monthly mortgage payments. Following the 
government's HAMP announcement, however, the ratio of current 
customers contacting us increased dramatically compared to 
those who were delinquent. While we agree that HAMP should be 
available to borrowers who haven't yet missed a payment but are 
at risk of imminent default, this could hamper, to some extent, 
our ability to reach and assist the already delinquent 
borrowers who are most at risk.
    Public perception and individual expectations also vary 
widely, and there are borrowers out there who don't fully 
understand what HAMP is for and who should expect to benefit 
from the program. Some borrowers, for example, are fully able 
to afford their monthly mortgage payments, but expect that they 
should be eligible for a loan modification through HAMP simply 
because the current market value of their home has decreased. 
These borrowers' circumstances clearly aren't addressed by HAMP 
and weren't intended to be, yet this misperception of the 
program creates additional call volume for servicers and 
eventually results in frustration for the customer.
    This misalignment of consumer expectations regarding HAMP 
and the realities of the program has created some confusion and 
frustration among borrowers. We continue to discuss with 
Treasury ways that we can avoid similar challenges as new 
elements of HAMP or other borrower assistance programs are 
rolled out in the future.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATORS CORKER AND VITTER FROM 
                          MARY COFFIN

Q.1. The SAFE Act was designed to require licensing of loan 
officers, not mortgage servicers or employees that perform 
modifications and loss mitigation. However, I understand that 
this Act is being interpreted to apply to servicers. HUD has 
indicated it wants to include employees that do modifications 
within the licensing and registration scheme. Is this 
interpretation-that loss mitigators are covered by SAFE-going 
to impede your ability to do modifications?

A.1. Requiring any employee performing loan workouts, loss 
mitigation or loan modifications to be registered under the 
SAFE Act would impose a significant burden on mortgage 
servicers and definitely would impede our efforts to provide 
relief to struggling borrowers at a critical time and undermine 
the objectives of the Making Home Affordable initiatives. One 
of the most important issues is that it would severely restrict 
our ability to add employees to our home retention team or 
shift employees to home retention efforts as work demands vary. 
In response to significant increases in the volume of 
modifications we are considering, for example, Wells Fargo 
hired and trained 4,000 people in the first half of the year. 
It would have been impossible to register all or a significant 
number of those new staff in time to deal with the increase in 
activity that we have experienced.
    SAFE was not constructed to cover servicers or servicing 
personnel, but to establish nationwide oversight of individual 
loan originators, lenders and mortgage brokers. SAFE's 
education and testing requirements, for example, are focused on 
originations issues and don't address servicing-related 
matters. Loan modifications present none of the risks or 
concerns that the SAFE Act was intended to address, namely: 
accountability and tracking of mortgage loan originators; 
enhanced consumer protections; reducing fraud in the mortgage 
loan origination process. In a modification scenario, the 
mortgage has already been originated and the borrower is 
already aware of and contractually bound by the terms of their 
mortgage. Modifications do not present sales opportunities to 
Agency-regulated institutions.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM CURTIS 
                            GLOVIER

Q.1. In your testimony you focus on the need for additional 
principle reduction.
    Have you analyzed how many homes would need principle 
reductions, and how much principle would need to be written 
off, to stabilize our housing market?

A.1. Based on an analysis of non-performing loans in the Loan 
Performance data base as of April 30, 2009, (covering the non-
agency mortgage-backed securities market), we believe that 
approximately 1,622,000 homes would need principal reductions 
to prevent a foreclosure.
    In the aggregate, this equates to a reduction in mortgage 
debt of approximately $120.25 billion, which is approximately 
$74,000 per homeowner. This amount represents 6.8 percent of 
the $1.765 trillion non-agency residential mortgage market and 
would result in a principal reduction of approximately 30 
percent per mortgage loan.

Q.2. What level of taxpayer money do you believe would be 
necessary for these reductions?

A.2. No taxpayer contribution is necessarily required to 
achieve this principle reduction. It is certainly conceivable 
that the principal reduction could be borne entirely by the 
investors in the residential mortgage-backed securities.
    While some form of compensation for accepting a principal 
reduction of the first mortgage could serve as an incentive for 
facilitating more and quicker action, the Mortgage Investors 
Coalition supports policies that drive mortgage foreclosure 
avoidance policy toward principal reduction and refinancings 
(like those originally intended by the Hope for Homeowners 
program). We believe it is a better policy for homeowners 
because it reestablishes homeowner equity.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ALLEN 
                             JONES

Q.1. Hope for Homeowners and the Making Home Affordable 
Programs are both based on the idea that if we are able to 
modify a borrowers loan and thus decrease that person's monthly 
debt to income ratio, homeowners will be able to keep up with 
their payments. This will in turn reduce the number of 
foreclosures and stabilize our housing market.
    While you are probably not yet able to speak to statistics 
regarding these programs. However, historically have you seen 
that reducing a borrowers monthly debt to income ratio alone 
has a high success rate in keeping that borrower current in his 
or her new loan?

A.1. Bank of America applauds the Obama Administration's 
Homeowner Affordability and Stability Plan's focus on assisting 
financially distressed homeowners with their mortgage payments 
through their refinancing and loan modification program. We 
strongly support the Administration's focus on affordability in 
the loan modification and refinance processes in order to 
achieve long-term mortgage sustainability for homeowners. The 
Administration's focus on affordability and sustainability is 
consistent with the approach we have successfully developed 
with our customers. While there are many factors that influence 
whether a borrower will be able to perform on their loan, 
including the borrower's continued employment and whether the 
borrower has a desire to continue to remain in their home, we 
believe that reducing the borrower's monthly payment to a 31 
percent debt to income ratio under these programs should help 
to reduce the number of foreclosures and help stabilize housing 
markets. Our research suggests that reducing the borrowers 1st 
lien monthly mortgage obligation provides incrementally more 
benefit than other modification factors. The degree of this 
reduction is what is important. Payment change alone is not the 
sole factor. Other factors such a mod type, borrower profile, 
equity, etc are determining factors in the probability of 
success.

Q.2. We face a bit of a dilemma with how to inform the public 
about these programs. If we believe that loan modifications are 
truly the best way to stabilize our housing market, then we 
must make sure the public is aware of the programs. However, at 
the same time, we risk setting unrealistic expectations for the 
public as it relates to the sacrifices necessary for the 
program to be effective.
    What has been your experiences with customers seeking loan 
modifications before and after the government made them a 
priority? Are we in fact reach more of the most vulnerable? Are 
the expectations of the public realistic?

A.2. We have made important progress under our programs before 
HAMP, yet HAMP represents a watershed in loan modifications. 
The program applies lessons we learned in early efforts across 
the industry, establishes uniform national standards and 
provides appropriate incentives to borrowers, servicers and 
investors. We are confident HAMP enables servicers to help more 
struggling homeowners and will play a key role in stabilizing 
the housing markets and promoting economic recovery.
    However, the program was not designed to assist borrowers 
who have vacated their home or no longer occupy the home as 
their principal residence. Nor was the program structured to 
assist the unemployed or those who already have a relatively 
affordable housing payment of less than 31 percent of their 
income. Out of our HAMP eligible population, as recently 
defined by Treasury, of the customers we've talked with, a 
significant number are known to fall into one of these four 
categories. This demonstrates the depth of the Nation's 
recessionary impacts on homeowners, not the failure of the 
government program or the efforts of participating mortgage 
servicers.
    Bank of America believes it is necessary to provide 
solutions to these customer segments that fall outside HAMP's 
target reach--and we are doing so. We have non-HAMP options we 
consider to avoid foreclosure including modification programs 
for non-owners and borrowers with a debt-to-income ratio below 
31 percent, and importantly, forbearance programs for the 
unemployed.
    We also are working with Treasury to expand HAMP to assist 
in meeting these same challenges--specifically including a 
program for the unemployed and allowance for a housing ratio 
less than 31 percent for low-to-moderate income borrowers.
    The benefit of having Treasury take the lead to address 
these challenges is creating an industry standard that helps 
all customers and provides investor incentive to help more 
borrowers qualify. In any case, Bank of America will continue 
to provide solutions to these customers.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATORS CORKER AND VITTER FROM 
                          ALLEN JONES

Q.1. The SAFE Act was designed to require licensing of loan 
officers, not mortgage servicers or employees that perform 
modifications and loss mitigation. However, we understand that 
this Act is being interpreted to apply to servicers. Even HUD 
has indicated it wants to include employees that do 
modifications within the licensing and registration scheme. Is 
this interpretation--that loss mitigators are covered by SAFE--
going to impede your ability to do modifications?

A.1. If this interpretation were to apply to our loss 
mitigation employees, then it would impose additional burdens 
that would impair our ability to do loan modifications on a 
timely basis.
