[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?

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

                                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








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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
                                 ------                                

       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

                              ----------                              
                                                                   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?

                              ----------                              


                        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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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/.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
            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\
---------------------------------------------------------------------------
    \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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