[Senate Hearing 111-902]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 111-902

                  TARP FORECLOSURE MITIGATION PROGRAMS

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                            OCTOBER 27, 2010

                               ----------                              

        Printed for the use of the Congressional Oversight Panel







                                                        S. Hrg. 111-902

                  TARP FORECLOSURE MITIGATION PROGRAMS

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 27, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                    The Honorable Ted Kaufman, Chair
                             Kenneth Troske
                           J. Mark McWatters
                           Richard H. Neiman
                             Damon Silvers






                            C O N T E N T S

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                                                                   Page
Statement of:
    Opening Statement of Hon. Ted Kaufman, Chairman, 
      Congressional Oversight Panel..............................     1
    Statement of J. Mark McWatters, Member, Congressional 
      Oversight Panel............................................     6
    Statement of Damon Silvers, Deputy Chair, Congressional 
      Oversight Panel............................................    13
    Statement of Kenneth R. Troske, Member, Congressional 
      Oversight Panel............................................    18
    Statement of Richard H. Neiman, Member, Congressional 
      Oversight Panel............................................    22
    Statement of Phyllis Caldwell, Chief, Home Ownership 
      Preservation Office, U.S. Department of the Treasury.......    26
    Statement of Guy Cecala, CEO and Publisher, Inside Mortgage 
      Finance Publications, Inc..................................    60
    Statement of Julia Gordon, Senior Policy Counsel, Center for 
      Responsible Lending........................................    70
    Statement of Katherine Porter, Professor of Law, University 
      of Iowa College of Law.....................................   108
    Statement of Joseph Evers, Deputy Comptroller for Large Bank 
      Supervision, Office of the Comptroller of the Currency.....   124
    Statement of Faith Schwartz, Senior Advisor, HOPE NOW 
      Alliance...................................................   139

 
            HEARING ON TARP FORECLOSURE MITIGATION PROGRAMS

                              ----------                              


                      WEDNESDAY, OCTOBER 27, 2010.

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10 a.m. in Room SD-
138, Dirksen Senate Office Building, Washington, DC, Hon. Ted 
Kaufman, Chairman of the Panel, presiding.
    Present: Hon. Ted Kaufman [presiding], Mr. Richard H. 
Neiman, Mr. Damon Silvers, Mr. J. Mark McWatters, and Dr. 
Kenneth R. Troske.

OPENING STATEMENT OF HON. TED KAUFMAN, CHAIRMAN, CONGRESSIONAL 
                        OVERSIGHT PANEL

    The Chairman. Good morning. This hearing of the 
Congressional Oversight Panel will now come to order. My name 
is Ted Kaufman. I'm the Chairman of the Congressional Oversight 
Panel for the Troubled Asset Relief Program. We are here today 
to evaluate the progress of Treasury's foreclosure prevention 
programs and to examine the impact of recently reported 
irregularities in the foreclosure process.
    I have always believed that sound oversight must start with 
an understanding of a program's goals. So let us begin by 
recalling the Administration's original goal for foreclosure 
prevention. In February 2009, the President announced an aim to 
help, and I quote, ``as many as 3 to 4 million homeowners to 
modify the terms of their mortgage to avoid foreclosure.''
    At that time, our economy was on track to experience more 
than 8 million foreclosures, so the goal was always modest 
compared to the incredible scale of the problem. Certainly it 
was modest compared to the boldness shown in rescuing AIG, 
Fannie Mae, Freddie Mac, Bank of America, Citigroup, and the 
auto companies. Yet now, two years later, we can see that even 
this modest goal will not be met. To date, fewer than half a 
million homeowners have received permanent mortgage 
modifications through Treasury's programs. As many as half of 
these borrowers will ultimately redefault and lose their homes.
    Recently, as the goal of preventing 3 to 4 million 
foreclosures has appeared increasingly distant, Treasury has 
redefined its aim. The goal now is to offer a temporary 
mortgage modification to 3 to 4 million homeowners. Let me 
repeat that. The goal, Treasury now says, is to offer--offer--a 
temporary mortgage modification to 3 to 4 million homeowners.
    The distinction may sound subtle. I don't think it is. But 
the difference is vast. Borrowers who are offered temporary 
modifications may not accept. Those who accept may not complete 
the steps required to receive a permanent modification. Those 
who receive a permanent modification may redefault and lose 
their homes. At the rate that homeowners are falling through 
these cracks today, 3 million modification offers may translate 
in some cases to as few as 100,000 foreclosures prevented.
    For all these reasons, a goal of offering 3 to 4 million 
modifications is hardly a goal at all. It divorces the 
program's measurement of success from its ultimate aim, as 
expressed by the President, to keep homeowners in their homes. 
In many ways it's like a major league batter pledging to swing 
at every pitch. What matters is not how often you swing. What 
matters is how often you get on base.
    I hope the Treasury takes today's hearing as an opportunity 
to define in a detailed public way more concrete goals for 
success in foreclosure prevention. Most fundamentally, here are 
my main questions: How many foreclosures must be prevented? 
What redefault rate can we expect? How many temporary 
modifications will convert to permanent status? Clear answers 
are critical not only for our oversight work, but really, much 
more importantly, for Treasury's own ability to measure and 
improve its results.
    I also hope to hear evidence that the foreclosure picture 
improved dramatically since the Panel last examined the issue. 
Yet all evidence seems to be to the contrary. Of particular 
concern are reports that banks and loan servicers may have 
rushed their foreclosure process by relying on affidavits, as 
they say, robo-signed by employees with no knowledge of the 
underlying facts. These reports are already undermining 
investor and homeowner confidence in the mortgage market and 
they threaten to undermine Americans' fundamental faith in due 
process.
    If these reports reflect a disregard on the part of banks 
for legal requirements of foreclosure, that alone would be 
unconscionable. Yet it is conceivable that the banks' problem 
is even worse, that the banks have failed to follow the legal 
steps necessary to ensure clear title. If investors lose 
confidence in the ability of banks to document their ownership 
of mortgages, the financial industry could suffer staggering 
losses. The possibility is especially alarming coming so soon 
after taxpayers spent billions of dollars to bail out these 
very same institutions.
    I do not want to prejudge what we will hear from today's 
witnesses, but I must say this. I am concerned. I am concerned 
in part because it is the Panel's mandate to oversee Treasury's 
foreclosure programs and the overall stability of the financial 
system. But much more critically, I am concerned because across 
America our mothers and fathers, sons and daughters, are losing 
their homes.
    I do not pretend that every foreclosure in this country can 
or even should be eliminated. But even so, every foreclosure is 
clearly a tragedy. Every time a family is cast out of their 
home, their future is cast into doubt, their neighborhood's 
home prices plummet, and their town's stability diminishes. The 
American dream takes a step backward. Treasury cannot and 
should not prevent every foreclosure in this country for sure, 
but it can and must do far, far better.
    Before we proceed, I would like to hear from my colleagues. 
Mr. McWatters.
    [The prepared statement of Chairman Kaufman follows:] 

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STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. McWatters. Thank you, Senator.
    Since this Panel last addressed Treasury's foreclosure 
mitigation programs funded under the TARP, questions have 
arisen regarding the identity of the true legal owners of 
countless mortgage loans that serve as collateral for 
residential mortgage-backed securities, or what are referred to 
as RMBS, and whether the alleged owners may deliver clear title 
upon foreclosure or other transfer of the mortgaged properties.
    Although the securitization trust organized with respect to 
each RMBS should hold clear legal title to the mortgage loans, 
such assertion is not free from doubt. It is possible that some 
of these special purpose entities may be divested of their 
putative ownership rights in their mortgage loans are required 
to incur substantial fees and expenses so as to reflect the 
proper chain of title to the promissory notes, mortgage liens, 
and security interests in accordance with applicable law.
    Investors in RMBS are also beginning to assert that 
mortgage loan originators breached representations and 
warranties provided in their RMBS securitization documents and 
that the securitization trusts and their servicers should 
undertake to put individual residential mortgage loans back to 
their loan originators. These investors may also initiate 
claims against the securitization trusts and their sponsors and 
servicers for breach of contract, failure to comply with 
applicable law, and fraud.
    Individual mortgage loan borrowers or a class of such 
borrowers may also initiate wrongful foreclosure and other 
actions against the RMBS securitization trusts and their 
servicers. Such claims may be compounded as the rights and 
obligations of parties to collateralized debt obligations and 
synthetic collateralized debt obligations are considered.
    Since TARP recipients and other financial institutions 
acted as mortgage loan originators, RMBS sponsors and 
servicers, credit default protection buyers and protection 
sellers under synthetic CDOs, and RMBS and CDO investors, they 
could suffer substantial losses and capital impairment from the 
exercise of these legal rights and remedies.
    Further, since Fannie Mae and Freddie Mac had also acted as 
RMBS sponsors, and given Treasury's unlimited support for the 
GSEs, Fannie and Freddie may also serve as targets for 
aggrieved RMBS investors and mortgage loan borrowers.
    Conversely, the GSEs, acting on behalf of the RMBS 
securitization trusts that they sponsor, may undertake to put 
individual residential mortgage loans back to the TARP 
recipients and other financial institutions that originated the 
loans or perhaps--perhaps--cancel the guarantees issued for the 
benefit of the RMBS holders. The enforcement of these rights 
and remedies would no doubt create much uncertainty for TARP 
recipients and other financial institutions, as well as for the 
residential mortgage lending and RMBS markets.
    These matters are particularly significant since the 
operating costs of many TARP recipients are rising due to 
commercial and consumer loan defaults and foreclosures, while 
operating revenues remain relatively tepid due to weak loan 
demand and an overall sluggish economy. If--if--another 
liquidity or solvency crunch follows from these events, it is 
not inconceivable that the rating agencies may downgrade the 
credit rating of certain mortgage loan originators, RMBS 
securitization trusts, and investors, and mortgage servicers, 
which, as noted above, include TARP recipients and other 
financial institutions. This action could adversely affect the 
broader economy.
    I also wish to note that in my view the Administration's 
foreclosure mitigation program, including the HAMP and the 
HARP, have failed to provide meaningful relief to distressed 
homeowners and, disappointingly, the Administration has 
inadvertently created a sense of false expectations among 
millions of homeowners who reasonably anticipated that they 
would have the opportunity to modify or refinance their 
troubled mortgage loans under the HAMP and the HARP.
    From my perspective, the best foreclosure mitigation tool 
is a steady job at a fair wage, and not a hodgepodge of 
government subsidized programs that create and perpetuate moral 
hazard risks and all but establish the government as the 
implicit guarantee of distressed homeowners.
    I question why the taxpayers should subsidize mortgage 
lenders and RMBS participants when it is most often in the best 
interest of such parties to forgive principal--to forgive 
principal--and to modify or refinance troubled mortgage loans 
without government assistance. Why should the taxpayers provide 
incentives when they are not needed or merited?
    As such, I strongly recommend that each mortgage loan 
holder and RMBS investor and servicer work with each of their 
homeowners in a professional, good faith, transparent, and 
accountable manner to reach an economically reasonable 
resolution prior to proceeding with a foreclosure remedy. In my 
view, foreclosure should serve as the exception to the rule 
that only follows from the transparent and objective failure of 
the parties to modify or refinance a troubled mortgage loan 
pursuant to market-based terms.
    Thank you, and I look forward to our discussion.
    [The prepared statement of Mr. McWatters follows:] 

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    The Chairman. Thank you.
    Mr. Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Mr. Chairman.
    Good morning. Before I begin with my statement, I just want 
to say that I want to associate myself with the comments of the 
Chair and my colleague Mr. McWatters. I haven't heard the 
comments of my other colleagues. Perhaps I'll wish to associate 
myself with them once I've heard them.
    Today's hearing is the fourth that this Panel has held 
addressing the foreclosure crisis. Congress explicitly required 
in the Emergency Economic Stabilization Act of 2008 that the 
powers it granted the Treasury Department in the Act be used in 
part to reduce the incidence of foreclosures. In response, the 
Treasury Department in the spring of 2009 created the HAMP 
program, and since then the Treasury has created a number of 
other programs aimed at reducing foreclosures. I'm pleased to 
welcome Ms. Caldwell as the director of those programs on 
behalf of the Treasury Department.
    As I've said at every hearing on this subject since this 
Panel was created, foreclosing on a family's home is not a mere 
financial transaction. It marks a profound financial loss for 
the family and often devastating emotional defeat for the 
adults in that family, psychological trauma and social 
dislocation for the homeowners' children, falling property 
values and destabilized communities for the homeowners' 
neighbors.
    Mass foreclosures are a sure sign of a failing economy and 
a society that has been unable to provide basic economic 
security to its citizens. Mass foreclosures should no more be 
encouraged by our public officials than should contagious 
diseases or catastrophic floods or organized crime.
    These reasons alone would justify aggressive government 
action to prevent foreclosures in the wake of the housing 
bubble and the epidemic of exploitative lending practices by 
our financial institutions. But the social impact of 
foreclosures is not by any means the full story of the harm 
done to our country by the foreclosure epidemic. Mass 
foreclosures drive down real estate prices. You can see that in 
the price numbers that were announced this week. They shrink 
the wealth of American households, not of the people being 
foreclosed, but of all homeowners. Mass foreclosures weaken 
consumer confidence, which underlies whether or not our economy 
will recover from the economic crisis. And mass foreclosures, 
as my fellow panelists and our Chair have mentioned already, 
threaten the solvency of our financial system through their 
effect on the strength of the real estate market.
    Now, it has been clear since the beginning of the financial 
crisis that borrowers, lenders, and the public at large had a 
profound interest in restructuring loans to enable homeowners 
who had the ability to make lower payments to stay in their 
homes. By the way, for those who are concerned that somehow 
there's something morally suspect about restructuring loans, I 
should note that every day on Wall Street people of power and 
privilege in this society restructure their debt. It is 
commonplace for everyone but the poor.
    Yet, as the financial crisis escalated, the banks in their 
role as mortgage servicers simply did not restructure the 
loans. The Treasury Department created HAMP, offering $50 
billion in incentives for the banks to restructure the loans. 
And yet, a year and a half later we have only 467,000 permanent 
modifications, genuine restructurings, compared to 7 million 
homeowners in the process of foreclosure.
    Let me note--and perhaps this is a slightly different 
emphasis than my fellow panelists who have spoken before--that 
I think that helping 467,000 families avoid foreclosure is a 
good thing. In fact, it's a very good thing. It's substantially 
better than not helping them. But it does not appear by any 
means, by any measure, to be good enough.
    Now we have learned that the foreclosure process itself and 
our system of property law is cracking under the strain of the 
bubble and the bust in residential real estate markets. There 
appears to be strong evidence, being investigated by 50 states 
attorneys general and a Federal task force, that servicer banks 
have improperly executed and filed with the courts a large 
number of affidavits in the pursuit of foreclosures. Worse yet, 
since the affidavit revelations, evidence has mounted that 
there are substantive problems with the liens that support 
significant numbers of securitized mortgages.
    Today I hope we can shed light on whether 467,000 permanent 
modifications plus another 20,000 or so a month is the best we 
can hope for from HAMP. In particular, I am puzzled and 
mystified as to why one community group that I am familiar 
with, NACA, with a budget of less than $20 million, less than a 
thousandth of the budget of HAMP, can process 20,000 people a 
week in one city seeking mortgage modifications, whereas we get 
permanent modifications on an annual number of 20,000 a year 
across the whole country from HAMP.
    By the way, I've seen the community group NACA do this. 
I've watched 20,000 people come through the Washington 
Convention Center not six blocks from here in a week. So I 
don't understand what is going on here.
    Secondly, I would like to know whether HAMP has paid out 
money to servicers to ensure that they did not foreclose on 
homeowners in situations where the servicer did not actually 
have a valid lien or had filed a false affidavit with a court. 
Further, I would like to know what plans the Treasury 
Department has for finding out whether this sort of thing has 
occurred and whether public moneys have been paid out 
effectively under false pretenses or based on false affidavits.
    Finally, I would like to know what plans the Treasury 
Department and the OCC on our next panel have for dealing with 
the possibility that either the major servicer banks will be 
held liable for their failures to properly service $7 trillion 
in mortgages or that the collateral for significant amounts of 
mortgage loans will turn out to be invalid. These possibilities 
would appear to present systemic risks of the type that TARP 
was enacted to address, and in particular would appear to have 
grave consequences for the very institutions that TARP 
initially capitalized and who were allowed to exit TARP on the 
theory that they were now healthy.
    This hearing involves some of the most important issues 
facing our country today. I look forward to the witnesses' 
testimony. Mr. Chairman, I thank you for your indulgence.
    [The prepared statement of Mr. Silvers follows:]

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    The Chairman. Thank you.
    Dr. Troske.

STATEMENT OF KENNETH R. TROSKE, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Dr. Troske. Thank you, Senator Kaufman.
    So the issue before us today, foreclosures and the 
government's efforts to mitigate foreclosures, remains, 
obviously, quite contentious and fraught with strong feelings 
among the people debating this issue and making policy. 
However, when considering the effectiveness of programs 
designed to mitigate foreclosures, in my opinion, it is 
important to keep in mind that one of the primary goals and one 
of the goals I believe of the original legislation is to return 
the economy to a place where it can begin to grow at a pace 
that helps everyone currently in distress.
    Certainly all of us would like to return to a world where 
we have steadily rising home prices, low unemployment rates, 
and an economy that is growing at 4 to 5 percent per year. 
However, this is not the world we currently live in. Instead, 
we are in an economy where housing prices nationwide have 
fallen by 14 percent from their peak, where prices in the 
largest metropolitan areas have fallen by almost one-third, and 
annual existing home sales have plunged by over 40 percent.
    Without a doubt, the housing market has been in 
disequilibrium for several years, even before the recent 
discoveries of problems with foreclosures. The important 
question is what are the best policies for helping the housing 
market return to stability? Because until we achieve stability 
in the housing market, the economy will continue to limp along 
at 1 to 2 percent growth per year and unemployment will remain 
unacceptably high.
    One of the main problems in the housing market is that 
during the 2004 to 2006 period many people borrowed money to 
purchase houses or took out home equity loans predicated on the 
belief that housing prices would continue to rise. As long as 
home values kept rising, homeowners and other investors could 
refinance these loans at lower rates based on the accumulation 
of equity. When housing prices started to decline, many of 
these people were left with homes that were valued at less than 
the amount they owed. They were unable to refinance their loans 
and face loan payments that are beyond their means. The 
question is, what can we do about this problem now?
    One of the government's responses, the Federal Government's 
responses, is the program that we're focusing on today, the 
Home Affordable Modification Program, or HAMP. This program is 
presumably designed to help what Treasury refers to as ``at-
risk borrowers'' stay in their homes. The questions we are 
grappling with at this hearing are whether the program is 
effective and how the program affects the broader economy.
    HAMP works by reducing the monthly mortgage payments of 
borrowers through capitalization of arrears, a term extension 
of forbearance, and/or a reduction of interest rates or 
principal for up to five years. Then the program ends and the 
interest rates can gradually return to the prevailing rate in 
place at the time the modification was made.
    Given the structure of the program, it seems unlikely that 
borrowers, especially those with negative equity, will be able 
to keep their homes, unless we see dramatic improvements in the 
housing market, which seems unlikely at this point. The median 
borrower in the program has monthly debt payments equal to 80 
percent of their income and it is hard to imagine any 
government program putting a significant dent in this number. 
This program is focused on borrowers who can't make their 
monthly payments, even though they are currently employed and 
not underwater, this despite evidence from researchers at the 
Federal Reserve Banks of Atlanta and Boston showing that 
helping workers who have experienced temporary shocks, such as 
losing their jobs, is much more likely to result in the owners 
keeping their home. In the end, it appears that for most 
participants HAMP will only postpone the inevitable.
    So what would be the downside if all HAMP does is postpone 
foreclosures for a few years? Well, as my fellow panelist Mark 
McWatters has pointed out in an earlier Panel report, despite 
all the attention they have received, homeowners with mortgages 
were not the only group hurt by the financial crisis. Millions 
of homeowners who didn't have mortgages saw the value of their 
homes plummet, and this was devastating for those who were 
going to use the equity in their home to finance their 
retirement. Millions of others saw the value of their 
retirement savings decline significantly and families lost 
substantial amounts in their children's college savings 
accounts.
    For all of these people, relief will only come once the 
economy starts growing again. That growth will only occur once 
the housing market is stabilized and that stability will not 
develop until people move out of homes with mortgages that they 
cannot afford and into housing they can afford. So to the 
extent that HAMP simply kicks the foreclosure can down the 
road, it ends up hurting all of these people who are desperate 
for the economy to start growing again so that their lives can 
return to normal.
    I want to be clear. I recognize that some borrowers may 
have been misled into taking out loans they could not afford, 
and to the extent that people were defrauded, the perpetrators 
need to be prosecuted. I also recognize that there have been 
serious mistakes and perhaps fraud committed by servicers and 
lenders in the lending and foreclosure process, and any illegal 
activity on the part of banks needs to be fully prosecuted. 
Finally, I recognize the tremendous pain that accompanies any 
foreclosure. Homelessness is devastating for families and needs 
to be avoided whenever possible.
    However, there is $30 billion allocated to HAMP and I 
believe we need to ask whether it could be used more 
effectively to help all homeowners in need move towards stable 
and more economically appropriate housing arrangements. In 
other words, perhaps we need to start examining whether HAMP is 
a program that will bring stability to the housing market so 
that the economy can start growing again. I am hopeful that our 
discussion today can assist us with this evaluation.
    [The prepared statement of Dr. Troske follows:]

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    The Chairman. Thank you.
    Superintendent Neiman.

STATEMENT OF RICHARD H. NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you, Mr. Chairman.
    Ms. Caldwell, you and the Department of the Treasury 
deserve substantial credit for pushing an industry toward 
mortgage modifications and preventing avoidable foreclosures in 
a standardized format when the industry itself failed to 
appropriately act. In this way, Treasury's HAMP program has 
shown great potential. Thanks to your work, we have a new 
industry standard that has kept more people in their homes than 
otherwise would have been able, certainly more than HAMP's 
monthly reports demonstrate on their own.
    But to be frank, it's been a major disappointment that the 
public and this Panel have no way of meaningfully measuring 
success pertaining to the alternative non-HAMP mortgage 
modifications that Treasury points to in defense of HAMP. The 
available sources of data are simply inadequate for anyone to 
meaningfully assess performance among servicers or determine 
that these proprietary modifications are indeed helping, 
successfully helping, people. In addition, the current reports 
do not provide the public an effective means to assess 
performance among servicers or to serve as an effective 
supervisory tool.
    HAMP's metrics on their own--and people in Treasury have 
publicly stated this--have fallen fall short of our hopes. We 
now have nearly 700,000 families who have been kicked out of 
HAMP's trial modifications, many of whom may be worse off, 
despite the fact that they were making timely monthly payments 
for many, many months. Even worse, these 700,000 families far 
exceed the 500,000 families who remain in the program with 
permanent modifications.
    The future also looks somewhat bleak. The number of new 
homeowners entering the program each month is now near its 
lowest point, and there have been more than enough redefaults 
after a long-term modification has successfully occurred to 
raise serous questions.
    Now, this may be our last hearing on Treasury's foreclosure 
mitigation initiatives, so it is not just critical that we help 
the public fully understand HAMP's success and failures, but we 
must also get to the bottom of the biggest question: Is HAMP 
really the best the government can do to demonstrate a way 
forward?
    Ms. Caldwell, for whom I have the greatest respect, knows 
better than anyone that unemployment and deep negative equity 
have been driving foreclosures in a manner that HAMP simply 
cannot address. And these forces will continue to hit families 
hard. Treasury announced several new unemployment and negative 
equity initiatives in response. But again, it is disappointing 
that six months later the public still has no meaningful way to 
ascertain how these new initiatives are performing.
    As a final matter, I intend to explore with all our 
witnesses the issue of confidence. Given many of the mortgage 
servicers' poor track records of errors, including losing 
homeowners' submitted documents, how do we continue to look 
homeowners in the eye and ask them to continue to work with 
their servicers, given the latest news pertaining to faulty 
documents and fraudulent affidavits? The servicers at a minimum 
now have even a higher burden of proof in demonstrating that 
they are serious about their stated efforts to work with 
American families.
    I am grateful to you for being here today and I want to 
thank you and highlight not just your public service at 
Treasury, Ms. Caldwell, but throughout a long career of work 
for the underserved. I also very much look forward to speaking 
with our other five knowledgeable witnesses today and look 
forward to our question and answer session.
    Thank you.
    [The prepared statement of Mr. Neiman follows:]

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    The Chairman. Thank you.
    I am pleased to welcome, genuinely pleased to welcome, our 
first witness, Phyllis Caldwell, the Chief of the Department of 
the Treasury's Office of Home Ownership Preservation. Ms. 
Caldwell, thank you for joining us and thank you for your truly 
great public service.
    We'll ask you to keep your oral testimony to five minutes 
so that we'll have adequate time for questions. Your complete 
written statement will be printed in the official record of the 
hearing. Please proceed with your testimony.

     STATEMENT OF PHYLLIS CALDWELL, CHIEF, HOME OWNERSHIP 
      PRESERVATION OFFICE, U.S. DEPARTMENT OF THE TREASURY

    Ms. Caldwell. Chairman Kaufman and members of the 
Congressional Oversight Panel: Thank you for the opportunity to 
testify before you today on progress the Administration is 
making on helping responsible homeowners stay in their homes 
and stabilizing the housing market.
    My opening remarks will focus on three things: one, the 
Administration's response to recently reported problems in the 
foreclosure process; two, efforts that Treasury is taking to 
ensure servicer compliance with HAMP guidelines; and three, a 
look at the impact the HAMP program has had to date.
    There are three key points on the recently reported 
foreclosure process problems. First, we expect banks to follow 
the laws. Any bank that hasn't done so should be held 
accountable and should take prompt action to correct its 
mistakes. The Administration supports the efforts of the 50 
state attorneys general in their investigations of foreclosure 
irregularities and reviews by the Department of Justice and 
other Federal agencies.
    Second, we have been working closely with the broad range 
of Federal agencies and with the state attorneys general to get 
to the bottom of these problems as quickly as possible. Last 
Wednesday, Secretaries Donovan and Geithner met with 
representatives from ten different Federal and regulatory 
agencies for the latest in a series of meetings to coordinate 
reviews on this issue. These state and Federal agencies and 
regulators are requiring major banks to look at their servicing 
across the board, not just on this issue.
    Third, there have been recent calls for a national 
moratorium and I'd like to address that. An important part of 
assuring longer term stability in the market is to enable 
properties to be resold to families who can afford to purchase 
them. President Obama has said that we can't stop every 
foreclosure and he's right. But we are making progress.
    I'd like to now turn to the relationship of these 
foreclosure problems to the Administration's Making Home 
Affordable program, of which HAMP is a part. HAMP is intended 
to help eligible homeowners before they are in foreclosure. 
HAMP does not require a judicial process for homeowners to 
receive a modification, nor does it require affidavits to be 
filed with the courts. Therefore, HAMP is not directly affected 
by the robo-signers or false affidavits with state courts.
    Under HAMP guidelines, participating servicers must 
evaluate all eligible homeowners for HAMP modification prior to 
referring them to foreclosure. Should a homeowner not qualify 
for HAMP or if the homeowner falls out of HAMP or cancels the 
modification, participating servicers are required to evaluate 
that homeowner for alternative foreclosure prevention programs, 
such as one of the servicers' proprietary modifications or even 
the Administration's short sale program.
    If all of these efforts are unsuccessful, HAMP servicers 
may not proceed to foreclosure unless they have issued a 
written certification to their foreclosure attorney or trustee 
stating that all avoidable loss mitigation alternatives have 
been exhausted a non-foreclosure option could not be reached. 
Only after these steps are taken and the certification is 
delivered may the foreclosure process proceed.
    To date, HAMP has achieved three critical goals. It has 
provided immediate relief to struggling homeowners; it has used 
taxpayer resources efficiently; and it has helped transform the 
way the entire mortgage servicing industry operates. HAMP 
established a universal affordability standard, a 31 percent 
debt to income ratio. More than 460,000 homeowners who are 
currently in permanent modifications have experienced a 36 
percent median reduction in their mortgage payments, or more 
than $500 per month.
    In the year following initiation of HAMP, home retention 
strategies changed dramatically. In the first quarter of 2009, 
nearly half of mortgage modifications increased borrowers' 
payments or left their payments unchanged. By the second 
quarter of 2010, 90 percent of mortgage modifications lowered 
payments for the borrower. This means homeowners are receiving 
better solutions.
    HAMP uses taxpayer resources efficiently. HAMP's pay-for-
success design utilizes a trial period to ensure that taxpayer-
funded incentives are used only to support homeowners who are 
committed to staying in their homes and making monthly 
payments.
    While the housing market is showing signs of stabilization, 
it still remains fragile and too many homeowners are suffering. 
The nature of this crisis has changed and we will continue to 
focus our efforts on stabilizing the housing market and 
preventing avoidable foreclosures.
    Thank you and I look forward to taking your questions.
    [The prepared statement of Ms. Caldwell follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Thank you, Ms. Caldwell.
    HAMP--I'm trying to get at some of these hard objectives. I 
think it's hard to do oversight and I think it's definitely 
hard, as I said in my statement, to run a Department if you 
don't have some hard objectives. Realizing that you don't 
always make the hard objectives, but, just like when John 
Kennedy said we'd get to the Moon by the end of the decade, it 
worked out. So I think it's hard objectives.
    So one of my concerns is HAMP was announced 18 months ago. 
How much now do you think you're going to spend on the HAMP 
program?
    Ms. Caldwell. For the HAMP program, we currently have $29 
billion in TARP funds allocated to the Making Home Affordable 
program, which includes HAMP's financial funding first lien 
modifications, the second lien modifications, and some of the 
enhancements for principal reduction, as well as a little bit 
for the FHA short refinance program. So it's really all of the 
housing programs.
    The Chairman. $29 billion?
    Ms. Caldwell. $29 billion.
    The Chairman. And how many foreclosures do you think you'll 
be preventing?
    Ms. Caldwell. Our goal still remains to help up to 3 to 4 
million homeowners avoid foreclosure, and we continue to expand 
and enhance the programs to respond to the changing housing 
crisis. So our programs targeting unemployment and negative 
equity are just under way and we continue to focus our efforts 
on making sure we reach as many homeowners as possible.
    The Chairman. What was this 3 to 4 million offers that I've 
read in some of the testimony from Treasury, that the objective 
of the program was to make 3 to 4 million offers?
    Ms. Caldwell. I think, as you said, there is an objective. 
The GAO in its August 2009 report also confirmed that the goal 
is offers. And while we at Treasury agree that offers do not 
always translate into modifications, and while we can measure 
the offers because that is something we control, we also 
measure how many of those offers are accepted, and then how 
many of those offers perform, and for those that don't perform, 
where they go. Then we learn from those and continue to expand 
our programs, with the still overall objective of assisting 3 
to 4 million people avoid foreclosure.
    The Chairman. Great. And what's your forecast for 
redefaults over a 5-year period?
    Ms. Caldwell. It's still very early to tell. We've had very 
few modifications in the program for more than a year. Early 
indications are that HAMP modifications will perform better 
than historical modifications, which have been 60, 75 percent 
redefault. In the permanent modifications in HAMP at 9 months, 
over 90 percent of homeowners still remain in the program. So 
the data is young, but early signs indicate the same. The OCC-
OTS metrics report also confirmed that HAMP modifications are 
performing well and attribute it to the trial period program 
that makes sure homeowners are committed to staying in the 
home, the collection of documentation, and the 31 percent 
affordability standard.
    The Chairman. Do you have any projection on what the 
default rate will be?
    Ms. Caldwell. No, we don't. Again, we are watching it very 
closely, but early signs are that HAMP modifications will 
perform well.
    The Chairman. I'd recommend you try to come up with some 
kind of an objective for where you're shooting for. You've got 
a lot of data on it now. So I'm looking forward to what the 
redefault rate is.
    How many temporary modifications do you think become 
permanent modifications?
    Ms. Caldwell. During the first year of the program, less 
than 40 percent of temporary modifications became permanent. 
But that was because, in response to the crisis, we gave 
servicers the ability to offer homeowners a trial modification 
and then submit documentation. Those servicers that collected 
documentation up front experienced conversion rates to 
permanent modification in the 75 to 80 percent range.
    Beginning in June, Treasury's program requires upfront 
documentation so we expect that trial modifications will slow, 
but the conversions for permanent will be much, much higher.
    The Chairman. How do you think the widespread problems with 
foreclosure documents will impact on the stability of our 
financial markets?
    Ms. Caldwell. That's something we're following closely. At 
this point in time there is no evidence that there is a 
systemic risk to the financial system. But we are making sure 
that, one, in our programs focused on foreclosure prevention, 
that servicers are doing everything that they are supposed to 
do. Second, we are making sure that we're coordinating with 
agencies across the Federal Government and the state and local 
attorneys general to make sure that those servicers that are 
breaking the law are held accountable. And three, we're very 
closely monitoring any of the litigation risk to see if there 
is any systemic threat. But at this point there's no indication 
that there is.
    The Chairman. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you, Senator.
    And thank you, Ms. Caldwell, for appearing here today. When 
you consider these factors--the foreclosure documentation 
irregularities, that's one. Two is the failure of some 
securitization sponsors to assign, properly assign, notes and 
to record transfers of mortgage and deeds of trust in 
accordance with applicable law; that's number two. As well as 
the exercise of the put rights by securitization trusts to 
force the mortgage loan originators to in effect buy back the 
loans. And given that a lot of those mortgage loan originators 
are TARP recipients, other financial institutions, is Treasury 
concerned, given these three factors, and particularly the put 
rights--and that's an emerging thing particularly now that the 
RMBS investors are beginning to coordinate their efforts and 
file lawsuits and the like--is Treasury concerned that any of 
the large, ``too big to fail'' financial institutions may 
experience a solvency or liquidity or a capital crisis over the 
next few years?
    Ms. Caldwell. Thank you for the question. As I said 
earlier, we're still very early in this issue and are 
monitoring it closely. I think, as you suggested in the 
question, there are really three separate issues. In terms of 
the robo-signing, the documentation issue, that is one that we 
are following closely and we are anticipating that servicers 
will do what they need to do and fix those problems, and where 
they have not been following the law be held accountable.
    The second one that you discussed, the litigation. While 
I'm not a lawyer, and I don't want to go through all the legal 
structure, it is something as a practitioner that has been in 
the industry for a long time and the courts are used to dealing 
with that, and they will continue to deal with that. It's 
certainly, because of the affidavit issue, increased in 
visibility. But it's not a new issue in the market. But it is 
one that we are following very, very closely.
    Then third, the put-back risk on the large financial 
institutions. Again, we are looking at the situation very, very 
closely and will be following the institutions to make sure. 
But at this point there is no evidence of a systemic risk.
    Mr. McWatters Is this being discussed within Treasury? I 
mean, there was a lawsuit I think filed the other day, a put-
back right of $47 billion to a Bank of America loan. That was 
one. That was one lawsuit. I suspect there will be many, many 
more to come.
    I believe in one of the other--on panel two, one of the 
panelists I think projected there were something like $2.8 
trillion of subprime loans, and that even if a relatively small 
percentage of those are put back and the banks have to buy them 
back at face, this could be a substantial problem.
    Also, considering that this is not just a one-shot deal. I 
mean, when a mortgage is originated and put in an RMBS it may 
be multiplied through synthetic CDOs. So you may have the 
synthetic CDO problems also going back to the banks.
    So it sounds like Treasury as of today has not done even a 
back of the envelope sketch as to what the potential put-back 
rights could be to the TARP financial institutions.
    Ms. Caldwell. Let me just say that at Treasury we are 
monitoring this situation daily. The news continues to have a 
wide range of projections and numbers, so I'm not prepared to 
say that there is a particular scenario. But it is something 
that Treasury is working closely with all of the Federal 
agencies involved with these institutions, including the 
regulators and including the reporting agencies, to make sure 
that the risks are appropriately disclosed and measured and 
that we have a better understanding of what the potential risks 
could be. But it is something that we're monitoring daily.
    Mr. McWatters Okay. I would certainly encourage you to do 
that.
    One of the problems is the inability of some of these 
securitization trusts to deal with the local land title 
records, in other words to properly endorse notes and to assign 
deeds of trust and mortgages. So I ask you this: When an 
American homeowner sits down at the kitchen table to write the 
monthly mortgage check, how does that homeowner know that he or 
she is paying the correct lender?
    Ms. Caldwell. That's a very important question, and I think 
it's important to separate the legal framework of the mortgage 
securitization process versus the steps that individual 
servicers are taking to make sure they follow the law. As I 
said earlier, we have a group of Federal agencies and state 
attorneys general in with these entities making sure that they 
are following the law, and those entities that are not 
following the law should and will be held accountable.
    So again, it's important to separate the legal structure 
from what is actually happening.
    Mr. McWatters. Okay, thank you. My time is up, but I'll 
just make one quick comment. There are courts, state courts, 
which have held the MER System, the Mortgage Electronic 
Registration System, which I know Fannie and Freddie uses, and 
others, to simply not work. So the deeds of trust and the 
mortgages assigned under those, under MERS, doesn't work. 
Endorsement of the notes, unless it was done in accordance with 
applicable state law, doesn't work also, and that can create a 
problem.
    Thank you.
    The Chairman. Thank you.
    Mr. Silvers.
    Mr. Silvers. Ms. Caldwell, I would like to continue to 
pursue Mr. McWatters' train of thought. I'm concerned about 
Treasury making representations categorically that you don't 
see a systemic risk. Let me walk you through exactly why.
    Mr. McWatters referred to a demand letter sent by a number 
of bondholders, including the Federal Reserve Bank of New York, 
one of the institutions I believe that is encompassed by your 
list of regulators and the like that Treasury coordinates with. 
You're familiar with that letter?
    Ms. Caldwell: Yes, I am.
    Mr. Silvers. All right. That letter asks for $47 billion of 
mortgages to be--of mortgage-backed securities to be 
repurchased at par. Do you know what those mortgages are 
currently carried--what those bonds, the market value of those 
bonds today?
    Ms. Caldwell. At this point, I'm not prepared to comment on 
pending litigation.
    Mr. Silvers. Okay, fine. Let me tell you what the Fed says 
they're worth. The Fed tells us they're worth 50 cents on the 
dollar. So if the Fed's request of Bank of America is honored, 
Bank of America, assuming they are carrying these bonds--
assuming when they buy them back they mark them to market, Bank 
of America will take a $23 billion loss.
    The Federal Reserve further informs us that there is 
nothing particularly unique about that particular set of 
mortgage-backed securities, meaning they have not been chosen 
because they're particularly bad. They believe they are of a 
common quality with the rest of Bank of America's underwritten 
mortgage-backed securities. There are $2 trillion of Bank of 
America's underwritten mortgage-backed securities.
    Five such deals, five such requests, if honored, to Bank of 
America, will amount to more than the current market 
capitalization of Bank of America, which is $115 billion.
    Now, do you wish to retract your statement that there is no 
systemic risk in this situation? And the word is ``risk,'' not 
``certainty,'' but ``risk.'' I would urge you to do so, because 
these things can be embarrassing later.
    Ms. Caldwell. My statement, as I said earlier, is that it 
is still early. We're working very closely with 11 regulatory 
and Federal agencies. We are watching this every day. And that 
at this stage there appears to be no evidence of a systemic 
risk. But again, it is early, and it is something we are 
monitoring daily.
    Mr. Silvers. Let me suggest to you that the ``it is still 
early'' is a perfectly acceptable position. The notion that 
there is no--is it your position that Bank of America honoring 
five of these things would not present a systemic risk? Five of 
these requests, the first of which has been made by the Federal 
Reserve. Is Bank of America not systemically significant?
    Ms. Caldwell. At this point I'm not prepared to comment on 
a particular institution, but I think as we look at the put-
back risk, the litigation involved, the severity and the 
probability, and the time that it would take to go through 
these, those are all important factors to be considered in 
looking at the risk. And again just to reaffirm, we didn't say 
there was no risk. We said there didn't appear to be evidence 
of a major systemic risk.
    Mr. Silvers. I hope that if we come--if the Treasury comes 
back to us and is discussing whether or not we need to deploy 
further public funds to rescue Bank of America or such other 
institutions as might be affected by these events, that we get 
a similar kind of indifference to their fate after it's too 
late, because it strikes me that, in light of the mathematics 
I've gone through with you, it is not a plausible position that 
there is no systemic risk here.
    I want to take up two other statements you made that I 
think are just simply not plausible. The first is, you suggest 
at the beginning of your statement--and I can't quote it 
because my memory's not that good, but you suggested that it is 
a good thing that more homes be put on the market as a result 
of foreclosure. Is that the Administration's position?
    Ms. Caldwell. When you look at the current market for sale, 
close to----
    Mr. Silvers. Do we want more homes put on the market right 
now, as prices are falling?
    Ms. Caldwell. We want homes to be sold to homeowners that 
can afford them and stay in them.
    Mr. Silvers. That's not my question. My question is do we 
want to increase the inventory right now in the marketplace and 
drive down home prices? Is that the public position? Is that 
the position of the Administration as to what is good for our 
country right now?
    Ms. Caldwell. I think the position is we want houses to be 
sold to homeowners that can afford them.
    Mr. Silvers. But do we want more or less? I'm asking you a 
binary question: More houses on the market right now, less 
houses on the market right now?
    Ms. Caldwell. I would just say that if you have a home, 
whether it's in inventory for sale in the market----
    Mr. Silvers. You're not answering my question. Yes or no? 
More or less?
    Ms. Caldwell. We need to have the homes on the market to go 
through and be resold to homeowners who can purchase them and 
afford to stay in them and stabilize neighborhoods. Many of the 
homes that are in REO are vacant and that hurts the 
neighborhood.
    Mr. Silvers. You still haven't answered my question.
    You still haven't answered my question. Do we want to drive 
housing prices down? Are we so concerned at ensuring that the 
banks don't have to write these loans down that we would rather 
drive housing prices down?
    Ms. Caldwell. Again----
    Mr. Silvers. How can it possibly be the position of the 
United States Government that it is in the national interest to 
drive down housing prices?
    Thank you.
    The Chairman. Thank you.
    Dr. Troske.
    Dr. Troske. I'm going to change gears a little bit, and not 
because I'm not concerned about the issues that my fellow 
panelists have raised, but I think they've raised them quite 
strongly and I have other concerns about the program I'd like 
to explore.
    Your stated goals, at least the goals that you've been 
willing to articulate, are that you'd like HAMP to help 3 to 4 
million borrowers, and ``help'' you're defining now is even 
people just entering temporary modifications. 1.2, 1.3 million 
people have entered temporary modifications so far, I think. 
Many of these people entered the HAMP program when about 
150,000 borrowers a month were entering the program. Currently 
I think we're at the rate of about 20,000 to 30,000 a month are 
entering the program. The program's got about 24 months to run.
    If my math is correct, we're at 1.2 million. We're getting 
about 20 to 30,000 more a month for 24 months. We're not going 
to get to 2 million. So can you tell me how you're going to 
judge it a success if we're not even going to make the minimum 
standard that you've already articulated as one of the goals, 
given the rate that people are entering the program?
    Ms. Caldwell. That's a question we talk about very 
regularly in my office. The numbers that you stated are correct 
about the first lien modification. If you look back on what 
HAMP was started to address, it was unaffordable payments 
resulting from a reset of mortgage rates. As the crisis has 
moved to unemployment and principal reduction, our programs 
have changed. So the numbers that you're discussing relate to 
the first lien modification. In addition to that, we have the 
unemployment forbearance program, which became effective in 
August. We have a partnership with the FHA program on a 
refinance program that became effective in September, that 
allows principal reduction and refinance into an FHA mortgage. 
We also have additional incentives for principal reduction 
along with the Hardest Hit Fund initiative.
    So we have to look across all of those programs and respond 
to a changing housing market in our efforts to reach 3 to 4 
million.
    Dr. Troske. I guess originally your goals were stated for 
the HAMP program, and these are other programs that are outside 
the HAMP program; am I mistaken about that? So you're sort of 
saying as we add more things we can sort of--presumably, we're 
trying to help additional people. The goal we set for the HAMP 
program, sort of we lower that?
    So I guess, what's your goal for the HAMP program, the 
modifications that are running through the traditional HAMP 
program? Is it no longer 3 to 4 million? Is it lower than that 
now?
    Ms. Caldwell. The other programs, the add-on programs for 
unemployment and principal reduction, are in fact part of the 
HAMP program. They're ways that we have adapted the HAMP 
program to change with the economy. The one program I mentioned 
that is not officially part of HAMP is our help for the 
hardest-hit markets, where we took $7.6 billion out of the HAMP 
allocation and moved it over to enable state housing finance 
agencies to provide tailored assistance to unemployed 
homeowners and work with principal reduction in those markets.
    Dr. Troske. Another question. You talked about redefaults 
and I think you correctly stated that it's still early. But let 
me ask you about, so the permanent modification under these 
programs is for 5 years. It's not permanent. It's a 5-year 
modification. And when that 5-year period is up, borrowers 
return to their previous payment levels.
    Presumably, if something hasn't changed in the housing 
market, like a significant increase in prices, at least back to 
2006 levels, these are going to be borrowers who are still 
seriously underwater, with rates that have reset, back to 
making payments that they can't currently afford. So why do we 
think in 5 years they're going to be able to afford the 
payments that they can't afford now? What's going to change 
between now and 5 years that's going to result in something 
close to a success, that's not going to produce an enormous 
increase in redefaults when they reset in 5 years?
    Ms. Caldwell. Thank you. Let me first just make a 
clarification to the permanent modification and the reset. 
After 5 years, the rates adjust to the current rate, the 
current Freddie Mac rate. So while there will be some 
adjustment up from 2 percent, it will be an adjustment up to 
rates that are still consistent with today's historic low 
rates.
    In terms of the 5 years, the homeowner has gotten some 
additional principal reduction because of the amortization at a 
very low rate. So they have paid down more principal than they 
otherwise would have. In addition, homeowners that stay current 
on their HAMP modification receive $1,000 a year in principal 
reduction, or $5,000 over the 5-year period, which is some 
meaningful principal reduction at certain house values.
    Then there is time for the employment situation or other 
hardship in that family's circumstance to improve, and 
certainly over 60 percent of homeowners in HAMP permanent 
modifications have had either a reduction in wage or loss of a 
job of one of the wage earners.
    Dr. Troske. Thank you.
    The Chairman. Thank you.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    Ms. Caldwell, as I stated in my opening, Treasury often in 
its defense of HAMP, defense of the success of HAMP, refers to 
the significant number of non-HAMP proprietary modifications. 
Year to date there have probably been more than twice as many 
non-HAMP mods as HAMP mods. And while it's positive that these 
borrowers are not currently in foreclosure, questions still 
remain on the sustainability of these proprietary mods and 
whether homeowners are actually better off.
    The quarterly OCC and OTS reports on the issue and the HOPE 
NOW reports are a step forward. But we really do need to know 
more information about the specific terms of these proprietary 
mods in order to compare them among servicers as well as to 
serve as an effective supervisory tool. Will Treasury or HOPE 
NOW be providing additional data with respect to non-HAMP mods?
    Ms. Caldwell. Thank you. This is something that you and I 
have both discussed and something that we spend a lot of time 
thinking about within Treasury. In terms of the HAMP contracts 
with servicers, our contractual relationship with the servicers 
goes to those modifications where we're paying taxpayer 
incentives. We don't have supervisory authority over those 
modifications outside of HAMP.
    But because we are very focused on what happens and very 
concerned about that, we have asked HAMP servicers, the large 
ones, to participate in a monthly survey about what happens to 
homeowners that are either not approved and not accepted for 
HAMP, and what happens to homeowners who are in a trial 
modification that gets cancelled. And we do publish those 
results.
    In addition, we work very closely with HOPE NOW and with 
OCC-OTS metrics to try and use that as a validator or a reality 
check for what we're getting in the survey data. But we have no 
contractual authority over those.
    Mr. Neiman. So I've been going over in the last few days 
the various reports issued by Treasury in your monthly reports, 
HOPE NOW in their monthly reports, and the OTS in their 
quarterly reports. And though each of these reports continues 
to expand, it is still not that easy for the public, nor for 
the Oversight Panel, or for Congress to really assess the 
effectiveness of these proprietary mods.
    In fact, in many cases in the OCC report you cannot 
understand what the actual terms are of some of those monthly 
modifications. There's often groupings of all modifications and 
then HAMP modifications, so that the numbers are not always 
broken out for proprietary, non-HAMP mods, in order to 
determine whether these reductions--are they for 1 year, 2 
years, and to understand the impact of these mods, do they 
include lump sum payments for late fees? How sustainable are 
these really in the interests of the borrower?
    Ms. Caldwell. Again, we share that concern and are 
committed to transparency in the HAMP program. We expanded our 
survey in the spring to include the disposition. As we continue 
to follow this issue, we continue to expand our survey 
requirements of the servicers, because we do recognize that 
within HAMP we have contractual relationships with servicers 
that are regulated by a number of different agencies, and this 
is one place where we can try to put it all together.
    Mr. Neiman. I think we all support those provisions in the 
Treasury's monthly report that breaks down performance by 
servicers. What you don't see is that in the OCC report. So it 
is not--it cannot provide the public a means to distinguish 
servicers' performance with respect to proprietary mods.
    Would you support a greater ability for the OCC to provide 
a breakdown by servicer with respect to proprietary mods?
    Ms. Caldwell. I really can speak just for the Treasury 
programs and just say that we are very committed to 
transparency and we continue, as you know, to expand the 
reports every month and put demands on servicers for more 
information, such that they would almost say it's overload on 
reporting. So we are committed.
    Mr. Neiman. So because of the gaps, because your reports 
are only with those servicers that have contracted, because the 
OCC only covers 65 percent of the market, because HOPE NOW is 
also a survey, would you support the need or recognize the need 
for a national reporting requirement for mortgage performance 
data similar to what banks are required to provide in mortgage 
origination under HMDA?
    Ms. Caldwell. We support transparency in the mortgage 
modification business to make sure that the taxpayer dollars 
are going to servicers for programs that are meeting guidelines 
and following all applicable laws.
    Mr. Neiman. Thank you, and I obviously intend to follow up 
with the members on the next panel.
    Thanks.
    The Chairman. Great. Now we start a second round of 
questions.
    Can you tell us how many second liens have been modified or 
extinguished through the relevant programs?
    Ms. Caldwell. If I understand your question, you want to 
know the second liens modified through all the relevant 
programs?
    The Chairman. Right.
    Ms. Caldwell. That data we don't have for all the financial 
institutions. We're beginning to collect data on the Treasury 
program's second lien modification program, which is an 
enhancement to HAMP, that has the major servicers and some 
others. Again, we don't have data to report yet as the program 
really got started at the beginning of October, but we will be 
reporting that.
    The Chairman. So you'll send that to us as soon as you get 
that?
    Ms. Caldwell. We will be putting it in our public report 
when we have the data.
    The Chairman. What about the reluctance of some financial 
institutions to extinguish second liens because they're carried 
on the books at 90 percent of value?
    Ms. Caldwell. That particular thing we hear a lot. The 
impact of second liens in the modification market is something 
that we're very, very concerned about. It was why we put 
together the second lien program in HAMP, which addresses 
something that we hear from second lienholders about--it's 
current and they may not know when a first mortgage is 
modified. So that program has a platform that matches the first 
and second, and then the second lienholder has to write it 
down.
    In addition, as part of our program for refinance into FHA 
we offer incentives to reduce the second lien to enable the 
first homeowner to refinance. So while we don't mandate second 
lien writedowns, we're indifferent to it in the first lien 
program and we try to provide incentives as best we can to 
encourage second lien reductions to have more sustainable 
mortgages.
    The Chairman. But you talked in the beginning, and I think 
you're right, in terms of your model, that HAMP is a model, and 
one of the big things you did is set out a new standard. I 
mean, isn't it pretty standard in the industry that you write 
down the second liens first and then move to the first liens?
    Ms. Caldwell. From a lien priority standpoint, that should 
be the way it operates, yes.
    The Chairman. So really shouldn't we be, as a model, be 
putting the emphasis on that, so that people aren't carrying 
the second liens at 90 percent? It seems to me the only reason 
they're carrying the second liens is because they don't want to 
write them down because they're carrying them at 90 percent of 
value and they're worth nowhere near 90 percent of value.
    Ms. Caldwell. Right, and they continue to be current. I 
think that's a very important piece of the program--making sure 
those firsts and seconds are matched.
    The Chairman. In your testimony you say every person in a 
temporary modification is getting significant benefit. Can you 
kind of explain that? Because if a temporary modification 
fails, then the person has to pay the money back, right? So 
what is the benefit, the significant benefit, of every person 
who's in a temporary modification?
    Ms. Caldwell. Let me first talk about the permanent 
modifications. Now, beginning June 1st, homeowners provide 
upfront documentation and the homeowner is expected to convert 
to a permanent modification. The only reason to not convert 
would be failure to make payments. So they are getting a second 
chance to qualify.
    If you go back to where we were at the beginning of the 
program, there was a huge backlog of homeowners who were 
severely delinquent on their mortgages, struggling to find 
their servicer, and struggling to get a modification. By coming 
into the HAMP program, what those homeowners got was an 
immediate reduction in their payments and an opportunity for 
additional time to figure out if staying in the home was going 
to be a sustainable solution for them or to make other living 
arrangements. So it bought time.
    The Chairman. To follow up on Mr. Silvers' question, GMAC 
still has $17.2 billion in taxpayer funds and has been involved 
in the document irregularities. What's Treasury doing to ensure 
that financial institutions supported by the taxpayers are not 
acting improperly?
    Ms. Caldwell. Thanks. As I know this Panel knows very 
clearly, Treasury has an investment in GMAC, but is not on the 
board or management. But immediately upon learning of the 
alleged robo-signing issues, we were in touch with management 
at GMAC, and continue to be in touch with them regularly. They 
have reported back, at least at this point, that other than the 
time to correct some of those documentation problems, which 
they are doing promptly, they don't see a major risk in their 
system. But we are again watching that very, very closely and 
take it very seriously.
    The Chairman. So you're not sending anyone out to actually 
find out whether they hold the mortgages, and some of the 
stories we've heard about the robo-signing, that they actually 
have the mortgage that they think they have or that MERS has 
the mortgages for GMAC, or any kind of physical followup on the 
fact that there are mortgages out there, do they actually have 
the mortgages and they actually have title to the land that 
they are trying to foreclose on?
    Ms. Caldwell. At this point, we are supporting all of the 
agencies that are doing investigations of those servicers, 
including the GSEs, and are monitoring closely and will take 
followup action when there are facts that we get from those 
reviews.
    The Chairman. So there really is no--Treasury is not doing 
anything independently to determine that mortgages modified 
under HAMP have all necessary loan documentation and a clear 
chain of title? You're just taking the word of the people, of 
the folks, the banks and financial institutions you're dealing 
with, that they do have loan documentation and a clear chain of 
title?
    I think it's important for all these other people to look 
into it, but it seems to me that these are programs where 
Treasury has a direct involvement in this as an organization. 
They're actually involved in the thing, and this seems to me to 
be a pretty critical part of the process.
    Ms. Caldwell. That is an important issue and something 
that, at least at this point in time, we're looking at the 
foreclosure prevention process separate from the actual 
foreclosure sale process. To modify a mortgage, there is not a 
need to have clear title. You need information from the note, 
but you don't need a physical note to modify a mortgage.
    So the focus of the HAMP program is to make sure that 
homeowners stay in their home and don't go to foreclosure sale. 
But to the extent that is not successful and that goes through, 
we certainly expect all HAMP participating servicers to follow 
the law.
    The Chairman. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you, Senator.
    Ms. Caldwell, let's say I want to buy a house, and the 
house is foreclosed. How do I know that when I buy that house I 
will receive good legal title to that house? I mean, there are 
all sorts of questions about whether or not the securitization 
trust or the servicer can deliver good legal title. How do I 
know?
    Ms. Caldwell. Homeowners buying a house get title 
insurance. I think one of the things that we're very concerned 
about in the overall recovery of the housing market is making 
sure that homeowners have trust in the system and continue to 
buy homes and don't have a lack of trust in that, because, 
certainly reading the news, homeowners would have reason to be 
concerned.
    Mr. McWatters. Right. You anticipated my next question. Are 
title insurance companies issuing clean mortgagor and mortgagee 
title insurance policies today where the property liens are 
recorded under the MERS system?
    Ms. Caldwell. I think we have to separate the MERS system, 
which certainly has a lot of discussion in court, from how 
servicers are following the processes under MERS. To the extent 
a home has gone through foreclosure, whether it's foreclosed 
with the physical note or foreclosed with a judge, the judge 
has granted title and the title has been insured, the homeowner 
should be able to purchase the home and have title insurance.
    Again, as I said earlier in my testimony, I'm aware of the 
litigation around MERS. It's still in the lower courts. So I 
can't really wade down for what will be the outcome, but 
certainly we're watching the uncertainty in the market that 
could be attributed to MERS.
    Mr. McWatters. I read somewhere in the paper that one of 
the ``too big to fail'' institutions went to title insurance 
companies who were balking on issuing title insurance policies 
and said: Hey, we'll indemnify you. Well, if a ``too big to 
fail'' indemnifies and it blows up, guess who pays for it? We 
have TARP II, unless Dodd-Frank liquidates them, which is not a 
good answer to anyone.
    So I think this thing is, as you said, is in play, but it's 
a little bit frightening.
    Speaking of frightening, I'll move on to Fannie and 
Freddie, who are also co-owners of MERS and apparently did 
billions of dollars of securitizations based upon MERS. So 
surely someone at Fannie and Freddie thought about MERS. I 
mean, what diligence did they do? Did Fannie and Freddie 
receive legal opinions, and if they did could we see those 
legal opinions, as to the efficacy of the MERS program?
    Ms. Caldwell. I can't testify to what Fannie and Freddie 
did in terms of MERS, but can just say that MERS has been a 
part of the mortgage securitization system for a long time. 
There have been a lot of legal cases on it.
    Mr. McWatters. Let me ask this question. Is it the opinion 
of the Department of Treasury that the MERS system works to 
deliver good legal title to property, that it properly allows 
notes to be endorsed, it allows for the proper assignment of 
mortgages and deeds of trust?
    Ms. Caldwell. This is something that we're still continuing 
to dig deeper on. But at this early stage, it does not appear 
to be a fundamental legal structural risk or issue with MERS, 
but rather how MERS is used based on the different state and 
local laws governing the real estate transactions across the 
country. So there's still more work to be done there.
    Mr. McWatters. Okay. Let's say that I'm a CEO of a ``too 
big to fail'' and I've made a lot of second mortgage loans. And 
I know that people are encouraging me to write those off, and 
if I do my capital's going to be impaired and I'm going to book 
a substantial loss and I'm going to be hurt, maybe put out of 
business.
    So my response to people who ask me to write them off is to 
say: You know, they may be out of the money today, but in 
another year or 2 years I expect the housing market will 
recover; and maybe I'm out of the market today, but maybe I get 
40 cents on the dollar in 2 years. So if I write them off 
today, then my shareholders are going to sue me because they go 
to the same economists and the economists tell them also, in 2 
years you're going to get 40 cents on the dollar.
    What do I do? I'm just not sure what to do.
    Ms. Caldwell. You summarized the reason why principal 
forgiveness is one of the most complicated parts of the 
mortgage modification business, because once you take it you 
lose that opportunity to get it back.
    In the principal reduction alternative that we have under 
HAMP, we require servicers to run two net present value 
calculations, one with principal reduction, one without. And in 
those cases where it is net present value positive to reduce 
principal, we think there is a justification there for reducing 
it.
    Mr. McWatters. What if I say to you, yeah, okay, I'll write 
these things down. That may start solving a lot of problems. 
But I want an equity kicker here. So if this house turns 
around, appreciates in value over the next 2, 3, 4, 5 years, I 
get a piece of that. In fact, we're going to share that equity 
appreciation three ways. We're going to give some of it to me 
because I wrote it off. We're going to give some of it to 
Treasury because Treasury expended taxpayer funds. And we're 
going to give a substantial portion of it to the borrower 
because I want to keep the borrower interested in staying in 
the house and making the payments, keeping the house up and the 
neighborhood up.
    Is there a problem with that approach?
    Ms. Caldwell. There is not. In fact, the principal 
reduction alternative under HAMP does not prohibit shared 
appreciation. I think at this point in time I'm not sure the 
servicing industry has capacity to administer shared 
appreciation, but it's not something that is prohibited, and we 
put the guidance out with the expectation that that could be 
something that changes in the marketplace.
    Mr. McWatters. Okay. What I can say to them, it's a one-
page document. It's not a big deal.
    Okay, thanks.
    The Chairman. Thank you.
    Mr. Silvers.
    Mr. Silvers. Ms. Caldwell, I want to explore very briefly 
this question of the relevance of irregularities in the title 
system to HAMP. It's my understanding--I accept your testimony 
earlier that, of course, you're not in foreclosure when you get 
HAMP assistance. But HAMP does make payments to servicers, 
correct, up front? Isn't there an assumption that that servicer 
is representing someone with a good lien? Why would we make the 
payment if that wasn't true?
    Ms. Caldwell. There certainly is the assumption that the 
servicer is following the laws, because that's required in the 
contract. If we learn something after the fact that contradicts 
that, we do have the ability to go in and claw back the 
incentive.
    Mr. Silvers. So my question in my opening statement was, 
how do we know, in light of all of the discussions--and I think 
Mr. McWatters has ably summarized what the issues are, and the 
chairman has as well. How do we know that we're not--and in 
light of all the state law issues that you mentioned a moment 
ago--how do we know that people who don't have good liens 
aren't getting public money essentially under the false 
pretense that they have a good lien?
    Ms. Caldwell. Again, we don't. Our focus at this point has 
been on making----
    Mr. Silvers. Okay. So that's the--hold it. That's the 
issue. The issue that I would hope the Treasury would be 
diligent about looking into is trying to answer. You say no, we 
don't. I think that's fair enough. These are very complicated 
questions. The data is huge, the legal issues vary from state 
to state.
    In view of the fact that what's potentially at play is 
servicers and banks getting public money under false pretenses, 
we ought to try to figure out whether that's true or not. I 
take from your answer that you're looking into it.
    Ms. Caldwell. Right, I would agree.
    Mr. Silvers. I would hope that that clarifies the fact that 
there is a relevance between the irregularities and the HAMP. 
We've identified it here. I look forward to hearing what you 
find.
    Let me shift then from there to something that I'm very 
supportive of Treasury's direction. I want to hear more about 
how you intend to do it. I gather from your opening statement 
and from your response to my fellow panelists' questions that 
you want to expand the reach of Treasury's mortgage foreclosure 
mitigation programs, that you feel the current numbers of 
permanent mods and the like should be expanded, that you want 
to reach the unemployed and be of greater assistance there, and 
so forth. Did I hear you correctly?
    Ms. Caldwell. Yes.
    Mr. Silvers. What do you see as the major obstacles to 
doing that? What do you see? Are we having difficulty reaching 
and involving people in these programs?
    Ms. Caldwell. I think there are a few points we can say 
about unemployment. One is it differs across markets, and HAMP 
is a national, one-size-fits-all program. So one of the changes 
that we made to respond to the local nature of unemployment was 
the Hardest Hit Fund, so that different states could create 
programs to better target the unemployed in their own market. 
So one is just making sure we can tailor programs to local 
market conditions.
    Second is outreach. Struggling homeowners are scared. 
They're getting bills, not sure who to respond to, who to call. 
So we do run outreach events. We've had 40 across the country 
in the last year to reach homeowners.
    Mr. Silvers. How many people have attended your outreach 
events?
    Ms. Caldwell. I don't have the number offhand, but I'd 
estimate in the 30,000 range.
    Mr. Silvers. Are you familiar with the Neighborhood 
Assistance Corporation of America, called ``NACA,'' that I 
referred to earlier?
    Ms. Caldwell. I am.
    Mr. Silvers. They have represented in a letter to us, to 
our Panel, which I will introduce into the record, that in 23 
outreach events of theirs they have had approximately 700,000 
people attend. Do you have any reason to doubt that that's 
true?
    Ms. Caldwell. I don't have any reason to doubt, but I'm not 
familiar with all of them.
    Mr. Silvers. No, I understand. So can we learn something 
from that? Is there a way that we can--that Treasury, with its 
vast resources, can get to that level of participation? I'm not 
talking about the back end about outcomes, but just getting 
people in the door.
    Ms. Caldwell. I think we work with a number of housing 
counselors and state and local mediators, including NACA, to 
figure out the best way to have outreach to homeowners. 
Certainly NACA mods, where eligible, can get HAMP incentives.
    Mr. Silvers. I'm actually not so much focused on the mods, 
but I'm focused on the intake. You said 30,000 people for all 
of your events around the country. NACA got more than that to a 
single event in D.C. a few weeks ago. I visited that event. I 
saw 5,000 people at the Convention Center on a Friday night at 
10:00 o'clock at night.
    Surely we can learn something from them, if nothing else, 
how to get people in the door.
    Anyway, my time has expired. Thank you.
    The Chairman. Thank you.
    Dr. Troske.
    Dr. Troske. Thank you, Senator.
    So help me here about something I still don't understand 
about the program, and I'm still relatively--I was not involved 
in the last report. But my understanding is if the NPV model 
shows that the net difference between the modified mortgage and 
the original mortgage is positive, this suggests that it's in 
the best interests of the borrowers and the lenders to modify 
the mortgage.
    If that's the case, why do we have to pay them to do it? 
Why do we have to pay people to do something that seemingly is 
in their best interest? What's preventing them from doing it on 
their own?
    Ms. Caldwell. That's a very important question. Two things 
to think about there. One, on the HAMP program, part of the 
incentives for servicers is actually compensation for moving to 
an affordability standard and certain protocols that required a 
full change in their business model. So it is compensation for 
things that they have had to do in a different way.
    Second, within the HAMP program there are some cases where 
the investor incentives are an important piece of the 
modification being NPV positive.
    Dr. Troske. So let me--the first question--your first 
response was that there seem to be things apparently outside 
the NPV model. The NPV model is not taking into account the 
costs of changing the business model, so you have to pay them 
because the NPV model doesn't include all the costs. Is that a 
way of interpreting what you just said?
    Ms. Caldwell. No. When you look back at the beginning of 
the program, again, HAMP is a voluntary program, getting the 
servicers, the investors, and the homeowners to the table and 
to change the business model to do that required some 
incentives. Even with those incentives, there was some doubt 
that servicers would sign up, and indeed it took a full year to 
get close to 100 non-GSE servicers signed up for HAMP, even 
with those incentives.
    Dr. Troske. So let me build on that a little. So much of 
your claim about the success of HAMP has been that it set a 
standard, that you've changed the way people are doing business 
in this market. We can discuss it, but find, I'll give that to 
you, great. You've set a new standard. You've shown servicers 
there's a better way of doing business.
    Why do you need to keep doing anything? What are you 
accomplishing now that you've set a standard, everybody 
recognizes the standard? Great, fantastic. They're now free to 
live by the standard, recognize the benefits from the standard, 
go to town. So why do we still need Treasury involved in this 
once you've set the standard?
    Ms. Caldwell. The HAMP program does a couple of important 
things. One, because servicers that participate in HAMP are 
required to evaluate homeowners first for HAMP, it keeps a 
consistency across the industry in terms of at least where 
homeowners are evaluated first.
    Second, as this Panel has pointed out certainly to Treasury 
a number of times, there's inconsistency in reporting across a 
number of different servicing entities, and during a time of 
crisis HAMP provides a standard platform on which other 
modifications can be based.
    Dr. Troske. But again, once the standard platform is 
established, once you've established that platform, I'm still 
struggling to understand what is there left to do? You've 
established it. Now everybody knows what they should be doing. 
Everybody should be doing it Treasury says.
    Ms. Caldwell. I think that for the first lien program, 
certainly we can talk about the change in the industry 
standard. It's important, again as you've pointed out, that 
there is the unemployment program that is still new in 
Treasury. There is the entire platform for how short sales and 
deeds in lieu of foreclosure are handled, that are still 
operating under HAMP.
    So having that standard platform can change a number of 
things beyond first lien modifications.
    Dr. Troske. Let me--I want to build on a little bit of my 
fellow panelist Mr. Neiman's question. In her written 
testimony--and we haven't heard it yet, but--Julia Gordon 
claims that HAMP trial modifications make borrowers who do not 
move into permanent modifications worse off, because they are 
reported as being delinquent to credit bureaus and have late 
fees and interest continues to accumulate, resulting in larger 
arrears due at the end of the trial modification program.
    So she--you've said that it makes them better off. She says 
it makes them worse off. Is she right, and what's the 
difference between what she's claiming and what you're 
claiming?
    Ms. Caldwell. Again, when we talk about the trial 
modifications, I think it's important to refer to early on in 
the program where people could come in without documentation 
and just call up and get immediate payment relief. When I'm 
talking about being better off, I'm talking about program-wide, 
on the whole, having that many homeowners at that time in 
crisis receive immediate assistance and get time was an overall 
benefit.
    Certainly when you provide time to a large number of 
people, there are going to be cases where individuals say: You 
know, if I knew it was going to be bad news, I'd rather have 
the bad news now. We do hear of those cases and we take them 
seriously and it's very troubling. But when you look at the 
million homeowners that got immediate relief last year at the 
time of the crisis, on balance I think it's the right thing.
    Dr. Troske. Thank you.
    The Chairman. Thank you.
    Superintendent Neiman.
    Mr. Neiman. I'd like to kind of follow up on your 
discussion with Damon regarding your unemployment programs, 
because I think even in your opening testimony you acknowledge 
that unemployment is really going to be, particularly going 
forward, a driving force in driving foreclosures.
    I saw it up close when I, on behalf of the Panel, joined 
your outreach forum in Atlanta. And in talking to both 
counselors and individual borrowers, it was clear that there 
were many individuals there who were in financial difficulty 
with their mortgage because of unemployment or underemployment.
    You referenced the Treasury's unemployment program, which 
provides 3 months of forbearance. When will we be seeing--how 
do you contemplate providing data to assess the results of that 
program?
    Ms. Caldwell. Again, that program became effective in 
August and we will be incorporating data into the public report 
once it's available and validated.
    Mr. Neiman. So recognizing that many of the individuals I 
spoke to there were out of work for 6 to 12 months, behind on 
their mortgage payments for similar terms, who's the population 
that this 3-month forbearance is intended to help?
    Ms. Caldwell. A couple things to think about. It's a very 
important issue, unemployment, in terms of the modification. I 
think first and foremost, as was said earlier on the Panel, you 
need a job to pay the mortgage. So unemployment forbearance is 
really intended to provide temporary assistance for unemployed 
to enable them to find a job.
    Mr. Neiman. So people who are just unemployed and expect to 
find a job within these 3 to 6 months?
    Ms. Caldwell. The national unemployment program in HAMP 
provides a minimum of 3 months. Servicers can go longer, as 
long as they want, but it's a minimum of 3 months. Many go up 
to 6 months.
    So it's expected that some will not find a job and may end 
up in a short sale or something that results in not being in 
the home. Some may become quickly reemployed and become current 
on their payment and had some benefit. Some may become 
reemployed at a lower income level and be eligible for HAMP.
    Again, that's a one-size national program. In those 
markets, 18 states and the District of Columbia, with higher 
than average unemployment rate, we have tailored programs where 
each of the housing finance agencies can do something that 
works in their market, and those include anything from the HFA 
targeting certain professions that have been hardest hit and 
sharing the mortgage payment, to some combining them with job 
counseling and retraining.
    Mr. Neiman. We look forward to the data on the success of 
that program.
    In my remaining minutes, I want to shift over to the web 
portal, because this is something that we have talked about for 
a long time at the Panel and have been urging Treasury to get 
that web portal up and running so that there is an effective 
means for borrowers and housing counselors to reach servicers 
in order to facilitate the approval process.
    Can you give me some indications as to where it stands, how 
many borrowers, how many loans are being processed through the 
portal?
    Mr. Neiman. Home loan port.
    Ms. Caldwell. Home loan port.
    Again, I can't testify to Home loan port's specific 
performance, but just say that we at Treasury are very 
supportive of the Home loan port that's run by the HOPE NOW 
Alliance and think it's a very important step to not only 
automate the document collection process, but also to involve 
counselors who can help assemble those document packages.
    So we are very supportive of that effort. In addition, as 
we've streamlined the documentation within Treasury, we've 
tried to make sure all of our forms are available to be 
downloaded on the web on our MakingHomeAffordable.gov website.
    Mr. Neiman. Will Treasury be using that system or using--or 
its agents, compliance agents, using the system to test for 
compliance, to reach out to borrowers, to try to identify areas 
of concern?
    My understanding is it's not currently available for access 
by regulators.
    Ms. Caldwell. I'll follow up on that.
    Mr. Neiman. You follow up. Our compliance is really focused 
on the documentation issues more broadly across all of the 
channels, whether it's Loan port or mail.
    My time has expired.
    The Chairman. Thank you.
    Thank you, Ms. Caldwell, for your testimony. Again, thank 
you for your service.
    Will the second panel please come forward.
    [Pause.]
    The Chairman. Thank you. This panel is made up of: Faith 
Schwartz, Senior Advisor for the mortgage industry's HOPE NOW 
Alliance; Joseph Evers, Deputy Comptroller of the Large Bank 
Supervision, Office of the Comptroller of the Currency; 
Katherine Porter, Professor of Law, University of Iowa College 
of Law; Julia Gordon, Senior Policy Counsel, Center for 
Responsible Lending; and Mr. Guy Cecala, CEO and Publisher of 
Inside Mortgage Finance.
    Let's start with you, Mr. Cecala.

  STATEMENT OF GUY CECALA, CEO AND PUBLISHER, INSIDE MORTGAGE 
                   FINANCE PUBLICATIONS, INC.

    Mr. Cecala. Thank you, Mr. Chairman and members of the 
Panel, for inviting me to speak today. My name is Guy Cecala. 
I'm the CEO of Inside Mortgage Finance, a specialized 
information firm that publishes a variety of products related 
to the residential mortgage market and its key players. We are 
not affiliated with any lenders per se or consumers. We're kind 
of just objective observers of the facts.
    Any opinions expressed today are my personal opinions and 
don't represent the views of Inside Mortgage Finance or any of 
its publications.
    In my written testimony, I think I've responded to just 
about every one of the questions you guys have asked. But I'll 
summarize some major points from that testimony. What I'd 
really like to do is provide a reality check on what's going on 
in the mortgage market, because I think sometimes that gets 
lost.
    First of all, the mortgage industry is really divided into 
two separate businesses. One is the production side and one is 
the servicing side. Briefly, I'll talk about the production 
side. There's good news and bad news when we look at the 
production side of the mortgage business these days. The good 
news is that long-term mortgage rates are extremely low and 
there's a plentiful supply of mortgages to borrowers who have 
good credit and down payments. The bad news is about 90 percent 
of all the mortgage funding is coming from the government and 
not a lot of people qualify for that government funding.
    What little private sector activity there is is pretty much 
relegated to home equity and high-balance jumbo mortgage 
lending, or basically places the government doesn't have any 
activity.
    To make matters worse, we seem stuck in a world where most 
mortgage funding will continue to come from the government. 
There is currently no secondary market or investor demand for 
mortgages or mortgage-backed securities that don't carry a 
guarantee from the U.S. government. As a result, private 
lenders really can't compete with the government for mortgage 
customers.
    But we also seem to be afraid to reduce the government's 
massive support of the mortgage market, for fear of disrupting 
a very fragile housing market. So it pretty much leaves us in a 
state of limbo.
    Unfortunately, matters are probably worse in the mortgage 
servicing business. I think to talk about the success or 
failure of recent mortgage modification efforts or the scope of 
current foreclosure problems, it's really necessary to look at 
the massive problems we are attempting to deal with.
    Between 2005 and 2007, which is really the housing boom 
peak period and the mortgage boom peak period of the last few 
years, about one-third of the $8.5 trillion mortgages that were 
made, or roughly 13 million loans, could broadly be 
characterized as non-prime. These loans were made to subprime 
borrowers, those with little or no documentation, those with 
low or no down payment, or those that had some other high risk 
of default characteristic.
    It is these groups of mortgages that made up the bulk of 
mortgage defaults and foreclosures that we've seen over the 
last 3 years. Add to this mix the fact that nearly one-third of 
the homes sold during the 3-year boom period were sold to 
investors or people buying second homes. Now factor in the 
impact of high unemployment and the sharp nationwide drop in 
home values, and you get a pretty good idea of the scope of the 
problems we are facing.
    It is literally a perfect storm of mortgage problems that 
are very difficult to resolve with loan modifications or any 
other foreclosure avoidance measure. Right now we have a 
situation where the average borrower facing foreclosure is 
somewhere around a year and a half behind on their mortgage 
payments. By traditional mortgage industry standards, 6 months 
is the point of no return.
    I won't go into the HAMP numbers. You guys seem to know it 
very well and have gone over in terms of it. Needless to say, 
the number of HAMP modifications or even overall loan 
modifications have been dwarfed by the number of increases in 
defaulted mortgages and foreclosures over the past year.
    The record high problems in the mortgage market have and 
continue to take their toll on the housing market. Last month 
48 percent of the home purchase transactions in this country 
involved distressed properties, namely foreclosures or short 
sales involving properties headed for foreclosures. That was up 
from 45 percent a year earlier.
    Meanwhile, the ongoing flood of problem mortgages and 
efforts to consider modifications on a loan by loan basis have 
severely taxed the mortgage servicing industry, used to dealing 
with one-quarter of the current level of defaults and 
foreclosures. Is it a surprise mortgage servicers and their 
agents have been overwhelmed or that some shortcuts have been 
taken with foreclosures to deal with the backlog of severely 
defaulted borrowers? No, it isn't surprising, and unfortunately 
it's a development that can only slow down a housing recovery 
that is moving at a snail's pace if it is moving at all.
    Thank you.
    [The prepared statement of Mr. Cecala follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    The Chairman. Ms. Gordon.

 STATEMENT OF JULIA GORDON, SENIOR POLICY COUNSEL, CENTER FOR 
                      RESPONSIBLE LENDING

    Ms. Gordon. Good morning, Chairman Kaufman and members of 
the Panel. Thank you so much for inviting me to address you 
today. I serve as Senior Policy Counsel at the Center for 
Responsible Lending, a nonprofit research and policy 
organization dedicated to protecting home ownership and curbing 
abusive financial practices.
    As we're here today, mortgage servicers are in the process 
of foreclosing on over 2 million families. About 3 million or 
so more are just weeks away from receiving a notice of default. 
Over the next several years, the toxic combination of high 
unemployment and underwater loans could mean a stunning total 
of more than 31 million foreclosures.
    African-American and Latino families are much more likely 
than whites to lose their homes, and we estimate that 
communities of color will lose over $360 billion worth of 
wealth.
    So far, our major government response to this crisis has 
been HAMP. HAMP, as we've discussed today, has fallen far short 
of its initial goals and even left families who did not convert 
to a permanent modification worse off than they were before. 
Relatively few new trials are starting each month now, replaced 
by a trend of servicers moving their modification activities 
outside of HAMP, where there's little transparency or 
accountability.
    The principal reductions we need are not happening in HAMP 
and they're not really happening out of HAMP either, except in 
some small portfolios, usually ones that were marked down upon 
acquisition.
    The real problem is that servicers need to foreclose 
quickly and in volume in order to make money. That's why people 
get foreclosed on even when they're in the middle of being 
reviewed for other solutions. That's also led to this utterly 
unacceptable but routine practice of falsifying court documents 
when it's too expensive or in some cases impossible to conduct 
the process legally.
    It's increasingly clear that one incomplete payment or one 
accounting mistake can land you on an apparently unstoppable 
conveyor belt to eviction.
    The crisis didn't need to be this bad. If government had 
acted quickly and forcefully at the beginning we could have 
significantly limited the damage. But instead our government 
believed servicers' early assurances that they would handle the 
crisis on their own. When that turned out to be wrong, we 
provided legislative tools such as the investor's safe harbor, 
we added financial incentives through HAMP and related 
programs, we cajoled and begged and threatened. None of those 
strategies have worked. It's quite clear that servicers will 
not do what needs to be done unless someone makes them do it.
    The fact is the HAMP program has never had the tools it 
really needed to succeed. A key part of the original 
Administration foreclosure prevention plan was to involve the 
bankruptcy courts, who serve as our nation's comprehensive 
resolution authority when debt goes bad. The failed subprime 
lenders got bankruptcy protection. So did Lehman Brothers. 
Bankruptcy courts can modify mortgages on vacation homes, 
farms, commercial properties, even yachts. But because they're 
barred from saving the family home, homeowners had no 
alternative but to rely on the voluntary assistance of the 
servicers, and servicers had no real incentive to change doing 
business as usual.
    Those bankruptcy laws should be changed. In the meantime, 
let's broaden and enforce a commonsense practice requiring 
servicers to review all loans for alternatives to foreclosure, 
either loan modifications when that makes financial sense or 
short sales and deed in lieu. Congress and state legislatures, 
the Administration, the banking regulators, and law enforcement 
officials all have lots of tools available to do this. In fact, 
the so-called mandatory loss mitigation standard already is 
supposed to be in place in the government-backed housing 
programs.
    To make it work in practice, though, homeowners need a 
chance to stop their foreclosures if their case hasn't been 
properly reviewed. In many cases homeowners will need access to 
legal help. Congress should appropriate the $35 million 
authorized in the Dodd-Frank Act for that purpose. While that's 
a very small amount compared to what will be spent on the 
battalions of corporate lawyers for the other side, it will 
make a real meaningful difference for the many homeowners who 
can't afford an attorney.
    We also recommend that the banking regulators use all their 
supervisory and enforcement powers to let servicers know they 
can no longer fly under the regulatory radar. This is a perfect 
opportunity for the Consumer Financial Protection Bureau to 
show what a difference it can make when an agency focuses 
squarely on eliminating practices such as a predatory servicing 
now taking place.
    There's no silver bullet strategy to fix every mortgage and 
not every foreclosure is avoidable. But even one unnecessary 
foreclosure is devastating to that family and their neighbors, 
and multiple unnecessary foreclosures are devastating to all of 
us. Once and for all, let's make sure the system works, both 
for families and for those who invest in our economy.
    Thank you for your time and I look forward to your 
questions.
    [The prepared statement of Ms. Gordon follows:]

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    The Chairman. Thank you.
    Professor Porter.

STATEMENT OF KATHERINE PORTER, PROFESSOR OF LAW, UNIVERSITY OF 
                      IOWA COLLEGE OF LAW

    Ms. Porter. My name is Katherine Porter. I'm a law 
professor who does research on consumer credit, consumer 
protection, regulation, and mortgage servicing.
    In the last month, allegations about serious and widespread 
legal errors in the foreclosure process triggered moratoriums 
by a few of the nation's largest servicers. These moratoriums 
and the misbehavior that led to them are only the most recent 
and the most visible symptoms of a chronically sick industry. 
In 2007, almost exactly 3 years ago, I released an empirical 
study showing that 40 percent of the mortgage companies' 
paperwork in bankruptcy cases did not include a copy of the 
note, despite a clear legal requirement that it be included.
    Sadly, the problems we are hearing about today are largely 
duplicative of those that I and others have described for 
several years now. To summarize, the key problems with the 
foreclosure process are: First, that the mortgage servicing 
industry is a high-volume, cost-cutting industry. It relies on 
staff with insufficient training. It provides weak oversight of 
that staff. It operates with inadequate quality control checks 
and it is not transparent about its profit structure and 
affiliations with related entities.
    These problems are at the heart of the robo-signing 
scandal. That practice is entirely consistent with the 
industry's business model and standard of ethics. Robo-signing 
erodes confidence in the rule of law in this country.
    Second, the paperwork on the troubled securitized loans 
often does not seem to comply with legal requirements. The 
primary concerns are: first, that some paperwork is missing, 
evidenced by the increasing use of lost note affidavits to try 
to remedy past mistakes; and two, that some transfers of loans 
simply did not occur or were not properly conducted. The 
proliferation of assignments in blank, the widespread use of 
MERS that eroded the public property records, and confusion 
about the location of the physical paper for these loans all 
expose the industry to attack from investors and from 
homeowners.
    At the core is whether the securitization trust has the 
standing to foreclose and whether the investors have been 
defrauded. Contrary to what Ms. Caldwell suggested, I do think 
that good title is a requirement to do an effective loan 
modification. I think parties can't legally agree to override 
and alter the rights of a party that's not at the table.
    The third problem is a sort of melange of miscellaneous 
problems we've seen in the servicing industry, including most 
primarily the bloating of homeowners' accounts with bogus or 
suspect default fees and the continuing difficulty that the 
servicers are having in sweeping under the rug the fact that 
the originations of these loans were themselves not documented 
correctly and did not meet the underwriting standards for the 
securitization.
    If these practices are allowed to continue unchecked, I 
think we're going to see several kinds of harm. I think an 
increasing number of homeowners will challenge their 
foreclosures in court. I think there will be class actions by 
homeowners if problems are identified that exist across an 
entire pool of securitized loans. And I think in non-judicial 
foreclosure states we're going to see intense public 
frustration about the lack of access to a court to adjudicate 
these problems.
    Second, I think investors will sue mortgage companies to 
force them, to try to force them to buy back the loans. One 
cannot easily put the genie back in the bottle with regard to 
litigation, notwithstanding the servicers' protestations that 
everything is basically all right.
    The banks' argument that the foreclosures are not faulty 
because the homeowner is in default should be given zero 
weight. Regardless of whether a homeowner cannot pay, the 
mortgage company must comply with the relevant laws to exercise 
their rights. Due process does not bend in the wind. It is a 
fundamental principle that protects all Americans, consumers 
and businesses, as they invoke the law to their aid.
    Finally, I think regulators will have to devote substantial 
resources to investigating problems with faulty foreclosures. I 
think it's crucial that the government investigation be 
transparent. American taxpayers need to be shown in concrete 
terms that the Dodd-Frank Act will change how regulators intend 
to carry out their promises about consumer protection.
    [The prepared statement of Ms. Porter follows:]

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    The Chairman. Thank you.
    Mr. Evers.

 STATEMENT OF JOSEPH EVERS, DEPUTY COMPTROLLER FOR LARGE BANK 
     SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Evers. Chairman Kaufman and members of the 
Congressional Oversight Panel: My name is Joe Evers. I'm a 
Deputy Comptroller and National Bank Examiner in the Large Bank 
Supervision Division of the Office of the Comptroller of the 
Currency. In this role, I oversee the collection, analysis, and 
reporting of data we collect from national banks relating to 
the performance of first lien residential mortgages.
    I appreciate the opportunity to share insights that this 
data provides us on mortgage modification activities. 
Consistent with the Panel's letter of invitation, my written 
testimony includes data and charts from the most recent 
mortgage metrics report that demonstrate the trends we are 
seeing pertaining to loan modifications and delinquencies on 
loan modifications for mortgages serviced by the largest 
national banks and Federally regulated thrifts.
    Beginning in 2008, the OCC began collecting mortgage loan-
level data from the largest banks it supervises and publishing 
this information in quarterly metrics reports. The most recent 
report, published last month, reflects data at the end of June 
2010 and represents almost 34 million first lien mortgage loans 
or 65 percent of all first lien mortgages outstanding in the 
country, totaling nearly $6 trillion in outstanding balances.
    Early in the mortgage crisis, servicers were generally 
relying on traditional methods to assist borrowers who were 
facing financial hardship, typically various informal payment 
plans that allowed a borrower to defer his or her mortgage 
payment for a period of time. These types of plans, which were 
previously successful in normal economic times, gave delinquent 
borrowers experiencing temporary financial problems a chance to 
catch up on making their loan payments.
    However, as the mortgage crisis deepened and the number of 
delinquent borrowers increased to unprecedented levels, it 
became clear that more formal and permanent modifications would 
be needed. The OCC's mortgage metrics data provided factual 
evidence that loan modifications completed in 2008 were 
experiencing high redefault rates. As a result of those high 
redefault rates, the OCC directed the largest national banks to 
implement programs designed to achieve more sustainable 
modifications.
    Today servicers are using a combination of actions to 
achieve more affordable and sustainable modifications. When 
taking these actions, mortgage servicers are taking into 
account both the needs of borrowers and the rights and 
interests of investors.
    Our mortgage metrics report provides data on how 
modification actions affect the borrower's monthly payment and 
how the modifications perform over time. This allows us to 
evaluate the effects that certain modifications may have on 
long-term sustainability.
    Over the past several quarters, we have seen the servicers 
offering more sustainable modifications. Modifications that 
lower monthly principal and interest payments now represent 
over 90 percent of all modifications provided. Modifications 
made during the second quarter of 2010 reduced monthly payments 
by an average of $427. This resulted in a 62 percent reduction 
in the average monthly payment from a year ago.
    Further, 56 percent of the modifications made during the 
second quarter reduced the borrower's monthly payment by 20 
percent or more, representing an average saving to the borrower 
of $698 a month.
    Our data also illustrates the rate at which previously 
modified loans become delinquent or redefault. This is a useful 
metric to gauge the payment sustainability of loan 
modifications, identify unsafe and unsound loan mitigation 
practices such as loss deferral, and determine loan loss 
reserves.
    Our data show that, while all modifications experience 
redefaults, more recent modifications have performed better 
than early modifications. As well, modifications that result in 
lower monthly payments consistently perform better over time 
than those that increase payments or leave payments unchanged, 
and that better performance directly correlates to the amount 
of payment reduction.
    In conclusion, following our directive to large national 
bank servicers to make more sustainable modifications, our data 
show that servicers have adjusted their programs to provide 
meaningful reductions in borrowers' monthly mortgage payments. 
These actions are resulting in more sustainable modifications 
and fewer redefaults.
    Thank you for the opportunity to appear today. I will be 
happy to answer questions.
    [The prepared statement of Mr. Evers follows:]

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    The Chairman. Thank you.
    Ms. Schwartz.

 STATEMENT OF FAITH SCHWARTZ, SENIOR ADVISOR, HOPE NOW ALLIANCE

    Ms. Schwartz. Chairman Kaufman and member of the Panel, 
members of the Panel: Thank you for having me here today. My 
name is Faith Schwartz and I'm currently a Senior Advisor to 
the HOPE NOW Alliance and HOPE LoanPort.
    HOPE NOW was formed in 2007 to expand and coordinate the 
industry response in the private sector and nonprofit 
counseling sector to reach borrowers at risk, counsel borrowers 
at risk, and work toward alternatives to foreclosure. We've 
supported the Homeowner's HOPE Hotline, 888-995-HOPE, which has 
to date manned over 4 million calls, which operates 24 hours a 
day, 7 days a week, and is supported by over 600 housing 
counselors, HUD-approved counseling agencies.
    The HOPE NOW outreach events for homeowners have held over 
90 events across the country in at-risk markets, with up to 
75,000 families who've come through. While it doesn't mirror 
the hundreds of thousands through other outreach events that 
they've attracted, it's very targeted outreach and doesn't just 
offer help to anyone who wants to talk to their servicer. So 
they're 60 days or later past due or non-contact borrowers. In 
fact, 30 to 40 percent of the borrowers who still come to these 
events have never contacted their servicer.
    We also support HOPE LoanPort, a neutral and independent 
web-based system that addresses the issue of loan documentation 
and allows for uniform intake of an application for all types 
of loan modifications, which allows the stakeholders to see the 
same information in a secure manner. This portal delivers a 
completed loan application package to the servicer which is 
actionable, with the ability to message back and forth until a 
final decision has been made.
    Currently, 14 nationwide servicers have adopted and signed 
onto the portal, one mortgage insurer, a few state housing 
agencies, and 320 housing counseling agencies across the 
country in 48 states. We welcome more endorsement and use of 
this portal.
    HOPE NOW also, as you know, has collected data across the 
industry for 3 years every month to report on loss mitigation 
results. In August, we know that year to date we have 874,000 
non-HAMP mods that were made. We know year to date that HAMP 
modifications are 429,000, and we know that year to date 
foreclosure sales are 775,000 sales.
    The points and takeaways from some of the data points are 
as follows. Loan modifications combined far exceed that of loan 
sales to foreclosure. It's important to note the interventions 
are working and should continue.
    The vast majority of the non-HAMP modifications, much like 
Mr. Evers has spoken to, in August 91 percent of them had a 
lower principal and interest payment, and we know that that's 
far better than it was a year or 2 ago.
    I was asked to speak to the merits of HAMP and some of the 
detraction from it. Let me say I quite agree, it's very 
integral and important that the government step forward to put 
a protocol in place for modifications, and that this protocol 
would have been very difficult to get into place otherwise. I 
am here to tell you, I've been 3 years on this project and it's 
been a good step forward.
    The first most important contribution of HAMP is that all 
servicers that signed up for HAMP must review all homeowners 
for eligibility. The HAMP process offers homeowners a first 
line of defense to avoid foreclosure.
    Second is the importance of the HAMP waterfall. Investors, 
servicers, lenders, nonprofits, and homeowners have a uniform 
map of activity that is necessary to ensure delinquent 
homeowners who seek help are being considered for a solution 
prior to foreclosure. HAMP offers uniformity of approach which 
is fair and systematic, and it's an approach for all homeowners 
at risk. That's important for fair lending and other 
attributes.
    There are many challenges around HAMP and I'll cite just a 
few of them that have been addressed by Treasury. But these 
challenges have impacted some of the uptake from the program. 
Clearly, there are a lot of changes as it was being rolled out. 
This is a complex effort and those changes had to require 
retraining, hiring of staff, changing of legacy systems that 
are outdated, and so execution made it difficult quickly.
    It's a complex program. Definitions are unclear investor to 
investor. GSEs don't agree with Treasury or FHA on what 
imminent default would be. There are differences on principal 
writedown attributions. Back-end consumer debt--while we are 
addressing the first lien and made it an easier process to go 
through, there's a broader debt issue in the country, not just 
first liens, second liens, and consumer debt, and that's been 
cited today.
    Honestly, just lack of uniformity for all the mod 
processes. If you wanted a cookie-cutter approach, it would be 
a lot easier if everyone would accept the same processes, 
documents, etcetera. Again, the servicers have legacy systems. 
They have to train and get things in process.
    Also, affordability and eligibility. Everyone thought that 
31 percent was an awfully good and aggressive start, because 
after years of looking at the front-end debt ratio, some of 
which were very high, 31 percent seemed aggressive. Yet, many 
of these borrowers come in under 31 percent; they don't 
qualify, and in theory they'd go to foreclosure. So lots of 
people don't qualify because they're under 31 percent, but yet 
they're having trouble staying in their home.
    High vacancy rate. 30 percent of the market, vacant homes, 
investor properties. Those don't qualify and it's hard to get 
people to contact if they're not in their homes. So when you 
look at the uptake of HAMP, you need to accommodate for some of 
the foreclosures going through that people aren't on the other 
side of the conversation.
    I do think all of us can do a better job to communicate to 
the public, to policymakers, to stakeholders, about what the 
process is and what the options are for all borrowers, whether 
it's HAMP or non-HAMP. I believe a lot of the non-HAMP activity 
is very positive and huge progress has been made versus a 
couple of years ago.
    You've asked me to speak a little bit about the current 
documentation issues in the market. First of all, remember----
    The Chairman. Can you finish, please?
    Ms. Schwartz. Pardon me?
    The Chairman. Can you bring it to a close shortly?
    Ms. Schwartz. Pardon me?
    The Chairman. Bring it to a close shortly?
    Ms. Schwartz. Yes.
    The Chairman. Thank you.
    Ms. Schwartz. So the market issues are such that HOPE NOW 
works on the pre-foreclosure process, and I think all the 
stakeholders do agree no borrower should go to foreclosure 
without due process and a thorough review of all alternatives 
to foreclosure. That said, I'm confident the companies are 
working through their documentation issues to execute that.
    Thank you.
    [The prepared statement of Ms. Schwartz follows:]

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    The Chairman. Thank you very much. I thank the panel.
    I'd like to ask a question to all the panel members. That 
is, based on the fact the President said 3 to 4 million homes 
saved from foreclosure was a realistic objective for HAMP, what 
do you think the realistic objectives are for HAMP? I start 
with Ms. Schwartz.
    Ms. Schwartz. Well, I think if you look at HAMP and then 
non-HAMP solutions you're already at about 1.3 million 
modifications to date this year. That's combined. So if you 
look at an annual rate, you can hit that if you give the 
Treasury some credit for the protocols someplace.
    The Chairman. At the end of the program--we're just getting 
started with the program--what do you think? Is it a realistic 
objective at the end of the program, after we're finished?
    Ms. Schwartz. For the mod program?
    The Chairman. Yes, for the mod program, the modification 
program, number of homes protected from foreclosure.
    Ms. Schwartz. Well, I think we do have systems and 
protocols in place and NPV tests that now are used across the 
market to look at foreclosure versus a modification that were 
not in place probably 4 years ago in any systematic way. So 
hopefully the systems in place will stay and the regulators 
will I'm sure work with the banks and the investor community to 
keep things moving.
    The Chairman. Mr. Evers.
    Mr. Evers. That's really a policy question I don't have a 
real clear view on. All I can tell you is that over the last 
five quarters there have been 902,000 mods completed, both HAMP 
and proprietary. That compares to about 670,000 completed 
foreclosures. So yes, I agree with Faith that you have to look 
at what's happening with HAMP and the proprietary mods to get a 
better sense of how many borrowers are being helped.
    The Chairman. Professor Porter.
    Ms. Porter. I apologize in advance, but I'm going to turn 
your question a little bit and say that what concerns me is 
that what I'm hearing is that we've gotten up to speed with 
HAMP slowly, we're making progress. It took 3 years, it took 2 
years, it took--what does that timeframe and that gigantic 
learning curve mean for whether the servicers are going to be 
able to address the kinds of procedural defects that we're 
hearing about now in anything remotely approaching a timely and 
effective fashion.
    The Chairman. Ms. Gordon.
    Ms. Gordon. Realistic objectives for HAMP. First of all, 
what we need to do is fix HAMP, not end it. HAMP's the only 
thing we've got out there right now and if we take that away we 
go backward in time to a very dark place.
    The concept of the NPV test has been a very useful one to 
get out and it serves as a great benchmark for Federal 
legislation or for states to work on incorporating it into the 
requirements for foreclosure. There is lots of use for this. 
I've provided in my written testimony what one might charitably 
call an exhaustive list of ways in which we could fix HAMP and 
make it work better. But until we've got something better in 
place, let's fix it and not get rid of it. We need much better 
programs in place. We need mandatory programs, and to the 
extent possible we need third party involvement to make sure 
everything is going as it should.
    The Chairman. Mr. Cecala.
    Mr. Cecala. The simple answer is I think the HAMP goals are 
unrealistic, given the program restrictions and the types of 
troubled borrowers we're dealing with. If there's any good 
news, I think it's extremely unlikely that TARP or your Panel 
will see anywhere near $30 billion spent on this program. My 
understanding is in the first year and a half about $400 
million has been spent in terms of incentives paid out. I think 
that gives you a realistic expectation on, if we continue on 
the current path, what we're going to spend.
    The Chairman. Thank you.
    The next question is, can you comment on the impact you 
think these foreclosure problems will have on the mortgage 
market?
    Mr. Cecala. Obviously, that's a real tough question to 
answer. There are a couple different areas we're looking at, 
you have to look at the foreclosure problem. One of them is 
just the issue of what is the liability in terms of servicers 
improperly foreclosing on a property. The mortgage industry's 
response is that these are paperwork problems, we can clean it 
up, worst case we just refile the paperwork and we get to the 
same point, maybe in 2 or 3 months.
    Obviously, the states attorneys general and other 
regulators are looking at whether laws were actually violated. 
That brings up the question of legal action for criminal 
behavior or whatever else. That's kind of hard to quantify, 
too.
    The other issue, of course, is the lawsuits that are 
surfacing now regarding mortgage securities and mortgage 
securities investments. Those are kind of interesting to 
monitor because those lawsuits have been pending out there just 
on different reasons in the past. The latest reason is to go 
after them because of foreclosure paperwork.
    I've been covering this industry and the mortgage security 
industry for 25 years. I'm not aware of any successful 
litigation involving procedures, foreclosure procedures that 
have been violated, that would require a lender to buy back a 
loan.
    The Chairman. Thank you. I'm going to hold the rest of them 
until my next set of questions.
    Mr. McWatters.
    Mr. McWatters. Thank you, Senator.
    Mr. Cecala, in your opening statement you said there were 
$8.5 trillion of new residential mortgages made between 2005 
and 2007, and that about a third of those were subprime, with 
documentation problems, around 2.8 or so. There are a lot of 
lawsuits out there that are beginning and they're not based 
solely upon foreclosure issues. They're based upon straight-up 
misrepresentations and warranties, underwriting that was 
misrepresented when the securitization trust bought those, and 
the securitization trusts and their investors are undertaking 
to put those back.
    What is your estimate, do you have an estimate, of what of 
that $2.8 trillion will be put back to the loan originators?
    Mr. Cecala. I think it's important to identify what the 
size of the universe we're really talking about now.
    Mr. McWatters. Okay.
    Mr. Cecala. There's approximately $6 trillion worth of 
mortgage securities outstanding. $1.5 trillion is what we call 
non-agency mortgage securities. The rest are basically 
guaranteed or insured by Ginnie Mae, Fannie Mae, or Freddie 
Mac. So that really means we're talking about a universe of 
$1.5 trillion.
    You're right, there's been litigation from day one. A 
disproportionate amount of that volume has involved subprime, 
Alt-A mortgages, mortgages with a lot of default 
characteristics, and clearly they've performed a lot worse than 
anyone expected. The normal recourse that the mortgage industry 
uses is to require buybacks on those loans, and they go right 
at the mortgage originator. If a mortgage originator originates 
a loan that goes bad in 6 months, they're required to buy back 
the loans.
    What we saw is that process actually began in 2006. By 
2008, basically all the major subprime mortgage originators in 
this country were put out of business. What we've got left are 
major banks that acquired subprime loans, either through 
servicing or through some other capacity.
    Bank of America was one of the few major mortgage lenders 
out there that steered away from the subprime market. 
Nevertheless, it's the target of all the litigation out there? 
Why is that? First of all, they're the largest bank and they've 
got a lot of money, so that helps.
    But also the reason is they, for better or for worse, 
acquired Countrywide Financial, which was the largest subprime 
lender, and basically inherited the largest subprime mortgage 
portfolio that they are trying to deal with now.
    Mr. McWatters. Right. And as those loans moved into 
securitization pools, BofA or Countrywide may have re-upped the 
representations and warranties that were made by the subprime 
lenders, because someone's going to have to do that or you 
wouldn't take it.
    Also, I'm not sure why you excluded Freddie and Fannie. I 
mean, they were huge securitizers. If they took loans, mortgage 
loans, under misrepresentation, why shouldn't Freddie and 
Fannie--in fact, I think they are beginning to exercise their 
rights to put back their loans to the mortgage originators.
    Mr. Cecala. They are. Currently Fannie and Freddie are 
requiring mortgage repurchases by the major banks and mortgage 
servicers to the tune of about $2 billion a quarter. They 
clearly have the most clout because they're still in business 
and if you don't play ball with Fannie and Freddie they'll cut 
you out of new business. So that is where most of the action is 
going on in terms of repurchases, and Fannie and Freddie have 
been very aggressive at pursuing it. But they're getting 
pushback from the mortgage industry, too.
    The most pushback you see is in the non-agency area, 
because the parties are not around anymore who originally 
committed the crime, such as it is, and you have no leverage 
over the lenders other than legal action.
    Mr. McWatters. Will, in your view, this present a systemic 
problem, meaning a lot of TARP recipients that are going to 
have to buy back loans?
    Mr. Cecala. That's been a problem that's been going on for 
2 or 3 years. Is the amount of buybacks going to increase 
significantly? My personal opinion is not. It'll be managed and 
spread out over time. However, if these non-agency security 
litigation claims, particularly the more recent ones involving 
foreclosures, gain traction, that's certainly going to increase 
the liability and that's something really we haven't factored 
into the system.
    Mr. McWatters. Well, one new development is that the 
investors in RMBS are beginning to recognize one another and 
work in concert, and they are suing the securitization sponsors 
and the securitization trusts and the servicers to force them 
to put back loans, which they've been unwilling to do so far, 
perhaps because of conflict of interest issues and otherwise.
    How do you see that changing it?
    Mr. Cecala. Well, as I pointed out, it's been very 
unsuccessful to date. There are a lot of people who are 
requiring mortgage repurchases, but they're not non-agency 
security investors. Mortgage insurance companies, Fannie Mae 
and Freddie Mac, they've been very successful. The investors in 
non-agency securities haven't been, for a variety of reasons, 
as I indicated. One, the original offending party is no longer 
around. They're going after people who acquired other ones, and 
it's hard to make a legal claim that Bank of America is really 
liable for the quality of loans someone made 3 years earlier.
    Mr. McWatters. Yes, but if Bank of America put those loans 
into a securitization trust and re-upped the representations 
and warranties, they're on the hook the same.
    Also, I've read that there's an increased use of 
statistical sampling, as opposed to having to prove each 
individual loan was misrepresented, to do a statistical 
analysis of the pool and if it's significant then put the whole 
pool back.
    Okay, my time is up.
    The Chairman. Thank you.
    Mr. Silvers.
    Mr. Silvers. Thank you.
    Mr. Cecala or anyone, any other member of the panel: In 
view of the exchange, Mr. Cecala, you just had with Mr. 
McWatters, I remain just deeply puzzled by what the Federal 
Reserve Bank of New York is up to. Do you have a theory, or do 
any other members of the panel have a theory as to why, in view 
of--if I take your remarks of a few moments ago, why the 
Federal Reserve Bank of New York is asserting the sorts of 
claims that we were just discussing?
    Mr. Cecala. I'll take a quick shot at that. The Federal 
Reserve Board of New York inherited a bunch of non-agency 
mortgage security investments as a result of the merger of 
JPMorgan Chase, Bear Stearns is the most obvious one. Part of 
the agreement required the Federal Reserve Board of New York, 
or effectively the government, to take over the worst assets, 
because no bank wanted to acquire those bad ones.
    So basically the Federal Reserve Board of New York's in the 
position of having acquired a sizable amount of these bad 
assets and, in representing the government's interests, would 
like to get any possible money they can get out of anybody who 
does--so they basically helped lead that effort to reclaim 
losses that those investors--that doesn't mean they've got a 
great claim, but that's the motivation behind it.
    Mr. Silvers. Well, they appear to have a good enough claim 
to put their name behind it, which is a nontrivial thing in 
terms of the Fed.
    Other members of the panel have a theory about what's going 
on here?
    [No response.]
    Mr. Silvers. Okay. Secondly, I just want to--Mr. Evers, I 
know that your testimony is limited to matters of data. If you 
were in the room when I was discussing with Ms. Caldwell Bank 
of America's finances, did I make any mistakes in that 
analysis?
    Mr. Evers. I heard parts of it. What we're doing is we're 
working with our banks to assess that put-back risk and 
basically make sure it's properly dimensioned, and that the 
banks have the reserves for that. We're making sure that they 
do a very full, complete analysis of that.
    Mr. Silvers. How many $47 billion buybacks of 50 cents on 
the dollar securities could Bank of America do before it blows 
through its capital?
    Mr. Evers. Well----
    Mr. Silvers. Isn't that a mathematical question, not a 
policy question?
    Mr. Evers. Yes, you could do the numbers.
    Mr. Silvers. You could run the numbers. It's not ten, 
right?
    Mr. Evers. Right.
    Mr. Silvers. It's less than ten.
    Mr. Evers. Right.
    Mr. Silvers. It's probably less than five before you guys 
would be pulling the fire alarms.
    Mr. Evers. Like I said, the banks have to assess, fully 
assess and dimension the risk here. We're making sure that they 
do that. I don't know whether the estimates thrown out there in 
terms of exposure----
    Mr. Silvers. I understand that. I just wanted to make sure 
I wasn't making any mathematical mistakes.
    Now, we have heard in this hearing I think from different 
members of our panel and from different witnesses two kinds of 
stories about what is in the public interest here broadly with 
respect to what to do about the very large number, somewhere 
between, I've heard, 7 million and 13 million homes and 
families, homeowners, that are facing foreclosure, what outcome 
we want.
    I think there are two stories that have been put out there. 
One is kind of the thing that Andrew Mellon said early in the 
Great Depression, which is liquidate everything, let's get 
these homes out of the hands of the homeowners and into the 
hands of the banks and sold onto the markets as fast as we 
possibly can. The second theory is--and one can look back at 
how Andrew Mellon's advice worked out for him and Mr. Hoover.
    But then we can look at the other sort of basic 
inclination, which is to try to keep as many people as possible 
in their homes and keep those homes off the market.
    Those are the two sort of basic ideas in play here. In view 
of what we know about housing prices, housing prices' effect on 
consumer demand, basic supply and demand dynamics, which of 
these ideas is right? Which is in the national interest? I ask 
any member of the panel to respond.
    Mr. Cecala. I'll start out responding. There's no question 
that to resolve the housing crisis, such as it is, you have to 
eliminate or reduce the number of distressed properties out 
there. The question is just the timeframe of doing it. It would 
be painful, there is no question, to try to burn through all 
the foreclosures as quickly as possible, get over the 
foreclosure mess in 2 or 3 years, but recover. Worst case is 
you take action that drags it out for 5, 10 years.
    Mr. Silvers. You didn't listen to my question. My question 
is, is it a better idea to throw people out of their homes and 
put the homes on the market or is it a better idea to try to 
keep them in the homes paying something? Which is better for 
the economy? Which is better for housing prices? Which is 
better for the viability of the financial system? Which course 
is better for the country, not if we're going to take one 
course should we do it slow or fast, but which course is 
better?
    Ms. Gordon. I'm happy to provide a straight answer to that. 
It is better to save the homes. We're talking--let's not 
conflate two things. What we want to do is keep homes from 
being sold in foreclosure. Once the homes are sold in 
foreclosure and the family is gone, you want a family living 
back in them. I in many cases would like to see the original 
family get to buy that home right back at the same price that 
they kicked them out for, that they wouldn't reduce their 
principal to to prevent the costs of foreclosure in the first 
place.
    But before you get to the foreclosure sale, we should be 
doing every single thing we can do to keep people in their 
homes. Once that sale is over, putting Humpty Dumpty back 
together again is very, very difficult. But before the 
foreclosure starts, we've got lots of options to prevent it.
    Mr. Silvers. My time has expired. Thank you.
    The Chairman. Dr. Troske.
    Dr. Troske. Thank you.
    I have a question for I guess several of you, and maybe 
I'll start with you, Mr. Cecala. Several of you in your written 
statements indicated that you felt that the rules under HAMP 
were sort of inappropriate, that they were overly onerous and 
didn't address the problem directly, and also indicated that 
HAMP rules may be pushing servicers to modify mortgages outside 
of HAMP.
    Could you sort of respond, do you think the rules of HAMP 
are appropriate, and if not what do you think we should do to 
be modifying them?
    Mr. Cecala. Well, one of the significant things we've seen 
with the HAMP program--particularly it was an unintentional 
test of it--was when the program was launched you saw a lot of 
people who were put in trial modifications without having their 
paperwork checked or whatever else. One of the most 
significant, I think, results of that is a lot of the borrowers 
were able to make the payments at the reduced amount, but later 
were kicked out of the program because they couldn't meet the 
paperwork requirements.
    Keep in mind, going back to what I said before, we've got a 
huge number of borrowers who've got loans out there with no 
paperwork, no documentation of income, and now we're asking 
them to produce tax returns and other things to qualify for a 
HAMP modification. I think that makes it very, very hard.
    There are some other things. Talk about the present value 
test; I think that's a good idea, but it basically favors 
people who are under water on their mortgage. There are a 
number of borrowers that I know who've come to me and said they 
had equity in their home and that immediately almost 
disqualifies them for HAMP, because you can certainly get a lot 
more out of them with a foreclosure than you can with a loan 
modification.
    There are some basic flaws in the program that I think 
discourage a lot of people and end up in rejections.
    Dr. Troske. Ms. Gordon, would you like to--care to address 
the question?
    Ms. Gordon. Complexity is never our friend, and with the 
kind of business model that the servicers have, having relied 
on them alone to take on the task of reunderwriting all of 
these mortgages, we didn't do the necessary things to make sure 
they staffed up and increased capacity in a way to make that 
happen right.
    Now, I do want to point out that actually, particularly for 
people who used nonprofit housing counselors or attorneys, many 
of those borrowers in fact submitted all of their documentation 
at the beginning of their trial modification, but the servicer 
just didn't necessarily want to bother to look at it or wasn't 
quite sure what to do with it.
    So in my written testimony I give a lot of reasons why I 
think there have been problems with HAMP. But ultimately the 
problem is we're offering carrots and apples and oranges, but 
we've got no stick. And there are so many different cross-
cutting incentives in the system right now, so many entities 
are wearing two or three different hats. It's just very 
difficult to untangle without involving neutral third parties 
in some way.
    Dr. Troske. Ms. Schwartz, I'd like to hear your response.
    Ms. Schwartz. Sure. Well, it's my view that, while onerous, 
these are taxpayer dollars and if they don't qualify, and if 
there's a like solution outside of HAMP, which is happening, we 
shouldn't necessarily say that's a bad thing. People that don't 
qualify for HAMP could go to foreclosure.
    If the person wants to stay in their home, has the capacity 
to stay in their home, the servicer can accommodate that and 
the investor. Modifications outside of HAMP are a good thing 
and they are not with the use of taxpayer dollars.
    So I think it's a complicated issue and I would say the 
lost documentation, we also recognized that and that's why we 
developed a safe and secure way for counselors to be involved 
in the process. I really like the third party help for that 
borrower, to have a trusted solution and an adviser to work 
with as they submit things, and you know they won't get lost 
through an electronic system.
    Dr. Troske. Mr. Evers, I have a question for you. You talk 
about mortgages that involve a larger reduction in payment. Do 
you know, for those modifications, what the average increase in 
payments is going to be when the permanent modification ends in 
a 5-year period? Are they going to look--so the payment goes 
down by $500 or $600. How much is it going to go up?
    You've looked at these numbers. Can you speculate a little, 
what you think is going to happen at that point?
    Mr. Evers. Well, the mods are a permanent change in 
contractual terms. So those reductions in payment are 
permanent. So you're expecting the borrower to have lower 
payments.
    So when you look at HAMP, you're seeing a greater reduction 
in payment----
    Dr. Troske. But the reduction is only for--at some point it 
resets. It may not reset all the way, but those payments are 
going to go up. A previous witness did testify that at the end 
of that period the interest rate is going to reset to whatever 
the Fannie Mae interest rate at the time is. Presumably, 
they're making higher payments at that time. Is that not true?
    Mr. Evers. What we're tracking right now is basically the 
contractual change in payment and we're basically saying at the 
time of the mod that it's being done, we're comparing what the 
payment was before and after the mod, and we're doing that for 
HAMP mods and we're doing it for proprietary mods.
    What we haven't done is looked out further, 5, 7 years, or 
10 years.
    Dr. Troske. Is it possible? That seems like something worth 
doing to me. I guess I would encourage you to do that.
    Mr. Evers. It's something we could look at.
    Dr. Troske. Thanks.
    The Chairman. Thank you.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    I'd like to direct my first questions to our national bank 
regulator, Mr. Evers, and to our industry representative, Ms. 
Schwartz. You probably heard my dialogue with Ms. Caldwell 
around the sustainability of proprietary mods. I also want to 
point out that Ms. Caldwell has remained for this portion of 
the panel, and I want to commend her for that, because we've 
often asked Treasury representatives to stay for the second 
panel and it has not been a practice in the past. So I think it 
is very helpful for her, and we appreciate that, listening to 
this round of dialogues.
    You may also have heard Ms. Gordon, who shared my concerns 
that borrowers in proprietary mods may be worse off than they 
were before. So my question really goes to the data, and do you 
share our frustrations in being able to assess the actual 
sustainability of the proprietary mods? Though you point in 
certain sections that proprietary mods, we understand the 
reduction in payments may be half of what they are for HAMP 
mods, we still don't even know the terms of those 
modifications.
    In a HAMP mod, we know that those reduced payments will be 
for the existence of the trial mod, 5 years. We don't know the 
reduction in the HAMP mod and for what term.
    How comfortable are you and how can we improve these 
reports so that we really can get our arms around the 
sustainability of these proprietary mods? Mr. Evers.
    Mr. Evers. That's a great question. It's something we've 
looked at, so we've been trying to track that for the HAMP as 
well as the proprietary. In the second quarter report, where 
we're at right now is we know the change in payment for a HAMP 
mod versus a proprietary. We also reported the redefault rate 
for a HAMP mod versus a non-HAMP mod, and the HAMP mod 
redefault rate is half of what it is for a proprietary mod.
    Mr. Neiman. Ms. Schwartz.
    Ms. Schwartz. Yes. I think it's an excellent question and 
one that we need to address. We've been attempting to track, in 
addition to how many loans have a lower principal and interest 
payment, which is a good step forward. We've asked for, are 
they at 5 years duration and at 10 percent or more a reduced 
payment, so that you feel that affordability, and you can 
measure that as well. We're looking at redefaults. We've been 
working for a couple of months to collect that, and it's 
probably this month or next we'll be able to start reporting 
that.
    All the government agencies have looked to us to try to 
collect that, and I've worked with the servicers to do so.
    Mr. Neiman. Mr. Evers, could you share our interest in 
getting that performance data by servicer, so that we can 
actually compare performance among servicers as well as, I 
assume, provide a more effective supervisory tool for 
regulators?
    Mr. Evers. We can cut the data just about any way possible. 
We can do it by----
    Mr. Neiman. Is there a reason that you are not sharing that 
information by servicer in the public reports?
    Mr. Evers. It's confidential supervisory information.
    Mr. Neiman. Why do you feel that that is supervisory 
information, where the information of simply factual data 
included in the Treasury's monthly reports do not present 
similar issues?
    Mr. Evers. Well, we're collecting our data directly from 
our institutions. We're collecting loan-level data and we're 
using that data as part of the supervisory process. So under 
our legal authority, we deem it to be confidential supervisory 
information, and our policy approach has been to disclose 
aggregate data, but not individual bank-specific data.
    Mr. Neiman. And you are using that information with respect 
to supervisory responsibilities?
    Mr. Evers. Right. So for example, in my testimony, when we 
saw high redefault rates, we calculated that for each of the 
reporting institutions and we criticized each of them using 
their data and said: Here's your redefault rate, fix these 
redefault rates, put in mod programs.
    Mr. Neiman. Thank you.
    Picking up on this, we in New York have for the first time 
registering mortgage loan servicers. We now have oversight 
responsibilities. We've adopted duties of care, business 
conduct rules that are enforceable, including the requirement, 
the authority, to receive quarterly data regarding not only the 
mandatory modification efforts, but also performance data.
    Our ability is limited because of the visitorial powers, 
that we would be restricted in receiving data from national 
banks. I also assume the industry would not necessarily like to 
see different reporting structures among 50 states, even though 
we do believe that this is a model that can be adopted either 
nationally or at the CFPB level.
    Would the industry support a national reporting requirement 
for mortgage performance data?
    Ms. Schwartz. I have not spoken to--for that specific 
question, I couldn't comment on it. But I do believe there is 
some call in the Dodd-Frank bill to have a loss mitigation 
database created. So I thought that might be happening.
    Mr. Neiman. Thank you.
    The Chairman. Thank you.
    Ms. Gordon, to continue on my other question, what do you 
think the present foreclosure problems--the present foreclosure 
problems have on HAMP? I mean, the problems with the robo-
letters and the rest?
    Ms. Gordon. The problems with the robo-signing and whatever 
title problems they are, these aren't a technical problem. 
Also, just to set the record straight, these are not 
allegations. This is stuff we now know.
    But what it is, it's symptomatic of problems throughout the 
servicing industry. What's interesting, Mr. Silvers before used 
the term ``pull the fire alarms.'' The fire alarms only seem to 
get pulled around here when the bank solvency is threatened, 
when it's that kind of systemic threat. When it's the systemic 
threat to the American people, when we could have a quarter of 
homeowners with mortgages lose their homes, that seems to me to 
be worth a few fire alarms.
    The problems we're seeing now just demonstrate how broken 
the system. These problems I don't think--they're not a cause. 
They're a symptom of a broken system.
    The Chairman. Professor Porter.
    Ms. Porter. I echo that, the symptom of a broken system. I 
think any foreclosure relief program that permits servicers to 
craft the system around their choices, their preferences for 
how to deal with homeowners, is going to fail largely. So I 
think the leading problem--one of the leading problems with 
HAMP from the very beginning that we've seen Treasury try to 
peel back is putting the servicers front and center in charge 
and saying, you steer the ship and we'll just sit, we'll be the 
coxswain in the boat and every once in a while we'll shout 
something at you.
    I think that's a real problem. The other thing I'm 
concerned about is in the talk from Mr. Silvers about how do we 
get people to these events, how do we do outreach. I'm very 
concerned that homeowners are terribly discouraged by HAMP. 
There's this whole pool of people who've tried and failed, or 
who had the lost paperwork, friends and neighbors who've had 
that experience. There's sort of a community contagion effect 
here.
    Even as things improve, there's a big lag in getting the 
word back out. So I'm a little concerned that the result of 
that is we have people who are not coming into a HAMP program 
that might be improved and instead their new plan is that 
they're going to sue in court and they're going to prove the 
chain of title, and they don't have the legal capacity to do 
that and, with all due respect to our court system, they don't 
have the legal capacity, without a lot of struggle, to litigate 
those things.
    So I'm concerned that people are clinging to a life raft. 
There's sort of no good life raft, so they're looking from one 
to the other and they're falling and they're drowning in 
between.
    The Chairman. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you.
    You know, I come at this problem as a corporate lawyer, M 
and A lawyer, tax lawyer. When I look at it, I'm sort of 
mystified, because if someone came in my office and--to take 
off our foreclosure mitigation hat and just think about a 
workout deal, someone comes in and says, yeah, I paid $250,000 
for something, it's worth $150,000 today, there's a second lien 
on it of 50 and a first lien of 200. What do I do?
    The first thing I'd ask them: Is it non-recourse debt? And 
if it's non-recourse debt, I have an answer. If they say--then 
I would ask them, if it's recourse debt and they say yes, it's 
recourse, but I'm broke. Okay, now we have the facts.
    In a commercial setting, what you would do is you would 
write the loan down to 150. You wouldn't fool around. You would 
just write it down to 150, because, guess what, that's what the 
property is worth if you foreclose and nobody's going to pay a 
dime over 150. So you go to economic reality, 150.
    Now, first lien, first and second lienholders are not 
chumps. They're going to say: Well, what if the market turns? 
Okay, I'll give you an equity kicker. You give them an equity 
kicker. And the second lien mortgage, what you should do is 
write them down to zero. You can't write them down to zero. 
They're going to extort something out of you, right? They have 
a seat at the table. You give them 10 cents on the dollar, you 
give them 20 cents on the dollar, you make them happy, you give 
them an equity kicker, you write it down.
    The second thing you do is you refinance the loan to a 
market rate of interest, not 7 percent, not one of these 
ridiculous adjustable rate things which people can't pay. You 
take it down to a 3.75, 4 percent, risk-adjusted, 30-year fixed 
rate.
    Okay, what am I missing? Why doesn't that work in this 
environment? Yes, Ms. Schwartz.
    Ms. Schwartz. Well, you have investor contracts that won't 
let you write down mortgages. You have Fannie Mae, Freddie Mac, 
and FHA who won't allow for a writedown like that.
    Mr. McWatters. Well, those rules need to be changed. 
Someone needs to talk to them.
    Ms. Schwartz. The NPV test requires something north of what 
it's worth, and those workouts then take that into 
consideration. One thing this program has done through HAMP and 
others is target affordability. It's not negative equity per 
se. So 2 percent, 40 years, gets you that $500 payment, versus 
just writing off the full amount.
    Mr. McWatters. So you're saying there are rules that would 
inhibit a commonsense market-oriented response?
    Ms. Schwartz. Of course.
    Mr. McWatters. Oh, that's encouraging.
    Anyone else?
    Ms. Porter. I would say that what you described--I'm a 
bankruptcy lawyer, so what you described----
    Mr. McWatters. I'm trying to keep everyone out of 
bankruptcy here. I'm trying to cut a deal.
    Ms. Porter. Right. But the idea is, what you described is 
exactly right and exactly consistent with where parties get to 
when they don't want to go into bankruptcy court because they 
know that's exactly the deal the judge is going to get them.
    Mr. McWatters. Of course.
    Ms. Porter. So the point here is that if you like what you 
described and you think it makes sense, and I do, and the 
servicers aren't doing it, because they're the intermediary--in 
your negotiation, you weren't negotiating with someone that 
hung up on you, that you had to call--I don't know what your 
calling is like at your law firm, but----
    Mr. McWatters. I've been hung up on a few times, yes.
    Ms. Porter. But the basic idea is that it wasn't this 
intermediary that had a profit center and had misaligned 
incentives and was inept, frankly.
    Mr. McWatters. I would tell them that's a personal problem. 
They cut that deal back in 2004. I'm sorry they cut a bad deal. 
But guess what, if that deal had turned out to be a really good 
deal, do you think they would be calling Secretary Geithner and 
saying, hey, we made a whole bunch of dough, we want to give 
you some more? No, they would keep every dime of it. So they 
should live with the downside, too.
    Ms. Porter. I agree, and I think this is one of the reasons 
that we have pushed and pushed for cramdown, is our sense is 
that servicers will not reach the rational conclusion that 
you're talking about, and that negative equity--while 
affordability is important, so is negative equity. And because 
they won't get there on their own, we need this system to force 
them. And bankruptcy courts in my view are not the perfect 
system for this. I have concerns about putting more families 
into bankruptcy, but the point that Ms. Gordon raised about we 
need a stick--these people have gorged themselves on a buffet 
of carrots and they're still not doing what we want them to do, 
and so we need something stronger, I think.
    Mr. McWatters. I'm way over my time. Thank you.
    The Chairman. Mr. Silvers.
    Mr. Silvers. I just want to get a couple relevant pieces of 
data on the table.
    Mr. Evers or other panel members: The prior testimony today 
was that there have been 600,000 actual foreclosures this year. 
Do we know what portion of those were on homes whose mortgages 
were held by Fannie, Freddie, or another agency, as opposed to 
what percentage were in the private label market?
    Mr. Evers. I don't have that data available. I may be able 
to follow up with you.
    Mr. Silvers. If you could please follow up with us.
    Does anyone have a guess roughly, I mean in orders of 
magnitude?
    Mr. Cecala. Sure. It's got to be close to half, and 
particularly if you thrown in FHA and VA, or the whole 
government.
    Mr. Silvers. The whole government.
    Mr. Cecala. The whole government share of the market is 60 
percent. Even assuming the mortgages perform better than, let's 
say, non-agency mortgages, it's got to be close to half. So the 
answer is Fannie Mae, Freddie Mac, FHA, VA have a large role in 
terms of controlling those foreclosures.
    Mr. Silvers. Ms. Gordon, you think that's correct, that 
it's close to half? I would have thought, given what we've 
heard about the relative balance of quality, that it would not 
be.
    Ms. Gordon. You know, I don't know, but I'm pretty sure 
someone in my office does, and I can get back to you. But I 
think there's no doubt that some of the foreclosures happening 
are agency loans.
    Mr. Silvers. Oh, yes. Just the percentages.
    Mr. Evers, I think you probably have the definitive 
information on this. If you could provide the Panel with it, 
that would be very helpful.
    Secondly, Mr. Evers, in your testimony, in your written 
testimony, I believe you said that approximately 2 percent of 
mods both under HAMP and private mods--and Ms. Schwartz can 
comment--2 percent involved principal reductions; is that 
correct?
    Mr. Evers. Correct.
    Mr. Silvers. Ms. Schwartz, does that make sense to you? 
Does that sound right, in thinking about, say, the press 
release that's in your testimony----
    Ms. Schwartz. Yes.
    Mr. Silvers [continuing]. And the breadth of what your 
members are doing?
    Ms. Schwartz. Well, I think I don't have distinct knowledge 
of the 2 percent, but early indications show that we know 
investor roles--and of course, the HAMP waterfall is rates, 
term, and then principal forbearance or deferral as the three 
tools, until the market has a standard NPV test that includes 
the principal writedown first, which is coming, I believe, 
through Treasury. We can then see a little more activity under 
that, where applicable.
    Mr. Silvers. If there's any more data on that, I'd 
appreciate it.
    I have a final question for the panel. I think one could 
characterize the testimony and the remarks of my fellow Panel 
members, particularly Mr. McWatters' remarks, which I fully 
agree with, just a few moments ago, that we are faced with a 
choice here. We can either have a rational resolution to the 
foreclosure crisis or we can preserve the capital structure of 
the banks. We can't do both.
    Which should we do?
    Ms. Schwartz. I think we can do both.
    Mr. Silvers. I'm not surprised.
    Any other panel members?
    Ms. Gordon. I'm not sure. I think that we can--I think 
either way, down the road we can't--these homes are worth what 
they're worth. No matter what anybody's carrying them on their 
books at, we can't--we're not going to change that, and in fact 
the best hope we have of changing that is fixing the 
foreclosure crisis and stopping this death spiral that the 
housing sector is in.
    So if we do that right, maybe we can help make the banks' 
books hew closer to reality. If we do neither, everybody can 
lose their home and then the banks are going to lose all the 
money anyway.
    Mr. Silvers. My time is up. But, not surprisingly, you 
appear to favor keeping people in homes and perhaps having to 
deal with the bank balance sheets as a result.
    Ms. Gordon. Yes.
    Ms. Porter. Can I just say one more thing? If the banks got 
their deleveraging--we had too much leverage.
    Everybody was overleveraged, families and the banks. They 
got their chance to dump some of their bad stuff on the Fed of 
New York, and they got their chance to get an infusion of cash.
    Mr. Silvers. But the Fed wants it back.
    Ms. Porter. Yes, I know.
    But the point is, the American family is still very highly 
leveraged. We're still at a point of debt for most families 
that is unprecedented in the history of America. Even with 
their making a little more saving, their not using as much 
credit card, they're still really vulnerable going forward. 
That long-term affects the ability of the financial sector to 
be stable and be profitable.
    So there's some benefit to getting the homeowners' 
positions. There's pain in the short term for the banks, but if 
your whole base or pool to lend to is highly risky and highly 
unstable, you'll just keep running the risk of more blowups, of 
more very poor lending.
    Mr. Silvers. Thank you.
    The Chairman. Thank you.
    Dr. Troske.
    Dr. Troske. So I'd like to sort of preface my question a 
little, and I'm actually going to answer the question that my 
fellow panelist Mr. Silvers asked before, since I'm always 
happy to answer his questions, to the previous witness, because 
I'm actually an economist and I understand a little bit about 
supply and demand, and I also understand a little bit about 
dynamics and the growth of the economy over time.
    Mr. Silvers is exactly correct. If we push a lot of homes 
on the market, prices will go down, unequivocally. Now, why 
would that be a rational policy for a government to do? 
Because, of course, there are tradeoffs. As people have noted, 
we are at a point where--we're at a point. We're at a point 
where house prices are worth less than they were. Banks need to 
write that off, and of course people need to write that off as 
well.
    But again, the point I made before is, well, is that there 
are lots of actors in this economy, many of whom were hurt and 
any of whom will only recover when the economy begins to grow 
again. And there is a tradeoff. There is a tradeoff between the 
short-term growth, taking losses in the short term, for the 
potential of a quicker long-term growth in the long run. Part 
of what we're looking for is what's the best way to get to the 
long-term solution, a solution in which we have people in 
affordable housing situations.
    So, Ms. Gordon, you seem to be the one that was willing to 
address this question before, so I guess I'll ask you again, or 
I'll ask you to expand on what you thought. Should we not take 
any of the rest of the actors in the economy's well-being into 
consideration when thinking about this tradeoff ? Because we 
are where we are, and the question is--part of the question 
should be how we got here and we need to address the issues 
that got us here. But the other question is how do we move 
forward in a way that gets us back to a growing economy as 
quickly as possible.
    Ms. Gordon. I don't want us to be posing false choices 
here. There are foreclosures that are unavoidable. What we need 
to do is figure out a reliable way to separate out the ones 
that are avoidable from the ones that are not avoidable. We do 
not have that reliable way right now. That is the system in 
which the public has lost confidence and now the buyers have 
lost confidence, and we are in a pickle as a result.
    Foreclosures that are unavoidable, I completely agree, 
let's do them. Let's get that home resold, hopefully to someone 
in the community and get some of these communities rebuilt. For 
the ones that are unavoidable, where, as Mr. McWatters has 
pointed out, it just makes no sense to go through these very 
costly foreclosures when both the investor and the homeowner 
end up worse off.
    I mean, I'm not an economist, but I'm pretty sure that's 
not an optimal scenario there.
    Dr. Troske. As an economist, I'll agree with you 100 
percent. What Mr. McWatters said is entirely correct. If it's 
in the interests of the borrower and the lender to modify the 
mortgage, that should be done, and we shouldn't have rules that 
prevent that from occurring.
    Ms. Schwartz. And that is what we--we want that to happen 
in all of those situations.
    Dr. Troske. Thank you.
    The Chairman. Superintendent Neiman.
    Mr. Neiman. Thank you.
    One of the main frustrations with HAMP has been regarding 
issues around lost documents and delays in decisioning. That's 
why I've been so strongly interested in a web portal, the Hope 
LoanPort that Ms. Schwartz is an executive on. What is the 
level of usage? When are we going to begin seeing data 
regarding access and volumes of mortgages and counselors and 
borrowers who are using the system?
    Ms. Schwartz. It's a great question. We just left our pilot 
phase in June of this year and signed on some of the nation's 
largest servicers over the summer, which is what you need to 
get the volume. And of course, you need housing counselors to 
help direct that volume, and we've worked with NeighborWorks 
America and HUD to help endorse the system for counselors 
across the country.
    We have thousands of loans now on it that have entered the 
system.
    Mr. Neiman. Thousands meaning?
    Ms. Schwartz. Up to 6,000.
    Mr. Neiman. 6,000.
    Ms. Schwartz. What's most important is that we tested it 
thoroughly, and you should know that it was banks and 
counselors that developed it together and that accommodated 
each other's requests on how it could work for statusing of 
loans. We have good agreement among the banks and the 
counselors on how to operate and tell each other what's going 
on in a more timely manner and kind of guidelines of that sort.
    So we're working very closely with the community groups, 
counseling groups, as well as the banks and servicers.
    Mr. Neiman. Plans for direct access by borrowers?
    Ms. Schwartz. We'd like to see that happen. We do have--one 
of the state housing agencies already has direct access through 
the tool to borrowers and we'd like to see that more broadly 
offered, and we'll offer it to counselors directly, to have 
direct borrower access.
    We think third parties should be helpful to the borrower in 
that document retrieval and scanning to make sure it all works 
well. But we believe it's a fine way to go.
    Mr. Neiman. So my last question is also directed to you. 
You heard Mr. Evers talk about the limitations on sharing data 
regarding proprietary mods based on supervisory considerations, 
something I certainly know something about. However, the same 
restraints would not apply to the industry itself to 
voluntarily share that information to the public on performance 
data by servicer.
    Ms. Schwartz. You know, we went through a long process to 
get all the servicers to agree to share data. One of the 
constraints I have is I don't see anyone's individual data. I 
just have the aggregate information. I would leave it up to the 
regulators and the supervisors to work with you on bank by bank 
and servicer by servicer. We're here to kind of tell you the 
results otherwise.
    Mr. Neiman. Well, ideally, Treasury and HOPE NOW and the 
regulators, if they can find a way to share the servicers--I 
see Ms. Gordon. How important do you think getting that data 
out is?
    Ms. Gordon. You know, our goal is to make evidence-based 
policy, and when you can't see the evidence that makes it 
harder. We've been particularly frustrated by the fact that we 
have yet to see the public release of the loan-level HAMP data, 
which has been promised for months and months and months. The 
people at my organization who do the research using this data 
really, really need it.
    Mr. Neiman. Thank you.
    My time has expired.
    The Chairman. Well, thank you very much. Thank the panel 
very much. The record will be open for a week for any further 
questions the Panel members want to raise.
    I also want to thank Ms. Caldwell for staying behind. I 
thought this was an excellent panel and I think we all learned 
a lot from it.
    So thank you, and with that the hearing is adjourned.
    [Whereupon, at 12:53 p.m., the hearing was adjourned.]

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