[Senate Hearing 111-793]
[From the U.S. Government Publishing Office]
S. Hrg. 111-793
HOLDING BANKS ACCOUNTABLE: ARE TREASURY AND BANKS DOING ENOUGH TO HELP
FAMILIES SAVE THEIR HOMES?
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HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
APRIL 29, 2010--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
Available via the World Wide Web: http://www.gpo.gov/fdsys
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COMMITTEE ON APPROPRIATIONS
DANIEL K. INOUYE, Hawaii, Chairman
ROBERT C. BYRD, West Virginia THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa MITCH McCONNELL, Kentucky
BARBARA A. MIKULSKI, Maryland RICHARD C. SHELBY, Alabama
HERB KOHL, Wisconsin JUDD GREGG, New Hampshire
PATTY MURRAY, Washington ROBERT F. BENNETT, Utah
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
DIANNE FEINSTEIN, California SAM BROWNBACK, Kansas
RICHARD J. DURBIN, Illinois LAMAR ALEXANDER, Tennessee
TIM JOHNSON, South Dakota SUSAN COLLINS, Maine
MARY L. LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio
JACK REED, Rhode Island LISA MURKOWSKI, Alaska
FRANK R. LAUTENBERG, New Jersey
BEN NELSON, Nebraska
MARK PRYOR, Arkansas
JON TESTER, Montana
ARLEN SPECTER, Pennsylvania
Charles J. Houy, Staff Director
Bruce Evans, Minority Staff Director
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Subcommittee on Financial Services and General Government
RICHARD J. DURBIN, Illinois, Chairman
MARY L. LANDRIEU, Louisiana SUSAN COLLINS, Maine
FRANK R. LAUTENBERG, New Jersey CHRISTOPHER S. BOND, Missouri
BEN NELSON, Nebraska LAMAR ALEXANDER, Tennessee
JON TESTER, Montana THAD COCHRAN, Mississippi (ex
DANIEL K. INOUYE, Hawaii (ex officio)
officio)
Professional Staff
Marianne Clifford Upton
Diana Gourlay Hamilton
Melissa Zimmerman Petersen
Dale Cabaniss (Minority)
Brooke Hayes Stringer (Minority)
LaShawnda Smith (Minority)
Administrative Support
Molly Barackman-Eder
C O N T E N T S
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Page
Opening Statement of Senator Richard J. Durbin................... 1
Statement of Senator Susan Collins............................... 4
Statement of Hon. Timothy Geithner, Secretary, Department of the
Treas-
ury............................................................ 5
Prepared Statement of........................................ 8
Economic Recovery and Crisis Response............................ 9
Treasury's Budget................................................ 9
Improving the IRS................................................ 10
Reform and Investment............................................ 10
Global Economic Interest and National Security................... 12
Rebuilding Treasury's Institutional Capacity..................... 12
Statement of Kevin Puvalowski, Deputy Special Inspector General,
Office of the Special Inspector General for the Troubled Asset
Relief Program................................................. 27
Prepared Statement of........................................ 29
Program Updates and Financial Overview........................... 30
Oversight Activities of SIGTARP.................................. 31
SIGTARP Recommendations on the Operation of TARP................. 32
Statement of Richard Neiman, Superintendant of Banks, State of
New York and Member, Congressional Oversight Panel............. 34
Prepared Statement of........................................ 35
Panel Findings................................................... 36
Areas for Additional Action...................................... 38
Statement of Katie Van Tiem, Program Manager, Subprime Lending
Intervention, Neighborhood Housing Services of Chicago......... 39
Prepared Statement of........................................ 41
Neighborhood Impact.............................................. 42
Addressing the Problem........................................... 42
Creating Solutions............................................... 43
HOLDING BANKS ACCOUNTABLE: ARE TREASURY AND BANKS DOING ENOUGH TO HELP
FAMILIES SAVE THEIR HOMES?
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THURSDAY, APRIL 29, 2010
U.S. Senate,
Subcommittee on Financial Services
and General Government,
Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:30 p.m., in room SD-192, Dirksen
Senate Office Building, Hon. Richard J. Durbin (chairman)
presiding.
Present: Senators Durbin, Alexander, and Collins.
opening statement of senator richard j. durbin
Senator Durbin. Good afternoon. I'm pleased to convene this
hearing before the Senate Appropriations Subcommittee on
Financial Services and General Government. Our focus today is
on the Department of the Treasury and its programs designed to
prevent mortgage foreclosure.
I welcome my distinguished ranking member, Senator Susan
Collins, of Maine, and other colleagues who will join us during
the course of this hearing.
I welcome our witnesses: first, the Secretary of the
Treasury, Tim Geithner--thank you very much for being here;
Kevin Puvalowski, from the Office of the Special Inspector
General for the Troubled Asset Relief Program (TARP); Richard
Neiman, from the Congressional Oversight Panel; and Katie Van
Tiem, from the Neighborhood Housing Services of Chicago.
Almost 1 year ago, in 2009, the subcommittee met with
Secretary Geithner in the midst of a full-blown foreclosure
crisis. In the year before, in 2008, we discussed the growing
problem of foreclosures, with your predecessor, Secretary
Paulson.
The wave of mortgage foreclosures is not new or simply an
unfortunate side effect of the global economic crisis. The
systemic problems in the subprime mortgage market were the
catalyst that led us to this crisis in the first place. In
2007, as foreclosures mounted in my home State of Illinois and
across America, I started working on the Helping Families Save
Their Homes Act, to help stem the tide of these foreclosures.
To my regret, the Senate did not provide homeowners with a
meaningful chance to save their homes through the bankruptcy
process.
Foreclosures don't just leave homes empty, they ravage
communities and make it hard for local governments to make
investments in roads and schools.
These are just a few illustrations of the many, many
thousands of homes that are in foreclosure. This photo
illustrates what happens when a home goes into foreclosure. A
house goes empty. It drags down home values, threatens safety,
and destabilizes a neighborhood.
As an alternative to foreclosure, the administration
developed the Home Affordable Modification Program, or HAMP.
Despite the goal of helping 3 to 4 million homeowners, HAMP has
only resulted in 230,000 permanent modifications in just over 1
year. Yet, in 2009, 2.8 million more homeowners received a
foreclosure notice, and the rate continues to grow.
The red dots on this chart show the foreclosures initiated
in 2008 and 2009 for one single ZIP Code on the southwest side
of Chicago. You can see that there is barely a block in the
entire ZIP Code without a foreclosure in the last 2 years. This
is an area not far from Midway Airport, which you'll notice up
there in the left-hand corner, so you can get your bearings, if
you know a little bit about Chicago.
In March, Treasury announced important changes to HAMP, and
I'm pleased that HAMP will now require some relief for the
unemployed and will provide incentives for services to
voluntarily--voluntarily--help homeowners who owe more than
their home is worth. But, I am concerned that these changes may
not be enough to help unemployed and underwater homeowners.
Under the current plan, servicers may still have more incentive
to foreclose rather than to modify. And many borrowers will
still find that default may be easier than staying under water.
These changes won't be implemented until the fall, and may be
too little, may be too late. I still think the changes to the
bankruptcy code can make a significant impact on helping
families stay in their homes. That's good for the families, for
the banks, for the communities where these families live.
I want to discuss this Treasury foreclosure program, and
other ideas to minimize foreclosures, with the Secretary today,
and the other witnesses on our second panel. I also look
forward to discussing the Wall Street reform efforts that the
Senate began working on today, including plans to create the
strongest consumer financial protection agency ever, to help
police against the type of shady mortgage deals that lead to
this--the worst recession since the Great Depression.
First a word about the budget, briefly. For fiscal year
2011, the budget request for the Department of the Treasury,
excluding the IRS, is $1.4 billion. Total spending, compared to
fiscal year 2010, would increase by $93 million, about 7
percent. Treasury's budget funds executive management and
financial analysis, intelligence efforts related to terrorist
financing, and other criminal financial activity, as well as
grants to financial institutions in distressed communities
through the community development financial institutions fund,
known as CDFI.
I'm also interested in Treasury's proposal to increase
funding for the CDFI and to add new programs related to food
financing, which the Secretary may be able to explain in a
little more detail, and access to financial services for the
unbanked. I'm also interested to hear about budget increases
for your front-office staffing.
I turn to my ranking member, Senator Susan Collins, for her
remarks and opening statement.
statement of senator susan collins
Senator Collins. Thank you, Mr. Chairman.
Mr. Chairman, as you were showing us that chart and
describing the problems that homeowners are facing, it brought
to mind a meeting that I had recently with community bankers in
Maine. And I asked them about foreclosures in Maine, and the
effectiveness of Federal programs. Now, fortunately, Maine's
foreclosure rate is clearly far below Illinois' and several
other States, but it still is growing as people have lost their
jobs.
But, here's the startling fact. Of those bankers, not a
single one thought that the Federal programs that we had were
helpful to them. And indeed, many of them had refinanced the
mortgages of homeowners who were under water, but not one of
them had done so taking advantage of the Treasury program. And
I think that's very telling. They were doing it, and they were
providing assistance to homeowners, but not as a result of
Federal programs or policies. And that suggests that we need to
take a hard look at the effectiveness of these policies.
Mr. Secretary, welcome to our subcommittee. You certainly
have many challenging responsibilities that include, not only
the programs and problems that the chairman and I have just
addressed, but also reinvigorating bank lending to small
businesses. After all, it's the small businesses that are still
creating the vast majority of jobs in this country, and yet,
they're continuing to find it difficult to access capital.
In addition, you are overseeing the automobile industry,
you need to stabilize the housing markets, and encourage
sustainable economic growth. And, most important, you must
promote the long-term financial security of our country at a
time of unprecedented debt.
Congress has spent considerable time delving into the many
dysfunctional facets of our financial markets, which produced
turmoil so damaging that it nearly caused a second Great
Depression.
Looking back, we now all realize that our regulatory system
was outmoded and that we need a regulatory entity that can look
across the breadth of the economy and spot risky asset bubbles
in advance, and act to identify systemic risk to our economy,
and to close regulatory gaps.
In order to address this problem, more than 1 year ago I
introduced a financial reform bill. This bill created a Council
of Existing Regulators. A similar concept is in the bill that
is now before us on the Senate floor. My vision was for this
council to act as a systemic risk monitor for our financial
markets. This concept remains valid today as we look for ways
to prevent our economy from ever again reaching such a state of
crisis triggered by risky practices and products in the housing
industry and on Wall Street.
As I've said from the very beginning of this crisis,
there's no question that Congress must pass financial reform
legislation to strengthen oversight and accountability and
taxpayer bailouts of huge financial firms, and prevent the
excesses that have contributed to the deep recession that has
cost millions of Americans their homes and their jobs.
Another issue that I'm extremely concerned about is the
impact of our unprecedented level of debt on long-term economic
growth and stability. The current problems of Greece offer a
warning of the problems that a country faces when its debt goes
out of control. If we fail to stop our own approaching tsunami
of red ink, then the futures of our children and our
grandchildren will be damaged by our negligence.
It's certainly not going to be easy. I hope very much that
the President's appointment of a council, of a task force to
look at this issue, will produce real results. It's clearly
time to reassess our national priorities, to make the hard
decisions, and to set a new course.
Mr. Secretary, the Department of the Treasury plays a
critical role in managing the Federal Government's finances--
the critical role--and in attempting to reinvigorate our
economy. I look forward to working with you and with the
chairman as we consider your budget request for fiscal year
2011.
Thank you.
Senator Durbin. Thanks, Senator Collins.
Secretary Geithner, welcome. The floor is yours.
STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY,
DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman. And thank you,
Ranking Member Collins. Thanks for having me up here today.
Mr. Chairman, I think you first showed me that chart in
January of this year, and I think the tragedy of this crisis,
this recession, this housing crisis, is that there are
communities all across the country that look similar to that,
and there is a lot of hardship and pain still ahead as we try
to dig our way out of this mess and repair the damage caused by
the recession.
Today, as you both said, the full Senate begins debate on
landmark legislation that'll protect American families, limit
risky activities on Wall Street, and end the perception that
any firm is too big to fail.
Now, over the past weeks, opponents of reform, in the
industry and elsewhere, have tried to convince the American
people that these reforms will either hurt Main Street or help
Wall Street, or both. Those arguments are not going to work,
because they aren't true. These are tough reforms, they'll
provide tough protections for consumers, for homeowners, for
investors--rules with teeth--they will help create greater
certainty for all businesses, and they will restore the
financial system to its proper role of providing financing for
Main Street businesses across the United States.
Now, I've submitted written testimony that describes in
detail the important proposals in Treasury's budget request for
this year. And I'd welcome a chance to discuss those, but I
wanted to just spend a few minutes, in my opening remarks, Mr.
Chairman, responding to your suggestion that we talk a little
bit about the housing programs and our financial programs, that
are so important to recovery.
As, of course, you all know, the damage from the housing
crisis has affected millions of Americans. It's affected those
who were taken advantage of by predatory lenders. It's affected
those who took out traditional mortgages, but still saw their
houses plummet in value. It's affected those who, as a result
of the broader recession, have lost their jobs and, because of
that, are facing foreclosure. And solving these problems is
going to be critically important to providing a stronger
recovery.
For most Americans, of course, their house is their most
important financial asset. And as the crisis wreaked havoc on
household wealth, the administration moved quickly to protect
this critical component of financial security.
Beginning in February, the administration, working with the
Federal Reserve, undertook a series of programs to help
stabilize housing prices, bring down mortgage interest rates,
and reduce foreclosures. Together, Treasury and the Fed
purchased more than $1.4 trillion in agency mortgage-backed
securities. We put substantial additional financial support in
place to stabilize the GSEs. And these actions helped reduce
mortgage interest rates to historic lows. And, through those
efforts, we helped more than 4 million American homeowners
refinance to take advantage of lower interest rates, to lower
their monthly payments, saving an estimated $150 per month,
more than $7 billion, cumulatively, in the past year.
Now, the administration's Home Affordable Modification
Program has now offered trial modifications to more than 1.4
million Americans. This represents--and this is very important
to highlight--this represents roughly three-quarters of
Americans estimated to be eligible for this program today.
About 1.2 million homeowners have begun trial modifications
and seen an immediate reduction in their monthly mortgage
payments, by, on average, just more than $500 per month.
I want to underscore that this program, this modification
program, is a program designed to help a portion of borrowers
at risk of foreclosure. It is not designed for, or available
to, borrowers who are speculated in real estate, who are at
risk of losing a vacation home, who took out loans above the
limits established by Fannie and Freddie, or have a monthly--
mortgage payment already lower than 31 percent of their income.
We announced, as you said, Mr. Chairman, a series of
enhancements to the program, in the last few months, that are
designed to give us increased ability to reach the goal of
reaching 3 to 4 million homeowners at risk of foreclosure over
the next 3 years. These changes will expand the program's reach
to assist unemployed homeowners, help more Americans who owe
more than the mortgage to--their home is more than the current
mortgage on their home, and provide greater protections for
homeowners at risk of foreclosure.
The administration's hardest-hit fund also provides $2.1
billion to housing finance agencies in 10 States that
experience--have experienced the highest--the worst combination
of high unemployment and home-price declines.
I want to make it clear today that we do not believe that
servicers are doing enough to help homeowners; they're not
doing enough to help them navigate the difficult and often
frightening process of avoiding foreclosure.
We're concerned by the wide variation in performance we see
across servicers, by the countless frustrated phone calls we've
received from borrowers, by reports that servicers have
foreclosed on potentially eligible homeowners, or that they
have steered those borrowers away from HAMP modifications into
banks' own modification programs, that they have lost
documentation, or claimed to lose documentation, and that they
are not responding adequately to the needs of responsible and
increasingly desperate homeowners. None of this is acceptable,
and we are working very hard to make sure that servicers do a
better job of holding up their end of the bargain.
We're conducting targeted index--indepth compliance
reviews. We're compelling servicers to reexamine groups of
mortgagers--mortgages, or their entire portfolio of mortgages,
for eligibility. And in circumstances where services are not
complying with their obligations, we will withhold incentives
or demand their repayment.
And we will soon publish much more detailed data on the
performance of services, to hold them accountable to the
public, so that Members of Congress and homeowners in your
communities can look, for themselves, at the performance--
detailed measures of performance of these servicers.
Now, we're going to continue to work to refine these
programs to reach as many borrowers as possible, and we welcome
your input, of course, and that of the subcommittee.
Let me just conclude with a brief update on our efforts to
repair the rest of the financial system.
The steps we've taken, including those authorized by
Congress in the Recovery Act, alongside actions by the Federal
Reserve and our policies to stabilize the financial system,
have helped put the economy on a path to growth, and broke the
back of the financial crisis.
Through these policies, we have substantially reduced the
cost of borrowing, the cost of a loan to buy a house or a car,
to build a business or a new school has fallen dramatically. We
have placed--replaced taxpayers' funds with private capital,
and banks have repaid the bulk of TARP funds, with interest.
And we've been able to do this at a much lower cost than anyone
anticipated.
A year ago, we estimated the costs of these efforts would
be more than $500 billion. Our latest estimate conservatively
puts the cost at a--roughly $117 billion, or less than 1
percent of gross domestic product (GDP). And if Congress adopts
our proposed financial crisis responsibility fee that the
President proposed in January, the cost to the American
taxpayer, of the TARP program, will be zero.
Now, even with these improvements in the financial system,
we have to recognize that, in many areas--in commercial real
estate, for example, in parts of the housing market not
supported by Fannie and Freddie or the Federal Housing
Administration (FHA)--for small business in many parts of the
country, credit is still very tough to get. That's why we hope
Congress will be willing to work with us to enact legislation
the President has proposed to establish a series of programs to
help support small business lending, including a small business
lending facility, which will--this is designed to provide
support to small banks, in extending more credit to small
businesses.
I'm very grateful for the support of this subcommittee and
for the support you provide to make it possible for Treasury to
have the resources we need to carry out what is an enormously
complicated set of challenges.
And I just want to conclude by saying that I'm very
fortunate to work with a remarkably--group of talented,
dedicated people, career civil servants at the Treasury, who
are working very hard every day, doing enormously complicated,
difficult work under great stress in the service of goals we
all share, to help repair the damage caused by this broader
recession.
Thank you for having me here.
I wanted to say, Senator Collins, just quickly, in response
to what you--the point you began with. This--these housing
programs were not designed to help banks. Banks--all banks have
a set of other types of modification schemes that they
initiated a long time ago, and they're still pursuing.
Generally, those modification schemes, in our experience, have
not been nearly as favorable to the homeowner as the
modification schemes that we put in place when we came into
office. It's hard to measure that, because there's no very good
data on it. But, the data available suggests that most of those
modification programs are, as I said, substantially less
favorable to the homeowner than the programs we've put out.
prepared statement
So, with that, Mr. Chairman, I'd be happy to take your
questions.
[The statement follows:]
Prepared Statement of Timothy F. Geithner
introduction
Chairman Durbin, Ranking Member Collins, members of the
Subcommittee, thank you for the chance to testify about the President's
fiscal year fiscal year 2011 budget for the Department of the Treasury.
Treasury plays a critical role in the day-to-day lives of
Americans. We disburse Social Security checks, distribute tax credits
to stimulate the economy and manage the finances of the United States
Government. Under the leadership of President Obama, we have used
authority provided by Congress to help responsible homeowners, promote
investment in underserved communities, and stimulate lending for the
small businesses that create jobs across the country. As we emerge from
the worst financial crisis in generations, Treasury's role in both
protecting the financial security of Americans and our efforts to
stimulate the economy will continue to be essential to the nation's
recovery.
Treasury's fiscal year 2011 budget seeks to invest in four areas:
repairing and reforming the financial system to make it safer and help
assure that its benefits are broadly shared; boosting voluntary
compliance with our tax code to pay for vital government functions;
advancing our global economic interests and national security; and
rebuilding the Treasury's professional staff.
The focused investments in Treasury's budget request will support
our key goals of furthering efforts to spur job creation and private
investment, stabilizing the housing market and financial sector, and
reinforcing strong, broad-based economic growth. I look forward to
discussing some of the details of our budget request with you today.
economic recovery and crisis response
While substantial challenges remain for the economy and financial
system, the broad strategy that this Administration has adopted to
address a historic recession and contain the financial crisis has been
effective.
A year ago, the American economy was shrinking at an annualized
rate of more than 6 percent. The Administration responded with strong
policy actions, including the American Recovery and Reinvestment Act
(``Recovery Act''), the Financial Stability Plan, and programs aimed at
supporting housing markets. The economy began growing in the second
half of 2009 and grew nearly 6 percent at an annual rate in the fourth
quarter. The Council of Economic Advisors has compiled a range of
private estimates that indicate the Recovery Act has saved or created
somewhere between 1.5 million to 1.9 million jobs through the first
quarter of 2010.
Because roughly one-third of the overall package consists of tax
cuts, Treasury has played a substantial role in the implementation of
the Recovery Act. The tax cuts include the Making Work Pay tax credit,
which cuts taxes for 95 percent of America's working families, as well
as important tax cuts for small businesses. In addition, the tax
credits for clean energy and infrastructure in the Recovery Act have
led to billions of dollars in targeted investments for these crucial
sectors. Finally, Treasury has worked to implement the Build America
Bonds program, which has supported over $90 billion in new financing
for state and local governments' capital projects. In a recent report,
we note that Build America Bonds have saved state and local
governments' more than $12 billion.
In February of last year, I announced a strategy to stabilize our
financial system and encourage banks to raise private capital to
replace the Troubled Asset Relief Program (TARP) investment in order to
be able to absorb the losses they faced in a severe crisis. The stress
tests of our largest financial institutions provided the transparency
and confidence necessary for those institutions to raise substantial
capital in private markets. Since the results of the stress tests were
announced, these institutions have raised over $150 billion in high-
quality capital and over $75 billion in non-guaranteed unsecured debt.
Treasury has already recovered two-thirds of TARP investments in banks,
earning more than $19 billion on those investments through dividends
and warrants. Today, the American government has a dramatically smaller
investment in banks than a year ago because of this Administration's
policies.
The expected cost of our financial stabilization efforts has also
fallen sharply since last year. In President Obama's fiscal year 2010
budget, as transmitted in May 2009, the projected impact of financial
stabilization efforts on the deficit was over $550 billion, including
TARP and a reserve in case of continued instability. Today, the
Treasury expects that impact will be less than 1 percent of GDP. And,
if Congress adopts the President's proposed Financial Crisis
Responsibility Fee, American taxpayers will not have to pay one penny
for the cost of TARP. Treasury will continue its efforts in these areas
until recovery is firmly established and the financial system is
repaired and reformed.
treasury's budget
As the steward of the nation's finances, Treasury is well aware of
the fiscal constraints America is facing. As we put together this
year's budget request, we placed a priority on identifying potential
savings.
We made a series of tough choices. In some cases, we decided that
it was necessary to terminate well-intentioned and sometimes popular
programs because they aren't working or are duplicative. In others, we
concluded that programs are worthwhile, but only if funding is
accompanied by fundamental reform. In still others, we chose to seek
your approval to shift the cost of programs from all taxpayers to those
who benefit directly from the programs.
In the end, Treasury came up with nearly a half billion dollars in
savings and revenues from bureaus and offices throughout the
Department. Among the proposals:
--Fund the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the same
way as most other regulatory agencies--through fees on the
regulated industries--at a savings to taxpayers of $106
million;
--Save the Community Development Financial Institutions (CDFI) Fund
$105 million by not funding its Capital Magnet Fund and Bank
Enterprise Award in the coming year;
--Save the IRS nearly $23 million through increased e-filing and
another $20 million by eliminating the automatic mailing of tax
booklets to taxpayers;
--Save $10.6 million in the Department's Headquarters Offices budget
through efficiencies such as improved technology contracting
and space utilization; and
--Cancel $62 million in unobligated balances from the Treasury
Forfeiture Fund.
The result of our efforts is the targeted, constrained budget that
you have before you, a $13.9 billion request for the Department's 10
appropriated bureaus.
Our budget request includes a $474 million, or 3.5 percent,
increase over fiscal year 2010 enacted levels. This budget includes
targeted investments in the Internal Revenue Service (IRS), the CDFI
Fund, global economic and national security efforts, and institutional
capacity. These key areas of investment in the fiscal year 2011 budget
will be crucial to addressing the challenges our nation faces, and I
would like to turn to how each will help us meet our increased
responsibilities, achieve our immediate goals, and perform our core
missions.
improving the irs
The Internal Revenue Service is vital to the financial well-being
of the nation. As the government's revenue collector, it raises the
money that builds our roads, improves our health, and secures our
nation.
Treasury's budget request for the IRS reflects our understanding
that administering a tax code involves not only collecting payments and
keeping records, but also increasing compliance with our tax laws.
To increase tax compliance we will bolster international
enforcement, regulate tax preparers and improve the services that the
IRS provides. To work effectively, all of these will depend on
completing a long-running effort to modernize IRS technology.
Our budget request provides nearly $250 million for new enforcement
initiatives aimed at reducing international tax evasion and
noncompliance by businesses and high net worth filers. By the time
these measures are fully in place, we estimate that they will produce
additional tax revenues of nearly $2 billion a year. This will mean $9
in additional revenue for every additional enforcement dollar spent.
The budget request includes a number of legislative proposals
including repeal of a requirement that indebted taxpayers make partial
payments before starting negotiations with the IRS over how to handle
their past due bills, and getting third parties to report more about
payments to businesses. These adjustments would be relatively
inexpensive to implement, impose little additional burden on taxpayers,
and increase collections by an average of $2.6 billion a year.
We also are working to begin regulating tax return preparers. Given
that the IRS estimates there are between 900,000 and 1.2 million
preparers operating in the United States, with many handling hundreds
of individual filers, rules limiting fraud and errors by preparers
would have a multiplier effect of improving compliance by millions of
taxpayers, and would do so at minimal additional cost.
To get taxpayers to voluntarily comply with our tax laws requires
more than tougher enforcement; it requires improved service. The budget
request includes a targeted investment of $46 million to improve
taxpayer services. The IRS now receives more than 100 million service
calls a year, so we propose $21 million to improve the answer rate for
the IRS's 1-800 telephone lines.
Additionally, we propose $25 million to upgrade the agency's
website, IRS.gov. This will improve the agency's telephone service
levels by encouraging taxpayers to turn to the web for services. It
will also work in tandem with a multi-year effort by the IRS to
encourage taxpayers to file electronically. Treasury estimates that e-
filings will save the agency almost $23 million in the coming fiscal
year, effectively paying for the new investment in the website.
To improve enforcement and service, the IRS must complete a decade-
long upgrade of its technology. That's why our budget request includes
a $168 million investment to finish a new centralized database that we
believe will double the speed of refunds to taxpayers, speed resolution
of taxpayer issues, and allow for steadier mailing of tax notices to
smooth out service-damaging spikes in telephone call volumes.
reform and investment
As we recover from the financial crisis, it is important that we
put in place financial reforms that will protect consumers, investors,
taxpayers and the entire economy from the risk-taking that produced the
financial crisis. The House of Representatives has already passed a
strong financial reform package and the Senate is moving strong
legislation to the floor, and we look forward to continue our work with
Congress to produce a package for the President's signature. But as we
work to repair the financial system, it is important that we address
the economic needs of the hardest hit communities.
The fiscal year 2011 budget provides the CDFI Fund with $250
million for the coming fiscal year. This includes $140 million for its
flagship financial assistance awards to CDFIs, an increase of $32
million, or 30 percent, from the current fiscal year. This funding
level is expected to leverage private sector capital by CDFIs and
result in loans, investments, financial services and technical
assistance to underserved populations and low-income communities.
This translates into significantly more lending to support small
businesses and microenterprises, first time homeowners, and the
development and rehabilitation of low-income housing and community
facilities, such as charter schools and child care centers.
The CDFI Fund reports that recent award recipients helped finance
over 10,000 businesses and over 1,600 commercial real estate properties
in 2008. CDFIs also reported that they helped create or maintain over
70,000 full-time jobs in that period. While we have made additional
funding available for the CDFI Fund's financial and technical
assistance awards to CDFIs, we have also refocused our priorities to
support two critical new areas: (1) expanding access to financial
products and services through the Bank on USA initiative; and (2) a
program that is part of the First Lady's campaign against childhood
obesity, the Healthy Food Financing Initiative (HFFI).
In order to make funding available for these initiatives and for
the Fund's core financial and technical awards, we propose to save $105
million by not funding the Capital Magnet Fund or Bank Enterprise
Awards programs in fiscal year 2011.
The Bank on USA initiative would help expand access to mainstream
financial services to help families avoid predatory lending traps and
high fees for check-cashing and other alternative financial services.
The initiative will promote broader access to bank accounts, basic
credit products, and other financial services to help these families
build savings and solid credit histories.
HFFI is a partnership between Treasury, the Department of
Agriculture, and the Department of Health and Human Services that will
provide over $400 million in financial assistance to expand access to
nutritious foods in urban and rural communities that have limited
access to healthy foods. The budget includes an additional $25 million
in grant funding through the CDFI Fund and $250 million of New Markets
Tax Credit (NMTC) authority for HFFI. This initiative will help to
promote a range of financing to expand access to nutritious foods,
including developing grocery stores and other small businesses selling
healthy options in communities where healthy foods are not readily
available.
As noted, a key component of HFFI is the New Markets Tax Credit
program. The NMTC is another critical tool administered by the CDFI
Fund which helps extend the benefits of recovery to hard-hit
communities. This tax credit helps attract investment to these
communities by reducing the risks investors must take in putting their
capital into them. It does so by letting investors claim a 39 percent
credit against their Federal income taxes in return for making equity
investments in Treasury-certified Community Development Entities
(CDEs). CDEs, in turn, invest in small businesses and other projects
that serve hard-hit communities.
To date, NMTC recipients have invested over $15.6 billion in
distressed communities across the country. That financing has helped
small businesses, manufacturers, grocery stores and retail centers,
alternative energy projects, healthcare centers, charter schools and
job-training sites. It has helped create, save or support hundreds of
thousands of local jobs.
The budget requests $5 billion in NMTC authority in 2010, and
another $5 billion of authority in 2011, of which $250 million will be
used to expand financing for the development of healthy food retailers
as part of HFFI.
We are proposing reforms to make the credit more effective, such as
expanding the types of taxes against which the credit can be used. As
is the case for many types of investments, investor capacity to use
NMTCs has fallen since the recent crisis. To help attract a broader
array of investors, our budget request would change the credit so that
it can be used to offset not only investors' regular Federal income
taxes, but also the taxes they owe under the Alternative Minimum Tax.
In addition, Treasury is working to simplify rules for the NMTC to
improve the overall attractiveness and effectiveness of the credit as
well as to make the credit work better for small businesses. Treasury
and the IRS are actively pursuing reforms that would make it easier for
CDEs to provide more working capital loans and other investments in
small businesses in distressed communities. In all of these efforts,
our aim is to strengthen the NMTC's ability to attract investments and
jobs to hard hit communities.
global economic interest and national security
Treasury also advances U.S. economic interests abroad, advocates
international policies that help create American jobs and domestic
economic growth, and protects against foreign threats to our economic
and financial well-being. The recent crisis elevated the importance of
these tasks.
The budget provides $44.4 million to support the Office of
International Affairs. This includes a $6.7 million increase to support
our international coordination efforts in forums like the G-20.
Although not directly under the jurisdiction of this Subcommittee, the
Treasury's budget request includes approximately $3 billion to meet our
obligations to the International Financial Institutions, which support
the President's recent commitments in Copenhagen to help combat climate
change, contribute to a multi-donor trust fund to combat global hunger,
and meet our international obligations.
Treasury plays a critical role in protecting our national security
through the Office of Terrorism and Financial Intelligence (TFI). The
budget provides $203.1 million for TFI, which includes the Financial
Crimes Enforcement Network (FinCEN). This includes $4.7 million in new
investments to improve TFI's ability to target proliferation networks
and expand Treasury's role in coordinating financial intelligence
across the nation's overall intelligence community. TFI works to
deprive proliferators, terrorists, narcotics traffickers, corrupt
foreign officials and other illicit actors of the money and financial
access they need to carry out or profit from their activities.
To do this, TFI uses financial information to map out the support
networks of these dangerous actors, works to educate financial
institutions worldwide about the risks of doing business with them,
administers and enforces financial regulatory authorities that protect
the integrity of our financial system, and collaborates with our
foreign partners to set standards to help the international financial
system avoid illicit activity.
For example, TFI's efforts to crack down on the financing of the
proliferation of weapons of mass destruction have led to financial
institutions worldwide cutting off the banks, companies, and
individuals that are integral to Iranian, North Korean and Syrian
nuclear ambitions. In the case of Iran, all U.S. banks, nearly every
major European bank, as well as large banks in Asia and the Middle
East, have cut or severely limited their ties to that country.
TFI's efforts have also helped to put Al-Qaida in its worst
financial position in years. Its core leadership is struggling to raise
and sustain funds.
In pursuing all of these efforts, protecting the integrity of our
own financial system is key. That is why, even as we continue our
international efforts, Treasury is marshaling state, Federal and
private sector resources to crack down on mortgage fraud and loan
modification scams, and is working to address emerging threats and
vulnerabilities in new technologies and financial products.
rebuilding treasury's institutional capacity
Treasury entered the recent financial and economic crisis with the
professional ranks of many of its key policy offices seriously
depleted. Responding to the crisis has put a severe strain on these
units and made clear the need to rebuild our professional ranks to
assure that Treasury can deal effectively with the issues that it must
tackle.
We entered the worst economic downturn in generations with only 25
economists working in the Office of Economic Policy, a third fewer than
in 2000. To put this in some prospective, the comparable office in the
Department of Housing and Urban Development has 140 economists, the
Department of Agriculture has 330 economists, and the Federal Reserve
System has over 500 economists.
We arrived on the doorstep of the worst financial crisis since the
Great Depression with our Financial Markets and Financial Institutions
units within Domestic Finance each staffed by about 20 people, and a
Tax Policy office whose staff had dropped by one fourth since 2000.
Treasury has a tradition of operating with a lean staff. We are
proud of this fact, and have no intention to change it, especially
given the severe fiscal constraints that the nation faces. But we must
reverse the erosion of the Treasury's basic intellectual capital or we
will be unable to meet the nation's economic challenges. We began the
process of making targeted investments in upgrading professional staff
this fiscal year, and we need to continue it in the coming year.
Our budget request for fiscal year 2011 would provide the Office of
Domestic Finance with an additional $16.7 million to expand its staff
by 24, in order to build capacity to more effectively respond to the
aftermath of the financial crisis; promote stronger, more equitable
financial policies; and add expertise in securities market structure
and housing finance.
The request also provides an enhancement of $2.4 million to the
Office of Tax Policy to hire additional specialists to analyze emerging
tax issues and provide timely analysis of key fiscal and financial
issues.
Finally, we propose $2 million in funding to hire additional
economists for the Office of Economic Policy for swifter, more
effective analysis of economic trends and proposals. This sum would
also fund the creation of a data analysis unit to maintain the large
economic and financial databases used for Department-wide analyses.
These investments are very modest. We propose to add only six new
economists to our Office of Economic Policy, which would still leave
its professional staff below where it was in 2000. We propose to add
just eight new specialists to the Office of Tax Policy, which would
also leave its professional staff below 2000 levels.
Let me end where I did last year, with a word about the Treasury's
staff.
I have had the honor over the past year of leading a team of smart,
dedicated individuals who are working to make our government more
effective and our society fairer. They debate policies on their merits;
they do what is right and not simply what is expedient; and they draw
from the best ideas and expertise available. They are performing an
incalculable service to our country. In February, I joined IRS
Commissioner Shulman in Austin, Texas, to talk to the IRS employees who
were affected by the senseless attack on them and their co-workers,
like Vernon Hunter, who tragically lost his life in the attack. They
are a group of dedicated and committed public servants. This nation
owes them a debt of gratitude, and we owe them our respect.
Treasury has accomplished great things in the past year, but we
recognize that challenges still lie ahead. The targeted investments
proposed in this budget will provide the tools needed to meet those
demands.
Senator Durbin. Thanks, Mr. Secretary.
There are so many issues. Let me just echo what you've
said, that I think the financial stability act that we have on
the floor now, the Wall Street Reform Act, really is a step
forward. I'm hoping that we can, through the amendment process,
find a strong bipartisan majority to support this. This is
going to be an opportunity for the Senate to work together, and
I hope that we utilize it. But, I think the starting points are
right, and I'm glad that we're engaged now, on this bill,
directly.
So, it's been a year since the HAMP program; 230,000
homeowners have received permanent 5-year mortgage
modifications; an additional 1.4 million, that you mentioned,
received trial modifications. But, we also know that the
problem grows; 2.8 million homeowners, in this period of time,
received a foreclosure notice; 10 to 12 million mortgages face
foreclosure over the next 3 years; and 1 in 4 mortgages in
America is currently under water. And just today, the Woodstock
Institute reported that, in Chicago, the number of foreclosure
auctions this past quarter increased by 56 percent, compared to
the same period in 2009. I'm afraid that map might look a
little worse if we updated it.
And so, let me ask you a couple of questions. First, if I
can, we do have a problem, in that we don't require servicers
to reduce principal when it makes sense to do so, for the
servicer and the borrower. Can we expect to get the results
that we want until we reach a point when there's reduction of
principal? A followup question: Those who go into trial
modification--at the end of the trial modification, are they
deeper under water?
Secretary Geithner. Excellent questions. Let me just begin
by saying that the program we began with, which was designed to
make it more affordable to stay in your home, and reduce your
monthly payments to below 31 percent of your income, it does
reduce, substantially, your obligations over the life of your
mortgage. So, in--it is a form of reducing your obligations as
a homeowner. And, on average, for a typical mortgage, that
reduction in your full obligations is very substantial; it
could be 30 percent.
Now, in the enhancements to this program, we put in place
in March--we announced it in March, and we're in the process of
implementing--we were going to substantially change the
incentives so that--we're going to provide more of that relief
in the form of reduced principal payments. We think that makes
sense. We think it's a sensible evolution in the program. And,
as you said, it's going to take us a little bit of time, now,
to put this in place, because it's very complicated to do, but
we think that's an important step forward.
Now, it is true that this program, by design, was only--is
only able to reach a portion of people at risk of foreclosure.
And, as you and I have talked before, it's important to look at
the broad dimensions of the program, still.
Right now, across the country, there's roughly 5, 5\1/2\
million Americans who are more than 60 days past due on their
mortgages. As I said in my opening remarks, we have trial mods
in place for about 1.2 of those 5\1/2\ million. People ask,
reasonably, ``Why not more? Isn't that a measure of failure of
this program?'' But, it's important to know that that 5\1/2\
million homeowners includes a bunch of vacant properties,
people who were--homes occupied by people who were speculating
in real estate, second homes, homes above the Fannie and
Freddie limits supported by jumbo mortgages, or homes owned by
people who already have monthly payments they can afford to
meet. That reduces the eligible stock of existing homeowners
universe to about 1.8 million. So, we're now reaching, with
offers or trial mods in place, a substantial fraction of people
eligible now, and we expect to be able to reach more over time.
But, you're absolutely right, that only a fraction of those
trial mods have, so far, been converted into permanent
modifications. But, a trial modification is an immediate,
substantial economic benefit. From onset, you get an average
reduction in your monthly payments of over $500 a month. That's
a very substantial benefit, even in relation to many of the
things we did in the Recovery Act, for those homeowners. And we
are working very hard to make sure that as many of those trial
mods as possible will convert into permanent modifications, and
we're going to continue to work to make sure that we can reach
a larger fraction of homeowners at risk of foreclosure.
But, I started with those numbers, Mr. Chairman, as you
know, just to point out that, because of the damage caused by
this crisis, we are not going to be--and because of the
judgments many people made coming into this crisis--financial
judgments--we're not going to be able to reach all of those
people affected by that, but we're going to work as hard as we
can to reach as many as we can.
Senator Durbin. I'd like to ask you, at the risk of going a
minute or two over, here, about servicers, because it strikes
me that, if a mortgage foreclosure costs the lender some
$50,000, or more, the servicers may not be the losers in a
foreclosure; they may be the ones who are actually making money
in a foreclosure. Number one.
Number two, we'll have testimony from Ms. Van Tiem, on the
second panel, that, in her experience, in this part of Chicago,
her clients wait on average, 6 to 9 months to get response from
servicers and often submit paperwork four to five times. I've
met people like this. And you think to yourself, ``Well, maybe
they didn't send everything they needed to, or maybe they
didn't send it at all.'' But, what we're finding is, these
servicers just keep telling people, ``Do it all over again. Do
it all over again,'' trying to wear 'em out.
You have a hotline that's supposed to be hearing about
complaints. I'd like to know what your response is to this
situation, and what your hotline is hearing from America, in
terms of the problems people are running into when they face
foreclosure.
Secretary Geithner. Mr. Chairman, we're hearing exactly the
same things that you're hearing. And you're right about the
extraordinary level of complaints we get about the
responsiveness of servicers to people who are looking for help.
Now, the good news is--I'll just offer you two forms of
good news--one is, the overall number of those complaints has
come down very substantially, over the last several months, in
response to the efforts we've put in place to substantially
increase the quality of the service banks are providing. But, I
think, more important, that, as I said in my opening remarks,
we are going to put, in the public domain, bank by bank,
starting, we hope, in June or July, a very detailed set--much
more detailed set of data on performance--responsiveness to
calls and complaints, the nature of complaints by institution,
and measurable, verifiable metrics, numbers, data, on how good
a job banks are doing.
Senator Durbin. Are you going to name names in this?
Secretary Geithner. We are. And we're going to do it by--
bank by bank.
Senator Durbin. And when----
Secretary Geithner. And we're going to----
Senator Durbin [continuing]. Will this be available?
Secretary Geithner. Well, we're going to--we do a monthly
report, and I think our next one comes out in a few weeks.
We'll provide the end of data--end-of-April data. In that
report, we're going to lay out, in detail, what we're going to
publish, bank by bank, and the data will be in the public
domain--I think, sometime in June or July. That's what we're
going to work toward.
Senator Durbin. Thank you.
Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Mr. Secretary, either you missed my point in my opening
comments or perhaps I did not explain my point clearly. My
point was only that many more homeowners in Maine have
benefited from the initiatives taken by our community banks
than have benefited from the Treasury program. I want to leave
that issue, because there are so many others what we need to
cover today.
In January, the Director of the Congressional Budget Office
(CBO) testified before the Budget Committee, as follows,
``There is just one pool of Government money, and everything
else is accounting treatments to keep track of various
purposes. If more is spent through TARP, then that is just more
money that is spent, more that is borrowed, more that goes onto
the Federal debt.''
Do you agree with that statement?
Secretary Geithner. Absolutely. Also, the inverse is true,
of course. The less we spend in TARP, the less we borrow, the
lower our future deficits, the lower our debt burden. But, of
course I agree with that.
Senator Collins. General Motors (GM) is currently running a
commercial concerning its debt repayment. And in that
commercial, the CEO says, ``I'm here to announce that we have
repaid our Government loan in full, with interest, 5 years
ahead of schedule.'' You put out a press release on that loan
repayment, saying that you were encouraged that GM has repaid
its debt well ahead of schedule. In fact, however, GM still
owes the American taxpayers billions of dollars, is that not
correct?
Secretary Geithner. You're--absolutely true. What GM did is
to repay the loans outstanding, substantially ahead of when we
expected. But, you are absolutely right, we still have
substantial equity investments in both GM and Chrysler, and
still face, of course, some risk of loss on those investments,
although a small fraction of what we anticipated.
Senator Collins. Don't you think that the impression left
by that television ad and by your statement is that the
taxpayers' burden has been lifted and GM has repaid all the
money it owes?
Secretary Geithner. Senator, I have not seen that ad, but
I've heard exactly the same concerns expressed about that ad in
my building. I do not believe we left that impression in our
press release. In fact, again, I want to make it clear that we
provide very detailed information, on a regular basis, about
what we think our remaining risk of loss is, and return, on
these programs; and we do it in very considerable detail--by
autos, American International Group, Inc. (AIG), the banks, et
cetera--for exactly the reason you said. We think it's very
important that people can see for themselves--and we actually
give people the information to judge for themselves what that
scale of loss is. And you're absolutely right, we still have
substantial equity investments left in those companies, and, of
course, as a result, some risk of loss, although a fraction of
what we feared.
Senator Collins. Did GM pay back the taxpayers from its
earnings?
Secretary Geithner. I'm not quite sure how to answer that.
I don't think I could answer it quite this way, because they
haven't reported earnings for this period of time yet. But,
perhaps, Senator Collins, I could say it this way. Because we
forced those companies, as a condition for assistance when we
came into office, to go through a very substantial, very
difficult, and very demanding restructuring program, they are
now emerging financially stronger, stronger underlying
financial position, than any of us expected; and therefore,
they are going to be in a position to repay the taxpayer much
more quickly than we thought. And we find that very
encouraging. But, of course, as always, in an abundance of
caution, we try to emphasize the fact that, you know, we're all
going through a challenging period, across the economy still,
it's early still, and we're--still have substantial exposure
out there.
Senator Collins. Wasn't the payment, in fact, made from an
escrow account that was drawn from the Treasury?
Secretary Geithner. Senator Collins, I think what it would
be fair to say is, we--at--went through a very careful process
of figuring out how best to stabilize the automobile industry,
put these firms through the necessary restructuring, reduce our
risk of loss, reduce the job loss. It was avoidable, in this
case. And, in that process, we provided substantial additional
assistance to what President Bush initiated. And we're getting
a portion of that back sooner than we thought because these
firms are doing better than we had feared and hoped. I think
that's the best way to respond to it.
Senator Collins. I think we can all be happy that GM is
beginning to repay the money. But, if, in fact, as the special
inspector general for TARP has told me, GM has used one pot of
Federal money to pay back another Federal loan, then I think it
is very misleading.
Secretary Geithner. Well, Senator, as I said, I am always
very careful to underscore that, even where we're making
progress, we have a lot of challenges ahead, and we provide
very careful, enormously detailed estimates of our remaining
exposure in the financial system all the time, for exactly the
reasons you've said, to make sure that we're being open and
candid. People can make their own judgments about what,
ultimately, we're going to face, in terms of potential losses
in return.
Senator Collins. Well, let me end this round of questioning
by going back and reading you the exact words in the GM
commercial that is running now, ``That is why I'm here to
announce we have repaid our Government loan in full, with
interest, 5 years ahead of the original schedule.'' Do you
think that that's a misleading statement?
Secretary Geithner. Well, Senator, as I said, I've not seen
that commercial, haven't read it, but, as I said to you
initially, I've heard the same concerns expressed in my
building. And, as I said, we're--always trying to be very
careful to make it clear that we still have substantial equity
investments out there in these companies. And, although we're
much more optimistic today about what return we're going to get
on that, we have substantial exposure still.
Senator Collins. Mr. Chairman, I was going to bring in the
commercial and play it at this hearing, but I was positive that
the Secretary would have seen the commercial. And I have a
feeling that he is familiar with the issue and transcript, and
I'll certainly share that with him, and perhaps we can get a
fuller answer on the record.
Thank you.
Senator Durbin. He just doesn't have enough time to watch
television. That's one of the problems.
Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
Following--Mr. Secretary, thank you for coming, and thank
you for your service--to follow up Senator Collins' question,
How much money does General Motors still owe the United States
Government?
Secretary Geithner. Senator, I don't have those numbers
with me here. I'd be happy to provide them in detail to you.
But, we have a substantial share of--we own a substantial
share of the company today, unfortunately.
Senator Alexander. Well, that was going to be my next----
Secretary Geithner. Yeah.
Senator Alexander [continuing]. Next question. But, it's
$60 or $70 billion. It's----
Secretary Geithner. I don't know--I don't think it's that
high, but--you might be right, but, again, I don't have the
numbers with me today. I'll be happy to provide them in
writing.
[The information follows:]
As you know, this Administration and the prior
Administration provided $49.5 billion in total to GM. On April
20, the company repaid the balance of the $6.7 billion of that
investment that was in the form of a loan. In addition, GM has
paid $615 million in interest and dividends to the Treasury.
The remainder of our investment is represented by the
Treasury's ownership of $2.1 billion of preferred stock and 304
million shares or 60.8 percent of GM's common equity. No market
valuation exists for the Treasury's investment, given that GM's
preferred and common stock are not publicly held or traded yet.
However, Treasury's audited financial statements provided a
value by program as of September 30, 2009. In this case, the GM
investment was grouped with the GMAC and Chrysler investments.
The estimated value of all these investments was $43.3 billion,
which represents an expected loss as of that date of $30.5
billion. This was updated to an expected loss of $24.6 billion
in a May 21 press release (publicly available on
www.financialstability.gov).
Senator Alexander. Do you know how many common equity
shares of General Motors the United States taxpayer owns?
Secretary Geithner. Roughly 60 percent----
Senator Alexander. Roughly.
Secretary Geithner [continuing]. Of the outstanding shares,
I believe.
Senator Alexander. What are those shares worth today?
Secretary Geithner. They are--again, I don't have the
estimates with me today. I'd be happy to provide them to you. I
will say--and you'll see it when we provide our latest
estimates of the valuation of these investments--they are
worth, of course, substantially more than they were,
substantially more than we expected. And, Senator, there is a
reasonable chance--now, you know, this is an uncertain world we
live in, a lot of challenge to that--but, there is a reasonable
chance, now, that we will recover all of the dollars we put
into these companies after January 26.
Senator Alexander. How long will it take--how long does the
Government plan to hold these shares?
Secretary Geithner. Not a day longer than necessary. We are
planning to unwind our investments in these companies as soon
as we can. And we're going to be guided, Senator, across the
financial system, by the same basic principle. We want to get
out as quickly as we can, but, of course, reduce any risk of
loss to the taxpayers that we can. And that's a--sometimes
those objectives are in conflict. We'll have a different path
to exit across the financial system.
Senator Alexander. The----
Secretary Geithner. But, as quickly as we can.
Senator Alexander. The former chief executive, Mr.
Anderson, told a group, on a conference call, about 1 year ago,
that it's such a large block of shares that it might take a
number of years to dispose of those shares properly over a
period of time. Is--that sound reasonable?
Secretary Geithner. That is certainly possible, but, just
on the basis of my latest--our latest conversations about this,
again, I think that the time horizon for us to have a full exit
is much shorter now, again, than we had expected or feared,
because we've seen such a substantial improvement in the
underlying financial conditions of the firms.
Senator Alexander. Wouldn't the fastest and best way to get
the Government out of the car business be to simply declare a
stock dividend and give the shares to the 150 million people
who paid Federal income taxes this month?
Secretary Geithner. Well, in effect, that's--you could say
that's what we're doing, because the investments we have in
these companies today, and across the financial system still,
are investments, of course, of the American people. And where
we are able to generate a positive return on those investments,
they reduce, ultimately, the overall obligations the American
people have. But, in effect, that's what we're doing.
Senator Alexander. Well, it is and it isn't. I mean, I
think there's a widespread feeling in the Congress--and I know
many Democrats agree with Republicans on this--we'd like to get
the Government out of the car business--you said, yourself--as
soon as possible. To unload such a large number of shares takes
a while. There's a--not a common, but a well-understood
procedure in corporate finance called the ``corporate spinoff''
or the ``stock dividend.'' Procter & Gamble did it with Clorox
in 1969; Time Warner, with Time Warner Cable; PepsiCo with its
restaurant business. It's whenever you have a holding company
or a major company that acquires a subsidiary which has nothing
to do with its main purpose, and they say to the shareholders,
``Okay, it has nothing to do with what we're supposed to be
doing, so we're going to give it to the shareholders.''
Well, the United States Government has no business being in
the car business, so why don't we give----
Secretary Geithner. Right.
Senator Alexander [continuing]. It to the shareholders? Why
don't we give it to the taxpayers? It seems to me that that
would create a--you know, a fan base like the Green Bay Packers
fan base, you know, of investor/owners who'd cheer on the next
Chevrolet, 150 million of them. It would stop this
incestuousness of Congressmen calling up people from General
Motors and say, ``Put a plant here,'' you know, ``I'm your
owner,'' and it would avoid the problem of having to deal with
this over several years. You could just do it, and then each of
us who paid taxes would have a share, too. We could put it
away, use it for college. Why wouldn't--why don't we give the
stock to the taxpayers who paid for it? It's their money. They
ought to own it.
Secretary Geithner. Senator, again, we'll--happy to--we're
open to any ideas that help us get out as quickly as we can, at
least cost to the taxpayer, and I'd be happy to talk to you
about it in more detail anytime. But, I want to just underscore
what you said. We are not--do not want to be in the business of
the automobiles, as--we should never have been in it, do not
want to be in it, came in there reluctantly, in the face of the
worst financial crisis in generations, and we want to get out
as quickly as we can. And we are being very careful, Senator,
while we're in this reluctant position, not to make--to make
sure we are not involved, in any way, in the bases of these
businesses for how to run their companies. We've been very
successful in doing that. You can ask any of the people
involved. And we've been honoring that commitment.
Senator Alexander. Well, thank you, Mr. Secretary. But, I
believe the best way would be to declare a stock dividend and
give the shares to the taxpayers who own it, and then you'd be
out of the business, and you could attend to the other issues
that Senator Durbin and Senator Collins want to ask about now.
Thank you, Mr. Chairman.
Senator Durbin. Senator Alexander has raised this issue on
the floor, and made several speeches on it. I know he feels
very passionately about it. I'm glad he had a chance to ask the
question today. I'm sure we're going to see some more speeches.
Senator Alexander. Thank you, Senator Durbin.
Senator Durbin. I'd like to ask the Secretary a little
different question. And that is--we brought up, in last year's
hearing, the fact that we now use credit cards more and more
for people to pay things to the Federal Government. And there
is a fee charged to the Federal Government as it is charged to
businesses which use credit cards--an interchange fee. And I'd
like to ask you, Mr. Secretary, in light of last year's
question, if you've considered the interchange fee paid by the
Federal Government to the major credit cards--for example, if a
family in Springfield, Illinois, decided to pay its income tax
liability through a credit card, the amount of money received
by the Federal Government would be diminished by the fee we
have to pay that credit card company for the use of their card.
These fees change by businesses. They are--some are negotiated,
and some are imposed, but there are different fees being paid.
But, I want to ask you specifically, What is the Treasury
Department doing to make sure that our Government--Uncle Sam--
isn't being taken advantage of when it comes to debit and
credit card fees? For example, for payment by check, there is
no added fee for the use of a check. For payment by debit card,
which is directly removing funds from the checking account,
there is a fee imposed. So, we're paying credit and debit card
charges against the Government. How much in taxpayers' dollars
could we save through interchange reform? How much are we
paying?
Secretary Geithner. Mr. Chairman, I believe that you've
required us--or you--the Congress has--to provide a report on
just this question, I think, both to measure the cost and to
examine ways to reduce those costs. We're in the process of
completing that report, and we're going to meet the deadline
established with it, which I believe is approaching soon. So,
we have a team of people looking exactly at this question;
understand the importance of it to you, and we're going to
provide a full report on an estimate of costs and, I hope, try
to be responsive to--not just trying to figure out how much it
costs us, but what--if we can do anything to reduce those
costs.
Senator Durbin. And if you could, perhaps after the
hearing, give me some indication of your schedule on that.
Second, totally unrelated question. Two months ago, I went
to Africa, visited four countries; one was Ethiopia. I had a
long conversation with President Meles, a very engaging and
interesting man, a real leader in Africa. I make a point, when
I visit a foreign country, to always ask one last question,
``Tell me about China in your country.''
It's a fascinating question, and a fascinating response, no
matter where you go. And here's what we're learning. The
Chinese are expanding their reach into the global economy in
every corner of the world. Where they can find resources--
energy resources, minerals, timber--they do business with that
country. Where they see the potential of a developing middle
class, a developing group of customers, they do business in
that country. If they find a potential for cheaper labor than
China, they do business in that country.
It is clear that they have a plan and a vision. The United
States does not. I would say--it is safe to say that we do not
engage Africa, for example, and developing nations, the way
China does, with concessional loans and other efforts to
ingratiate ourselves into the economies of these countries.
Ethiopia is now having stadiums and highways built by the
Chinese, with low-interest loans, and, not surprisingly,
decided that the telecommunications network for Ethiopia would
be based out of China in the future.
How do you view this, from your position as Secretary of
the Treasury, as we consider questions like the currency
valuation in China and our role in the developing world?
Secretary Geithner. Senator, I am a very strong supporter,
as is the President, in making sure the United States is
providing well-targeted, but substantial amounts of, financial
support to countries in--to developing countries, where you see
concentrated poverty, where we have huge economic/strategic
interests. And the scale of resources we provide, as a Nation,
to those countries vastly exceeds, of course, what--and what we
do now still exceeds, substantially, what China does.
But, you're raising an important question. And I think my
view on this is, we have to approach these basic questions with
the following two dimensions.
First, it is very important, and overwhelmingly more
important than anything else that we do, that we are working--
doing a better job, in this country, of supporting
manufacturing investment in American workers. And this
President has supported the largest amount, in terms of
investments, in terms of his support for research and
development, for innovation, for investments in new
technologies in energy, for example. And those things are very
important to the future of American manufacturing and helping
make sure, alongside reforms in education and elsewhere, that
we're emerging from this crisis stronger, as a country, more
competitive, better able to meet those broader challenges. And
those reforms, combined with what Senator Collins referred to,
which is to making sure that we dig out of this fiscal hole,
reduce our deficits sustainables over time, will be very
important to make sure that we're strong enough to sustain the
role we traditionally played around the world.
Now, of course, that's necessary. And you could say it's
not sufficient. So, I believe very strongly--and the President
does, too--that we need to make sure that we are working very
hard to make sure that American firms place a level playing
field, not just in China, but in countries around the world
where we compete with China, and many other emerging markets.
And that--as part of that effort, the--my colleagues in the
Cabinet that are responsible for trade are pursuing a very
aggressive strategy of trying to make sure that we are
increasing opportunities for American firms in China, that
American firms are subject to less discrimination or adverse
preference. And as China moves to increase growth from domestic
consumption sources, shifts to a strategy less dependent on
exports to the United States--which is very important to us, we
think it's very important that they renew the process of reform
of their exchange rate so that we allow the market to play a
greater role in determining the level of that exchange rate--
that's the basic strategy that I think is important. And you're
right to point out that China, like many countries, is playing
a much more active role now, not just in Africa, but in
countries around the world, that are not just resource-rich,
but that provide future markets for their goods.
Senator Durbin. Senator Collins.
Senator Collins. Thank you.
Mr. Secretary, Freddie Mac and Fannie Mae are major
financial institutions that contributed to the economic crisis
and had to be bailed out by the taxpayers. In fact, according
to CBO, taxpayers have already paid $91 billion to cover losses
at Freddie and Fannie, in 2009 alone, and CBO projects that the
long-term costs of bailing out Fannie and Freddie could exceed
$380 billion. The end of last year, you announced that Treasury
had lifted the prior $400 billion cap on further financial
support of Freddie and Fannie. Yet, the financial regulatory
reform bill that is before us on the Senate floor does not deal
at all with Freddie and Fannie, despite the prominent role that
they played in the collapse of our economy.
Shouldn't we be tackling reform of Freddie and Fannie?
Secretary Geithner. Absolutely. We made a judgment,
Senator, because of the scale of the challenges when we came
into office facing, that because fixing what was broken in the
housing market was going to be such an enormously complicated
task, and is a much more complicated task than simply figuring
out what to do with Fannie and Freddie--it involves the future
of the FHA and, of course, a range of other actions we've
traditionally taken in housing markets--and because housing
markets were going to be under stress for such a long period of
time, we thought it would better to do this in stages.
So, the first stage of reforms, which Congress is
considering today--Senate's considering today--are--you know,
they're very comprehensive and sweeping, but we thought it was
best to leave the important difficult task of reforming the
housing finance market to a second stage. And we are engaging
in a process now, with your colleagues in the Senate and the
House, through a process of hearings and public comment, to
explore a range of reforms to Fannie and Freddie.
You're right to emphasize how much they contribute to the
crisis, and reforming them is important. And let me just say,
as I've said in public before--testified--we are not--that's
not a system we can live with, going forward, and we're going
to have to fundamentally change the role they play in the
housing markets, going forward. It's just that our judgment was
we'd be better able to get it right, and get consensus behind
it, if we were further along in stabilizing this housing
crisis, things were less fragile. We thought we'd get better
reforms.
Senator Collins. The problem is--you brought up the FHA--I
just read that the losses for that agency are actually going in
the wrong direction; they're going up. It really concerns me
that we've yet to tackle these Government-sponsored
enterprises. They played a critical role in the collapse of the
economy. And I guess I don't know what we're waiting for. It
seems to me that should be part of the Federal financial
regulatory reform. They are large financial institutions, after
all.
Secretary Geithner. Well, Senator, again, I--you're
absolutely right to emphasize the importance in reforms, and
it's something we're going to have to do. But, it is a
enormously complicated, difficult thing to get right. And,
frankly, our judgment is, we're more likely to get it right if
we go through a careful process of testimony/public comment.
You know, we spent 1 year debating these broad reforms in the
financial system. It's going to take months to figure out what
to do on the broader future of the GSEs and the rest of the
housing finance complex. And--but, we're committed to doing it,
want to work with you on it.
But, I just want to underscore that, in the near term, we
are working very hard to make sure we're limiting the risk of
losses, going forward. And getting the reform right is going to
be about the future, preventing this from happening in the
future. In the meantime, we're working very carefully, very
hard, to make sure we're limiting risk of future losses in
these institutions, and that the market comes back and replaces
the exceptional role they came to play in the crisis.
Senator Collins. Does the Treasury have a set of
recommendations for reform?
Secretary Geithner. We've laid out some broad objectives
and principles. I've testified on some alternative models we
might take. But, we're going through a process of public
comment and testimony, to examine the full range of alternative
models. There's a lot of models to look at. Our system worked
very well for many decades, but, as you said and as you've
seen, we made some very damaging mistakes, as a country, in
letting them take on a huge amount of risk, without capital to
back up that risk and provide those returns to the
shareholders, not to the homeowners, and that's not something
we're prepared to tolerate in the future.
Senator Collins. It just seems to me that there's so much
that we should be doing in that area that is not that
complicated to figure out, such as capital requirements, such
as underwriting standards, such as having the Securities and
Exchange Commission (SEC) have more jurisdiction. Those are all
recommendations that have been around for a long time. And----
Secretary Geithner. But, we're--Senator, I agree with you,
and we're not waiting for reform on those things. On capital
and underwriting standards, and a range of other changes in how
they design their programs, we are on that, and working on
that, and not waiting for reform on those.
Senator Collins. And when do you expect that you will
present a plan for reform?
Secretary Geithner. Oh, it's probably going to take us
another 6 months, actually, I think, to do that. I'm not sure
exactly when. We'll do it as soon as we can. And again, I
think, if your colleagues on the committees, in Banking here in
the Senate, and Financial Services in the House, want to move
more quickly in examining the options, we're prepared to do
that.
Senator Collins. Thank you.
Senator Durbin. Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
Mr. Secretary, as I study the proposed--the various drafts
of the proposed financial regulation bill, there is this Bureau
of Consumer Financial Protection. I believe the Director--it's
run by a Director and--who is appointed by the President and
confirmed by the Senate. After that, to whom does the Director
of the Bureau of Consumer Financial Protection report?
Secretary Geithner. Well, in the proposal we presented, the
design is an independent agency with a head accountable to the
Senate, confirmed--appointed by--confirmed by the Senate; of
course, subject to oversight by the Senate----
Senator Alexander. But, who----
Secretary Geithner [continuing]. Or the Congress.
Senator Alexander. Once the head's in office, who--to whom
does he or she report? Who's the boss? I mean, who----
Secretary Geithner. He or she----
Senator Alexander [continuing]. Do you call up and say,
``Do this,'' or, ``Do that,'' or, ``Don't do this''?
Secretary Geithner. He or she is the boss.
Senator Alexander. He or she is the boss.
Secretary Geithner. Now, we've also proposed--but, I'm not
sure exactly which provision you're referring to, because this
is still in the process of evolution in the----
Senator Alexander. Right.
Secretary Geithner [continuing]. House and the Senate--we
also proposed, on the model of a proposal Senator Collins made,
that there be a council established on which would sit the
Secretary of the Treasury and the principal regulators, and the
head of this agency would be a member of that council, would
sit on that council; and the job of that council, in addition
to the responsibility Senator Collins said, would be to look
across the system, make sure that standards are sufficiently
conservative, there's not big gaps in oversight, we don't have
these huge gaps in regulation that helped--this crisis, but--I
was trying to answer your question.
Senator Alexander. Well, I'm wary of--not to use a
pejorative word--a czar with no boss in an area of such
unprecedented importance. I mean, let's say the new Director of
the Bureau of Consumer Financial Protection got it in his or
her mind that it would be a good idea to allocate credit and
encourage credit unions and banks to loan money to people who
couldn't pay it back, which is exactly what happened with the
big housing agencies, with the encouragement of the Congress,
with the encouragement of the President, who can call down and
say, ``Don't do that anymore''? I mean, the way I understand
the structure, this person wouldn't have to--we couldn't, very
easily--congressional oversight is limited; the--he doesn't
work for the Secretary of the Treasury--he or she--or for the
President. Wouldn't it be better if this person reported to
someone who was elected by the people, either Members of
Congress or the President or his appointees?
Secretary Geithner. Well, let me offer two things in
response to that concern, Senator.
First is, the statute that would govern the body, this
agency for consumer protection, would not authorize--would not
empower the head of the agency to do what you--the example you
fear; would not have anything like that kind of authority. The
authority would be to write rules and enforce rules to prevent
abuse and fraud, unfair/deceptive practices, to make sure
consumers have clear disclosure and can make better choices
about which products are in their interests, as a whole.
Second, I would just say this again, we're trying to take a
model which is familiar to you, not dramatically different in
design of the model that we live with, with the Federal Trade
Commission (FTC), the SEC, the Commodity Futures Trading
Commission (CFTC). Each of those are independent agencies with
a Chairman appointed by the President, confirmed by the Senate.
And in those agencies, as in this one, you have a statute--a
defining statute--what is the limits and the scope of their
authority. And I think that protection, combined with
congressional oversight, is the balance we would----
Senator Alexander. We're hearing from--in the Congress,
from a lot of auto dealers and dentists and credit unions and
community banks and people on Main Street, who are afraid that
this new credit bureau will make it harder for them to borrow
money, limit their choices, make it take longer to borrow
money. And--on Main Street, as well as on Wall Street--but, on
Main Street, if you have fewer choices and it takes longer and
you fill out forms and it's harder, sometimes that means you
just don't get the credit. What would you say to those people?
Why should they not be concerned about this new agency, which
seems to me to have unprecedented authority and the real risk
of a Washington takeover of Main Street lending?
Secretary Geithner. Senator, I do not believe it has any
material risk in that direction, and I think we've designed a
proposal that's very careful to limit that risk.
The system we've been living with for a long time now was a
system in which there were rules, but they only extended,
fundamentally, to a class of banks. They left vast swaths of
the country without any rules or any enforcement of those rules
to protect consumers. And that system helped produce the worst
financial crisis in generations. And the system--we got in that
mess, in part, by letting a whole range of institutions provide
credit to consumers, competing business away from banks without
being subject to those basic rules.
So, we started with the basics----
Senator Alexander. Such as credit unions?
Secretary Geithner. Well, there--I don't think there's any
argument to say that credit unions were a contributing cause of
this crisis. And, in fact, I would associate myself with many
who have said that community banks largely distinguish
themselves well in not following the market down and competing
by lowering standards and underwriting elsewhere. But, there
are a large number of different types of companies across the
country involved in the finance business--consumer finance
business--that took advantage of the current system and left
people with financial obligations they did not understand,
could not afford, were not appropriate for them. And the damage
of that was catastrophic.
So, what we're trying to do is take responsibility that
exists today, Senator, but is diffused across a whole range of
different entities, and we're trying to take that and
streamline it and put it in one place, where people have a
dedicated responsibility to protect consumers.
Now, we want to make sure there's an agency that has
authority to write rules across anybody that's in the business
of providing credit--consumer finance companies, as well as
banks--and can enforce those rules so there's a level playing
field. That's the model we're trying to produce. And the
provisions that came out of the House and that are being
considered in the Senate provide a lot of protections and
comfort to community banks and credit unions.
Senator Alexander. Thank you, Mr. Chairman.
Senator Durbin. Secretary Geithner, thank you for coming
and giving us generously of your time. We're likely to call you
back for informal and formal meetings, depending on your
availability and the need. But, you've been very helpful,
today, in answering a broad range of questions, and we look
forward to working with you again in the future.
We'll send some written questions your way, and hope that
you and your staff can take a look at them.
Thank you, again.
Now I'd like to invite the second panel to come before us.
And as they're being placed, we'll wish the Secretary a fond
adieu.
Is that appropriate? I think it is.
And Kevin Puvalowski, Richard Neiman, Katie Van Tiem, are
going to come up. And we welcome them.
Mr. Puvalowski is with the Office of the Special Inspector
General for Troubled Asset Relief Program, known as SIGTARP. We
love these acronyms. And he was appointed there in December
2008 as deputy special inspector general. He's the principal
advisor to the special inspector general, oversees and
coordinates audits and investigations of the TARP program, and,
prior to that, was a Federal prosecutor in the U.S. Attorneys
Office for the Southern District of New York. His specialty was
money laundering and asset forfeiture. He is a graduate of the
Fordham University School of Law.
Richard Neiman is with us. He's a member of the
Congressional Oversight Panel created to oversee the
implementation of the TARP program. Mr. Neiman is currently the
superintendent of banks for the State of New York. He chairs
the Governors Halt Abuse Lending Transactions, or HALT, a task
force to address the foreclosure crisis. He represents New York
in the Multistate Foreclosure Prevention Working Group, began
his career at the Federal Office of the Controller of the
Currency, worked for several financial service firms, holds a
B.A. from American University and a law degree from Emory
University School of Law.
Katie Van Tiem, currently the program manager of subprime
lending intervention for the Chicago Lawn and Gage Park Office
of the Neighborhood Housing Services of Chicago, previously
worked as a mortgage counselor to prevent over 100 foreclosures
and preserve $16 million mortgage principal on the southwest
side of Chicago, which is represented partially by this
illustration we have; she is currently working on the subprime
mortgage crisis and foreclosure prevention. Incorporating
experience from the front line of mortgage foreclosures, she's
played a critical role in organizing the campaign to help keep
families in their homes. She has helped community residents
develop an understanding of foreclosure and Federal prevention
programs. In October 2009, she was named a community hero--
could have been ``Shero''--by the Local Initiative Support
Corporation New Communities Program, for her leadership. She
holds a B.A. from Notre Dame University, and begins the DePaul
University master of science in leadership and policy studies
programs this year.
Mr. Puvalowski, the floor is yours.
STATEMENT OF KEVIN PUVALOWSKI, DEPUTY SPECIAL INSPECTOR
GENERAL, OFFICE OF THE SPECIAL INSPECTOR
GENERAL FOR THE TROUBLED ASSET RELIEF
PROGRAM
Mr. Puvalowski. Chairman Durbin, Ranking Member Collins,
it's a pleasure and an honor to appear before you today to talk
about the TARP program, and, in particular, the efforts within
TARP to assist struggling homeowners.
There is some relatively good news to report. Some aspects
of the financial system are on their way back to recovery, and
many TARP recipients have been able to pay back TARP funds much
faster than had been anticipated. As a result, estimates
concerning taxpayers' expected losses on their TARP
investments, while still very substantial, have been steadily
coming down.
The Office of Management and Budget's (OMB) most recent
estimate is a loss of $127 billion, with the losses
concentrated in TARP's support of AIG, of the automotive
industry, and of residential mortgages. However, even as TARP
has helped Wall Street begin to regain its footing, it has, so
far, not fulfilled its statutory goal of doing the same for
Main Street. Long-term unemployment is the worst in recent
history. Smaller banks are still failing at an alarming rate.
And the goal of preserving housing has, so far, come up short;
2.8 million foreclosures--or filings--were made in 2009, and
we're on a pace for even more--close to 4 million--in 2010.
The HAMP program, Treasury's TARP-supported mortgage
modification initiative has, so far, only put a dent in the
foreclosure problem, resulting in only approximately 230,000
permanent modifications in its first year of operations, a
number that is less than the foreclosure notices that went out
in the month of March alone, and less than the amount of homes
that actually were repossessed by banks in just the first
quarter of 2010.
Last month, SIGTARP issued an audit, examining HAMP, that
identified several significant failings that have contributed
to results that Treasury itself has called ``disappointing.''
The audit identified problems in HAMP concerning Treasury's
goals for the program, its rollout, its outreach efforts, and
in the program's design; in particular, with respect to the
vulnerability of the program to redefault.
In apparent response, Treasury recently announced dramatic
changes to the program, addressing, for the first time, one of
the most significant indicators of redefault, negative equity
or underwater mortgages. These new initiatives are important
steps in the right direction, and Treasury should be applauded
for its willingness to make changes to improve the program.
The new initiatives, however, are not without their own set
of problems. In SIGTARP's most recent quarterly report, which
was released just last week, we identified several areas of
concern, and offered recommendations relating to transparency,
to potential fraud vulnerabilities, and to several issues that
could threaten the new initiative's effectiveness or result in
arbitrary results for homeowners. Unless Treasury addresses the
issues raised in the reports, and in the prior reports of the
Government Accountability Office (GAO), of the Congressional
Oversight Panel, HAMP will continue to result in only modest
relief to the foreclosure crisis.
In my remaining time, let me discuss, very briefly, some
recent developments in several of SIGTARP's investigations.
Over the past quarter, SIGTARP has added to its successes
in bringing to justice those who would seek to take criminal
advantage of TARP. For example, in Manhattan Federal Court,
criminal charges were brought against Charles Antonucci, the
CEO of Park Avenue Bank, who was charged, among other things,
with trying to steal $11 million of TARP funds. That case was
done in close coordination with several of our law enforcement
partners, including the New York State Banking Authority, which
operates under the strong leadership of my co-panelist Mr.
Neiman.
SIGTARP worked with the New York State attorney general to
secure civil fraud charges against Bank of America and its
former CEO and CFO related to Bank of America's merger with
Merrill Lynch and their successful effort to obtain tens of
billions of additional TARP dollars. We also assisted the SEC
in its investigation of Bank of America, which led to a $150
million civil settlement and important governance changes to
the bank.
And in California, we recently secured criminal charges
against two individuals who allegedly preyed on struggling
homeowners by tricking them into paying thousands of dollars
each, more than $1 million in total, for mortgage modifications
that never materialized.
PREPARED STATEMENT
Thank you again for the opportunity to testify before you
today, and I look forward to answering any questions you may
have.
Senator Durbin. Thank you very much.
[The statement follows:]
Prepared Statement of Kevin R. Puvalowski
Chairman Durbin, Ranking Member Collins, and Members of the
Committee: Thank you for the opportunity to testify today about the
critically important oversight mission of the Office of the Special
Inspector General for the Troubled Asset Relief Program (``SIGTARP'').
There are clear signs that some aspects of the financial system may
well be on the path to recovery. Many of the large banks and Wall
Street firms propped up by unprecedented taxpayer support in the fall
of 2008--including massive infusions under the Troubled Asset Relief
Program (``TARP'')--have returned to profitability, attracted private-
sector capital, and enjoyed substantially rebounded stock prices. Many
of those firms have been able to repay TARP far sooner than anyone
reasonably would have anticipated, resulting in a profit on those
particular investments for the Treasury Department (``Treasury''), and
thus the American taxpayer. Even Citigroup Inc. (``Citigroup'') and
Bank of America Corporation (``Bank of America''), firms that appear to
have survived only with extraordinary TARP assistance, have rebounded,
with Bank of America repaying its TARP bailouts in full and Citigroup
on the verge of doing the same. All told, as of March 31, 2010, $205.9
billion has come back to the taxpayer through repayment of principal,
interest, dividends, cancellation of guarantees, and warrant sales.
Although TARP is still expected to result in a large loss ($127 billion
according to the Office of Management and Budget, as of February 2010),
the expected loss is far lower than previous estimates, and is
concentrated in the programs designed to support American International
Group, Inc. (``AIG'') ($50 billion), the automotive industry ($31
billion), and housing ($49 billion).
Even as Wall Street regains its footing, however, signs of distress
on Main Street remain disturbingly persistent. Although unemployment
has eased slightly in recent months, it remains much higher than at any
time since 1983. In addition, the long-term nature of unemployment is
unprecedented in recent history--the March 2010 figure for the average
duration of unemployment, 31.2 weeks, is the highest since such
measurement began in 1948. Meanwhile, smaller and regional banks
continue to struggle (with 57 closed so far in 2010), small-business
lending remains substantially depressed from pre-recession levels, and
the real estate markets, both residential and commercial, continue to
suffer at crisis proportions in many areas of the country. In sum,
notwithstanding that the financial system appears to be stabilizing and
record profits are returning to Wall Street, the plain fact is that too
many Americans on Main Street are still in imminent danger of losing
their businesses, their jobs, and their homes.
In light of these circumstances, Treasury has shifted much of
TARP's focus to initiatives intended to offer economic relief to the
broader public. A year ago this March, Treasury introduced the Making
Home Affordable (``MHA'') initiative to address the growing wave of
home foreclosures ravaging many areas of the country. The centerpiece
of MHA is the Home Affordable Modification Program (``HAMP''), which
was intended to result in millions of sustainable mortgage
modifications that would allow homeowners to remain in their homes by
reducing their monthly payments to affordable levels. The
Administration has allocated $75 billion to HAMP, including $50 billion
of TARP funds.
Despite Treasury's efforts on this front, however, the home
foreclosure crisis has not abated; indeed, the situation has continued
to deteriorate since HAMP's rollout. Nearly 2.8 million foreclosures
were initiated in 2009. More ominously, 2010 is on pace to be even
worse: there were more than 932,000 foreclosure filings during the
first quarter--a 16 percent increase from the already staggering rate
for the first quarter of 2009. Similarly, for the first quarter of
2010, actual bank repossessions rose 35 percent from 2009 levels to
nearly 258,000. Unfortunately, HAMP has made very little progress in
stemming this onslaught, resulting in only 230,000 permanent
modifications initiated over the approximately 12 months of the
program's existence. That figure represents only 8.2 percent of the
foreclosures initiated in 2009 and fewer than just the most recent
quarter's actual bank repossessions.
A SIGTARP audit report published on March 25, 2010, examined the
design and operation of HAMP in detail. The audit first found that
Treasury's publicly touted measure of success, the number of short-term
trial modification offers that have been made to struggling homeowners,
was largely meaningless, and that Treasury needs to identify clearly
the total number of homeowners it actually intends to help stay in
their homes through sustainable permanent mortgage modifications. The
audit also found that the limited results to date stemmed from, among
other things, flaws in HAMP's design, rollout, and marketing that
diminished the program's effectiveness in providing sustainable relief
to at-risk homeowners. In its original version, HAMP involved frequent
and time-consuming revisions of guidelines that created confusion and
delay; permitted reliance on unverified verbal borrower data that
slowed down conversions to permanent modifications; suffered from
insufficient outreach to the American public about eligibility and
benefits; and did not fully address risk factors for re-defaults among
participating borrowers, including negative equity and high total debt
levels even after modification. Without addressing the dangers of re-
default, HAMP risks merely spreading out the foreclosure crisis at
significant taxpayer expense. Although this may benefit financial
institutions that would not have to recognize the losses from immediate
foreclosures, it would do little to accomplish the Emergency Economic
Stabilization Act's (``EESA'') explicit purpose to ``help families keep
their homes.''
Although Treasury was initially reluctant to address the issues
raised in the audit report regarding re-default, including a suggestion
that only modest changes would be made to the program to address
negative equity, just days after the publication of SIGTARP's audit
report and a subsequent Congressional hearing discussing the report's
findings, Treasury changed course and introduced major revisions to
HAMP, including new provisions designed to address the plight of
unemployed homeowners and to require consideration of principal write-
downs for borrowers with negative equity. To Treasury's credit, the
program changes appear intended to expand HAMP participation and
improve the rate of permanent modifications, as well as to address the
significant re-default risk driven by homeowners' negative equity. On
the whole, the revisions to HAMP constitute a potentially important
step forward in addressing some of the flaws identified in SIGTARP's
audit report.
However, the program changes, as announced, also raise several
issues that could impede HAMP's effectiveness and efficiency.
Treasury's urgency in rolling out the new initiatives, laudable as it
is, risks significant costs in the form of ill-defined goals,
incomplete program guidelines, increased vulnerability to fraud,
incentives that may prove ineffective, and the potential for arbitrary
treatment of participating borrowers. SIGTARP has made a series of
recommendations designed to address these issues:
--Treasury should identify its participation goals and anticipated
costs for each HAMP program and subprogram and measure success
against those expectations in its monthly reports.
--Treasury should launch a broader based fraud awareness campaign for
HAMP and include fraud warnings when it makes program
announcements.
--To protect against fraud, Treasury should abandon its differing
valuation standards across HAMP and adopt the Federal Housing
Authority's appraisal standard for all HAMP principal reduction
and short sale programs.
--Treasury should reevaluate the voluntary nature of its principal
reduction program, considering changes to maximize
effectiveness, to ensure to the greatest extent possible
consistent treatment of similarly situated borrowers, and to
address potential servicer conflicts of interest.
--Treasury should reconsider the length of the 3-month minimum term
of its unemployment forbearance program.
In sum, until Treasury fulfills its commitment to provide a
thoughtfully designed, consistently administered, and fully transparent
program, HAMP risks being remembered not for catalyzing a recovery from
our current housing crisis, but rather for bold announcements, modest
goals, and meager results.
program updates and financial overview
TARP currently consists of 13 announced programs, all of which have
been implemented. Six are closing or have already been wound down. As
of March 31, 2010, Treasury had announced programs involving potential
spending of $537.1 billion of the $698.8 billion maximum available for
the purchase of troubled assets under TARP as authorized by Congress.
Of this amount, Treasury had expended or committed to expend
approximately $496.8 billion through the 13 implemented programs to
provide support for U.S. financial institutions, the automobile
industry, the markets in certain types of asset-backed securities
(``ABS''), and homeowners. As of March 31, 2010, 77 TARP recipients had
paid back all or a portion of their principal or repurchased shares for
an aggregate total of $180.8 billion of repayments and a $5 billion
reduction in exposure to possible further liabilities, leaving $387.8
billion, or 55.5 percent, of TARP's allocated $698.8 billion available.
In addition to the principal repayments, Treasury has received interest
and dividend payments on its investments, as well as revenue from the
sale of its warrants. As of March 31, 2010, $14.5 billion in interest,
dividends, and other income had been received by the Government, and
$5.6 billion in sales proceeds had been received from the sale of
warrants and preferred stock received as a result of exercised
warrants. At the same time, some TARP participants have missed dividend
payments: among participants in the Capital Purchase Program (``CPP''),
104 have missed dividend payments to the Government, although some of
them made the payments on a later date. As of March 31, 2010, there was
$188.9 million in outstanding unpaid CPP dividends. In addition, three
TARP recipients have failed and several others have restructured their
agreements with Treasury, increasing the potential for further losses.
oversight activities of sigtarp
As you know, SIGTARP was created by EESA to conduct, supervise and
coordinate audits and investigations concerning TARP. Initially
envisioned as a large but relatively straightforward toxic asset
purchase program, TARP has morphed into multiple complex programs--the
current count is 13--that touch on nearly every major aspect of our
economy, from too-big-to-fail Wall Street giants, to regional and
community banks, to the asset-backed securities markets, to small-
business lending initiatives, to the automobile industry, and, perhaps
most broadly, to the mortgages of millions of struggling homeowners
around the country. In just 16 months of existence, SIGTARP has had a
tremendous impact on the TARP program: it has made significant and
demonstrable contributions to the transparency of the program; it has
worked closely with Treasury and the other agencies administering TARP-
related programs to make those programs more effective and less
susceptible to waste, fraud and abuse; and it has successfully brought
to justice those who have sought to benefit criminally from this
national crisis.
Investigative Activities
SIGTARP's Investigations Division continues to develop into a
sophisticated white-collar investigative agency. Through March 31,
2010, SIGTARP has 84 ongoing criminal and civil investigations. Recent
highlights include:
The Park Avenue Bank.--On March 15, 2010, Charles Antonucci, the
former President and Chief Executive Officer of The Park Avenue Bank,
was charged by the United States Attorney's Office for the Southern
District of New York with offenses including self-dealing, bank
bribery, embezzlement of bank funds, and bank, mail and wire fraud,
among others. In particular, Antonucci allegedly attempted to steal $11
million of TARP funds by, among other things, making fraudulent claims
about the bank's capital position. These charges mark the first time an
individual has been criminally charged with attempting to steal TARP
funds. According to the allegations, Antonucci falsely represented that
he had personally invested $6.5 million in The Park Avenue Bank to
improve its capital position. As set forth in the charges, however, the
funds were actually borrowed from the Park Avenue Bank itself and
reinvested as part of an undisclosed ``round-trip'' transaction. The
complaint further alleges that this fraudulent transaction was touted
by The Park Avenue Bank in support of its application for TARP funds as
evidence of its supposedly improving capital position.
Bank of America.--On February 4, 2010, the New York Attorney
General charged Bank of America, its former Chief Executive Officer
Kenneth D. Lewis, and its former Chief Financial Officer Joseph L.
Price with civil securities fraud. According to the allegations, in
order to complete a merger between Bank of America and Merrill Lynch &
Co., Inc. (``Merrill Lynch''), the defendants failed to disclose to
shareholders spiraling losses at Merrill Lynch. Additionally, after the
merger was approved, it is alleged that Bank of America made
misrepresentations to the Federal Government in order to obtain tens of
billions of dollars in TARP funds. The investigation was conducted
jointly by the New York Attorney General's Office and SIGTARP, and the
case remains pending in New York state court. SIGTARP also assisted the
Securities and Exchange Commission (``SEC'') with its Bank of America
investigation. On February 22, 2010, the Honorable Jed S. Rakoff,
United States District Judge for the Southern District of New York,
approved a $150 million civil settlement between the SEC and Bank of
America to settle all outstanding SEC actions against the firm.
Nations Housing Modification Center.--On March 19, 2010, Glenn
Steven Rosofsky was arrested by agents from SIGTARP and the Internal
Revenue Service, Criminal Investigation Division, and charged by the
U.S. Attorney's Office for the Southern District of California with one
count of conspiracy to commit wire fraud and money laundering and one
count of money laundering. A separate information the same day charged
Michael Trap with conspiracy to commit fraud and money laundering. As
set forth in the charges, Rosofsky, Trap, and others operated a
telemarketing firm, ostensibly to assist delinquent homeowners with
loan modification services. Rosofsky and Trap took advantage of the
publicity surrounding the Administration's mortgage modification
efforts under the TARP-supported MHA program and are alleged to have
used fraudulent statements to induce customers to pay $2,500 to $3,000
each to purchase loan modification services that were not actually
provided. It is alleged in court documents that the fraud grossed more
than $1 million. Trap pled guilty to the charges listed in his March 19
information the following day. The case against Rosofsky remains
pending.
Colonial Bank.--On August 3, 2009, SIGTARP, with the Federal Bureau
of Investigation (``FBI''), the Department of Housing and Urban
Development Office of Inspector General (``HUD OIG''), and the Federal
Deposit Insurance Corporation Office of Inspector General (``FDIC
OIG''), executed search warrants at the offices of Taylor, Bean and
Whitaker (``TBW''), formerly the nation's 12th-largest loan originator
and servicer, and Colonial BancGroup (``Colonial''), which applied for
assistance under the CPP. Prior to the execution of these warrants,
SIGTARP had served subpoenas on Colonial after it had announced that it
had met conditions imposed by Treasury to receive $553 million in TARP
funding. Based upon, among other things, the actions of SIGTARP, the
funding was never made. Both Colonial and TBW have been shut down, and
this investigation, which is being conducted with the Department of
Justice and the SEC as well as the FBI and HUD OIG, is ongoing.
Audit Activities
SIGTARP's Audit Division (``AD'') conducts, supervises, and
coordinates programmatic audits with respect to Treasury's operation of
TARP and recipients' compliance with their obligations under relevant
law and contracts; evaluates TARP policies and procedures; and provides
technical assistance to Treasury. AD is designed to provide SIGTARP
with maximum flexibility in the size, timing, and scope of audits so
that, without sacrificing the rigor of the methodology, audit results,
whenever possible, can be generated rapidly both for general
transparency's sake and so that the resulting data can be used to
improve the operations of the fast-evolving TARP. Our recommendations
in our audits and quarterly reports have had an immeasurable impact by
preventing and deterring fraud, waste and abuse of TARP funds.
To date, AD has initiated 20 audit projects and has issued 8 audit
reports on such topics as TARP recipients' use of funds, the
circumstances surrounding the first TARP investments in nine large
banks, bonuses paid to employees of American International Group, Inc.
(``AIG''), the circumstances that led to the Government's decision to
pay effectively 100 cents on the dollar to AIG's counterparties for
securities then worth about half of that amount, and, most recently, on
the problems with the design and implementation of HAMP. SIGTARP has
ongoing audits examining: Treasury's warrant valuation and disposition
process; the automobile dealership closings processes used by General
Motors and Chrysler; Government oversight of and interaction with those
companies that the Government has or is approaching majority owner
status; the Asset Guarantee Program protections of a pool of Citigroup
assets; Capital Purchase Program (``CPP'') applications that received
conditional approval; the process used to select asset managers for the
Public-Private Investment Program (``PPIP''); internal controls for
PPIP; the process for making valuation determinations in the Term
Asset-Backed Securities Loan Facility; the criteria used by the Office
of the Special Master on Executive Compensation; Treasury's CPP exit
strategy; the application of the HAMP net present value test; and a
material loss review, with FDIC OIG, of United Commercial Bank, a CPP
bank that failed after receiving $298.7 million of TARP funds.
sigtarp recommendations on the operation of tarp
One of SIGTARP's oversight responsibilities is to provide
recommendations to Treasury so that TARP programs can be designed or
modified to facilitate effective oversight and transparency and to
prevent fraud, waste, and abuse. SIGTARP has issued six quarterly
reports to Congress, provided 58 formal recommendations to date, and
have provided countless more informal guidance to Treasury and the
Federal Reserve in their implementation of TARP and TARP related
programs. In this quarter's report, we make the HAMP recommendations
discussed above, and make recommendations designed to improve
transparency and better safeguard against fraud or the failure of
participating institutions in the Community Development Capital
Initiative (``CDCI''), a new TARP initiative designed to provide up to
$1 billion in additional capital to Community Development Financial
Institutions to incentivize lending.
Over the past quarter, Treasury has also announced another new
initiative designed to spur small-business lending, the Small Business
Lending Fund (``SBLF''). As announced, although SBLF will be funded
with $30 billion that will be rescinded from TARP, SBLF will not be
part of TARP, but rather will be operated outside of TARP and thus will
not be subject to the executive compensation restrictions and perceived
stigma associated with TARP. However, many of the characteristics of
SBLF are the same or very similar to the TARP's CPP and CDCI: the
economic structure is basically the same, with Treasury providing
capital in the form of preferred equity, and, like CPP and CDCI, the
maximum amount of capital available under SBLF will be a percentage of
the institution's risk-weighted assets. It would also appear that the
application and approval process for new participants will be similar
and will involve the same primary regulators. Even many of the same
banks will be participants--SBLF is expressly being designed so that
many CPP participants will be able to convert their CPP capital into
SBLF capital. SIGTARP has estimated that up to 95 percent of CPP
participants could be eligible to convert to SBLF. In sum, the funds
being utilized, the core mechanics, the economic terms of the program
and even many of the participants all stem from TARP's CPP. Because
SIGTARP has developed considerable experience and expertise in its
oversight of the very similar (and similarly complex) CPP, particularly
in reporting, monitoring, deterring, and investigating fraud, SIGTARP
has strongly encouraged that SIGTARP be included in the oversight
provisions of Treasury's legislative proposal concerning SBLF. SIGTARP
has sent a letter to Treasury objecting to its stated intent not to
include SIGTARP in the proposed legislation.
Budget
SIGTARP's budget as submitted in the fiscal year 2011 President's
budget request is $49.6 million. SIGTARP plans to allocate that amount,
along with $5 million in supplemental funds provided to SIGTARP under
Pub. Law No. 111-22, as follows:
SIGTARP has secured temporary office space and equipment for staff;
has contracted for permanent space; has contracted with public and
private vendors for personnel services, procurement assistance,
publication consulting, data processing and analysis, and office
equipment and services. Through March 31, SIGTARP has hired 116
professionals with a wealth of experience in program auditing, law
enforcement, securities enforcement, and other relevant expertise. Our
budget is designed to enable SIGTARP to continue to fulfill its role as
the agency that stands between hundreds of billions of taxpayer dollars
and those who would seek to steal, waste or abuse those funds.
Chairman Durbin, Ranking Member Collins, and Members of the
Committee: I want to thank you again for this opportunity to appear
before you, and I would be pleased to respond to any questions that you
may have.
Senator Durbin. Mr. Neiman.
STATEMENT OF RICHARD NEIMAN, SUPERINTENDANT OF BANKS,
STATE OF NEW YORK AND MEMBER, CONGRESSIONAL
OVERSIGHT PANEL
Mr. Neiman. Chairman Durbin, Ranking Member Collins, it's a
pleasure to be here, and I appreciate the opportunity to
testify today.
I should also note that the views expressed are my own. I
will, of course, do my best to convey the Oversight Panel's
views, but my statements cannot always reflect the opinions of
our five independent thinkers.
Assessing Treasury's response to the housing crisis, as a
particular point of emphasis for the panel with the release,
this month, of our third foreclosure report. It is also a
personal priority for me, as a bank regulator and as the chair
of New York's Foreclosure Mitigation Task Force.
Foreclosure prevention is not just the right way to
alleviate suffering, but it is the lynchpin around which all
other efforts to achieve financial stability revolve. We cannot
solve the financial crisis without dealing with the root of the
problem.
The reality is that, despite Treasury's efforts--and some
of the Treasury's most recent announcements have been
laudable--families are, tragically, being foreclosed on when
foreclosure was preventable.
A homeowner recently called my office. In fact, I picked up
the call, late one evening. The difficulty was that she was
having difficulty obtaining a long-term modification under the
HAMP program, and it really exemplifies a lot of the problems
with the program. She had been making her trial modifications
for over 6 months; in fact, it was only because of these
reductions in her trial modification which were able to keep
her in her home. Her family income had dropped from $85,000 to
$54,000 because of a loss of spousal income. But, she had--
despite her repeated efforts, she wasn't able to find out what
happened, whether she would be offered and converted to a long-
term modification. She was eventually told by her servicer that
her HAMP modification conversion had been denied; however, they
never provided a sufficient explanation as to why.
Worst of all, she was told that her non-HAMP modification
that was being offered to her would actually increase her
monthly payments, not only over her trial modification, but
over her original mortgage, instead of decreasing it.
With our agency's help, she ultimately obtained a more
sustainable modification that did allow her to lower her
payment and allow her to remain in her home.
This woman's story is only one example of many which
starkly illustrates one of the major points of the Oversight
Panel's report this month. Treasury must do a better job of
holding servicers accountable. If not, these well-intentioned
programs will not work.
First, Treasury must exercise greater oversight of Fannie
and Freddie, who are supposed to be overseeing the servicers.
The failure of servicers to consistently and accurately provide
valid reasons for canceling or denying a mortgage modification
is critical, and makes it difficult to gather reliable data on
the program's effectiveness. When not in compliance, servicers
must meaningfully be sanctioned.
Second, the reporting of the status of homeowners within
the modification process is inadequate and does not allow for
analysis to determine the extent to which the programs are
actually preventing foreclosures. As two major examples,
Treasury must obtain from the servicers, in public release, the
reasons for and the number of, all denials of mortgage
modifications by servicer. And, two, the number of junior liens
that have actually been extinguished by Treasury's second-lien
program, as this additional borrowed debt affects the long-term
sustainability of mortgage modifications, and, as all you--as
you both well know, inhibits principal writedowns. And we've
included a number of other recommendations in our--my formal
testimony.
Third, Treasury's expanded Web portal must launch.
Borrowers need to be empowered to check their status and verify
whether servicers have actually received the necessary
documentation so that corrective action can be taken before it
is too late. This concern is perhaps the one I hear most often
from borrowers and housing counselors.
Finally, Treasury must provide a mechanism to assist people
left in limbo who are not getting sufficient responses from
their servicers. The stories we hear point to a clear need for
an ombudsman, a homeowner's advocate within the Treasury, a
staff of real human beings, not just the currently offered e-
mail inbox.
There is much more to discuss, particularly with respect
for the need for a nationwide Emergency Mortgage Support
program, or EMS, to help borrowers facing reduced income that
goes beyond Treasury's recent expansion for the unemployed.
There's also a great need for a national mortgage
performance database that reports on the status of existing
mortgages, similar to what we already have under HMDA for
mortgage originations, so that we can better focus on our
actions and assess our impact in solving the enormous problem
we, collectively, face.
Improvements like these are not just the right thing to do,
they are also the things we have to do if we are going to
stabilize our economy.
PREPARED STATEMENT
Thank you very much, and I look forward to our--the
questions.
Senator Durbin. Thank you very much.
[The statement follows:]
Prepared Statement of Richard H. Neiman
Chairman Durbin, Ranking Member Collins, and distinguished members
of the Subcommittee: I am Richard H. Neiman, the Superintendent of
Banks for the State of New York and a member of the Congressional
Oversight Panel. I appreciate this opportunity to comment on the
ongoing evaluation of the Treasury Department's implementation of the
Emergency Economic Stability Act (EESA) with respect to home
preservation. I should note that the views expressed in this testimony
are my own. I will do my best to convey the Panel's views, but my
statements cannot always reflect the opinion of our five diverse
thinkers.
The Panel is charged by statute to provide monthly reports to
Congress assessing the effectiveness of the Treasury's implementation
of the Troubled Asset Relief Program (TARP), including foreclosure
mitigation efforts. Assessing Treasury's response to the housing crisis
is a particular point of emphasis for the Panel and for me personally
as a bank regulator and as the New York Governor's appointee to lead
our state's foreclosure prevention efforts.
When the Panel examined the foreclosure crisis in October of 2009,
the picture was grim. About one in eight mortgages were already in
foreclosure or default, and an additional 250,000 foreclosures were
beginning every month. The Home Affordable Modification Program, or
HAMP, was Treasury's main program, and we knew little then about how
many HAMP trial mortgage modifications would ultimately become long-
term modifications. HAMP was still focused on bringing new families
into the program in order to provide immediate relief.
Treasury has since taken additional steps to mitigate foreclosures.
Treasury began requiring HAMP loan servicers to explain to homeowners
why their applications for loan modifications had been declined, and
Treasury launched a drive to convert temporary modifications into long-
term, 5-year modifications. In keeping with the Panel's
recommendations, Treasury also announced new programs to support
unemployed borrowers and to help underwater borrowers regain equity
through principal write-downs.
While it is too soon to evaluate the results of these program
enhancements, Treasury should be commended for its efforts to address
unemployment and negative equity as drivers of default. As the
recession has lingered, the crisis evolved to impact prime borrowers
whose loans were originally affordable. Loss mitigation initiatives and
HAMP guidelines need to keep pace with this changing nature of the
problem.
However, these initiatives are in their early stage, and
foreclosures have continued at a rapid pace. In total, 2.8 million
homeowners received a foreclosure notice in 2009. Each foreclosure has
imposed costs not only on borrowers and lenders but also indirectly on
communities and the broader economy. These foreclosures have driven
down home prices, and nearly one in four homeowners with a mortgage is
presently underwater. Although housing prices have begun to stabilize
in many regions, home values in several metropolitan areas, such as Las
Vegas and Miami, continue to fall sharply. Indeed, all Americans are
impacted, as taxpayers are now mortgage investors through Fannie and
Freddie, so everyone faces losses from declining values.
Results from Treasury's existing programs continue to lag well
behind the pace of the crisis. For every borrower who avoided
foreclosure through HAMP last year, another 10 families lost their
homes. Treasury's stated goal is for HAMP to offer loan modifications
to 3 to 4 million borrowers, but only a portion of offers will result
in temporary modifications, and even fewer of those temporary
modifications will convert to final, 5-year status.
panel findings
The Panel has issued three reports to date on foreclosures. The
most recent was just released on April 14. It lays out three primary
areas of concern: the timeliness of Treasury's response to the subprime
crisis, the sustainability of mortgage modifications, and the
accountability of Treasury's foreclosure programs.
From the Panel's ongoing assessment of Treasury's response to the
housing crisis, I would like to highlight two of these themes, namely
sustainability and accountability. In both areas there are specific
recommendations to improve program effectiveness.
Sustainability
Although HAMP modifications reduce a homeowner's mortgage payments,
many borrowers continue to experience severe financial strain, which
calls into question the long-term sustainability of the modified
mortgage. The typical post-modification borrower pays about 59 percent
of his total income on debt service, including payments on first and
second mortgages, credit cards, car loans, student loans, and other
obligations. Most borrowers who proceed through HAMP still face a
precarious future, with severely constrained resources.
Treasury should consider whether its definition of
``affordability'' and the present 31 percent debt-to-income requirement
for program entry adequately captures the many financial pressures
facing families today. A particular concern is the existence of second
mortgages, which may leave borrowers exposed to foreclosure risk even
after the primary mortgage has been modified. Modification efforts
should encompass the impact of second liens, which ideally would be
extinguished, and any remaining other mortgage debt should be included
when evaluating the sustainability of household finances.
Further, we have heard from servicers that whenever principal
reduction is included as a component of the modification, even at the
same debt-to-income ratio, the outcome is more sustainable. This
highlights the importance of incorporating broad principal forgiveness
into foreclosure mitigation programs. Treasury amended the HAMP
waterfall to require consideration of principal forgiveness, which also
gives servicers a liability safe harbor from investors when making
modifications. Initial industry reaction indicates that voluntary
principal write-downs may not result in widespread change in servicer
behavior, but I strongly encourage servicers to execute write-downs as
appropriate.
It is also important to remember that the terms of permanent
modifications only stay in place for 5 years. After that period, the
interest rate can begin to rise one percentage point a year until it
reaches the rate that prevailed at the time of modification. Even
though rates will be capped at current prevailing rates, which are at
an historic low, many families will experience increased payments after
5 years.
Accountability
The success of these measures to improve HAMP ultimately hinges on
accountability. Treasury must take care to communicate clearly its
goals, its strategies, and its specific metrics for success for its
programs.
I would like to highlight four topics related to accountability:
compliance, program transparency, launch of a web portal to empower
borrowers, and the creation of an ombudsman or Homeowner Advocate
within Treasury.
Compliance
The Panel's April report gets to the heart of the accountability
question, by recommending that Treasury exercise greater oversight of
Fannie Mae and Freddie Mac on compliance issues. In particular, the
failure of servicers to consistently and accurately provide valid
reasons for canceling or denying a mortgage modification has made it
difficult to gather reliable data on the programs' effectiveness and
Treasury should subject servicers to sanctions. Although servicers
began to report on reasons why HAMP modifications were denied or
cancelled beginning in February 2010, the data has been reported
inconsistently. Indeed, a valid reason for a modification cancellation
or denial was not provided in more than 70 percent of the cases.
Treasury needs to ensure that homeowners are not improperly denied the
opportunity for a modification and sent into foreclosure without their
servicer accounting for their determinations. Treasury must thoroughly
monitor the activities of participating lenders and servicers, audit
them, and enforce program rules with strong penalties for failure to
follow the requirements.
Program Transparency
Further, our Panel's recommendations concerning greater data
collection on the HAMP process is important. The Panel has identified a
comprehensive list of data that Treasury should commit to releasing
publicly, including:
--Conversion rates by vintage of trial modifications and the
percentage of modifications commenced in any given month that
have converted;
--Average loan-to-value ratio (LTV) of all permanent modifications;
--Number of junior mortgages eliminated under the second lien
program;
--Average front- and back-end debt ratios before and after permanent
modification; and
--Breakdown of trial modification denial and cancellation reasons by
number and percentage on a cumulative and monthly basis.
Treasury should also release information on the status of borrowers
who received notice from servicers by January 31 of the expiration of
their trial modification period, and inform the public with a new data
category for those who are appealing the servicer's notice.
We need improved data access to identify the choke points in the
process, so the program can adapt to ensure that Treasury's new
standards taking effect on June 1 meet their objective. Using this
data, Treasury might consider whether some duplicative or burdensome
document requests are slowing the process, such as requiring profit and
loss statements.
Additionally, Treasury should pledge to release data publicly
through the full term of all loan modifications, not simply until TARP
expires or until HAMP stops making additional modifications.
Web portal
Most importantly, the data must address the most frequent concern I
have heard from borrowers and housing counselors as Chair of New York
State's foreclosure mitigation task force: borrowers do not know the
status of their submissions and are not receiving timely updates as to
whether submitted documents have been received or are deemed adequate.
These problems do not go away on June 1, but the number of people who
will be denied access to the program will go up if they are not
addressed.
I am troubled that Treasury's expanded web portal, where borrowers
could check their application status and verify whether servicers have
received necessary documentation, has so far failed to launch. Although
Treasury is seeking to improve the servicers' notification process,
borrowers should be encouraged and enabled to be proactive in
monitoring the processing of their modification request. I urge
Treasury to swiftly implement this tool.
Homeowner Advocate within Treasury
Borrowers have to expend extraordinary effort to achieve results in
the modification process, and are kept in the dark throughout much of
the process. This lack of servicer responsiveness highlights the need
for an ombudsman or Homeowner Advocate within Treasury to go beyond the
automated tool of the web portal.
As Superintendent of Banks for New York, I am closely in touch with
complaints and concerns from our residents in regard to their mortgage
loans. I was especially struck by a homeowner who had faithfully made
trial modification payments for 6 months without being notified of her
status. Her HAMP modification was eventually denied, and would have
been replaced with a non-HAMP workout that increased her monthly
payment. She ultimately persevered in obtaining an alternate and more
sustainable modification that did lower her payment, but no homeowner
should be left in limbo for months on the status of their modification
application. HAMP implementation must learn from the currently low
conversion rate to permanent modifications.
Borrowers should also be informed about how their eligibility for
HAMP is calculated, including the inputs used when denied as a result
of an alleged NPV-negative loan. This degree of transparency and
accountability for servicers in their decision to deny a modification
will also give borrowers the information they need to make a meaningful
appeal if they believe they were denied a modification incorrectly or
to submit additional facts in support of their application.
As a final point on accountability, Treasury needs to be clear on
the amount of funding it intends to allocate for foreclosure
mitigation. Treasury originally stated that $50 billion would be
designated; yet, previous apportionments plus the amounts related to
recent program enhancements total more than $61.6 billion. Treasury
should clarify whether it intends to increase its spending or scale
back its initiatives.
areas for additional action
In my supplemental views supporting the Panel's April report, I
identified two areas beyond HAMP where I believe more can be done to
prevent foreclosures: Assisting homeowners who are experiencing
temporary unemployment or other hardship; and creating a national
mortgage performance database.
The Country Needs a National Emergency Mortgage Support Program (EMS)
Even prime borrowers with loans made on prudent terms are facing
increasing pressure as the crisis has continued. Unemployment and
reduced earnings is the number one reason for prime defaults according
to Freddie Mac.
The State Foreclosure Prevention Working Group, a multi-state
effort of state attorneys general and state banking supervisors, has
conducted additional research that brings the impact on prime loans
into sharp focus. The number of prime loans in foreclosure has doubled
in each of the past 2 years and now account for 71 percent of the
increase in the total number of loans in foreclosure.
The Administration's Help for the Hardest-Hit Housing Markets is a
step in the right direction, both in terms of assisting those most in
need and in leveraging states as partners. The recent enhancements to
HAMP will also help unemployed borrowers through temporary payment
reductions and expanded eligibility for permanent modifications.
As positive as these steps are, these measures do not replace the
need for a nationwide Emergency Mortgage Support system (EMS). The Help
for the Hardest-Hit Housing Markets program by design is limited to
target geographies. And the recently announced 3- to 6-month reprieve
for the unemployed under HAMP, although very helpful, is an
insufficient timeframe to stabilize household budgets that have been
ravaged by sharply reduced income. The scope of impacted borrowers is
simply too great for anything short of a national program, which should
be administered by the states with the support of the nonprofit housing
community.
Pennsylvania, Delaware, North Carolina, New Jersey, and Connecticut
currently have state programs to assist the unemployed facing
foreclosure that can help inform a national model. They take different
approaches to making short-term loans accessible for those who need
temporary help while seeking to ensure a borrower will repay their
loans once their hardship has passed.
An evaluation of these differing states approaches suggests that
underwriting criteria should be based on bright lines for easy
administration and program sustainability, but within a sufficiently
flexible framework so that the program can truly help those it is
intended to. For example, the number of past missed payments by a
borrower should be evaluated on a bright line basis as most of the
states do. However, the states differ about the number of missed
payments that should be permitted, thus demonstrating the need for a
guiding principle. The principle should perhaps be based on the age of
the mortgage loan, whereby newer loans allow for fewer missed payments.
This flexible framework, by incorporating a bright line, better
protects the program from early payment default or fraud on newly-
originated mortgages while allowing appropriate discretion for aged
loans to take account of servicer delays in payment processing or
occasional borrower oversight.
A full set of underwriting criteria is beyond the scope of my
remarks today, but I mention this one example of how expanded
assistance could be achieved within a prudent program framework.
Emergency mortgage support should also involve lender and investor
concessions, including eventual HAMP modification and perhaps waiving
arrearages for unemployed borrowers.
A National Mortgage Performance Database Is Needed
The gaps in data access for borrowers seeking modifications
highlight the general lack of data about the mortgage market. Access to
complete information on existing mortgages does not exist, and the
reason is simple: there is no mortgage loan performance reporting
requirement for the industry.
Once a new loan has been initially reported under the Home Mortgage
Disclosure Act (HMDA), it is no longer tracked in any public database.
HMDA has been a powerful tool for combating housing discrimination and
predatory lending in mortgage origination, but a performance data
reporting requirement would provide a similar window on servicing
practices after the loan has been made. Because lenders and servicers
already report the payment status of open loans to credit bureaus, a
performance data standard could be put into operation quickly.
Currently, Congress, banking regulators, consumer advocates, and
other policymakers are left with incomplete or unreliable data
purchased from third-party vendors or with limited data provided
voluntarily by the industry. This lack of a public database has
hindered the response to the housing sector. Improved intelligence on
the mortgage market is critical to preventing future crises.
That is why I believe that Congress should create a national
mortgage loan performance reporting requirement applicable to banking
institutions and others who service mortgage loans, to provide a source
of comprehensive information. Federal banking or housing regulators
should be mandated to analyze such data and share the results with the
public.
conclusion
Foreclosure prevention is not just the right thing do for suffering
Americans, but it is the lynchpin around which all other efforts to
achieve financial stability revolve. We cannot solve the financial
crisis without dealing with the root of the problem: the millions of
American families who are at risk of losing their homes to foreclosure.
I appreciate the opportunity to share my views. I would be pleased
to provide more details on the Panel's assessment of Treasury's
foreclosure mitigation efforts or to answer any questions. Thank you.
Senator Durbin. Ms. Van Tiem.
STATEMENT OF KATIE VAN TIEM, PROGRAM MANAGER, SUBPRIME
LENDING INTERVENTION, NEIGHBORHOOD HOUSING
SERVICES OF CHICAGO
Ms. Van Tiem. Good afternoon. Thank you for the opportunity
to share the experience of our community and others like it
across the country.
My name is Katie Van Tiem. I'm a leader with the Southwest
Organizing Project, SWOP, a broadbased community organization
on the southwest side of Chicago. I also work at the Chicago
Lawn/Gage Park Office of Neighborhood Housing Services.
Our residents feel both grief and anger about the growing
foreclosure crisis and its devastating impact on our
neighborhoods, and about the lack of meaningful and substantial
responses from both the public and private sectors.
We still believe the number one priority should be to keep
families in their homes, and that an affordable loan
modification is healthier and more cost effective than a
foreclosure.
SWOP has been fighting predatory lending and foreclosures
for more than a decade. Two years ago, we began mapping the
foreclosures in our neighborhood, and what we saw stunned us:
an entire community, drowning in a sea of red dots, and
drowning from a tsunami. Hundreds of families have been torn--
in the past 2 years, our neighborhood has experienced over
6,600 foreclosure filings. The foreclosure crisis has shifted
from being a crisis of individual families in trouble to one of
an assault on the very structure of our community. Hundreds of
families have been torn from local schools and churches. Parish
leaders have lost homes. Schools are experiencing a critical
decline in enrollment and the loss of key parent leaders. The
community is left with hundreds of vacant, boarded-up homes,
havens for gangs and drug dealers. On some of our blocks,
second grade students pass in front of 10 or 15 of these vacant
homes on their way to and from school every day.
Home values have declined by more than 33 percent in our
neighborhoods, leaving remaining homeowners under water and at
risk of foreclosure. They walk into our offices, wondering how
they're going to pay their increasing property tax bills. We
know the crisis is still growing, and the need for policy
change is more urgent than ever.
We've responded, on many levels. We've tripled the number
of HUD-certified housing counselors, and we began a broad
community campaign to engage local institutions, banks, and
servicers, and government, to come up with real solutions to
keep families in their homes.
As part of this campaign, SWOT negotiated an agreement with
Bank of America to work on a special pilot project aimed at
bank-initiated loan modifications. Throughout the last 9
months, SWOP continues to encounter obstacles caused by the
banks' unwillingness to proactively modify loans. In the
pilot's initial ZIP Code, which is actually on the map right
now, over 543 Bank of America loans were identified as 60 plus
days delinquent. SWOP trained 50 community residents, each of
whom adopted 10 families from that list to contact and help
move through Bank of America's loss-mitigation process.
Resident leaders made direct contact with 70 percent of these
borrowers, resulting in nearly 100 loan-mod applications handed
directly to Bank of America.
We have proven the community has the capacity to act, but,
unfortunately, SWOT believes that Bank of America has not
demonstrated their capacity to deliver, even with the
community's leadership. While an outcome of 52 workouts is
valuable, it pales in comparison to the results that over
hundreds and hundreds of hours of labor should have resulted
in.
This experience, coupled with years of working with
borrowers, created the impetus for my position paper critiquing
HAMP and offering recommendations. Acknowledging the Treasury's
efforts to recraft HAMP, we stand by our original policy
suggestions, of which I'm willing to share more about in the
questions and answers.
SWOP believes an effective program must involve these five
characteristics: bank-initiated loan modifications, an accurate
net present value (NPV) tool using local real data, long-term
forbearance plans for the unemployed, and permanent loan
modifications, and participation must be mandatory.
First, mortgage servicers are grossly overwhelmed. To
streamline and hasten loss mitigation, banks should standardize
the process by mailing full loan modification offers, rather
than open-ended solicitations, to borrowers.
Second, investors and servicers are making the wrong choice
when deciding whether to modify, because they're working with
the wrong information when determining NPV. Investors lose ten
times as much on foreclosures than on mods, yet HAMP-eligible
borrowers are being denied commonsense solutions.
Next, many distressed communities experiencing high rates
of foreclosure like ours endure even longer-than-average
unemployment periods. These homeowners need the option of a
long-term forbearance plan, neither dependent on proof of
unemployment income nor excluding borrowers already 90 plus
days delinquent, as the majority of our cases are.
Fourth, trial periods cost taxpayers and borrowers more
money and further damage credit history, while less than 1 in 5
ever become permanent. Modifications must be permanent for the
life of these loans, beyond 5 years, in order to perform in the
long run.
Finally, servicers should not be allowed to opt out, as,
right now, well over 900,000 loans are currently excluded due
to servicer nonparticipation. Mandatory participation must also
come with real repercussions for not following correct
procedure. And Government should have the authority to override
investors pooling and servicing agreements, pooling and
servicing agreements (PSAs), that preclude modifications when
testing NPV-positive. The current structures incentivize
servicers to foreclose.
PREPARED STATEMENT
So, our community is hemorrhaging, but this doesn't have to
be our fate. There is really opportunity here to increase
modifications, keeping families in their homes, and our
neighborhoods intact.
Thank you.
[The statement follows:]
Prepared Statement of Katie Van Tiem
introduction
Good afternoon, Chairman Durbin, Ranking Member Collins, and
Members of the Committee. Thank you for the opportunity to testify and
share the experience of our community and others like it across the
country.
My name is Katie Van Tiem. I am a leader within the Southwest
Organizing Project (SWOP)--a broad-based organization of 29 churches,
mosques, schools, and other institutions, representing 30,000 families
on Chicago's southwest side. SWOP's work enables families to exercise
common values, determine their own future, and connect with each other
to improve life in their neighborhoods. I am employed as the Program
Manager for Subprime Lending Intervention in the Chicago Lawn/Gage Park
Office of Neighborhood Housing Services of Chicago (NHS), a member
institution of SWOP.
Our residents are saddened, scared, and angry about the growing
foreclosure crisis and its devastating impact on our southwest side
community. They also are upset about the lack of meaningful and
substantial responses from both the public and private sectors.
It is not too late to fix the Home Affordable Modification Program
(HAMP) or create another solution altogether; our country already has
been ravaged by 1.5 million foreclosures, but a total of 8 million are
anticipated to devastate by 2012. We still believe the number one
priority should be to keep people--families--in their homes and that an
affordable loan modification is better, healthier, and more fiscally
beneficial for all involved parties than a foreclosure.
neighborhood impact
SWOP and its member institutions have been fighting foreclosures,
largely due to the subprime mortgage industry and predatory lending,
for more than a decade. Two years ago, in response to the rapid
increase, SWOP began plotting these foreclosures on a map of our
neighborhood. What we saw surprised even us. Our maps showed an entire
neighborhood drowning in a sea of red. Felicidad Masebay, a leader from
St. Rita Church, located right in the middle of that mass of dots, took
one look at the map and declared, ``Oh my God, our neighborhood is
bleeding!''
In those past 2 years, the neighborhoods that SWOP serves have
experienced over 6,600 foreclosure filings.\1\ The foreclosure crisis
has, for us, shifted from being a crisis of individual families in
trouble to one of an assault on the very structure of our community. As
families are forced out of their homes, key neighborhood institutions
are losing the social capital needed to keep them functioning,
businesses are losing critical customers, and newly-vacant homes are
becoming havens for gangs and drug dealers. Everybody loses.
---------------------------------------------------------------------------
\1\ Data collected from Record Information Services, foreclosure
filings in SWOP zip codes 60629, 60632, 60639, and 60652 from January
2008 to present. Retrieved from public-record.com.
---------------------------------------------------------------------------
We have lost hundreds of families from our anchor institutions, and
our community leaders are deeply concerned. Our Pastors tell stories of
parish leaders who have lost homes; schools are experiencing a critical
decline in enrollment and the loss of key parent leaders. The community
is left with hundreds of vacant, boarded-up homes. On some of our
blocks, 2nd grade students pass in front of 10-15 vacant homes on the
way to school. Home values in our neighborhood have declined by more
than 33 percent, leaving remaining homeowners underwater and at risk of
future foreclosure.
The development that businesses, local government, and community
organizations helped create over the last 30 years lies in jeopardy.
Scores of businesses have failed or are planning to leave, including a
large grocery store the community fought hard to bring to the
neighborhood over 10 years ago.
Even as home values plummet, homeowners are walking into our
offices wondering how they are going to pay their increased property
tax bills. As the Federal Reserve Bank of Chicago tells us, ``City and
local governments can lose up to $20,000 in revenue for every
foreclosure proceeding in their jurisdiction,'' \2\ and ``these
foreclosures cost between 8 and 22 times the cost of a loan
modification.'' \3\
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\2\ PICO National Network. (n.d.) A Response that Makes Economic
Sense: Systematic Home Loan Modification.
\3\ Hatcher, Desiree. (February 2006.) Federal Reserve Bank of
Chicago. Foreclosure Alternatives: A Case for Preserving Homeownership.
---------------------------------------------------------------------------
addressing the problem
SWOP and our community have responded on many levels. We have
tripled our HUD-certified counseling staff, and we began a broad
community campaign to engage community institutions, government, and
banks/servicers to come up with real solutions to help keep families in
their homes. Early on, we recognized that the problem could only be
resolved if the major banks and servicers acted more proactively to
keep people in their homes.
As part of this campaign, SWOP has negotiated an agreement with
Bank of America to work with us on a special pilot program aimed at
getting the bank to more proactively modify loans in trouble.
Throughout the last 9 months of meetings and implementation, SWOP has
continually encountered obstacles caused by the bank's unwillingness or
inability to proactively modify loans. In the pilot program's initial
zip code, 60629, over 543 Bank of America loans were 60+ days
delinquent. SWOP identified and trained 50 community residents, each of
whom adopted 10 families from that list to contact and help move
through Bank of America's loan modification process. Resident leaders
made direct contact with 70 percent of these borrowers, resulting in 94
loan modification applications handed directly to Bank of America.\4\
After 6 months of negotiation between counseling staff on both ends,
only 33 borrowers have been offered HAMP Trial Modifications, 17
permanent modifications, and 2 alternative solutions.
---------------------------------------------------------------------------
\4\ Rosen, Anne. (April 2010.) Bank of America Pilot Program:
Results of Interest.
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SWOP has proven the community has the capacity to act.
Unfortunately, SWOP's position is that Bank of America has not
demonstrated their capacity to deliver, even with the community's
assistance. While 52 work-outs may be a small victory, they pale in
comparison to the other 6,600 foreclosures facing our community.
creating solutions
This experience, coupled with years of working with borrowers with
unaffordable loans, created the impetus for SWOP's position paper. In
January, SWOP released a paper critiquing HAMP and providing a set of
recommended changes. While we acknowledge the Department of the
Treasury's efforts to recraft HAMP, we stand by our original
recommendations. We are pleased with the recent emphasis on forbearance
for the unemployed and loan principal reduction, but the last year has
proven that a voluntary loan modification program fails to produce the
number of loan modifications necessary to counter the scale and impact
of the crisis.
A pro-active loan modification process with bank-initiated loan
modification offers should be implemented, as the current case-by-case
method is not working. Not only are mortgage servicing departments
grossly overwhelmed, they are incentivized to foreclose.\5\ In order to
streamline and hasten the loss mitigation process, banks should
standardize the process by mailing full loan modification offers,
rather than open-ended solicitations. As the National Consumer Law
Center (NCLC) also urges, ``only when a borrower rejects a
modification--or, if an initial, standardized modification fails--
should detailed underwriting be done.''
---------------------------------------------------------------------------
\5\ National Consumer Law Center, Inc. (2009, October.) Why
Servicers Foreclose When They Should Modify and Other Puzzles of
Servicer Behavior. Retrieved from http://www.consumerlaw.org/issues/
mortgage_servicing/content/Servicer-Report1009.pdf.
---------------------------------------------------------------------------
Next, a standardized and fully transparent Net Present Value (NPV)
tool, using local, real-time data, should be employed. Investors and
servicers are making the wrong choice when deciding whether to modify
or not because they are working with the wrong information (e.g. REO
Discounts.) As already highlighted, the costs and losses associated
with foreclosures are huge. NCLC reports that investors lose ten times
as much on foreclosures than they do on modifications,\6\ yet HAMP-
eligible borrowers are being denied modifications due to faulty results
from an inaccurate test. The NPV test needs to be fixed allowing
reality to make the case for more loan modifications, saving all
parties involved.
---------------------------------------------------------------------------
\6\ National Consumer Law Center, Inc. (2009, October.) Why
Servicers Foreclose When They Should Modify and Other Puzzles of
Servicer Behavior. Retrieved from http://www.consumerlaw.org/issues/
mortgage_servicing/content/Servicer-Report1009.pdf.
---------------------------------------------------------------------------
Unemployed and underemployed homeowners need a workable solution.
The country's unemployment rate for the month of February is 10.4
percent, while the state of Illinois's reached 12 percent.\7\ Moreover,
the average length of unemployment has increased to nearly 6 months,
and many distressed communities experiencing high rates of foreclosure
endure even longer unemployment periods.\8\ These homeowners should
have the opportunity to sign into a long-term forbearance plan, neither
dependent upon proof of unemployment income, nor excluding borrowers
already 90+ days delinquent, as the new HAMP changes dually dictate.
The forbearance period could be linked to the unemployment rate of the
related area.
---------------------------------------------------------------------------
\7\ U.S. Bureau of Labor Statistics. (April 1, 2010.) Retrieved
from http://www.google.com/
publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en
&q=un-
employment+statistics#met=unemployment_rate&idim=state:ST170000&tdim=tru
e.
\8\ Illinois People's Action. (March 27, 2010.) Press Release.
Administration's New Plan: Baby Steps up a Mount Everest of
Foreclosures.
---------------------------------------------------------------------------
Truly permanent loan modifications lasting the life of the loan
should be granted. ``Trial'' modification periods slow the entire loan
resolution process--costing taxpayers and families more money, further
damaging borrower credit, and decreasing the number of permanent
solutions. Currently, in Chicago, only 22 percent of total HAMP
activity involves HAMP permanent modifications.\9\ Permanent loan
modifications are needed--including permanent interest rate adjustments
and principal reductions. Loan modifications with principal reductions
perform better than those without. Future payment shocks, after the
initial 5-year rate freeze, will mirror the ARM/POA payment shocks of
the last 5 years; the most recent SIGTARP reports predicts average
increase in the 4th year to be 23 percent while borrowers' incomes are
unlikely to increase 23 percent.\10\
---------------------------------------------------------------------------
\9\ U.S. Department of the Treasury, Making Home Affordable
Program, Servicer Performance Report through March 2010. Retrieved from
http://www.makinghomeaffordable.gov/docs/
Mar%20MHA%20Public%20041410%20TO%20CLEAR.PDF.
\10\ SIGTARP. (March 25, 2010.) Factors Affecting Implementation of
the Home Affordable Modification Program. Retrieved from http://
www.sigtarp.gov/reports/audit/2010/
Factors_Affecting_Implementation_of_the_Home_Affordable_Modification_Pro
gram.pdf.
---------------------------------------------------------------------------
A revamped HAMP program must then be made mandatory. Mortgage
servicers should not be allowed to opt out of the program, nor deny
individual loans without correct procedure. The latest Servicer Report
lists 6 million HAMP-eligible borrowers across the country, defining
HAMP-eligible as 60+ days delinquent. Of these loans, 900,000 are
excluded upfront due to servicer non-participation.\11\ A more truthful
HAMP-eligible picture would include those loans marked ``imminently
delinquent'' and those in default from 1-59 days, in addition to 60+
day delinquent loans. Portraying the full HAMP-eligible pool of loans
would unmask much more than 900,000 homeowners excluded due to servicer
non-participation; as the public does not know the percentage of truly
HAMP-eligible debt that is excluded by servicer non-participation.\12\
Mandatory participation should also come with accountability and
repercussions for not following correct procedure, and the government
should have the authority to override investors' pooling and servicing
agreements (PSA) that preclude modifications when testing NPV positive.
---------------------------------------------------------------------------
\11\ U.S. Department of the Treasury, Making Home Affordable
Program, Servicer Performance Report through March 2010. Retrieved from
http://www.makinghomeaffordable.gov/docs/
Mar%20MHA%20Public%20041410%20TO%20CLEAR.PDF.
\12\ U.S. Department of the Treasury, Making Home Affordable
Program, Servicer Performance Report through March 2010. Retrieved from
http://www.makinghomeaffordable.gov/docs/
Mar%20MHA%20Public%20041410%20TO%20CLEAR.PDF
---------------------------------------------------------------------------
conclusion
In order to increase loan modifications and decrease foreclosures,
to save communities like ours and hundreds of others across the country
from further destruction, the HAMP program needs to be improved. As
stated, SWOP believes an effective loan modification program must
involve bank-initiated loan modification offers, an accurate NPV tool,
long-term forbearance for the unemployed and underemployed, and
permanent loan modifications. And, participation must be made
mandatory.
Thank you again for the opportunity to share our story and
expertise.
Please see additional data to support claims of HAMP failure and
the need for systemic change.
Increase in Foreclosure and Increase in Demand for Foreclosure
Counseling
Foreclosures have been increasing--across the country, in the state
of Illinois, in Chicago, and on the southwest side--while experts
predict national levels to peak only at the end of this year.\13\
Standard & Poor's recently predicted 3 years will be needed to clear
the inventory of bank-repossessed properties and current
delinquencies.\14\ Credit Suisse forecasts that over 8 million families
will lose their homes to foreclosure between 2009 and 2012, that's 16
percent of all mortgages.\15\ Without significantly more intervention
to stop foreclosures, as many as 13 million homes could be lost.\16\
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\13\ Calculated Risk blog. August 20, 2009. MBA Forecasts
Foreclosures to peak at End of 2010. Retrieved from http://
www.calculatedriskblog.com/2009/08/mba-forecasts-foreclosures-to-peak-
at.html.
\14\ Prior, Jon. (February 16, 2010.) Shadow Inventory of Homes to
Take Nearly Three Years to Clear: S&P. Retrieved from http://
www.housingwire.com/2010/02/16/shadow-inventory-of-homes-to-take-
nearly-3-years-to-clear-sp/.
\15\ Credit Suisse. Fixed Income Research. (December 4, 2008.)
Foreclosure Update: over 8 Million Foreclosures Expected. Retrieved
from http://www.nhc.org/Credit%20Suisse%20Update%2004%20Dec%2008.doc.
\16\ Hatzius, Jan and Michael A. Marschoun. Home Prices and Credit
Losses: Projections and Policy Options, Goldman Sachs Global Economics
Paper, (No. 177, Jan 13, 2010) at 16.
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During the month of February, foreclosure filings were reported on
over 380,000 properties nationally--1 in every 418 housing units, up 6
percent from last year at this time.\17\ Illinois currently ranks 8th
in the country for foreclosure filings, with 1 in every 305 households
receiving a filing for a total of 130,165.\18\ Chicago's 2009
foreclosure filings increased by 21 percent compared to 2008, up from
57,927 to 70,122,\19\ and Chicago now experiences a foreclosure every
22 minutes with an average of 118 foreclosures in every square
mile.\20\ In the community areas on the southwest side of Chicago that
SWOP serves, foreclosure starts have increased by 11.4 percent from the
second half of 2008 to the second half of 2009.\21\ Over the last 2
years, our neighborhoods have witnessed 6,600 foreclosure filings.
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\17\ RealtyTrac. U.S. Foreclosure Activity Decreases 2 Per Cent in
February. Retrieved from http://www.realtytrac.com/contentmanagement/
pressrelease.aspx?channelid=9&itemid=8695.
\18\ RealtyTrac. Illinois Real Estate Trends. Retrieved from http:/
/www.realtytrac.com/trendcenter/il-trend.html.
\19\ Woodstock Institute. Chicago City and Regional Foreclosure
Activity Second Half 2009 Figures. Retrieved from http://
www.woodstockinst.org/.
\20\ Bianchi, Nick. (March 2010) National People's Action. The Home
Foreclosure Crisis in Chicago: An Assessment of Foreclosures and their
Impacts in 2009.
\21\ Woodstock Institute. Chicago City and Regional Foreclosure
Activity Second Half 2009 Figures. Retrieved from http://
www.woodstockinst.org/.
---------------------------------------------------------------------------
The demand for foreclosure counseling remains high. Locally,
attributed in part to SWOP's successful outreach efforts, the Greater
Southwest Development Corporation--another member institution of SWOP--
witnessed a 53 percent increase between 2008 and 2009 in foreclosure
counseling, up from 651 homeowners to 993, while NHS of Chicago
completed 150 new intakes for the month of February alone.\22\ And NHS
counselors in the Chicago Lawn/Gage Park Office are carrying a caseload
of over 50 clients each and a waiting list upwards of 15 each.
Moreover, the Woodstock Institute--the nationally recognized non-profit
research and policy organization focusing on lending, wealth creation,
and financial systems reform--recently released a report (in addition
to its February 2010 report entitled ``Government Interventions Have a
Limited Impact on Chicago Area Foreclosure Activity'') on housing
counseling in the state of Illinois. It found ``a general consensus''
among Illinois foreclosure counseling service agencies that the demand
for services is higher than they are able to meet while 85 percent of
the agencies that responded reported needing additional counselors to
meet demand.\23\ Foreclosure counseling alone (without substantive
changes to HAMP) cannot be the only solution; funding must continue for
HUD-certified counseling in the midst of this growing foreclosure
crisis.
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\22\ Cole, Anne. (February 2010.) NHS Monthly Saves Report.
\23\ Woodstock Institute and Housing Action Illinois. (July 7,
2009) On the Foreclosure Front Lines: Surveying the Capacity of HUD-
Certified Housing Counseling Agencies in Illinois. Retrieved from
http://www.woodstockinst.org/publications/research-reports/.
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Inadequate Solutions, Especially HAMP Permanent Modifications
HAMP solution numbers are low. Again, SWOP thanks the Department of
the Treasury for its attempts at recrafting a Federal program to help
``responsible homeowners'' avoid foreclosure. But, unfortunately, as
foreclosure filings and the demand for foreclosure counseling continue
to climb, the number of HAMP loan modifications--especially HAMP
permanent loan modifications and not just the HAMP trial
modifications--fails to counter the crisis.
National Data
The latest Servicer Performance HAMP Report demonstrates that, as
of March 2010, only 230,801 homeowners across the country have achieved
a permanent HAMP modification, while a total of 1,166,925 HAMP trials
have started since program inception--a transition rate from trial to
permanent at 19.7 percent.\24\ When these ``successes'' are compared to
the backdrop of 7.4 million homeowners across the country who are
delinquent/behind on their mortgages,\25\ these HAMP numbers are not
reassuring; they are alarming.
---------------------------------------------------------------------------
\24\ U.S. Department of the Treasury, Making Home Affordable
Program, Servicer Performance Report through March 2010. Retrieved from
http://www.makinghomeaffordable.gov/docs/
Mar%20MHA%20Public%20041410%20TO%20CLEAR.PDF.
\25\ Lender Processing Services, LPS Mortgage Monitor, February
2010 Mortgage Performance Observations. Retrieved from http://
www.lpsvcs.com/NewsRoom/IndustryData/Documents/02-
2010%20Mortgage%20Monitor/Pres_MM_Jan10Data.pdf.
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MSA Data
While SWOP encourages HAMP data to be as local as possible, it
wasn't until December of last year that these Servicer Performance HAMP
Reports began including data at the Metropolitan Statistical Area (MSA)
level, in addition to the national and state level. The MSA data,
however, fails to include cumulative HAMP trials started since
inception--information necessary to make a real comparison between
transition rates of the nation to those of Chicago MSA.
Yet February's numbers do show 8,086 HAMP permanent modifications
for Chicago MSA--an area about three times the size of the city of
Chicago, as Chicago holds a population of nearly 3 million.\26\ When
Chicago alone houses 23,200 borrowers who fell into foreclosure and
over 8,500 homes lost to foreclosure last year, it is difficult to see
how 8,086 cumulative HAMP permanent loan modifications in the entire
MSA (less than the total number of completed foreclosures for the city
of Chicago in 2009) can have a substantial impact.
---------------------------------------------------------------------------
\26\ Wikipedia. (April 8, 2010) Chicago metropolitan area.
Retrieved from http://en.wikipedia.org/wiki/
Chicago_metropolitan_area#Metropolitan_statistical_area.
---------------------------------------------------------------------------
Southwest Side Chicago Data
Low Transition Rates from HAMP Trial to HAMP Permanent.--Our on-
the-ground efforts have taught us that achieving trial-to-permanent
conversions is a significant challenge. This challenge can be
quantified by looking at NHS of Chicago's modification data for its 10
target neighborhoods (which includes Chicago Lawn/Gage Park). Between
April 2009 and March 2010, NHS helped nearly 600 families secure HAMP
trial modifications. Only 78 of these families have subsequently
secured a HAMP permanent modification, resulting in a 13 percent
conversion rate. The reasons for the low conversion rate vary, but poor
communication with lenders and redundant paperwork requirements
continue to slow the process for many homeowners. For example, just 2
weeks ago, an NHS counselor received a phone call from a homeowner who
had first submitted paperwork over a year ago to her servicer and has
resubmitted paperwork over six times throughout the process. The
counselor and homeowner are now in weekly contact, and the homeowner is
still waiting to hear a response. Streamlining the loan modification
process, including eliminating trial modifications, is critical to
finding sustainable solutions for HAMP program participants.
Long Length of Time for HAMP Decisions.--Moreover, NHS housing
counselors spend an average of over 8 hours with a client to receive a
HAMP trial modification and still need an additional 4 hours to convert
the trial to permanency.\27\ Additionally, the average length of time
it takes for a counselor/borrower to reach a HAMP trial modification
has been increasingly slightly over the last several months to 131
days.\28\ Not only does this highlight the continued need for
counseling and advocacy, but also highlights the need to expedite the
transition process. SWOP encourages Treasury to create accountability
benchmarks with real consequences when it comes to HAMP review periods.
---------------------------------------------------------------------------
\27\ Cole, Anne. (February 2010.) NHS Monthly Saves Report.
\28\ Cole, Anne. (February 2010.) NHS Monthly Saves Report.
---------------------------------------------------------------------------
Average Debt-to-Income Ratio Found Higher than Targeted 31 percent
for HAMP Modifications.--Successful--hence, affordable--loan
modifications result in a win for all parties: the homeowner,
neighbors, neighborhood institutions, local/state/Federal government,
and the investor. The ``affordability'' of HAMP loan modifications is
founded on the basis that the full monthly mortgage payment be no more
than 31 percent of the household's gross monthly income. NHS of Chicago
has found that as many as 30 percent of loan modifications are being
offered to homeowners with documents which claim that the offer is made
under HAMP when the loan modification does not appear to follow the
HAMP guidelines--based upon the homeowners reported income, the payment
reduction does not lower the PITIA payment to 31 percent of the
homeowner's gross monthly income. Such loan modifications are often not
sustainable and create the potential for redefaults in the future.
Homeowners often accept these offers without realizing that the offer
does not meet the HAMP guidelines.
SWOP encourages the use of all possible resources to investigate
the affordability details of HAMP ``permanent'' modifications and apply
pressure--with real consequences--to servicers that fail to follow
guidelines.
Bank of America Data.--Please see attached ``Bank of America Pilot
Program: Results of Interest'' for statistics on the wins and losses of
our pilot program.\29\
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\29\ Rosen, Anne. (April 2010.) Bank of America Pilot Program:
Results of Interest.
Senator Durbin. Thank you for your testimony.
So, several years ago, I introduced a bill to change the
bankruptcy law to say that the primary residence could be
considered for modification of the mortgage debt by the
bankruptcy court, as we currently allow the court to consider
secondary residence--vacation homes--they can do those, but
they can't touch the primary residence. The feeling was that if
the lender knew that, ultimately, the bankruptcy court had the
power to do this, they would be inclined to take their own
action earlier, before it reached bankruptcy court. I tried
that twice. It didn't work. And I don't know if I'll try it
again. But, let me set that aside for a second.
There are a couple of things that I want to explore with
you for a moment, and try to ask you each to step back into the
shoes of the lender and understand their economic decision,
that we know a foreclosure is a very expensive undertaking, and
there is a loss of, some say, $50,000. That's a figure that's
used a lot; I don't know how accurate it is. There is certainly
a loss in the value of property when they're foreclosed and
vacant, and the like. So, they know, ultimately, that the asset
that they are, basically, lending the money on, and that they
own for this purpose, is going to diminish dramatically in
value if foreclosure is initiated. It seems to be an economic
incentive for them to act and avoid foreclosure, if they can.
And yet, they don't.
It strikes me there might be one or two reasons. If they
had to really bring down the cost of that portfolio of real
estate to its true value, it could create some underwriting
problems at the bank, in terms of their own securitization and
the reserves that they have for the work that they're doing.
And, second, if it becomes a commonplace thing to renegotiate a
mortgage to a lower principal value, the so-called ``moral
hazard'' argument might get in; people will say, ``If I'm under
water, I'll just stop paying. I know the bank's going to call
me, and we can renegotiate a mortgage at a lower principal.''
So, I'm trying to figure out exactly what their economic
argument is for resisting the modification, for people who
clearly have the ability to pay something on their under water
mortgage.
Jump ball. Anybody interested in commenting?
Please.
Mr. Neiman. I totally agree with you. One, I think we--
there was a real missed opportunity by not adopting the cram-
down when it was proposed, because I think that would have
provided the right incentive, both as a carrot and a stick.
So, where we are today--and I think it's a great question,
because, What is driving lenders? You know, we used to hear--
and affordability? You know, we started looking at
affordability as the key driver, and I think it's becoming much
clearer that negative equity is a--really, now, a critical
driver to sustainability. And the lenders, in--what we've been
hearing, and I think it's a--it's--there's--it's supported in
evidence that, in order to get to a sustainable mortgage--
lenders are not interested in having a redefault, because that
only prolongs the foreclosure--but, in order to get--minimize
lender default and to get to a sustainable--a combination of
interest rate reduction and a principal reduction really is
clearly a stronger payment, even at the same DTI, than an
interest only. Having the borrower, with reduced negative
equity, with more skin in the game is a--proven evidence of a
more sustainable mortgage.
One of the Treasury's proposals was to get to that concern.
Lenders were saying, ``We can't reduce mortgage.'' I think you
highlighted, too, the writedown, the--taking the loss, and the
moral hazard. I think the other was that the waterfall
provision did not provide a safe harbor for them, because it
would not--a principal writedown would not be viewed as
standard and customary.
The Government--the Treasury--modified the waterfall
provision to allow and to encourage principal writedowns, and
now we are still hearing, from lenders, that they are reluctant
to write down principal.
So, I agree with you totally that there are concerns, but
it is critical that we get to the issue of principal writedowns
as part of a--the modification process.
Senator Durbin. Ms. Van Tiem.
Ms. Van Tiem. Sure. Senator, I think that's a wonderful
question. I mean, that's something we've been scratching our
head about for years, not understanding, if everyone is losing
money, why aren't modifications happening, and why is
foreclosure being chosen?
I think one thing that it brings up is, kind of, the fight
or the debate of the investor and the servicer. We work with
servicers who blame it on the investor. We work with investors
who blame it on the servicer. And so, I think that one of those
reasons is that servicers are making their front-line decisions
when you call in. And a lot of times, they refer to PSAs, which
I mentioned is almost like Frankenstein papers; there's not
actually live people making those decisions; it's a paper that
was written, you know, 2, 3, maybe 4 years ago, and it's
sitting there in a room, being translated by the servicers.
So, I think the current structure, right now, is set up
that servicers receive lots of money from servicing loans in
foreclosure, and they sometimes lose money and do not make any
money from having a loan modification. And so, I think the
current pay structures are incentivizing servicers to either
not modify or just continue with their behavior. And I think
that investors, if they knew more of what was happening, maybe
they would be making larger points. But, I feel like we're
mostly talking about servicing more than we're talking about
investors.
Senator Durbin. So, when the Secretary was here, he talked
about this body of 5.5 million mortgages going under water and
facing foreclosure across America, and said that about 1.8
million, one-third of them, would be eligible for the HAMP
modification, and said the other two-thirds would not be, for a
variety of reasons he went through. You know, I've heard them
from him before. The properties are too valuable. Not likely in
that particular----
Ms. Van Tiem. Yeah.
Senator Durbin [continuing]. ZIP Code. The people have--
it's an investment property or a second home, or their income
disqualifies them from a modification.
What percentage of the world that you live in fits into
that two-thirds category?
Ms. Van Tiem. So, you know, I agree with the list that he
was going down, of the four types of mortgages that shouldn't
be involved in these residential modifications. But, almost
nobody in our neighborhood has a loan over $729,000 for
residential second--you know, second property, jumbo loans. So,
the--so, he--the answer to your question is, he was excluding
almost no one from our neighborhood; and who he was talking
about should be included is everyone in our neighborhood, yet
everyone in our neighborhood is not benefiting from these
programs.
Senator Durbin. Okay.
Senator Collins.
Senator Collins. Thank you, Mr. Chairman.
Mr. Puvalowski, I want to go through with you the issue I
raised with the Secretary about General Motors' repayment of
some of its TARP money. Could you take us through: How much did
GM get? What was the source of the repayment of the loan? How
much is outstanding?
Mr. Puvalowski. Sure. $49.5 billion of--with the TARP funds
went into General Motors as a loan, some prior to bankruptcy,
and some during bankruptcy. As General Motors emerged from
bankruptcy, the U.S. Treasury--that is, the taxpayers--
essentially had three assets: one, 61 percent of the common
equity of General Motors; two, $2.5 billion worth of preferred
shares, paying a dividend; and three, an obligation from
General Motors to pay $7.1 billion to Treasury--essentially
$7.1 billion continued as a loan that GM would have to pay
back.
Senator Collins. And that's what was repaid, the $7.1
billion, correct?
Mr. Puvalowski. That's exactly right. Now, what happened
was, of the money that--of the TARP money that went into GM in
the first instance, a majority was used by the time that
General Motors emerged from bankruptcy, but there was $16.4
billion left as GM emerged from bankruptcy. That $16.4 billion
was put into an escrow account. It's General Motors' money. The
Treasury Secretary is absolutely right about that. It was the
TARP loan paid to GM, it is owned by GM, but, in order to use
that--those funds, GM had to get Treasury's permission to
release funds from that escrow account in order to--and they
have done that on various occasions. They paid off some debts
relating to Delphi, one of its suppliers, and they have made,
now, a series of payments back to Treasury to pay off the $7.1
billion.
What happened last week is that General Motors applied, and
Treasury approved, the release from that escrow account of the
remainder--$4.7 billion--that was owed to Treasury, and the
rest of the escrow funds was released back to General Motors.
Senator Collins. But, the source of the money for--the
source of the money for the escrow account is ultimately from
what source?
Mr. Puvalowski. The source of the money from that escrow
account was the initial TARP loan to General Motors.
Senator Collins. Exactly. Which brings me to my point.
Mr. Puvalowski. The----
Senator Collins. Wasn't GM essentially using TARP money to
repay TARP money?
Mr. Puvalowski. The--yes, is the answer. This is good news.
It's good news that General Motors did not need to use the
funds to pay other expenses. It's good news that the--that a
part of the taxpayers' investment has been repaid. But, what
needs to be made clear are two things. One is that the source
of the funds came from an escrow account that was funded with
TARP funds in the first place. And, second, as was discussed
with the Treasury Secretary, there are still a--the vast
majority of the taxpayer investment in General Motors remains
outstanding, in the form of the 61-percent equity stake and
$2.5 billion of preferred shares.
Senator Collins. This is so frustrating to me, because I
think the public is being very misled. When General Motors runs
an ad, saying--by its CEO--saying, ``That's why I'm here, to
announce that we've repaid our Government loan in full, with
interest, 5 years ahead of the original schedule,'' do you
think that's misleading?
Mr. Puvalowski. The statement is literally true, because
they have paid back the loan. But, again, what--that--the--to
get the full picture, you need those two additional facts; one,
that it was repaid with TARP funds; and, two, that it's only a
small portion of the overall taxpayer investment.
Senator Collins. I think that most people listening to that
ad would think that General Motors had repaid all of the
taxpayers' investment into the company. And I think that
impression was reinforced by the Treasury's press release and
by the President's radio address, last Saturday, because the
fact is, the source of the repayment money is from the
taxpayers, also. Correct?
Mr. Puvalowski. That is correct.
Senator Collins. Let me switch to a different issue, and
that has to do with the oversight of the Special Inspector
General's Office of programs under TARP. The Treasury has
proposed a new program to provide capital to community banks,
with the goal of increasing small business lending. And all of
us are very concerned about the dearth of capital for small
businesses.
It's my understanding that the Treasury has challenged the
ability of your office to oversee this new program. Is that
accurate?
Mr. Puvalowski. That is accurate. What--the Treasury
Department has announced an initiative in which $30 billion of
TARP money will be taken out of the TARP program and put in--
into a program called the Small Business Lending Fund (SBLF).
That Small Business Lending Fund is, in--almost all major
respects, a mirror image of the TARP's Capital Purchase Program
(CPP). In fact, we estimate that 95 percent of the remaining
CPP banks will simply convert their CPP investments into the
Small Business Lending Fund, in which they will be able to get
reduced dividend rates, should their lending go above 2009
levels. The basic economics are a good idea.
We were initially told that SIGTARP would be part of the
oversight mechanisms that was put into the legislative proposal
concerning SBLF. We were later told that that would not be the
case.
We have concerns about that, in several respects. We have
spent the last 1\1/2\ years, since our inception, developing an
expertise, developing a staff, developing technological
capacity, and we have two dozen ongoing investigations into
CPP-related fraud allegations. To essentially take the--a
program that involves the same amount--the same money, many of
the same participants, and the same basic structure, and expect
a different oversight body to get up to speed, assuming they
have the resources to do it, would subject the taxpayer to very
significantly and unnecessary fraud exposure.
Senator Collins. So, in your view, there's absolutely no
justification for treating this program differently from the
other TARP program and excluding your office from conducting
vigorous oversight of the program.
Mr. Puvalowski. We have strongly suggested that SIGTARP be
made a part of the oversight mechanisms for SBLF. And I don't
speak for the Congressional Oversight Panel or GAO, but,
frankly, I would think that those organizations, who also have
spent substantial resources overseeing CPP, should be included,
as well.
Senator Collins. Well, I can't imagine that we would allow
this program to go forth without the same kind of necessary
aggressive oversight that your office has provided.
Thank you, Mr. Chairman.
Senator Durbin. I might just say, in followup to that, if I
understand the logic behind this, TARP carries with it a
negative connotation in the financial sector. It sounds like
the ``Government bailout,'' the ``Government handout,'' with
strings attached, on executive pay--and the notion, here, was
to somehow move the money from the TARP into a different
entity, which banks would not be loathe to turn to because of
that connotation. And also, the hope is that that money would
then be loaned to small businesses across America that are
facing a credit crunch.
But, I don't disagree with Senator Collins' premise.
Regardless of what we call it, the name we put on it, we want
to make sure that it's being watched carefully and spent
wisely, and that there is some accountability. So, I don't
quarrel with your conclusion, but I think that is the
mechanism. We are trying to cleanse and purify these TARP funds
to the point where the community banks of Illinois, for
example, may feel there's no, you know, negative connotation to
be a participant in a new program like this.
I think----
Mr. Puvalowski. And, Senator, we don't quarrel with those
basic, kind of, policy determinations. We--the only point that
we would--made on this is to suggest strongly that the
appropriate oversight be put into place.
Senator Durbin. I couldn't agree with you more.
I want to go back to a point that Ms. Tiem made in her
testimony, and was, I think, also referred to by Mr. Neiman,
and that is this consummate frustration people feel by being
asked to submit the paperwork over and over and over again when
they are trying to get modifications on their mortgages.
Does this reflect an effort by the servicers to wear down
the applicants? Does it reflect ineptitude and change of staff
at the servicers' level? How do you--I mean, you've been
through this so many times. What's your thought on that?
Ms. Van Tiem. That's another good question. You know, I
think one problem that the servicers have is just capacity. You
know, we've heard, from Bank of America, that they had, like,
30--couple of thousand staff, and they doubled their staff in
the last year, to make up for HAMP and its changes. And that's
still not enough. And Bank of America has some of the slowest
loss mitigation departments around. And so, I think one, I
would say, would be capacity. Two, I don't think it's
necessarily intentional, that they're--they may be trying to
wear people down, but I think it would circle back again into
where the servicers' incentives are, and I think that, as long
as they're getting paid out while they still move people
through the foreclosure process, then there's nothing, really,
like--there's no real impetus, a real fire behind them to kind
of work that modification more quickly than they are.
Senator Durbin. One of the things we've found--and Mr.
Neiman, you might be able to comment on this, as well--it was
virtually impossible to figure out who was holding the mortgage
on some of these parcels in this ZIP Code. We wanted to say,
is--ultimately, who is it? Deutsche Bank? Is it Bank of
America? Is it Chase? They have literally made it hard, if not
impossible, to find out who that might be.
Mr. Neiman. Yeah. And even----
Senator Durbin. There is----
Mr. Neiman [continuing]. When you find out who it is, it's
typically the trustee, who is----
Senator Durbin. Exactly.
Mr. Neiman [continuing]. Not the investor. Can I----
Senator Durbin. Who would make the ultimate decision on
modification to reduce the principal, for example? Doesn't it
have to be the ultimate----
Mr. Neiman. The investor. And----
Senator Durbin [continuing]. Investor?
Mr. Neiman [continuing]. That's--and that's often dictated
by the pooling and servicing agreement. In some cases, it
requires the concurrence of all those investors. And that's why
some of these are that difficult.
Senator Durbin. Before you go further, I'll just say, that
was one of the motives behind the bankruptcy change.
Mr. Neiman. That's right.
Senator Durbin. ``It's a roundup time. Everybody show up in
court. A decision's about to be made, and if you have an
interest in this, you'd better be there and represent
yourself.'' And that provision didn't go forward.
So, can you tell me, is there a way through this, that we
can cut through all of this information, to the reality?
Mr. Neiman. Well, I think the--my reference to this Web
portal is so critical, that there be one location where
borrowers and lenders can go to verify what documents are
submitted. You know, servicers were set up to collect payments.
They--this is a resource, and a whole change of mindset, for
servicers. And unless they have the tools, like a consistent,
standardized Web portal offered through a Fannie Mae or through
an individual servicers, where it is clear----
The one woman who I made reference to, she was a fortunate
individual, who kept all her documents in Word files that she
was able to send to us. So, when a servicer would say to her,
``You didn't submit the tax form,'' she was able to show, and
she showed us, ``Yes, I did. Here's a copy of the evidence.''
So, I think it is critical that we revisit, and Treasury
commit to the timeline that they talked about, having a
centralized system utilizing a Web portal that borrowers can
evidence submission of documents and evidence servicer receipt.
Senator Durbin. Mr. Neiman, I don't know if you're in a
position to answer this question, but I want to follow up on a
very valid point raised by Senator Collins, and that's Fannie
Mae and Freddie Mac, and the fact that they have become,
literally, the Government guarantors of mortgages, on a
wholesale basis across America. And I don't know if they
started off with that intention, but they certainly do play
that role today.
And, as we look at their being overextended in many areas,
and the Secretary's--I wouldn't say ``reluctance,'' but his
caution in approaching this--it would strike me that we also
have to step back and say, ``We have to be careful, here.''
We've lowered interest rates to zero. We are trying to create a
market for mortgages, for private borrowers in residences in
America. And Fannie Mae and Freddie Mac are playing a big role
in this decision. And how we approach their reform is going to
have an impact on the availability of mortgages across our
Nation. Would you agree with that?
Mr. Neiman. I--oh, I totally agree with that. And mortgages
would not be made today, but for the fact that Fannie and
Freddie are standing behind those mortgages. So, this is
complex. I agree that it has to be done in a thoughtful way. I
think it has to be done in a way that respects the role of
community banks that have set the correct model. The--it has to
include a review of the securitization process. We have done a
lot, at the State level, to establish, at the State level,
underwriting standards, duties of care for brokers and lenders,
and--or, one of the first States to register servicers and
impose duties on care and information reporting requirements of
the servicers themselves. And I think those are also
recommendations that, if adopted at the Federal level, can
significantly improve the housing market.
Senator Durbin. If Senator Collins would let me ask one
last question of Ms. Van Tiem.
I would like your thoughts, based on your experience, on
the role of community banks. I respect them, I've worked with
them, and I've been told, you know, by many people, ``They're
not the problem.'' And they have a tendency to, when they make
a mortgage loan, make it in the community and follow up on it
so that the people know who they're dealing with.
Critics have come in and said, ``No, Senator, you're
missing the point. They don't lend to a lot of people who are
in lower-income categories. It's the larger banks that did
that, for better or worse, in the subprime mortgage
situation.''
So, how often do you run into community banks when you're
dealing with the incidence of foreclosure in your area?
Ms. Van Tiem. Well, I would just say that we have really
great relationships with the community banks in our
neighborhoods. And I think they do lend to many people in our
community, and they do lend good loans to people in our
community.
We do come across them, sometimes, with loss mitigation,
when you have a homeowner who had a good loan, but then had a
drop income or a drop of employment, and then we have to deal
with their servicing department. So, it's generally good loans,
but--you know, I believe it was--I can't remember whose paper,
but--you know, the increase, now, in foreclosures is 70
percent, you know, for prime loans, and so--clearly, because of
the bust of the overall economy, we're seeing a lot of people
with good loans have trouble. But, I would like to endorse
support for community banks.
If I could backtrack just a second, I do think the Web
portal is a good idea, in the sense that we need to streamline
information. But, as long as we're talking about Government
programs, I just want to say, too, that, even when all the
information is in, and even when a servicer has everything
accurate and up to date, they're still making the wrong
decisions, and they're still not modifying the number of loans
that they should be modifying. They're either not paying
attention to the waterfall and refusing to follow steps 3 and
4--or, now, hopefully, step 1, principal reduction--or the NPV
is flawed and they're just really, with the wrong information,
understanding how to make money, and the fact, again, that the
program is voluntary. And, again, I'd like to say I really
think the program should be mandatory so that people follow it,
or at least have real teeth.
Senator Durbin. Thank you.
Senator Collins.
Senator Collins. Thank you. I'm done.
Senator Durbin. Well, I want to thank this panel. We've
sure covered a lot of things here, in a short period of time,
and we're lucky to have the Treasury Secretary give his time,
as he did. But, of course, we do give him his appropriations,
so he'd better show up.
But, he's been very kind and cooperative throughout this
whole process. And you all have made sacrifices to be here, and
we thank you very much for that.
CONCLUSION OF HEARING
So, the subcommittee's going to stand recessed. If there
are written questions that may come your way in the next few
days or a week, hope you can answer them on a timely basis.
Thank you.
[Whereupon, at 4:13 p.m., Thursday, April 29, the hearing
was concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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